Setting Retirement Savings Plan with DW

**jIM_Ohio** · 10-21-2010, 01:08 PM

I have $110k as your gross income (before taxes, adjustments and deductions).

$43k is a 39% savings rate. If you topped off all accounts my guess is you would be in top 5% of all savers (as far as savings rate goes) and could even be in top 1%. Good luck with this.

Instead focus on what you can control.

3600/mo of expenses is 43k.

Focus on maxing 401k first (save 25% in taxes off the top)
$16,500 times 2=$33k (30% savings rate right there)

Your budget looks something like this on 110k would look like this (this is a VERY crude estimate)

110k
6.2% SS $6820
1.45% medicare $1595
33k 401k
44k of expenses (budget)
std deduction of $11,400
two exemptions of $3650 ($7300 total)

Taxable income is 110k-33k-$11,400-$7300=$58300

tax on 58300 is about $8000 (estimate, rounded up from $7910).

so budget looks like this

110k
minus 6820 SS
minus 1595 medicare
minus 33k to 401k
minus 5% of 58300 (this is state tax estimate)=$2915
minus 43k of expenses (from budget)
minus $8000 in fed taxes

That leaves $14,000 left
unless I missed something, you can put $5000 into each Roth and still have $4000 left

401k money is pre-tax
and you need to factor in the std deduction and similar to know some of your income is not taxed.

For more info on taxes
Reference Room

**am_vanquish** · 10-21-2010, 01:55 PM

I have access to a Roth 401(k) also and for the past 2 years I've been contributing about 10% to that account on an after-tax basis. The Roth IRA then comes out of net pay. I'd prefer to stick with this method as I think it will provide the best long-term results when we start withdrawing at retirement. (Feel free to talk me out of it).

I'm not sure whether or not DW will have access to a Roth 401(k). I assumed she would when calculating the extreme all 43k after-tax scenario.

Still, I like the concept behind your suggestion. I'm interpreting it as splitting the retirement savings about 25% after-tax and 75% before-tax (correct me if I'm wrong - maybe you're saying something else). That's what I had in mind when saying we would "phase" from traditional to Roth. Start at 100% Traditional, 0% Roth. After 2 years, move to 15/85. Two more years, move to 30/70. Maybe the splits would change, but the concept holds. The problem with this is that we're increasing Roth savings as we get higher in tax brackets ... which seems backwards.

**jIM_Ohio** · 10-21-2010, 05:58 PM

Originally posted by am_vanquish View Post

I have access to a Roth 401(k) also and for the past 2 years I've been contributing about 10% to that account on an after-tax basis. The Roth IRA then comes out of net pay. I'd prefer to stick with this method as I think it will provide the best long-term results when we start withdrawing at retirement. (Feel free to talk me out of it).

I'm not sure whether or not DW will have access to a Roth 401(k). I assumed she would when calculating the extreme all 43k after-tax scenario.

Still, I like the concept behind your suggestion. I'm interpreting it as splitting the retirement savings about 25% after-tax and 75% before-tax (correct me if I'm wrong - maybe you're saying something else). That's what I had in mind when saying we would "phase" from traditional to Roth. Start at 100% Traditional, 0% Roth. After 2 years, move to 15/85. Two more years, move to 30/70. Maybe the splits would change, but the concept holds. The problem with this is that we're increasing Roth savings as we get higher in tax brackets ... which seems backwards.

In above example, there is 58k of taxable income, which is 13k below the 15% bracket cap (above).

You could shift the 33k 401k to 20k pre tax and 13k Roth to move towards your goal. This would mean you have $2000 more in tax paid (15% of 13k is $2000).

State taxes are still a wildcard- if you live in a high tax state (like CA or NY for example) then using a Roth account to its max might be a bad idea.

The first $500k of 401k money comes out pre-tax (assuming you take it out over 30+ years). There is no reason to think you need 100% of money in Roth accounts.

**am_vanquish** · 10-22-2010, 05:09 AM

Originally posted by jIM_Ohio View Post

The first $500k of 401k money comes out pre-tax (assuming you take it out over 30+ years). There is no reason to think you need 100% of money in Roth accounts.

Thanks Jim. Sounds like a phased or split version of options 1 & 2 will be best. I'll admit that I my tax knowledge is just enough to get by ... and this may be causing me to place too much emphasis on the Roth accounts. For instance, the quoted piece above about getting $500k of 401k withdrawals pre-tax is news to me. Looks like I'll be brushing up on the taxes of retirement withdrawals this weekend.

PS - I've been in & out of the forum world lately, but I almost recall you were planning a career move to CFP/CFA-type work full-time. How's that going? Or, am I way off on that one?

**jIM_Ohio** · 10-22-2010, 05:39 AM

Originally posted by am_vanquish View Post

Thanks Jim. Sounds like a phased or split version of options 1 & 2 will be best. I'll admit that I my tax knowledge is just enough to get by ... and this may be causing me to place too much emphasis on the Roth accounts. For instance, the quoted piece above about getting $500k of 401k withdrawals pre-tax is news to me. Looks like I'll be brushing up on the taxes of retirement withdrawals this weekend.

PS - I've been in & out of the forum world lately, but I almost recall you were planning a career move to CFP/CFA-type work full-time. How's that going? Or, am I way off on that one?

Here is a basic on taxes

When contributing, the 401k money goes in "off the top"- meaning it reduces your tax bill based on your highest marginal bracket. This means if your highest bracket is 25%, the 401k contribution reduces tax bill $.25 for $1.00 you put in. If highest bracket was 15%, then it would save you $.15 for that same dollar. The higher your bracket the more you save.

When you earn money, or when you withdraw from the 401k, it fills in from the bottom (you cannot get taxed at the top until the bottom brackets are filled up). The first $16,750 is taxed at 10% (if you need help with that math, that is $1675 of tax). If you are married and claim the standard deduction, the std deduction ($11,400) and two exemptions ($3650 each) get you $18,700 of tax free income (which is higher than the 10% bracket cap). The income between $16750 and $71,000 is taxed at 15%. The income between $71k and about 160k is taxed at 25% (I posted a link to fairmark which has the tax tables in a previous post).

I am still studying for my series 7, I will be posting here for maybe 3 more weeks, might be a little less.

jIM

**am_vanquish** · 10-22-2010, 06:01 AM

Good run-down. Our goal has been to replace 100% of pre-retirement income, and the withdrawal strategy hasn't even played out in my mind (so pre-occupied with accumulation). So I over-simplified that Traditional retirement withdrawals would get taxed just like our current income while Roth retirement withdrawals would be essentially tax-free.

I see now what you're saying. If we can build up a Traditional retirement savings fund that provides for withdrawals equal to our deductions, we can take advantage of tax savings both now and in the future. OTOH, the Roth's tax benefits are essentially limit to future savings.

Best of luck on the series 7 and your future endeavors. I'm a fan of your style and hope you the best.

**jIM_Ohio** · 10-22-2010, 06:17 AM

Originally posted by am_vanquish View Post

Good run-down. Our goal has been to replace 100% of pre-retirement income, and the withdrawal strategy hasn't even played out in my mind (so pre-occupied with accumulation). So I over-simplified that Traditional retirement withdrawals would get taxed just like our current income while Roth retirement withdrawals would be essentially tax-free.

I see now what you're saying. If we can build up a Traditional retirement savings fund that provides for withdrawals equal to our deductions, we can take advantage of tax savings both now and in the future. OTOH, the Roth's tax benefits are essentially limit to future savings.

Best of luck on the series 7 and your future endeavors. I'm a fan of your style and hope you the best.

You are young, not sure how young, but my best clue to your age is

DW is graduating nursing school next semester and recently accepted a job offer for after graduation. So, we're putting together our spending/saving plan now that we have a pretty good idea of what our income will be after she graduates. I�m looking for some thoughts on the where we�re at with our retirement savings plan.

Focus on the basics

1) Spend less than you earn
2) Take advantage of tax advantaged savings (401k, IRA).
3) Focus on asset allocation and liquidity with investments

I would not advise having a detailed withdraw strategy at age 30 for money you take out at age 70 (40 years later). Too much will change.

Examples- the standard deduction changes each year, and once you reach a certain retirement age, it increases. State taxes change based on standard deduction too (for example in NY, a VERY high tax state, I am told first 40k of retirement withdraws are tax free by my father).

If you move between now and retirement, things will change in this regard. What you want to do is avoid paying extra taxes now if you can... pay 15%, do not pay 25%... even if money is taxed later, you can find advice and ways to shelter some of the money from taxes later or use more Roth earlier if the tax rules at present time are unfavorable.

**frugalgirl** · 10-22-2010, 12:33 PM

Originally posted by am_vanquish View Post

The problem is, my obsession to hit that $43,000 mark is blurring the strategy that I would otherwise consider optimal.
3. Ask DW to find places to cut back in the budget to get from $3,600 to $2,700 a month. I actually think this is possible because we have a pretty conservative budget. This would include: decrease EF savings, less dining out/entertainment, drop to basic cable/internet, increase insurance deductibles, etc. I don�t really want to do this because DW has a valid argument that there�s no sense in living like cockroaches now to have a king�s ransom later in life.

Please let your DW live better than a cockroach! She will be much happier and, in turn, so will you. You've agreed on a budget so don't ask her to cut back any more. She just did all of that work to get through school. You both should enjoy a few "luxuries" in life now. Smell the roses a little bit....

**am_vanquish** · 10-22-2010, 03:39 PM

Thanks for the input FrugalGirl. There's a reason that was the last option. We're only 23 and we don't see a need to expand our lifestyle/spending. We learned to live comfortably on only my income ($60k) for the last 2 years, while still saving anywhere from 10% -20%.

That's why our savings rate will be so high after she graduates. The plan was to add a few agreed-upon "luxuries" like cable, a few more dinners out, etc. Even with those, the plan is that most of her entire income goes to savings.

As long as we avoid the Joneses, which we've done well so far ... everything will work out fine.

**sandrark** · 10-23-2010, 09:09 AM

I'm a big fan of simple.

It sounds like you could afford to have the 401(k)s done as pre-tax investments, and still do the Roth IRAs as after-tax investments.

That gives you your 43K goal, with a mix of pre- and post-tax. As your income rises, you can move a proportion of the 401(k)s to Roth 401(k)s. But you don't have to do it all now.

While FrugalGirl's message is not wrong, it is also true that the habits you establish as a couple with two incomes will carry on for years. If you can swing the middle ground now, do it. Your income will only get harder to set aside as you look to home ownership and kids (assuming you do want them).

Sandi

**snafu** · 10-23-2010, 01:57 PM

You express "a borderline obsessive desire...to hit the $43K mark in retirement savings" so I suggest you find a second job rather than 'living like a cockroach.' To make me more sympathetic, perhaps you would be willing to let us know what you see in your crystal ball. What will your retirement investment be worth in 40 years? What will retirement age be in 4 decades? [France is increasing retirement age]. What is your plan for retirement? Where will you live? What will you do to fill your days? What does your value system look like? Will you be frugal or a skinflint worrying about each penny spent? Folks are now living 35 yrs post retirement...what figures do you anticipate? How will retirement income be taxed when you retire? [currently, the largest population growth segment is senior]. Alternatively, I don't wish to frighten you BUT what if some disaster overtakes you?

I grew up in a household whose theme was..."if momma isn't happy, ain't no one gonna be happy," and I'm working hard to extend that theme in my home. Your DW will be working in an incredibly stressful environment and will need some luxuries for balance. While I am delighted that you are aware of the need to prepare for the future, it all needs balance.

Setting Retirement Savings Plan with DW