30 year old, dismal retirement fund. Advice appreciated

[KTP]

If it isn't too nosy of me to ask, I'm very curious about what field you are in? Your pay (from both jobs) sounds great, and to be able to make 95K from a job at home is amazing to me. I'm currenly studying accounting myself. It will (most likely) lead to a 6 figure income (in time), but it will take me a while to get to that level.

Well, from his many questions about IRAs and Roth conversions, we can rule out that he is in finance, which probably means he is in tech, most likely software engineering.

My wife, a software engineer, is in a similar situation. Makes about 200K, can't contribute directly to a Roth or a deductable IRA, and so I made a contribution for her to a regular after tax IRA at the beginning of 2011 at Vanguard (easy to set up, no cost) and the next day when it was funded I selected "convert to Roth" and whammo! instant Roth IRA. This works great since she does not have any other IRA accounts with a cost basis, so no taxes were due. I also did this for 2010 last January and will do it for as many years as they leave in the loophole.

My wife says everyone at work is amazed at my financial knowledge (mostly gained on here) but it isn't really me, it is that most tech types are fairly ignorant of this stuff. I think this stems from the past when all they really had to do was check every few months to see how many more millions their stock options had made them.

[jpg7n16]

There must be a post limit to enable PMs. I can send them to most people, but as you only have 5 posts, you can't send them out. I guess this keeps people from SPAMing inboxes on the forums.


And TCubed, that's exactly what I'm saying You just keep reopening 'A', funding it with $5k - and then as soon as possible transfer the balance to account 'B.' If you can't reopen A, then just open A2 like you said. Rinse and repeat.

And if the law doesn't permit for a year or two (or three) then you just let account 'A' keep growing (or A2, or A3 - whichever one you're on at that time). And then if the law permits you to transfer later in life, you can convert the whole balance later - though you'd pay income tax on any earnings in order to transfer. [earnings, not balance]

So let's say you're on account A3, and the law changes to reinstate an income limit on conversions. So for 5 years, you keep funding A3. You've deposited $25k total over those 5 years, and it's grown to $30,000 (about 8% returns). Then if income limit on conversions is removed, you can transfer all $30,000 at that time. You would incur tax on $30,000-25,000 = $5000 in the year of conversion to do so.

[DebbieL]

Hi TCubed,

I just tried to PM you, but your settings don't allow it (it says you've specified you don't want emails. That might be why you can't send PMs to others? I can understand that you don't want to post it on the board - like I said, it is a nosy question. I'm always impressed when I read about others who are doing so well (better than me, lol) and curious about what it is that they do.

[TCubed]

JPG,

Thats great. I actually got off the phone with a tax guy I looked up from one of the links you sent me - we chatted for 1/2 hour or so. He pretty much validated what we were discussing here. So my plan right now is to open a traditional IRA with VanGuard or TRowePrice or something, place 10k in there. Then roll over to a Roth right after. At the same time, I signed up for 401(k) today with job#1. (If I put 5% I get 4% match). Kicks in next paycycle. Im not too happy with the options for funds that they offer, but Im stuck with them for now. Maybe ill make it 'moderate' risk.

My old 401(k), the one with only about $13K, had been only making 0.8% in the past 3 years because I neglected it! >< I just dusted it off, going to make put it under an aggressive plan for now.

He also mentioned that I could theoretically place all my extra earnings into a 'Qualified Plan' or something like that, that would allow me to 'catch up'. Heard of this? I good thing to know would be how much 401(k) money is someone my age supposed to have anyway...

DebbieL,

Ah! Ok, I just went into options and allowed emails from members. Dunno why it was off from before. Go ahead and try again.

[jpg7n16]

JPG,

Thats great. I actually got off the phone with a tax guy I looked up from one of the links you sent me - we chatted for 1/2 hour or so. He pretty much validated what we were discussing here.

It's always nice to be validated by the experts

He also mentioned that I could theoretically place all my extra earnings into a 'Qualified Plan' or something like that, that would allow me to 'catch up'. Heard of this? I good thing to know would be how much 401(k) money is someone my age supposed to have anyway...

Well, yes I do know about Qualified plans, but since you're an employee - I don't know what control you have over that.

He may have been referencing starting up the 401k process. 401ks are Qualified plans. So since you weren't contributing to your 401ks before, that's probably what he meant. (IRS: Qualified Plans)


And if you don't like the options at one company, only contribute enough to get their match. You can do a combined $16,500 across the two companies. So just do whatever they match at the one with options you don't like, and then max out the other one.

So if you make $95k at each job, if you do 5% they match 4%, then do 5% at that job. (5% * 95k = $4,750) So then you'd have to do 16,500 - 4,750 = 11,750 at job #2. That works out to 12.37% (11,750/95,000)

I really think that's what he was referring to. (which is what both snshijuptr and I advised earlier in the thread )

[TCubed]

JPG,

Yeah, the million dollar question now becomes: With all the extra cash coming in for me at the moment - is there anything I can do besides a 401(k) or IRA to also stash it away for retirement somehow, since the 401(k) and IRA plans always have limits.

In other words, after I have added 10k to my IRA-converted-to-Roth very soon, and after I have maxed out my 401(k)(s), I will have this cash coming in fast. How else can I stash it to 'catch up' my retirement fund(s)?

I basically want to have as much in 'retirement' now as someone 'normally' my age would have had. (Ball park of course). Because right now I know I am behind the game compared to my peers my age as far as retirement funds go.

[elessar78]

TCubed, I don't know if I like the move of "comparative investing"... there's no "normal" person in terms of investing.

Identify a retirement date, project how much money you think you'll need in retirement. Make sure you don't outlive it. Account for things that you don't concern yourself about at a young age like medical care or nursing care.

When you've answered those questions then the numbers will fall into place.

[jpg7n16]

Taxable accounts.

Here's how that pretty much works. Qualified accounts are tax-deductible employer accounts (like 401k, 403b, money purchase pensions, etc.) Note: if you were self-employed you would have more options here as you would control the type of Qualified account you have.

Then you have Individual Retirement Accounts (IRAs) which have contribution limits. So once you've used up all your tax advantaged accounts, then you're back to the normal course of events - taxable accounts. Where if you buy something for $1 and sell it for $2, you're taxed on the $1 of earnings. That's the normal course of events in an income tax society.

So let's say you do amazing this year and bring in $190k again. Of that you decide you'd like to save 20% this year for retirement. $190k * 20% = $38k

So you would take:

38,000 (20%)
-16,500 (to 401k)
-5,000 (to IRAs)
16,500 remaining to invest

So you would add $16,500 to a standard brokerage account. Or save it up to invest in real estate. Whatever investment you want to get into - the world is your's!


But since taxes are an area you've mentioned concerns about - you should look for tax efficient investments. Municipal bonds pay out tax free interest. Growth funds are usually composed of stocks that pay little to no dividends - and if you purchase as an ETF, there wouldn't be flow-through of capital gains.

At this point, it'd just be finding investments that help you meet your goals.

If you want to limit taxes, you wouldn't want to purchase a high yield bond fund (outside of the retirement accounts). As the high yield funds pay out lots of interest, and interest is taxed at your marginal rate, it would be working against your low-tax goals. If you really like the fund itself, purchase it in the Roth - since the Roth is all tax free.

This is where you may also need the help of a financial professional - someone who knows the types of investments the world has to offer, and can help you identify your goals and get you started down the right path for you. The links above can help you find a planner in your area.

[TBH]

I just want to bring up another angle--it sounds like you're doing well keeping your living expenses in check if you're spending less than half of your take-home pay. I agree with the person who said you may not be able to sustain this level of work forever. So catching up on retirement savings now and keeping your living expenses low will give you the option of cutting back to one job if/when you decide to put more attention on personal relationships and/or having a family.

You are concerned about catching up on retirement savings. I agree with everyone else that you should put as much as you can into tax-sheltered retirement savings accounts (401ks, IRAs, the way jpg has so clearly described.)

But when professionals ask you how much you have in retirement savings, they are also talking about money in taxable accounts or real estate investments--basically anything that you have earmarked for retirement and don't intend to spend between now and then.

I would recommend doing a retirement calculator online. You can easily find one with google. Plug in your age, and your income, and the amount of income you want to replace. If you're currently living on about $4500 per month, that means you need to replace that amount, adjusted for inflation over the next 30-35 years.

Because you're not trying to replace your entire income, you will probably be able to catch up fairly quickly. I bet that by your mid thirties you'll be caught up and will be able to consider working a lot less.

Good luck!

[TCubed]

TBH

Thanks for your reply - you are right - I have actually been very meticulous about my spending habits, and I never really was the type to spend extravagantly (Well, 2008 was a different story...) but in general Im really good about it. It took me about 5 years after college to finally stop using my old beat up college car! :-)

I have a piece of software that I use to track all spendings and that has REALLY helped be visualize when/where/what I spent money on, and where to cut down. It has easily saved me about $7k since I started using it 2 years ago. It cost five bucks.

After I open the Roth IRA with $10K really soon, I might just actually pay off the car, (worth 8k now), and be done with it. The monthly cost is 250/month for it. (Bought for around 14k), and I believe the interest rate on it is 5.7% or so.

I am not clear about one thing you mentioned though: What did you mean exactly with what income I need to 'replace'? Although I see what a previous poster said about 'comparative investing', at the same time, I think there is a healthy retirement amount 'figure' for someone in my situation out there, and once that is determined, I will know by how much I need to catch up by. In other words, I am not really trying to compare my 401(k) to someone else's 401(k). I am trying to compare my 401(k) to what my 401(k) should healthily be for someone at my age/position.

JPG,

Thanks again. I will definitely look into the nitty gritty of those funds you have mentioned, and normal 'taxable accounts' once I have saturated my tax sheltered ones.

One thing I started to think of however, was why not ALSO put the 401(k) I currently have (worth $13k) into the Roth IRA (which will have $10k) that I will open soon? That way I start with a Roth worth about $23k...

Thanks again everyone.

[jpg7n16]

JPG,

One thing I started to think of however, was why not ALSO put the 401(k) I currently have (worth $13k) into the Roth IRA (which will have $10k) that I will open soon? That way I start with a Roth worth about $23k...

Because you would be taxed on $12k of extra income at your highest marginal rate.

In order to convert from a 401k to a Roth, you have to include the entire amount into your taxable income for the year, as none of it has been taxed yet - there's no basis. And for converstions (Value - Basis = Taxable Income). So for your 401k, it'd be $12,000 - 0 basis = $12,000 taxbale income (at at least 30% taxes)

Since your income is so high, I would honestly prefer to see you use tax-deductible accounts and postpone as much income as possible.


For your IRA situation, that's just not possible to get a current tax deduction. The way the non-deductible straight to Roth works out is that your value and basis are virtually indentical. So for your $5k contribution and immediate conversion, your value is $5000 - $5000 basis = $0 taxable gain.


I would personally wait until you're in a lower tax bracket before converting if you want to convert at all.

[TBH]

TBH

I am not clear about one thing you mentioned though: What did you mean exactly with what income I need to 'replace'? Although I see what a previous poster said about 'comparative investing', at the same time, I think there is a healthy retirement amount 'figure' for someone in my situation out there, and once that is determined, I will know by how much I need to catch up by. In other words, I am not really trying to compare my 401(k) to someone else's 401(k). I am trying to compare my 401(k) to what my 401(k) should healthily be for someone at my age/position.

Income you want to replace:
What I mean by this is that you currently make X dollars a year. You need to live on Y percent, which is a percentage of X. When you retire, you need to replace the amount of income you actually live on, not your gross income. So if you retired tomorrow, you would need a reliable source of income for life from your investments. That amount would equal Y, not X. To figure out how much you need when you retire, a simple formula is to figure out how Y will change based on inflation over the next 35 years or so. Retirement calculators will figure this out for you based on a prediction of how inflation might effect your buying power over time.

I hear you about finding out how much YOU should have, not an abstract person your age.

Most retirement calculators don't spit out their information in that format, though. Instead, when you tell them how much you have saved, how much you are earning, and what percentage of your income you want to replace, it will tell you how much you need to save per year or per month to get where you need to be.

The retirement calculators at Bankrate.com are a place to start, although there are plenty of other good ones.

I did a bit of poking around on Google and found this post from the blog Money Under 30, which says:
"Assuming you have been working since you were 22 or 23, at 30, a great target is to have a 401(k) or IRA equal to about one year’s salary."

So that's one metric you can use--the multiples-of-income metric. If you treat your second job as a temporary thing while you're relatively young and unattached and trying to catch up, and the income from one job will be a more permanent level of income for you, then you could consider that you should have a retirement account right now that's equal to the annual income from one job.

I've read various places about extending this metric even further. By 40 you should have so many times your annual income, by 45 you should have this many times your annual income, etc. I have found the multiples-of-annual-income thing helpful for my particular situation. (I am in my mid 30s, started saving right out of college, and have had irregular income my entire career, but I'm in fairly good shape for retirement savings. My spouse is in his late 40s, started saving only about 10 years ago, has had steady income but invests conservatively, and is not surprisingly very behind on his retirement savings.)

I'm curious--does anybody else use this multiples-of-annual-income benchmark, and if so, can you remind me what those multiples are? I can't remember where I read about this and can't find a source on google that seems like a simple and clear reference point for this idea.

[TCubed]

Thanks TBH, and JPG.

TBH - yeah, the one years' salary does make qualitative sense to me... I guess Id better start it up now! My world-travelling plans can wait. :-)