Need some 401k advice

drumenigma

NES Member
Rating - 100%
13   0   0
Joined
Dec 26, 2007
Messages
3,542
Likes
602
Location
Purgatory
- Fluctuates with the stock market, including bad fluctuations?
Which is why diversification is key. Personally I have four different mutual funds in my 401k which touch a lot of different aspects of the market(stocks of all types, bonds, convertibles, domestic, international, etc...). You also want to try to look at investment overlap as funds from a mutual fund company can have some of the same companies in them so pay attention to the portfolio holdings.
 

jasons

Moderator
Moderator
NES Life Member
NES Member
Rating - 100%
43   0   0
Joined
Aug 8, 2009
Messages
15,799
Likes
3,401
Most companies that do some sort of percentage match also have a maximum dollar amount, so depending on your salary you may not need to max out the percentage to get the full dollar amount match. While it almost always makes sense to max out whatever dollar amount your company matches, it may also make sense to consider other options for other investments past the match. (For example if you're currently in a low tax bracket or expect taxes to go up it might make sense to do a Roth and pay the taxes now.)

This stuff can be a bit complicated. If you're saving money for retirement it's probably worth talking to a pro about strategy. Where (and how) you put your money today can have a major impact on what you end up with when you retire.
 
Rating - 100%
23   0   0
Joined
Mar 20, 2011
Messages
8,960
Likes
1,613
Location
Central MA
This stuff can be a bit complicated. If you're saving money for retirement it's probably worth talking to a pro about strategy. Where (and how) you put your money today can have a major impact on what you end up with when you retire.
how much also. A little more now when compounded can make a huge difference in 30 years.
 
Rating - 100%
1   0   0
Joined
Jun 9, 2008
Messages
10,964
Likes
3,209
**** it... I just signed up. Minimum to get the 50% match.

I hate myself for doing this. I hope to prove myself wrong... I'll continue to buy silver and gold as well.
I think others have already said it, but with 50% match, assuming you're in the 25% tax bracket, you're literally getting an immediate 100% return on investment. For example, you put $100 per week into the plan. Your employer contributes $50 more bringing the total investment to $150, but at the same time the $100 you put in is no longer taxable income, so you get a $25 deduction on your taxes. You've added $150 to your retirement savings, but it only cost you $75.

Someone may argue that the money will be taxed later, but it's doubtful that it will be taxed anywhere near enough to make your tax burden higher.
 
Rating - 100%
1   0   0
Joined
Jun 9, 2008
Messages
10,964
Likes
3,209

jasons

Moderator
Moderator
NES Life Member
NES Member
Rating - 100%
43   0   0
Joined
Aug 8, 2009
Messages
15,799
Likes
3,401
The earlier you start putting the money away, the better. It really cannot be underemphasized how important it is to start saving for retirement as early as possible. As the link below points out, starting in your 20s really gives you the best advantage in saving enough.

http://www.businessinsider.com/compound-interest-retirement-funds-2014-3

+1 on this. I really wish I had started earlier, as it is I'm going to be playing catchup when I could have been kicking back and watching interest accrue. Meh, retirement sounds boring anyway. [grin]
 
Rating - 96.3%
77   3   0
Joined
Jan 31, 2007
Messages
3,636
Likes
421
It may have been posted somewhere in the preceding 16 pages, but, one piece of information that a lot of people aren't aware of is this:

A 401K or IRA has pre-tax money going into it. The money then grows and when withdrawn is all taxed.

A ROTH 401K or IRA has post tax money going into it. The money then grows and when withdrawn, is all tax free.

If you are in the same tax bracket when you put money into the account and when you withdraw it, there is no difference between the amount of money you end up with.
As others have pointed out, you're incorrect about the way the taxes work.

However, you're also missing one of the most important points about the ROTH vs. IRS tax affect and the way tax brackets work.

We have a progressive tax system, meaning that tax rate increases the more you make. However, the increase is a marginal rate - it only applies to the the next dollar you earn once you've entered a new tax bracket.

For instance, the first ~$10k of taxable income is taxed at 10%. That 10% rate applies to EVERYONE, whether you make $100 or $1,000,000. Everyone pays 10% on the first $10k

The next tax bracket is 15%, and that goes from $10,001 to $37k. That means if you made $37k of taxable income in one year, the first $10k is taxed at 10%, and the next $27k is taxed at 15%.

How is this relevant for retirement planning?

When you contribute to a tax deferred retirement plan (401k or IRA), the money you contribute would otherwise be taxed at your highest bracket. In other words, if you made $37k of taxable income in a year, and you contributed $7k to a 401k, your taxable income drops to $30k. That $7k you contributed would have been taxed at 15%, but instead it was not taxed. Taxes avoided = $1,050.

Now, fast forward 50 years, you're retired and you withdraw that $7k from your 401k. Lets assume tax brackets have not changed. However, since that's your only income, it's the first $7k of taxable income. The first $7k of taxable income is in the 10% tax bracket. So your taxes are only $700. You've reduced your tax liability by nearly 30%.

In other words, when you contribute, you take income off the top tax bracket. When you retire, the income is taxed starting from the bottom bracket.

While it's good to have both, that's the power of the 401/IRA over a ROTH.
 
Last edited:
Rating - 100%
1   0   0
Joined
Jun 9, 2008
Messages
10,964
Likes
3,209
Another way to put it, for every dollar you have saved for retirement at age 25 (assuming 5% average annual returns, which historically is a very low/conservative assumption) you'll have $7.04 when you retire (age 65). Assuming the exact same returns, for every dollar you have saved for retirement at age 35, you'll have $4.32 at retirement. Start even earlier, say age 20, and each dollar in savings at age 20 becomes $8.99. That five years from age 20 to 25 accounts for a nearly 200% increase on your original investment...or about 25% of the total increase over 45 years (assuming an average annual return of 5%).

ETA: For the people here with children, college savings may be the more pressing thing to save for, but even when your kid gets their first job, they can start contributing to an IRA, giving them just that much longer to earn "compound interest" (whether that's in interest, dividends, capital gains, etc.) and making retirement savings that much easier.
 
Last edited:
Rating - 100%
23   0   0
Joined
Mar 20, 2011
Messages
8,960
Likes
1,613
Location
Central MA
And you 50+ NES'er can also make an additional $6K catch up contribution to the $18K limit. This can be done the year you turn 50
I have done this every year for the last 7 years. it is easier when you have prepared. At 50 I basically had no major bills and was making a good paycheck. You don't miss the money if you never have it in hand. Young kids for the most part don't get it. If I had started 10 years earlier I would have accumulated 2.5 times what I did.
 

M1911

Moderator
NES Member
Rating - 100%
26   0   0
Joined
Apr 1, 2005
Messages
39,570
Likes
7,756
Location
Near Framingham
+1 on this. I really wish I had started earlier, as it is I'm going to be playing catchup when I could have been kicking back and watching interest accrue. Meh, retirement sounds boring anyway. [grin]
I was in grad school from age 27 to 31. I'd contributed to my 401k between age 24 and 27, but that gap has certainly penalized me.
 
Rating - 100%
5   0   0
Joined
Apr 24, 2005
Messages
35,169
Likes
11,855
this is correct and you have also leveraged that extra 40% by it also compounding hopefully.
Look at my math. If you leverage the 40%, it's just more to be taxed. The only real benefit is if you are in a different tax bracket at withdrawal time.

Another benefit is if one contributes while in a high tax state, then moves to a no income tax state to withdraw ... though I think NY was trying to tax pensioners on deposits made while in that state.
 

Varmint

NES Member
Rating - 100%
9   0   0
Joined
Jul 5, 2014
Messages
12,973
Likes
5,157
Location
North Shore, MA
Look at my math. If you leverage the 40%, it's just more to be taxed. The only real benefit is if you are in a different tax bracket at withdrawal time.

Another benefit is if one contributes while in a high tax state, then moves to a no income tax state to withdraw ... though I think NY was trying to tax pensioners on deposits made while in that state.
Yes - if I understand the math, if your tax rate were the same today and 20 years from now, you wouldn't benefit by having a 401k vs a regular non-retirement account, maybe even worse, cause you'll pay regular income tax on the 401k growth, but capital gains rate on the non-retirement growth.
 
Rating - 0%
0   0   0
Joined
May 30, 2011
Messages
7,266
Likes
1,414
Location
Metrowest
Yes - if I understand the math, if your tax rate were the same today and 20 years from now, you wouldn't benefit by having a 401k vs a regular non-retirement account, maybe even worse, cause you'll pay regular income tax on the 401k growth, but capital gains rate on the non-retirement growth.
The monkey wrench I'll throw into the mix, since we're talking about tax rates and retirement income, is that at some point - if you're lucky - you'll be managing both taxable and tax-deferred accounts. They are totally different animals. Figuring out when to trigger a tax event, i.e. selling a stock you have made money on, can be a difficult decision. However, once you have maxed out your tax-advantaged accounts, putting money into taxable accounts is also a good idea.

That said, another benefit of 401k's is that you can buy, sell, and rebalance without worrying about the tax consequences now, which is effectively another way 401k's increase your wealth. You benefit from the earnings of unpaid future tax payments.
 

MRE

NES Member
Rating - 0%
0   0   0
Joined
Jul 31, 2012
Messages
397
Likes
58
Location
Western, MA
As others have pointed out, you're incorrect about the way the taxes work.
I had typed that first part backwards. It was fixed before you quoted it.

However, you're also missing one of the most important points about the ROTH vs. IRS tax affect and the way tax brackets work.

We have a progressive tax system, meaning that tax rate increases the more you make. However, the increase is a marginal rate - it only applies to the the next dollar you earn once you've entered a new tax bracket.

For instance, the first ~$10k of taxable income is taxed at 10%. That 10% rate applies to EVERYONE, whether you make $100 or $1,000,000. Everyone pays 10% on the first $10k

The next tax bracket is 15%, and that goes from $10,001 to $37k. That means if you made $37k of taxable income in one year, the first $10k is taxed at 10%, and the next $27k is taxed at 15%.

How is this relevant for retirement planning?

When you contribute to a tax deferred retirement plan (401k or IRA), the money you contribute would otherwise be taxed at your highest bracket. In other words, if you made $37k of taxable income in a year, and you contributed $7k to a 401k, your taxable income drops to $30k. That $7k you contributed would have been taxed at 15%, but instead it was not taxed. Taxes avoided = $1,050.

Now, fast forward 50 years, you're retired and you withdraw that $7k from your 401k. Lets assume tax brackets have not changed. However, since that's your only income, it's the first $7k of taxable income. The first $7k of taxable income is in the 10% tax bracket. So your taxes are only $700. You've reduced your tax liability by nearly 30%.

In other words, when you contribute, you take income off the top tax bracket. When you retire, the income is taxed starting from the bottom bracket.

While it's good to have both, that's the power of the 401/IRA over a ROTH.

I'm aware of the progressive tax system.

If a person is getting most or all of their retirement funds from their 401K, I agree with you. Their contributions are withdrawn and taxed at lower rates for the first 9K (10%), 9-36K (55%), etc.

However if someone has a pension that supplies 80% of their last year's income, and has a 401K, they very well may be withdrawing their 401K funds at the same tax bracket as they put them in at, in which case there isn't an advantage over the ROTH vs non-ROTH accounts, at least in the tax sense.

It all depends on your situation.
 
Rating - 0%
0   0   0
Joined
May 30, 2011
Messages
7,266
Likes
1,414
Location
Metrowest
However if someone has a pension that supplies 80% of their last year's income, and has a 401K, they very well may be withdrawing their 401K funds at the same tax bracket as they put them in at, in which case there isn't an advantage over the ROTH vs non-ROTH accounts, at least in the tax sense.
I am going to go out on a limb and suggest that this is a fairly uncommon occurrence. Given how few people save at all, the likelihood of a person with a generous pension putting aside additional money seems a stretch. I applaud you if you've done it, but then you fall into that rare category of people (I'm thinking of San Francisco firefighters) who, short of a government collapse, doesn't need to save for their own retirement, and probably will enjoy their retirement very much.
 

Varmint

NES Member
Rating - 100%
9   0   0
Joined
Jul 5, 2014
Messages
12,973
Likes
5,157
Location
North Shore, MA
I am going to go out on a limb and suggest that this is a fairly uncommon occurrence. Given how few people save at all, the likelihood of a person with a generous pension putting aside additional money seems a stretch. I applaud you if you've done it, but then you fall into that rare category of people (I'm thinking of San Francisco firefighters) who, short of a government collapse, doesn't need to save for their own retirement, and probably will enjoy their retirement very much.
I'd think it's fairly common with half the jobs being government.

As for myself, working my entire career in private industry (at companies not connected enough to get bailouts), a pension is a pipe dream.
 

ASHDUMP

NES Member
Rating - 100%
6   0   0
Joined
Aug 1, 2009
Messages
4,894
Likes
945
Location
Massashootin'
My buddies dad worked for a large town here in mass with a golden pension... He brings in 85k a year for doing absolutely nothing.

I wonder why pensions are becoming extinct.
 

Varmint

NES Member
Rating - 100%
9   0   0
Joined
Jul 5, 2014
Messages
12,973
Likes
5,157
Location
North Shore, MA
My buddies dad worked for a large town here in mass with a golden pension... He brings in 85k a year for doing absolutely nothing.

I wonder why pensions are becoming extinct.
Yeah, pensions are only viable if you're either government and can print money and/or tax your citizens whatever you want, or you're a big private company who can pay washington to bail you out, otherwise they're simply not affordable.
 
Rating - 0%
0   0   0
Joined
May 30, 2011
Messages
7,266
Likes
1,414
Location
Metrowest
I'd think it's fairly common with half the jobs being government.

As for myself, working my entire career in private industry (at companies not connected enough to get bailouts), a pension is a pipe dream.
I think this is a good time to let a fact check disabuse us of some things that we think we know.

About 7% of the US workforce works for the government.

About 22% of private industry workers get defined benefit packages(pensions).

The average 401k contains $50,000-$75,000(depending on where/when you source your data.), and about 40% of American workers have them.

In MA, the average public employee pension benefit is about $41,000. States range from $15,000(MS) to $64,000(NV). The point being, that yes, there are some pensioners who are getting ridiculous pensions, those are a relatively small number of people.

My point is that while I am sure you are correct in pointing out that there are some people with fat pensions, and who may also have nice IRA's, such that they will see no benefit to having a tax-advantaged retirement account, this is such an outlier that it acts as a red herring in this discussion. IF you have an income of $200,000 when you are retired, and your biggest problem is the tax implications of taking 401k withdrawals, you are in a nice place.

But the average American has no retirement savings, and is living on about $15,000 in Social Security income with no pension benefit. That person will very much benefit from having a 401k, even if it is a modest one.
 
Last edited:

Varmint

NES Member
Rating - 100%
9   0   0
Joined
Jul 5, 2014
Messages
12,973
Likes
5,157
Location
North Shore, MA
I think this is a good time to let a fact check disabuse us of some things that we think we know.

About 7% of the US workforce works for the government.

About 22% of private industry workers get defined benefit packages(pensions).

The average 401k contains $50,000-$75,000(depending on where/when you source your data.), and about 40% of American workers have them.

In MA, the average public employee pension benefit is about $41,000. States range from $15,000(MS) to $64,000(NV). The point being, that yes, there are some pensioners who are getting ridiculous pensions, those are a relatively small number of people.

My point is that while I am sure you are correct in pointing out that there are some people with fat pensions, and who may also have nice IRA's, such that they will see no benefit to having a tax-advantaged retirement account, this is such an outlier that it acts as a red herring in this discussion. IF you have an income of $200,000 when you are retired, and your biggest problem is the tax implications of taking 401k withdrawals, you are in a nice place.

But the average American has no retirement savings, and is living on about $15,000 in Social Security income with no pension benefit. That person will very much benefit from having a 401k, even if it is a modest one.
Well, if you count full time workers in the US, government is more like 20%. If you count government funded private sector jobs, that's another 10-15%. If you count the Fed's trillion dollar/year QE stimulus, that's 7% of GDP, but I digress.

$40k pension sounds really sweet to me, I get $0.00, but my company has to pay for benefits without taxpayer funding or government bailouts.
 
Rating - 100%
23   0   0
Joined
Mar 20, 2011
Messages
8,960
Likes
1,613
Location
Central MA
Don't forget that most people who are getting or have received pensions also contributed to them in some fashion, union dues, lower hourly rate etc.
 
Rating - 0%
0   0   0
Joined
May 30, 2011
Messages
7,266
Likes
1,414
Location
Metrowest
Don't forget that most people who are getting or have received pensions also contributed to them in some fashion, union dues, lower hourly rate etc.
There is a vast difference between a person who fully funds their 401k and someone who 'contributes' 6% towards a pension that can't be supported by math, but must be supported by taxpayers.
 
Rating - 100%
23   0   0
Joined
Mar 20, 2011
Messages
8,960
Likes
1,613
Location
Central MA
There is a vast difference between a person who fully funds their 401k and someone who 'contributes' 6% towards a pension that can't be supported by math, but must be supported by taxpayers.
I realize that. My point was that a pension is not a gift from an employer. Most are at least partially worker funded either directly or through a union.
 

ASHDUMP

NES Member
Rating - 100%
6   0   0
Joined
Aug 1, 2009
Messages
4,894
Likes
945
Location
Massashootin'
My buddies dad worked for a large town here in mass with a golden pension... He brings in 85k a year for doing absolutely nothing.

I wonder why pensions are becoming extinct.
 

Varmint

NES Member
Rating - 100%
9   0   0
Joined
Jul 5, 2014
Messages
12,973
Likes
5,157
Location
North Shore, MA
My buddies dad worked for a large town here in mass with a golden pension... He brings in 85k a year for doing absolutely nothing.

I wonder why pensions are becoming extinct.
My buddies dad worked for a large town here in mass with a golden pension... He brings in 85k a year for doing absolutely nothing.

I wonder why pensions are becoming extinct.
Alzheimer's is a bitch!
 

MRE

NES Member
Rating - 0%
0   0   0
Joined
Jul 31, 2012
Messages
397
Likes
58
Location
Western, MA
I am going to go out on a limb and suggest that this is a fairly uncommon occurrence. Given how few people save at all, the likelihood of a person with a generous pension putting aside additional money seems a stretch. I applaud you if you've done it, but then you fall into that rare category of people (I'm thinking of San Francisco firefighters) who, short of a government collapse, doesn't need to save for their own retirement, and probably will enjoy their retirement very much.
No luck on the pension here. I started working for my company 6 months after the discontinued it in 2005. Even if I had started before the deadline it would be pretty small. They switched everybody from a percentage of their pay added per year to a fixed (small) amount.

I wasn't trying to cover "most" people, and maybe my first post saying "if you are in the same tax bracket" should have been more specific and cite the scenario TonyDedo mentioned.

In any case I'm not quite 30 and I expect to rely on my 401K for the majority of my retirement, and other investments for the rest. I have a small amount in a ROTH 401K but the majority and 100% of my new contributions go in a regular 401K (Pre-Tax) for reasons already discussed in this thread. I'm well ahead of most recommendations for retirement savings, so if all goes well I may be able to get out a few years early. Here's hoping.
 
Top Bottom