You can consult a “fee only financial planner” who will advise you for a one-time payment. Mine charged about $300/hr 5 years ago, and since I had a specific question (I had just sold a property for a large cap gain) and prepared all the docs, it took less than an hour.
I met with a Fidelity advisor last year when I inherited a small account at another brokerage and wanted it transferred to my name and rolled over into Fidelity. She helped me with that and also advised putting $100K in my Fidelity money market account (left over from the above real estate sale) into a 5 year fixed annuity that pays 5% compounded interest. I was not charged even though my assets with them are relatively modest (less than $2M). I’ve been really happy with Fidelity overall.
The more I try to think this through the more confused I get. Too late for me anyway, we consistently maxed out on the 401K option with corporate match. The tax hit as I make withdrawals will be what they will be.
But I’d love to see the exercise of the numbers run. Ignore the fact that some states do not have state tax on retirement fund distributions.
A couple has X to invest each year through their 30s on. Say in 24% Fed bracket.
They can invest X in the 401K/IRA and all of X appreciates, say at 8%, compounding annually. Then in retirement they take out … at say at the same 24%. Any leftover after they die goes to heirs with no tax hit for most.
Or other end of the spectrum - they could pay the 24% as income up front. Invest 0.76X each year instead. Compound that difference over say 30 years of dollar cost averaging but the same 8%. And then take out at 15% capital gains. Pretty sure without running the numbers having had that additional 24% in the market all that time offsets the higher tax bracket on the distribution end.
Even in the Roth option I suspect? But don’t know where the lines would cross.
I think on the Roth question it ends up as a wash if tax bracket stays the same in retirement?
Differences being RMDs limit flexibility on the 401K side which might push up into a higher bracket.
And again money left in the 401K account after death have their appreciated gains having never been taxed and won’t be in most circumstances, while the Roth side paid the tax upfront (none additional on death).
Unless I’m missing something. Which definitely might be!
Or invest the same full amount in the Roth, and just eat less avocado toast. I’m really not sure how to quantify that.
I’m going to max out my IRA contribution every year, Roth or standard. The Roth money is “more expensive”, and I guess if I was completely optimizing I’d have to calculate the extra Standard money going into an investment account and also earning 8%. In reality, it will probably sit in a 0.05% checking account.
Also, for a 401k I think it is almost always going to be a win to contribute however much is necessary to get the maximum employer contribution.
Correct. AIUI, all money in a 401k has to be withdrawn within 10 years of inheritance. And I believe it’s taxed the same as all other income to the heir(s).
I don’t see how this is a “lie”. If you are a big saver, that means you are a big earner, and if you are making $300k/year salary for example, then the upfront tax savings you are getting from contributing to the IRA/401k are way more than 15% on those contributions also. After tax investment accounts are great, but they are always worse than a Roth IRA (because they both are funded with after tax money, but the Roth IRA will then never again be subject to taxes, where earnings in the investment account will be subject to capital gains taxes) and the calculus with respect to regular before tax accounts (traditional IRA’s and 401k’s) is complicated and mostly dependent on your tax rate of when you contribute vs when you withdraw.
So, assuming same amounts of avocado toast, and same tax brackets working and retirement, Roth v 401K is a wash by numbers alone. But both better than paying tax on the income and then in the capital gains.
The main catch I think is the assumption many make that tax bracket will go down in retirement and with RMDs not necessarily so.
FWIW my company also had some profit sharing bit until these last several years as well beyond the match. Can’t say I understood it though.
IMO trying to psych out the pros/cons of which retirement savings options are better is kind of a waste of time, because “life” has a way of intervening. As we get older, we may also inherit assets – which have to be accounted for in the tax equation, and may trigger the dreaded IRMAA charge. Or an unfortunate event could change your favorable MFJ status to Single, which often causes the trifecta of less income, more proportionate expenses, and reduced standard deduction. Or your rate of return on your investments could turn out to be quite a bit different from what you anticipated.
If I could do it all over again in my 30s & 40s, I’d contribute to a 401k to the max if matched by an employer. If no employer match, contribute max to a ROTH IRA, and if eligible, then put the rest I could afford into the 401k.
So I’ll admit I haven’t done the math, and of course there are a lot of variables in the hypothetical.
But there are people who start early and aggressively in their 401k. Someone who puts $12,000/year (employee + match) into their 401k and gets an average CAGR of 9% (S&P 500 has returned an average of 10.5 back to 1929 with dividends reinvested) will have $4 million after 40 years working. A spouse who puts in an additional $6k/yr brings them to $6 million.
If they retire (I know this is over-simplified but it gets convoluted fast) and put it all in bond funds generating a 5% return, and just spend that, they’re generating $300k/year in income (of course, they could live on less). Per the tax link I provided, they’re paying $50k/year in taxes, an average rate over 18% AND they’re paying that on all of it, even the portion that isn’t gain, since it wasn’t taxed originally.
I’m not saying this is typical, and I don’t know how we’d do the counter, where the same money is saved in a regular retirement account. But with a top marginal rate of 37%, there has to be a point where it crosses over.
I certainly know dual income people making around $200k who are both maxing out their contributions (current max is $23k, I think). And around here, we start chemists right out of school around $100k (Boston, big pharma/biotech industry) so it’s not hard to imagine a disciplined couple hitting it hard and early.
The circumstance that it does flip over is if they have to take out RMDs stacked on top of other income at a high tax bracket, while the money in the account can be let be except in years of otherwise low income.
But the counter is not so complex. $12K not put into the retirement fund. Taxed at let’s call it 24%. So now $9,120 invested annually. End of 40 years just over $3M instead of $4M. Add in spouse and the comparison is $4.62M to the $6M of your example.
Your example is taking out 5% a year? Doesn’t matter bonds or equities, it is straight income coming out of the funds. Pretend a flat 24%. They live off the $228K.
This other couple takes out the same 5%, $231K, only pays 15%, left with $196K to live off of.
Now if we assume both couples already also have a very high other source retirement income, and all additional income is in the 37% bucket for the 401K couple then it flips. Barely. A $7K advantage to the ones only paying capital gains having invested after tax regular accounts.
IMO what I found is that by the time you get done with all this math, the numbers become de minimis. IOW If the delta for your level of assets is $5k, well $5k really isn’t an important amount of money to you. By the time the delta is $20k, that’s still not material versus your much larger assets.
The huge factor for a 40yo is “what will the tax laws be when I’m 70?” Good luck getting that right. Everything else amounts to guesswork atound a huge unknowable unknown.
No, not at all. But futzing with whether to save 5,000 of post-tax money into the Roth, or 5,000 of pre-tax money into the traditional matters far, far, less than what you invest in.
A 40yo in a grab bag of conservative funds selected by an advisor looking for high fees paid to him is throwing away millions. Bickering about whether traditional or Roth saves $1k of taxes this year is fiddling while Rome is being firebombed.
Just in case that isn’t a joke, no. How you hoard the money definitely matters. I only brought up the saving mechanism because, due to some unique circumstances, I’ve had to use a straight brokerage account for retirement saving for the last decade or so (my wife does have access to a 401k). So I now have two sizeable (to me) piles, one in a rollover IRA and one in a regular brokerage account. So I’m a little obsessive (because I’m a little miffed about it) in looking at how that impacts my retirement saving, taxing, and spending.
There are a few upsides, like for instance I plan to retire before 59 1/2 and I can access my brokerage money at my whim. It sounds like you’ll have that too.
I still think the real answer comes down to assumptions about the tax brackets.
If you have someone who somehow makes $50k/year, but puts $20k in his 401k, he’s only realizing a tax savings of 7% (single). I know that’s unrealistic for most people, but I guarantee there’s someone out there with no friends living in mom’s basement doing it (assuming there isn’t some contribution rule that precludes putting in that %).
If you’re in the 33% marginal bracket, well, that’s going to be a lot different.
And even a good saver was saving less and getting less tax benefit at 22 than at 52. I mean, my first career job paid $27,500 (which was just OK at the time) and I was damn proud to be putting 15% away, or $4,125 a year (+ match). Unfortunately, I came of age during the dot com boom and it took me a few years to find the cult of the low cost index fund.
I don’t know if you folks remember when the Vanguard Primecap fund was all the rage and closed to new investors, because it was so hot it couldn’t deploy all the money it was taking in, but it was offered through our 401k and I thought I was so damn smart. It was that fund that taught me the truth about genius fund managers.
What I discovered after I retired is that before retirement, it is indeed all about hoarding money. After retirement, it is all about cash flow.
What we did was to figure out what we were going to spend when I retired. Then we computed how much we would make in terms of interest and dividends. Plus, we had a pile of after tax money, which we used first. We were able to delay my taking Social Security until I hit 70 and maxed out. I also did this by taking out some IRA money while we were still in a low tax bracket - just enough to not have much or any of it taxed at the next higher bracket. When I got my social security it bumped everything up, but taking IRA money out early reduces the impact of your RMD.
We moved a lot of our IRA money into low volatility dividend stocks. Now Social Security and RMD money are enough for us to live on, very comfortably. Our portfolio has grown nicely, but nowhere near where it would be if we were more aggressive. But is also buffered from downturns. If your income sources are enough to live on, you don’t really need to care about whether your investments have gone up or down.
That’s what worked for us. I’ve never lost a second of sleep worrying about money in the 9 years I’ve been retired. The change in mindset from investment amount to cash flow was a big revelation. I’m sure it is mentioned somewhere, but I’d never seen it.