Retirement Plan?

[sammi]

Hi everyone,


Its been a while since I’ve posted and lots of changes. I need your advice.


I hope to retire (go from FT to PT work) in 3-5 years. I’m out of debt, live in a rental and trying to save. Currently putting 22% ($600, x26 paycks) into a 403b with a company match of 6%, current balance of $140k. Personalized rate of return since Jan is 6.39%. Also have $40k in an older account. And $50k cash in the bank. And I’m up for a 3-4% raise in pay. What’s the best way to manage this so I can really stop working in, say, 10 years? I’m 63 now, and planning to take SS at 66 ($1750/mo pretax). Assuming I can hold onto the job, the SS will roll into the savings.



The retirement plan allows both pre tax and Roth contributions. Does it make sense to split the 22% and make 8% or so into a Roth, plus whatever the salary bump is? That would give me a higher SS payout and I could balance distributions so I’m not hit with so much in taxes. And $30k into a Roth as well or some other type of account, leaving $20k in an emergency fund? What type of accounts do you recommend? I’m clueless about this.



Thank you!!

[tractor]

I’m no expert, but you should look a little harder at the SS part of your plan, if you take it and keep working full time, a substantial portion will likely be taxed. It will probably be best to wait to take SS when you either go to PT, or are fully retired.

Maybe it doesn’t matter if 66 is your full retirement age. I’m sure others will weigh in.

[resolution]

I like the idea of putting some of the contributions into a Roth account so that you have a little flexibility to control your taxable income if you need to make any large withdrawals. I have my retirement split up between tax deferred and Roth for that reason.

[phil5185]

If you add $600/m to your 230,000 and grow it at 6%/yr for 10 more years you will have about $600,000.

If grow it at about 10%/yr it will be $830,000. 

If your SS pays $1750/m at age 66, it will pay about $2380/m at age 70. (It goes up 8% per year).

So you might consider waiting for that - if you don't need the money at age 66.

[Tiny]

Will the RMD on the 401K be an issue? Doesn't it start at 70.5? How does that mess with your taxable income if you are working AND collecting SS?? Would it better to put $$ into the Roth which isn't subject to RMDs?

[buystoys]

I feel the most important question hasn't been answered.  What are your expenses?  What will they be in retirement?  Without a good knowledge of the expense side, questions about income are meaningless.

[teen persuasion]

From SSA, about working while collecting SS:

(Full retirement age is 66 for people born between 1943 and 1954. Beginning with 1955, two months are added for every birth year until the full retirement age reaches 67 for people born in 1960 or later.)

If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640.

In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit. In 2019, the limit on your earnings is $46,920 but we only count earnings before the month you reach your full retirement age.

As Phil pointed out, waiting until age 70 would increase your SS benefit (but not quite to his $2380 number; I get $2310 with 4 years of 8% since it doesn't compound).

If you are making $71k now, and are single, even contributing 22% you are in the 22% tax bracket. Any state tax? I wouldn't switch to Roth 403b contributions, you benefit more from the tax break now. Especially with your low retirement account balances - take a stab at figuring your retirement tax bracket with RMDs and SS income.

You would want to switch to Roth contributions IFF your RMDs plus SS push you into a higher tax bracket, which would be a much higher AGI (> $95k, and remember, SS is at worst only 85% taxable). If your RMDs are more moderate, your SS may have a lower % taxable.

One of your comments left me thinking that you believe Roth contributions increase your SS benefits (maybe vs pre-tax contributions lowering AGI?) - your SS benefits are the same whether you contribute to pre-tax or Roth. Look at your w2 from last year - your SS wages (includes 403b contributions) are different from your taxable wages (excludes pre-tax 403b contributions). So no reason there to contribute to Roth.

If you have more money to save, opening a Roth IRA is a good idea, especially if you don't yet have one. There's a 5 year clock you need to start before withdrawals of earnings are tax and penalty free (withdrawal of contributions is always tax and penalty free). You can contribute up to $7k per year to this as long as you have enough earned income.

[lund]

OP, you are on the right way.

I think that you should really try to work FT, without SS, at a minimum until your full retirement age (FRA)(66 years and two months for somebody born in 1955?)(Jan/Feb 2022?), and preferably as far towards 70 as you can manage before retiring and applying for SS.

Some thoughts and some comments:

• Once you apply for SS, it will stop growing. Else it will grow with a nice percentage (8% per 12 full months, counted per completed month), until maxing out when you are 70.
  
• Even if you don't pay in (that is, you live from savings and investments), your SS will be growing at that rate until you apply or turn 70. And the growth is quite nice too.
• If you work and receive SS, your SS will be reduced with a large percentage (half or a third depending on how far are from your FRA, I think) of what you earn over a comparatively low threshold (around $17500/year) until you reach FRA.
  
• You will still be paying the taxes for all your earned income. This means that the SS you get after reduction and taxes is quite small compared to the original amount.
  
• Thus, SS reduction (and taxes of the bracket where combined salary and SS land you) instead of SS growth (both by taking it later and by paying in) often is a bad choice.
• While working, you are likely to have benefits which else might be expensive (health insurance until FRA!) in addition to a nicely growing SS and 403(b). 
  
• Your SS grows both by adding more years worked/paid in to it, and, if you have the maximum number of years, by changing low-income years for recent years with more income (assuming your salary is relatively higher now than when you started out), and thus make the SS based on a higher lifetime relative income.
• Also, your 403(b) grows for each month you contribute. With 22% of your income per year (plus growth, plus any tax effects), what you add to it it is not chump change!
• You are likely to be earning more now than in retirement, and thus likely to be in a higher tax bracket now than in retirement, so making the most retirement contributions pre-tax to your 403(b) probably is to your advantage. (I compared 55k/year and also 55k - 22%  (which is income minus the untaxed retirement part) = 42.9k  to 1750*12 = 21k  plus 4% of (120 + 40) existing retirement = 6,4k or in total 27,4k. )(Please note that 4% was the old "golden number" for retirement withdrawals in order to not run out of money. Many now think that this is too high and use 3% instead.)
  
• If you want some post-tax retirement money, consider starting a Roth IRA. Your 403(b) is likely to have minimum distributions, and a Roth doesn't, which can be practical since it lets you keep money in the retirement account untouched. Also, a Roth may come in handy if you have the need for a larger amount of money in the same year, such as for repairing a car or home, since you will not get any tax effects from Roth withdrawals. And don't start a Roth at a bank; go to an investment company with a good reputation (ask the board). You may need to save up a starting amount. (If you have an old Roth IRA, you may be able to continue to contribute to it.) Roth or not will not have any impact on your SS. The SS is based on your earned and legally reported and taxed income.
  

• Once you approach 64 years and 9 months, make sure to sign up correctly for all relevant parts of Medicare (which you have to have done before you are 65, even if you don't retire until later, in order to be sure to avoid penalties later)(parts B and D, I think?). The research may take some time, so start early. Make sure that you can show that you have had continuous health insurance coverage in order to avoid penalties as well.
• Don't talk about retiring at work other than to say "not in a long time yet" with a smile. The ones who are known to be more prepared are the ones whom it is easiest to let go.
• Consider not buying a home of any kind until at least when you are past your FRA, or else when you have retired. The reasons are, that if things go wrong, you have much money tied up in it, you can't move as easily due to selling costs, and you may need to use the savings to live from in order to take SS as late as possible. (Doing that can be a good choice when SS is the largest part of the retirement income.)
• Contact the SS office before deciding to retire (including talking to people at work or friends) in order to confirm that you'll get what you think that you will get, and what hanging in for some additional months would give you. (They hopefully can count more exactly on what additional months with higher income will do for you.)
  
• Some more little coarse math: If your present full SS benefit is $1750, (not counting increases from adding a good year, possibly in exchange for a less good previous one - and these may be noticeable), working for one more year over your FRA will give you a monthly benefit of $1890, for two years of $2030, for three years $2170, until 70 $2287 (as per the SSA's page). (And still no corrections for years added or "upgraded" done.)
  
• Before retiring, also keep your eyes and ears open as to what the rules of your employer are. Will any unused vacation, PTO, sick time be forfeit or paid out? If it is paid out, how and when? If it is paid out, and you have the choice, consider retiring in the beginning of the following year instead of in the end of the year. That way, you are likely to get the pay-outs in a year with lower taxes. The same for any bonuses if applicable.
• Keep your savings. If something hits a fan in a bad way, they may help a lot in getting you through until you reach FRA.
  

• If you have a retirement account of 150 k and add 15k per year, and it grows with 6% per year, you will may have very approximately
  • One year: 174k, which may give you a 4% of  580 monthly or a 3% of 430 monthly
    
  • Two years: 200k - 670 - 500
    
  • Three years: 228k - 760 - 570 (should be around the FRA?)
    
  • Four years: 257k - 860 - 640
    
  • Five years: 288k - 960 - 720
    
  • Six years: 320k - 1070 - 800
    
  • Seven years: 355k - 1180 - 890

• As written by a previous poster, how much money you need depends on your expenses. When you list the expenses and track where your money goes, please don't forget the infrequent and/or irregular expenses, such as car repairs or replacements, home maintenance (depends on how you live), purchases of large household items (sofa, mattress,...), moving costs, medical expenses, family events,..... and that things usually get more expensive over time, plus that older persons often have higher expenses (because of paying for more medications, more doctor visits, transportation help, household help, handyman help,.....). Budget for having a savings going and some room in the budget.
  

  
  

[Plain Old Petunia]

Jun 13, 2019 16:01:57 GMT -5 phil5185 said:

If you add $600/m to your 230,000 and grow it at 6%/yr for 10 more years you will have about $600,000.

If grow it at about 10%/yr it will be $830,000. 

If your SS pays $1750/m at age 66, it will pay about $2380/m at age 70. (It goes up 8% per year).

So you might consider waiting for that - if you don't need the money at age 66.

S/he is adding $600 per paycheck, not per month.   $600 x 26 / 12 = $1,300 per month.

[Deleted]

Jun 21, 2019 16:18:30 GMT -5 Plain Old Petunia said:

Jun 13, 2019 16:01:57 GMT -5 phil5185 said:

If you add $600/m to your 230,000 and grow it at 6%/yr for 10 more years you will have about $600,000.

If grow it at about 10%/yr it will be $830,000. 

If your SS pays $1750/m at age 66, it will pay about $2380/m at age 70. (It goes up 8% per year).

So you might consider waiting for that - if you don't need the money at age 66.

S/he is adding $600 per paycheck, not per month.   $600 x 26 / 12 = $1,300 per month.

Yes, but . . . 

• She only has $180,000 in total retirement savings.  This level of contribution has to be fairly recent.
• If she moves to part-time in 3-5 years, will she be able to sustain this type of contribution?

I'd keep on working full-time for as long as I could.  

The "but" wasn't directed at you, Petunia. 

[teen persuasion]

Jun 13, 2019 20:38:20 GMT -5 Tiny said:

Will the RMD on the 401K be an issue? Doesn't it start at 70.5? How does that mess with your taxable income if you are working AND collecting SS?? Would it better to put $$ into the Roth which isn't subject to RMDs?

Just happened to re-read this - if you are still working at age 70.5, I believe there's no RMDs from that employer's plan (until you are no longer working). 


Roth IRAs have no RMDs, but employer Roth plans DO have RMDs.  You can roll the Roth employer plan over to a Roth IRA to get around the RMDs, but only after you quit working.  I'm not  sure if you might get hit with one RMD between the quit-working-after-70.5 & rollover, though.