Saving too much for retirement

[Deleted]

I am guessing it is possible to save too much for retirement, but I am wondering if that is ever a real problem? If it is, I am thinking it would be a good problem to have.

I would like to be in that couple's shoes in 30 years, and if all goes well (knock on wood) my wife and I will be there. I think the following might be difference in our case:
-> combined income
-> ROTH IRA amount (theirs is only at 40K)

but it seems they are worried they might have saved too much and cut back?

seattletimes.nwsource.com/html/businesstechnology/2014504957_burns20.html

Q: I am 55 years old. My wife is 54 years old. I have $700,000 in my 401(k). My wife has $400,000 in her 401(k) and 457(b).

We each have another $40,000 in Roth IRA accounts. We also have savings of $300,000 in a taxable account, mainly in stocks. We are in decent health. We are still working and earn $130,000 of combined income.

I will not collect any pension in my retirement. My wife will have about $800 a month in pension. We have no debt. We still contribute the maximum allowed to our 401(k) and Roth IRA accounts.

Are we contributing too much to these accounts? Should we cut back and invest more into taxable savings?

A: Yes, you can cut back on your current savings rate. How much you cut back will depend on when you retire.

If you are saving the maximum in your 401(k) plans, you would be saving $22,000 a year each ($16,500 maximum contribution plus $5,500 "catch-up" contribution).

You would be saving an additional $6,000 each of after-tax income in Roth IRAs. To put that money into the Roths, you would have needed to pay another $2,000 each in income taxes, assuming a 25 percent tax bracket. This means as much as $60,000 could be coming off the top of your income.

Subtract another nearly $10,000 in employment taxes, and you are currently living on about $59,000 a year for personal consumption, shelter and income taxes on same. Of that amount, nearly $10,000 will be replaced by a pension, bringing the money you need from other sources down to $49,000.

This is the amount of income you will need to replace from a combination of retirement savings and Social Security. With $1.48 million in financial assets today, you would not need to draw on Social Security benefits to support your current spending level. You are among the very rare birds that have saved more than enough.

You'll have to do more exact figures to see whether the train tracks of expenses and retirement income actually meet. To get a good idea, free, I suggest playing with the online calculator at basic.esplanner.com/.

[Deleted]

Basically they are both 55 and 54 with
-> 1.1M in 401K
-> 300K in taxable accounts
-> 80K in Roth
-> expecting $800/month from wife's pension
-> combined making 130K/year

So if you were in there shoes, would you cut back? What would you do?

[cronewitch]

Save young and you can cut back later.

The benefits of saving young start right away not just in old age. I for example started after my divorce when I was 35 and was only able to save about 2K a year at first then later 15% in a 401K plan. I got terminated off when I only had maybe 10K total saved. I remember telling the person who terminated me not to worry because I was putting 15% in my 401K so even if I took a lower paying job I would be fine.

Other times I was unemployed I was able to live on unemployment without taking on more debt because I was used to living below my total pay. If you and your wife were to save 25% each and one of you lost a job think about the comfort of knowing you only needed 1.5 incomes so with one income and unemployment you wouldn't be in deep trouble because you could stop saving if needed.

When you get to an age like 50 where you start to wonder if you will be able to keep your job until you are elderly you have a choice to down size jobs. You can look then and if you see you have your targeted retirement amount stop saving or cut way back. I did that last year instead of saving 22K in my 401K I only saved 11K because I had reached my minimum goal. I can use the spare 11K to pay down my HELOC or to beef up my taxable accounts.

The main thing I have gained is a total lack of worry for the last 15 years. I have lived below my means and had some money saved and a mortgage under control so I could do any work at all and be fine. Now I have been saving 50% so great practice for living below means in retirement.

[schildi]

Mar 20, 2011 23:53:15 GMT -5 TheHaitian said:

Basically they are both 55 and 54 with
-> 1.1M in 401K
-> 300K in taxable accounts
-> 40K in Roth
-> expecting $800/month from wife's pension
-> combined making 130K/year

So if you were in there shoes, would you cut back? What would you do?

cawiau, not that it matters much, but I think they have $80K in Roth IRA's ($40K each).
Yeah, it does sound like they can cut back a little if they are planning to replace $60K total.
Hopefully we will be in a similar situation at that age.

[azphx1972]

Mar 20, 2011 23:53:15 GMT -5 TheHaitian said:

Basically they are both 55 and 54 with
-> 1.1M in 401K
-> 300K in taxable accounts
-> 40K in Roth
-> expecting $800/month from wife's pension
-> combined making 130K/year

So if you were in there shoes, would you cut back? What would you do?

If I were in their shoes, and I was happy with life and not feeling deprived about anything, then I would keep on trucking. However, if there were things that I wanted to do but have been holding off due to concerns about money, I'd probably back off a bit and do those things.

[Deleted]

I didn't read when they are retiring.

Also, I didn't read anything about their housing situation. Do they have a paid off house or are they renting?

We're in a similar situation (not with 401ks but total investable assets). We will also be cashing in $1M of real estate equities over the next 10 years. I suppose the main difference between us and the couple in the story is that we're retiring early at ages 53 and 50. So basically we will stop contributing to savings in about 2 years (DH will collect severance pay for 6 months after he separates from service).

$49k assumes a 3.3% rate of return on $1.5M. That's o.k. in the short term but $49k today is likely to mean a whole lot less 20 to 30 years down the road with the biggest unknown being medical costs. If the guy and his wife in the story plan on working another 10-12 years until he's eligible for medicare he's probably fine. He and his wife should have about $2M in investable assets and probably won't need to touch SS income for a while. But I believe he will need to draw at some point depending on the market gyrations if he's winds up drawing down in excess of 3.3% (e.g. the 4% "safe" amount). As we transition into retirement we're supposed to put more of our portfolio into bonds. Neither they nor dividends are setting the world on fire right now. So if you're using up your market gains then your portfolio isn't growing.

If he waits until 65 to retire, it might not matter. If he can draw 49k earnings for a while and start cashing in their $2M at $50k/yr (obviously the math is more complicated) he could make it 40 years. But if he retires earlier (like us) he's going to need to pay attention to his budget.

DH is already whining about being "poor".

[Deleted]

Mar 21, 2011 0:03:31 GMT -5 schildi said:

Mar 20, 2011 23:53:15 GMT -5 TheHaitian said:

Basically they are both 55 and 54 with
-> 1.1M in 401K
-> 300K in taxable accounts
-> 40K in Roth
-> expecting $800/month from wife's pension
-> combined making 130K/year

So if you were in there shoes, would you cut back? What would you do?

cawiau, not that it matters much, but I think they have $80K in Roth IRA's ($40K each).
Yeah, it does sound like they can cut back a little if they are planning to replace $60K total.
Hopefully we will be in a similar situation at that age.

Thank you and I fixed it, fingers crossed if all goes well we will be.

[Deleted]

Mar 21, 2011 0:03:21 GMT -5 cronewitch said:

Save young and you can cut back later.

The benefits of saving young start right away not just in old age. I for example started after my divorce when I was 35 and was only able to save about 2K a year at first then later 15% in a 401K plan. I got terminated off when I only had maybe 10K total saved. I remember telling the person who terminated me not to worry because I was putting 15% in my 401K so even if I took a lower paying job I would be fine.

Other times I was unemployed I was able to live on unemployment without taking on more debt because I was used to living below my total pay. If you and your wife were to save 25% each and one of you lost a job think about the comfort of knowing you only needed 1.5 incomes so with one income and unemployment you wouldn't be in deep trouble because you could stop saving if needed.

When you get to an age like 50 where you start to wonder if you will be able to keep your job until you are elderly you have a choice to down size jobs. You can look then and if you see you have your targeted retirement amount stop saving or cut way back. I did that last year instead of saving 22K in my 401K I only saved 11K because I had reached my minimum goal. I can use the spare 11K to pay down my HELOC or to beef up my taxable accounts.

The main thing I have gained is a total lack of worry for the last 15 years. I have lived below my means and had some money saved and a mortgage under control so I could do any work at all and be fine. Now I have been saving 50% so great practice for living below means in retirement.

Thank you cronewitch and I hope to be in similar situation. I wish to be financially ready to retire at 55 if I choose to but personally plan to stay till 65 . But I want that freedom to be able to say the Hell with it in case my job makes the decision for me early on force me into early retirement.

People at my job says that I am pessimistic, I say it's being realistic. My friends mom is now 62 and has been looking for a job for in her field for awhile now, but no one will hire her.

[iono1]

I think there's a line that one can cross in saving too much for retirement. If you are sacrificing too much today for tomorrow, you've probably crossed the line. Examples are driving a beater with questionable safety issues so that you can contribute more $ to retirement, never going out or doing anything special like vacations, and basically being too cheap today to save for tomorrow. If you can still enjoy life & not make too many sacrifices, then you're not saving too much. Remember this: If you spend the money today, you are guaranteed of the enjoyment that it provides. There are no guarantees when putting money away for decades from now. I have a friend with health issues who looks around the office & is amazed by the people who can retire but just keep on working. His best line is "They think they're going to live forever."

[sapphire12]

If they are enjoying life today and not waiting until retirement, then no they are not saving too much for retirement.

I think it's good to plan to retire sooner rather than later. This economy in particular has highlighted this view. Many who are over 50 and were laid off will be destitute until 65. Many will retire early on their respective terms from their hectic jobs and work part-time at something fun. I see nothing wrong with that scenario either.

[resolution]

I think it is a question of are they saving too much tax deferred as opposed to inside taxable accounts. If their 1.4 million in the 401k grows to 5 million in the next 15 years, their first mandatory distribution will be for over 180k, which may end up being a higher tax rate than they are paying right now. I am not enough of a math person to figure out if they are better off paying the higher taxes now or later, but I think they have a good question.

[Wisconsin Beth]

Mar 21, 2011 8:15:05 GMT -5 resolution said:

I think it is a question of are they saving too much tax deferred as opposed to inside taxable accounts. If their 1.4 million in the 401k grows to 5 million in the next 15 years, their first mandatory distribution will be for over 180k, which may end up being a higher tax rate than they are paying right now. I am not enough of a math person to figure out if they are better off paying the higher taxes now or later, but I think they have a good question.

Yeah, I was wondering about that part too. What's the rule of thumb (is there one?) for how to figure out when/where/how much to put in taxable accounts.

[Plain Old Petunia]

I look at it this way: my goal is to "smooth" my income, so that my income before and after retirement are relatively the same. I don't want to decrease my standard of living now in order to increase it later. I don't want to increase my standard of living now and be forced to decrease it later.

And I don't think I am in danger of saving too much.

[phil5185]

'Cut back' is a relative term. If you have $1.5M of liquidity and earn $130k/yr, the income has to be placed somewhere. They may already own one of everything that they have ever wanted - home, motor home, etc. And they probably travel to the extent of their vacation time - 4 or 5 weeks/yr - and eat out much of the time. From that perspective, they would stick the excess income stream into the 401k's to defer taxes - that converts fed& state taxes from 35% while they are working to 20% later.
We built up a bigger taxable fund than they have - good for early retirement, a good backup EF, rental houses, etc. That fund grows tax deferred (index) and, if we never need it the tax will never be due, it will go to our heirs tax free. We cash the 401k money first (I'm above RMD age), that's more than we spend.

[cronewitch]

I hope to be Phil when I grow up.

I am not suffering now, so saving money I don't have a real desire to spend. I want my RMD to be about enough to pay taxes on SS and about what I need to spend. Then my taxable and ROTH are spare money. I will spend the ROTH if I need a chunk of money since their isn't a tax on it. I will leave most of the taxable for old age or heirs if I don't live to old age. To me old age is over about 90-95 when I might need household help.

[schildi]

Mar 21, 2011 13:06:42 GMT -5 phil5185 said:

We built up a bigger taxable fund than they have - good for early retirement, a good backup EF, rental houses, etc. That fund grows tax deferred (index) and, if we never need it the tax will never be due, it will go to our heirs tax free. We cash the 401k money first (I'm above RMD age), that's more than we spend.

Phil, question for you: an inheritance in the form of an index fund is tax free? Or do I misunderstand this?

[Plain Old Petunia]

Schildi, inheritance estate tax depends upon the size of the estate (and whatever the fluctuating rules dictate that year). But the taxable mutual funds will have a stepped up basis when they go to the heirs. The heirs will only owe tax on any gains from that point forward, should they sell. The gains which Phil and his wife enjoyed will not be taxed.

[Wisconsin Beth]

Mar 21, 2011 13:50:03 GMT -5 cronewitch said:

I hope to be Phil when I grow up.

I know Crone. I don't think I have the guts to be Phil when I grow up though. I'm a payoff my mortgage girl and I don't think I'm cut out to be a landlord.

[stats45]

I agree, and think it depends a lot on whatever they would spend their money on besides retirement.

If they are deferring doing other things in their life that would lead to long-term contentment or satisfication (life goals, travel, spending more time with family, etc.), I would say that is a good reason to look at the retirement contributions. If they are really satisfied with all of those things, then savings is a great choice. The money will be there if their preferences change, and they won't be spending money on things that might not provide much lasting happiness or even change their overall habits from being savers to spenders.

[Deleted]

I guess it is hard to say in their case since they did not give enough info; but I would love to be in their spot in 30 years.

[ameiko]

I wonder if I save too much in my retirement accounts (I have both a 403b and 457 as well as a pension) compared to putting more into brokerage accounts and paying down the house. That said, it's not a bad place to be and the 457 I think can be pulled earlier without penalty.

I would ask: what else will you do with that money? Experiences bought with money can be good, things not so much. If you feel deprived, that is one thing but things will often not buy happiness for long.

[Deleted]

Mar 22, 2011 0:17:16 GMT -5 ameiko said:

I wonder if I save too much in my retirement accounts (I have both a 403b and 457 as well as a pension) compared to putting more into brokerage accounts and paying down the house. That said, it's not a bad place to be and the 457 I think can be pulled earlier without penalty.

I would ask: what else will you do with that money? Experiences bought with money can be good, things not so much. If you feel deprived, that is one thing but things will often not buy happiness for long.

True and I am currently in that same spot wondering if maybe I am saving too much for retirement.

I save 25% into 401K, my wife 20% and I do have a pension (not sure if it will always be there since it is a private company after all)...

but we are not depriving ourselves of experiences I think. We are planning to go to Maine in a few weeks, Washing DC afterwards, somewhere nice for our honeymoon and London next year.

If we cut back on retirement savings, we could probably spend more; but I also enjoy the security of knowing that I will be able to retire at 55 or 60 if I want too.

[Deleted]

"the 457 I think can be pulled earlier without penalty"

Absolutely. You can access it without penalty when you separate from service at any age. That can be both a good and bad thing!We're planning on cashing mine in as a way to bridge the years from 54-59 (2013-2018).

Most people retiring early shouldn't have a problem with accessing those tax deferred 401k or IRA accounts without penalty provided they separate from service after they turn 55. DH's contract ends 5 months before he turns 55, hence our decision to start withdrawing from my 457. Otherwise he could convert the 401k to an IRA and withdraw according to their schedule (basically an annuity which has equal payments until he turns 107! ).

We are planning on a withdrawal rate that approximates a 3% return on our combined 401k/457 balances. If our taxable investments do a lot better I won't need to cash in the 457 as rapidly so I have it invested 50% all bond index and 50% international growth. Our taxable income will be a combination of dividends from large cap stocks, oil royalities, rent, and interest.

[Deleted]

Mar 22, 2011 1:53:04 GMT -5 @bonnap said:

"the 457 I think can be pulled earlier without penalty"

Absolutely. You can access it without penalty when you separate from service at any age. That can be both a good and bad thing!We're planning on cashing mine in as a way to bridge the years from 54-59 (2013-2018).

Most people retiring early shouldn't have a problem with accessing those tax deferred 401k or IRA accounts without penalty provided they separate from service after they turn 55. DH's contract ends 5 months before he turns 55, hence our decision to start withdrawing from my 457. Otherwise he could convert the 401k to an IRA and withdraw according to their schedule (basically an annuity which has equal payments until he turns 107! ).

We are planning on a withdrawal rate that approximates a 3% return on our combined 401k/457 balances. If our taxable investments do a lot better I won't need to cash in the 457 as rapidly so I have it invested 50% all bond index and 50% international growth. Our taxable income will be a combination of dividends from large cap stocks, oil royalities, rent, and interest.

Ok I am confuse, those the same rules applies for average joe's like me.
I thought if you withdrew money before 59 1/2 out of a 401K you are most likely to get penalize.

[Wisconsin Beth]

A 457 is different from a 401K. I think there are actually 3 different types of 457s (A, B and C) but what I KNOW is that I, personally, have a 457b plan. I thought 457s were aimed at gov't workers. There is no profit sharing part since gov't doesn't make a profit.

There's another variant for people who work in non-profit organizations - a 403. My friend who works for a hospital has a 403. I believe she gets a match on her contributions.

A lot of the rules are the same for 457/401/403s but each type contains it's own subset of rules specific to it. For example, the limits on how much you can put in each year are the same; the tax implications for each year are the same; etc. I don't know about the withdrawal terms though.

Does that help?

[TrixAre4Kids]

Mar 22, 2011 1:53:04 GMT -5 @bonnap said:

"the 457 I think can be pulled earlier without penalty"

Absolutely. You can access it without penalty when you separate from service at any age. That can be both a good and bad thing!We're planning on cashing mine in as a way to bridge the years from 54-59 (2013-2018).

Most people retiring early shouldn't have a problem with accessing those tax deferred 401k or IRA accounts without penalty provided they separate from service after they turn 55. DH's contract ends 5 months before he turns 55, hence our decision to start withdrawing from my 457. Otherwise he could convert the 401k to an IRA and withdraw according to their schedule (basically an annuity which has equal payments until he turns 107! ).

We are planning on a withdrawal rate that approximates a 3% return on our combined 401k/457 balances. If our taxable investments do a lot better I won't need to cash in the 457 as rapidly so I have it invested 50% all bond index and 50% international growth. Our taxable income will be a combination of dividends from large cap stocks, oil royalities, rent, and interest.

If your DH separates the same YEAR he turns 55, he can still access his 401k. So depending on the timing of his birthday and separation it may still work for him.

[TrixAre4Kids]

This message has been deleted.

Duplicate post