How Much to Put in 401k/Roth IRA?

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CrypticAgent
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How Much to Put in 401k/Roth IRA?

Post by CrypticAgent » Fri Oct 05, 2018 6:51 pm

The penalty-free withdrawal age for these types of retirement plans is 59~ years. ERE strives for retirement much earlier than that.

I understand that the purpose of ERE is to develop skills to live a life that is more loosely coupled to money, thus requiring less or improvising, but these retirement plans do offer legitimate advantages.

How much should one put into a 401k/Roth IRA? Meet the match? Max it out (if possible)?

prognastat
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Re: How Much to Put in 401k/Roth IRA?

Post by prognastat » Fri Oct 05, 2018 7:49 pm

There are ways to get money out of 401k/IRAs early.

https://www.madfientist.com/how-to-acce ... nds-early/

It does require some planning though.

arcyallen
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Re: How Much to Put in 401k/Roth IRA?

Post by arcyallen » Fri Oct 05, 2018 8:20 pm

This is delightfully simple: You can withdraw your Roth IRA principle at any time, for any reason, period. It's often misquoted and misunderstood. A Roth 401k is similar, but you may need to leave employment to roll it into a Roth IRA to withdraw the principle. Roth conversions are a slightly different beast.

My wife and I were maxing every Roth option before we FIRE'd. It lets you effectively put more in than a Traditional, too. A win win win! My wife would joke that she had the take home pay of a high schooler.

CrypticAgent
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Re: How Much to Put in 401k/Roth IRA?

Post by CrypticAgent » Tue Oct 09, 2018 7:35 pm

So you can ONLY withdraw the principal that you put in, not anything gained from interest/growth?

Is this a 401k thing as well or would you have to roll that into your Roth IRA/traditional IRA before withdrawal?

prognastat
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Re: How Much to Put in 401k/Roth IRA?

Post by prognastat » Tue Oct 09, 2018 7:40 pm

The Roth Conversion Ladder strategy has you convert your Traditional 401k to Traditional IRA after leaving your job. Then you can transfer 1 year of expenses from Traditional IRA to Roth IRA, 5 years later you can withdraw this transferred amount without having to pay an early withdraw fee as it wil count as principal. You would of course need enough saved elsewhere to get through the first 5 years in that case though. Since for the vast majority of time the money in in the traditional 401k/IRA and the smallest amount of growth happens after transferring to Roth IRA most of it counts as principal.

If you save it all in Roth from the start then all the growth will be locked away until retirement age.

EdithKeeler
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Re: How Much to Put in 401k/Roth IRA?

Post by EdithKeeler » Tue Oct 09, 2018 9:35 pm

I think the answer to this depends on your income and goals.

It would be foolish, imho, to forgo the company match in your 401k. I think a person should never turn down free money.

If you have a high income and spend little, you should be able to max out your 401k and save outside the 401k.

Personally, I think the biggest risk associated with early retirement is not getting sufficient quarters or high enough quarters for social security. Retire early anyway.... but the money in the 401k that you don’t access until later is a pretty good hedge for the future. If that makes sense.

Peanut
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Re: How Much to Put in 401k/Roth IRA?

Post by Peanut » Tue Oct 09, 2018 9:57 pm

Max it out, as sort-of artificially shrinking your income/take-home is typically conducive to more saving

Lucky C
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Re: How Much to Put in 401k/Roth IRA?

Post by Lucky C » Wed Oct 10, 2018 4:59 am

If you want to be able to live without any income at all, you'll either need a lot of accessible assets (small portion of your money in traditional 401k/IRA) or use a Mad FIentist early withdrawal type of strategy.

More commonly, people transition to working less or obtaining other sources of income that may not come with a 401k. If you might be doing this, it would make sense to move closer to maxing out your 401k now in your highest earning years, because you will still have plenty of income in you post-corporate or post-9-to-5 years.

Just make a spreadsheet estimating retirement (inaccessible) savings and after-tax savings as they accumulate over the next 5 to 10 years. Compare contributing the minimum to get all of the employer match vs. contributing the max. If you can't decide, split the difference and contribute about $10k per year. You can always change it later when you have a better idea of what the next stage of your life will be.

CrypticAgent
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Re: How Much to Put in 401k/Roth IRA?

Post by CrypticAgent » Wed Oct 10, 2018 8:31 pm

So I currently see it as gaining some tax benefit to saving in the 401k/roth/IRA while forgoing some liquidity.

Assuming that I get a job after college, the plan would be to live frugal and have money for use in the near future while also having a tax-advantaged hedge for the far future.

Does this sound like an appropriate plan if I don't have an uber-high income that allows me to live well and max out?

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bryan
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Re: How Much to Put in 401k/Roth IRA?

Post by bryan » Thu Oct 18, 2018 12:20 pm

EdithKeeler wrote:
Tue Oct 09, 2018 9:35 pm
Personally, I think the biggest risk associated with early retirement is not getting sufficient quarters or high enough quarters for social security. Retire early anyway.... but the money in the 401k that you don’t access until later is a pretty good hedge for the future. If that makes sense.
I haven't seen it talked about much (a few articles on https://www.kitces.com/ were the best, I think). Probably because most everyone can get 40 quarters by the time they are 62-70. There is decent probability, though, that the requirements (e.g. 40->48->60) or some other calculations change (likely hitting early retirees harder). Also probably because so much of the FIRE math out there assumes SS benefits is $0.

I can't find my information (trying to create an account on ssa.gov gives me an error), though the "Retirement Estimator" from them (which allegedly pulls from your income history) gives me an estimate of $771/mo at 62 (which is like $320 in today dollars, though there is a decent probability that inflation will be worse than that), assuming no more income (iirc I'm pretty close to 40 credits.. worked in high school, a few semesters during university, full-time at 23, stopped at 29).

CS
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Re: How Much to Put in 401k/Roth IRA?

Post by CS » Thu Oct 18, 2018 3:37 pm

Mad Fientist worked out that for early retirees, regular 401k (tax deductible) is better than Roth. The marginal tax rate of Roth when working in accumulation is pretty frickin' high. Better to get keep that cash in hand, and pay the lower tax later when converting to Roth in a lower, if not zero tax bracket. If you have the cash, max out all tax shelters that you can - 401k, IRA (or Roth IRA if don't qualify for regular one), or even back door Roth if can (watch out for Prorata conversions), HSA.

classical_Liberal
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Re: How Much to Put in 401k/Roth IRA?

Post by classical_Liberal » Thu Oct 18, 2018 4:44 pm

bryan wrote:
Thu Oct 18, 2018 12:20 pm
I can't find my information (trying to create an account on ssa.gov gives me an error), though the "Retirement Estimator" from them (which allegedly pulls from your income history) gives me an estimate of $771/mo at 62
The SS tool is flawed in that it does not include your previous full years of reported earnings (ie 2017 currently). Unless you you tell it otherwise it will extrapolate the "last years income" information the user inputs until retirement age to estimate benefits. However, the resulting benefit is "real" in that the estimate is based on today's dollars that will be adjusted for future inflation.

Calculating SS is actually very straight forward. I find it easier to make my own spreadsheet. Personally I use 50% of the promised benefit in my later years retirement calculations.

classical_Liberal
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Re: How Much to Put in 401k/Roth IRA?

Post by classical_Liberal » Thu Oct 18, 2018 4:49 pm

CS wrote:
Thu Oct 18, 2018 3:37 pm
Mad Fientist worked out that for early retirees, regular 401k (tax deductible) is better than Roth.
Agree with this. Tax sheltered growth is a huge driver to wealth accumulation. This becomes more true the more income one makes during accumulation and the less one spends (ie easy-mode ERE). IOW, very high tax brackets in accumulation, very low ones in ERE due to low spending needs. The only caveat being potential increases in future tax rate.

IlliniDave
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Re: How Much to Put in 401k/Roth IRA?

Post by IlliniDave » Thu Oct 18, 2018 7:13 pm

Deciding between traditional and Roth is a speculative play on what you tax rate will be when you withdraw. Higher marginal rate now means traditional 401 is better. Higher future marginal rate, Roth is better. I think there's a lot of political risk in the air, so I'm thinking about going Roth next year despite making > 4X what I anticipate spending after pulling the plug.

prognastat
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Re: How Much to Put in 401k/Roth IRA?

Post by prognastat » Thu Oct 18, 2018 8:07 pm

It really depends on what your current tax rate is and what you expect it to be once fired. The higher your current one is and the lower the latter is the more attractive Traditional is. For example if your household is currently making 100k+ annually and you expect to live off 30k or less a year in retirement it is very unlikely that your tax rate in retirement will ever reach what it was while still working. The higher your income during accumulation is the less likely too.

CS
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Re: How Much to Put in 401k/Roth IRA?

Post by CS » Fri Oct 19, 2018 10:53 am

@CL I don't know if you found this for your SS spreadsheet, but it has been useful for me. It is surprising how much past money counts! I have a listing of all my earnings unadjusted and adjusted.

https://www.ssa.gov/oact/cola/awifactors.html

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