The Retirement Planning/ Investment/ Savings Thread (6 Viewers)

inca911

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This thread is for those members who are nearing-or-in retirement to provide advice/tips to those who are just getting started. No advice in this thread should be assumed to be correct, without additional verification (e.g., discussion with an independent financial advisor). Personally, I'm currently looking to understand how to protect assets from being considered in the needs-based Medicare qualification test for long term care. I will edit this post with additional member contributions, to create a one stop primer on multiple topics. So let's get it started with what I consider "the basics", and build from there. Thanks in advance for the additional thoughts!

The 401(k)
A 401(k) is a retirement savings plan that uses pre-tax dollars from your paycheck, thereby enabling tax-deferred investment growth on that money. Upon withdrawing that money at retirement, the principle and growth will be taxed as income when is generally assumed that your tax rate will be lower. For example, it you are being taxed at a 28% rate today and upon retirement you will be in a 15% tax bracket, then you have already saved 13%. The 401(k) is the vanilla plan for many potential retirees, but it is hard to remove money from the plan without having penalties assessed against you. If you pull money out before age 59.5, you will owe income tax on the amount withdrawn + a 10% penalty. The CY2018 maximum annual contribution is $18,500, with an additional $6,000 catch-up contribution allowed for those 50 years and older.

Many employers offer a 401(k) matching contribution, such as a 50% match for the first 6% of your salary. This is “FREE MONEY”, and I always recommend that everyone contribute enough in the 401(k) to get the maximum employer match. Beg, borrow, and find a way to make it happen, and never leave free money on the table if you want to retire at some point in your life! Note that I didn’t say to maximize the full 401(k) contribution immediately, just enough to get the maximum employer match for starters. There are other choices to consider once the free money is in hand. More on that later.

It is possible to obtain an up-to-5Y loan from your 401(k) from your employer, provided that you are still employed by them. That loan period is longer for purchase of a primary residence. There is a lot of debate in this area, so others who have done this will be able to provide better advice. There are also ways to access your 401(k) earlier (e.g., Rule 72T), but those really should be discussed with an expert.

The Roth Individual Retirement Account (Roth IRA)
The Roth IRA is another retirement vehicle where you put post-tax dollars into the account and the investment growth on those dollars are not taxed upon retirement. Not taxed at all, ever. This is such a good deal that the IRS maximum contribution for CY2018 is $5,500 (+ $1k if you are over age 50). If you are early in your career, the advantage is that your tax rate is likely lower to begin with so your investment growth is compounded.

Because the principle in this account has already been taxed, you can withdraw the principle at any time, for any reason, with zero penalties. This is a huge advantage over the 401(k). You can’t put that principle back once withdrawn, but the Roth IRA is essential a huge safety net that is readily accessible. Additionally, withdrawals from a Roth IRA do not count as income. That doesn’t sound like a particularly big deal, but we will talk later about why it’s very big.

The IRS says they restrict participation in the Roth IRA for high earners, and begins to phase-out the ability to fund a Roth IRA if you have a Modified Adjusted Gross Income (MAGI) up to $133k; but there’s a huge loophole called the Back-Door Roth that was “overlooked”. In my opinion, a “wink wink” deal was cut such that the IRS still allows the highest earners to fund a traditional IRA, and convert it to a Roth IRA. It takes just a few minutes, and will likely be the best few investing minutes of your year. Every few years you hear rumblings about the IRS closing the Back-Door Roth, but it’s still open today.

If you haven’t contributed to a Roth IRA yet this year, you still have until the annual tax filing deadline to do so (i.e., 18April2018).

The Heath Savings Account, for high deductible health care plans (HSA)
For those with a high deductible heath plan, a Health Savings Account allows you to put away pre-tax dollars to pay for future health care expenses. It’s the only non-annual mechanism that creates a savings that is never taxed. Cafeteria Plans are annual use-it-or-lose-it accounts, but the HSA has no such annual clearance requirement. Most HSA Accounts also have investment options, so not only is the HSA principle never taxed, but the returns avoid all taxation as well. It’s a very powerful tool, as incurring health expenses at older age is essentially a certainty.

About Expense Ratios
When selecting mutual funds, be careful about funds with high expense ratios. Some of these funds quietly take a full 1% per year (or more) of the total amount in the fund for their management costs. Contrast this with something like a Vanguard Admiral Shares Index fund that takes 0.03% per year, and the savings become massive over a 20+ year period. It’s hard for large funds to beat the street in terms of market returns, so paying extra with no guarantee is a bit of a gamble.

TLDR Version
  1. Get the Maximum Employer Match from 401(k)
    • Strongly Consider Low Expense Ratio Funds
  2. Establish Health Savings Account (HSA) as part of your Emergency Fund (if applicable)
  3. Fund Roth IRA to Maximum, using Back Door, if needed
  4. Fund Health Savings Account to Maximum (if applicable)
  5. Fully fund remainder of your 401(k)
  6. Fully Establish your Emergency Fund (i.e., for non-health expenses)
    • Roth IRA can serve this function, until a true Emergency Fund is in place
  7. Set up Living Revocable Trust, Health Care Directive, Power of Attorney, and Pour-Over Will to protect it all
More to follow in future posts on topics such as:
  • Revocable Living Trusts: avoid the delay and hassle of probate upon death, capturing your wishes upon your death
  • Pour-Over Will: for anything that was missed being put in the trust
  • Health Care Directive: granting health care decision-making authority to a trusted person when you are not able
  • Power of Attorney granting financial decision-making authority to a trusted person when you are not able
  • The best way to access these types of money in retirement, including a mix of social security + 401(k) + Roth IRA that minimizes taxes long term.
 
Social Security
This area isn’t as familiar to me as the retirement preparation phase, but it’s worth discussing. It's also definitely worth getting input from those who are currently living in this world. For those born in 1960 and later, early retirement benefits from social security can generally begin to be accessed at age 62. Accessing benefits prior to the full-benefit age of 67 does mean you are accepting a lower benefit amount, as the IRS reduces the maximum benefit if you start grabbing it right away:
  • 25% less if you start at age 63
  • 20% less if you start at age 64
  • 13% less if you start at age 65
  • 7% less if you start at age 66
For CY2018, the maximum full-retirement age benefit = $2,788 per month, or $33k per year. This maximum assumes you have earned more than the SS taxable maximum for at least 35 different years (as well as some other caveats).

You can also defer receipt of benefits beyond age 67, up to age 70. This results in an increased annual benefit of roughly 8% per year (i.e., 32% maximum increase) = $3,680, or $44k per year. Worth considering if you are in good health and current financial standing.

Getting to the Money During Retirement
If you retire and decide not to get SS benefits right away (i.e., waiting for full retirement age and the maximum benefit), then pulling from the 401(k) first is generally going to be the best strategy since you will be in a nice low tax bracket, and you'll protect your SS payments later from being taxed due to 401(k) distributions counting as income (more on that to come).

A mix of Roth IRA + 401(k) in retirement allows you to pull from 401(k) up to a taxation breakpoint, then pull Roth IRA money to avoid higher tax rate in the next bracket. Remember that money pulled from the Roth IRA does not count as income. When you add in HSA dollars to fund your health expenses tax-free, and then add Social Security (which may be taxable in 15 years, instead of the $25k per year that is not taxed as income now), then you can see how the blend of options work together.

The determination of tax is based on the total combined income that is reported to the IRS (i.e., adjusted gross income + taxable interest + 50% of SS benefit). To minimize taxes in today's retirement situation, the goal is to keep your combined taxable income around $25k. For example, this mix of initial retirement funds results in a combined income of $25k, and an actual income of $32.5k:
  • $15k SS benefit (only 50%, or $7,500, counts as combined income) <--national average typical monthly benefit is now ~$1,200
  • $17.5k from 401(k)
With an income of $32k, using standard deduction + exemption, the tax owed would be less than $1k for the year, somewhere in the 2-3% range. If you need more income, supplementing with distributions from Roth IRA, that don't count as income, will keep you under the threshold.

In contrast, let’s look at the previous example, but with a combined income greater than $34k:
  • For each $100 of additional income, now 85% of the previously untaxed SS benefits become taxable. Assuming a 25% tax rate on that $185 ($100 additional income + $85 of SS benefit taxation), you are now going to have to effectively pay $46.25 in tax (at least until you have all 85% of your SS benefits taxed). Nothing like an effective 46% tax rate on that $100 additional income to drive you crazy!
Minimizing expenses during retirement is one key to avoid needing a larger income at retirement (e.g., having a residence paid off instead of paying to rent). Today, there are ways to figure out how to pay minimal tax. I fully believe that will change in the future, so younger savers should plan to pay taxes on all SS benefit, which includes 401(k) distributions. Of course, I could be wrong.

Having diversified sources of income/benefits is a key to being able to minimize tax during retirement, which is why paying off a residence in full and having a well-funded Roth IRA are important in my retirement planning. Distributions from Roth IRA do not count as taxable income in retirement, thereby effectively "earning" 46% return on investment via tax avoidance (i.e., per the second example above). It's such an amazing retirement vehicle (especially when putting in money taxed at a low rate early in a career), and yet it is often ignored in favor of adding more to a 401(k) after the free money from the 401(k) is already in hand. Yes, the 401(k) enables more pretax investment money to earn returns, but don't forget about the impact of the back end taxation on those earnings. After getting free 401(k) match money from an employer, fully funding a Roth IRA then a 401(k) is most likely the optimal basic retirement solution. Don't forget that you can still get the principle from a Roth IRA out untaxed if needed, and even the earnings can be accessed in many instances without penalty (e.g., $10k for first time home purchase for Roth owner or direct family).
 
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HSA can be withdrawn for non-medical expenses after a certain age too right? So it can be used like an IRA but with likely more limited investment options and lacks the ability to withdraw the principal for non-medical expenses until that age.

Increasing my HSA contributions and investing it is on my list of things to consider this year.
 
Save, save, save. Start early. No amount is too small, especially when you're young.

Sorry, I don't know much about sheltering assets.

Forrest is correct about contributing enough to get the maximum employer match. Mine was 200% (not a typo) on up to 5% of my salary.

The power of compounding (see what I did there?) is phenomenal and should not be underestimated .
 
My last company, a very very large company in the area, matched your 1st $500. That too, is not a typo. One of the many reasons I’m no longer there.
 
Forrest brings up many great points. I have been funding a 401k for years. My company matches 50% of the first 6%. So in this case a person gets 3% of their salary worth of free money. The 6% that you contribute is more than likely pretax so it actually effects your pay less than what you think.
I was fortunate to have an good size emergency fund and great health insurance. I cannot tell you how important it is to have a liquid fund for emergencies. I can tell you form experience if I did not have that and good insurance I would currently be in fanatical ruin!
Many times the younger members of society do not think investing and insurance are important. Please look into it.
Anyway with recent events we did do more such as a revocable transfer of deed or a TOD which you should check into. Power of attorney and Living will is very important.

@inca911 I am glad you brought this up because so many overlook these items. If you are one of the young ones on here please take heed! These are things that will make a big difference if you start early. You have to love compounded interest! It is your friend
 
save every raise and pretend you didn't get it. max 401k (my company matching 100% up to 5%) up to limit. Both IRAs and spousal iras, HSAs. Commuting tax breaks, everything is an expense for business as I'm always talking about and doing business 24x7.

Start early for sure. if you are not young... it's never to late to start saving.
 
I don't consider myself a younger one or an older one. I am 50.
Another thing I believe is important is to educate your kids on this. My kids are early 20's and both already have 401k accounts. When I was early 20's this was the furthest thing from my mind and it was not a point of emphasis - at least not in my house growing up.
 
Also everyone should have a very liquid account of at least 6 months of expenses!. This is a must and just as important as a 401k account. You lose a job or have a health issue come up it keeps that retirement safe!
 
Subscribed. I'm in pretty good shape with a generous 401k match at my current employer (100% match of up to 9% of my salary) but good info and a good reminder to always think about this every year and re-evaluate if you can afford to make further plans against emergencies or other unforeseen conditions.
 
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I also have been putting in an extra $6500 in my wife's IRA account. This really helps on taxes as well. I do not mind putting in $6500 when it save me over $2000 in taxes that would be payable to the IRS.
 
The company I work for, allows us to put away 20% off each paycheck and will match 100% of contributions. The money is used to buy shares in the company.

I've been doing this since I started 6 years ago and I'm 28 right now.
 
HSA can be withdrawn for non-medical expenses after a certain age too right? So it can be used like an IRA but with likely more limited investment options and lacks the ability to withdraw the principal for non-medical expenses until that age.
Yes after 65 you can withdraw from the HSA without paying the 20% penalty but you'll still owe income taxes on it.

There is a way to get tax-free money from your HSA at any age though, however it requires some planning and diligence on your part. You are allowed to reimburse yourself for qualified medical expenses that you paid out of pocket (i.e. not from your HSA). There's nothing in the rules that say when you must reimburse yourself. Some people pay their medical bills from their HSA as they go and while that's fine, you're killing your principal. Unless it's a major expense, like $5,000 wife gave birth expense, I pay all my medical bills with my cash back credit card. $100 here, $200 there, $5 at the pharmacy there and I get 2% cash back to boot. I scan all my receipts, download PDFs of all my EOBs and my year end credit card summary. I've now amassed about $8,000 in medical expenses that I've paid out of pocket since I established my HSA. That's allowed my HSA balance to climb to about $12,000. I keep a spreadsheet listing every out of pocket bill I've paid along with the names of each file that will support the expense. At any time I can reimburse myself up to $8,000 from my HSA tax free and I have the documentation to prove it. And that number will keep going up as long as I keep up on the documentation.

Two years ago my employer started offering a Roth 401(k) and I held out because I liked the immediate tax break. However with the tax cuts that just went into effect I honestly don't see myself having a lower tax rate in the future so I've switched to making all my 401(k) contributions after tax. Of course the company match is taxable when withdrawn but whatever.
 
The company I work for, allows us to put away 20% off each paycheck and will match 100% of contributions. The money is used to buy shares in the company.

I've been doing this since I started 6 years ago and I'm 28 right now.

That's an awesome deal, but I will caution you that this is not exactly what I would consider safe retirement planning. Anytime you have a huge bulk of your retirement savings tied to the success of a single company you are putting a huge risk in your future solubility. Just ask employees from a company like Enron. Crazy shit can happen. With that being said, by no means should you pass on the free match, just consider that if you can only contribute 20% of your salary, you may want to diversify a portion of your contributions into some other pre-tax savings account and not be so heavily leveraged into one stock. This will matter more as you get older and closer to retirement in your 40's and 50's.
 
That's an awesome deal, but I will caution you that this is not exactly what I would consider safe retirement planning. Anytime you have a huge bulk of your retirement savings tied to the success of a single company you are putting a huge risk in your future solubility. Just ask employees from a company like Enron. Crazy shit can happen. With that being said, by no means should you pass on the free match, just consider that if you can only contribute 20% of your salary, you may want to diversify a portion of your contributions into some other pre-tax savings account and not be so heavily leveraged into one stock. This will matter more as you get older and closer to retirement in your 40's and 50's.

I hear ya. I do sell off shares to diversify my portfolio. I understand keeping my money in one basket is not the smartest financial move! Luckily I've been able to save up a healthy amount so far and I'm thankful now that I started when I did.
 
A lot of good advice here. I had a job once with a 100% match up to the full 401k contribution limit. I maxed the hell out of that one for several years. I miss that one.

Another piece of advice: never leave a 401k with an employer plan if you leave the job. Find a cheap discount broker (or Vanguard), and roll all your 401k’s over to it, every time you change jobs. Over your career, you’re likely to change jobs several times. Don’t risk losing track of where your money is. Consolidate.
 
I'm 30 years old, have no ritirement!!!! Help me guys. I work for family buisness my dad is the owner and we have no 401K what is my best option
 
I'm 30 years old, have no ritirement!!!! Help me guys. I work for family buisness my dad is the owner and we have no 401K what is my best option
You can self-fund a 401k. I’m not sure of the details, but google it. Depending on how the business is structured, you may be able to do a SEP IRA, with much higher contribution limits.
 
You can self-fund a 401k. I’m not sure of the details, but google it. Depending on how the business is structured, you may be able to do a SEP IRA, with much higher contribution limits.
Still lost, think I need a financial advisor **cough cough** @Jeff
 

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