The Retirement Planning/ Investment/ Savings Thread (11 Viewers)

[IaHawk]

What are you already invested in?

For my Roth 401k, I use the Target 2045 fund which has the breakdown below. I max out my HSA and have that in a 2045 fund as well. I also put 2% into company stock.

As far as fees go,

My current 2045 Target Fund fee is .05%. This seems pretty low right? I did some spot checking on some others and S&P 500 Stock Index fee is .01% and the Small/Mid Stock Index fee is .04%.

 

[IaHawk]

You need one more data point for each fund - what are the fees? Generally they are pretty low for passive funds but worth checking. Some actively managed funds charge up to 2% in fees which makes a massive dent on your returns. For get looking at the 1/5/10 year returns especially given the bull market we're currently in - look at the lifetime average.

Personally in my 401k, I have 60% in a S&P500 tracker, 30% in International and 10% in US bonds. Currently I have stopped putting money in bonds as the prices are high/yields low so my paycheck contribution is 70% S&P/30% international. My target retirement is 20 years away although with some good fortune I'd like to be done in 10 years.

It's also important to look at this chart and understand the risks when it comes to retirement date:

View attachment 673986

If you looked at your 401k in mid 2000 and decided to retire in mid 2002, if you were 100% in the S&P500 your 401k would have dropped to half! It didn't recover until mid 2007 however had you continued working you would have been contributing over the dip and recovery leaving you in a much better position. Similarly if you looked at your 401k in mid 2007 and were a couple years out from retirement we had an even bigger drop to 2009 with recovery by 2013. Of course the opposite is also true.

For this reason, I think it's important to have some flexibility when it comes to retirement - if you can semi-retire and still earn some income then you're much more insulated from large market swings. And you can consider going more like 50:50 stocks:bonds to provide some insulation. And also diversify your assets outside of just the market. I have about half my assets in real estate in growth locations (excluding the house I live in).

Great info, thanks. I recall some of the horror stories of people who were close to retiring around 2007 but lost so much in the market that they had to postpone retirement. I think thats one of the big reasons I chose to just let the Target Fund manage it. But now I've come to realize that it's something I can just spend a few hours on annually and can save a little more money or get a little more aggressive when I'm still 20-25 years out from retirement.

 

[Darson]

Great info, thanks. I recall some of the horror stories of people who were close to retiring around 2007 but lost so much in the market that they had to postpone retirement. I think thats one of the big reasons I chose to just let the Target Fund manage it. But now I've come to realize that it's something I can just spend a few hours on annually and can save a little more money or get a little more aggressive when I'm still 20-25 years out from retirement.

If you're 25 years out from retirement, then it's probably fine to be 100% in stocks. Bear in mind that we're contributing monthly to our retirement funds so over the next 10-15 years we'll be buying the dips automatically as well as riding the gains. What the market does year to year is almost irrelevant, it's the performance over 25 years that's important.

So in the end you get:
1, Feed your 401k to maximize your company match (in my case they match up to 8% of salary so beyond that there's no free cash)
2, Backdoor Roth IRA to the max with post tax money
3, Fill up your HSA and sweep the max amount into a low cost index tracker (my HSA forces me to keep a minimum balance of $1k in cash)
4, Fill up your 401k if you have any space left

I had a very interesting conversation with my buddy on stock options. I was always of the belief that one company you know better than any other is the one you work in and if you think it's going to grow and do well you should maximize your exposure. My buddy thinks that the risk is high since you've coupled your stock holding to your income stream - i.e. if you lose your job because the company is doing poorly, then the share price is also likely to be in the toilet. So he exercises all his options immediately and put the money elsewhere - he doesn't have a great deal of faith in his company's future growth as it's likely to remain fairly stagnant; their phenomenal growth was over 7 years ago. If you're working for someone like Amazon or Disney or then holding stock is probably a good bet. If you're at Best Buy or Sears then I would think twice.

 

[TheAlchemist]

If you're 25 years out from retirement, then it's probably fine to be 100% in stocks. Bear in mind that we're contributing monthly to our retirement funds so over the next 10-15 years we'll be buying the dips automatically as well as riding the gains. What the market does year to year is almost irrelevant, it's the performance over 25 years that's important.

So in the end you get:
1, Feed your 401k to maximize your company match (in my case they match up to 8% of salary so beyond that there's no free cash)
2, Backdoor Roth IRA to the max with post tax money
3, Fill up your HSA and sweep the max amount into a low cost index tracker (my HSA forces me to keep a minimum balance of $1k in cash)
4, Fill up your 401k if you have any space left

I had a very interesting conversation with my buddy on stock options. I was always of the belief that one company you know better than any other is the one you work in and if you think it's going to grow and do well you should maximize your exposure. My buddy thinks that the risk is high since you've coupled your stock holding to your income stream - i.e. if you lose your job because the company is doing poorly, then the share price is also likely to be in the toilet. So he exercises all his options immediately and put the money elsewhere - he doesn't have a great deal of faith in his company's future growth as it's likely to remain fairly stagnant; their phenomenal growth was over 7 years ago. If you're working for someone like Amazon or Disney or then holding stock is probably a good bet. If you're at Best Buy or Sears

So theres a lot of research out now that would say fund the HSA before the IRA and potentially even before the 401k match (although that is very arguable still). In the above scenario does the individual make more than the max to do standard contributions to Roth IRA? Sorry, I skimmed the last couple pages after I just found this thread.

I would definitely agree with not having any large portion in your own company stock. I look at it like any other concentrated position in an individual company and its not what I would ever recommend. Despite you working for the company you probably don't have any amazing insights into the companies future and if you do, you are probably restricted from trading on it.

 

[Burke]

@TheAlchemist do you mind providing links to articles suggesting HSA prior to getting company match? That would certainly surprise me.

 

[TheAlchemist]

@TheAlchemist do you mind providing links to articles suggesting HSA prior to getting company match? That would certainly surprise me.

Now you're gonna make me cross my real job with the fun part of my life...ugh. Fine. Will try and find and throw some up here tonight.

 

[moose]

At almost 15k/yr in property taxes - my home would need to rise significantly to keep up.

Holy shit that seems high. What size is your house?

 

[CraigT78]

Holy shit that seems high. What size is your house?

We don't have state income taxes. This year's tax bill is 18k. Half to city and half to school district.

4200sqft.

 

[TheAlchemist]

Kiplinger
Some junky website
Motley Fool
Another junky site

So forewarning that those links are not ones I would really use at work or consider academic but they provide general context. Essentially the triple tax advantage of the HSA account provides a more or less "guaranteed" advantage over the IRA whether Roth or Traditional. The fun part about HSA accounts is that there is no time constraint around when the medical expenses had to occur for you to withdraw the HSA $ to pay for them. In theory you could be investing in an HSA during your entire accumulation phase of your life while saving your medical receipts and paying those out of pocket and then during retirement you can submit whatever medical receipts you want, whenever you want, and take it out tax-free.

 

[Burke]

I tend to agree with HSA over Roth IRA (if eligible), but I still think I'd want employer match on 401k contribution.

 

[Burke]

@inca911 do you have a 529 write-up as well?

 

[Darson]

So theres a lot of research out now that would say fund the HSA before the IRA and potentially even before the 401k match (although that is very arguable still). In the above scenario does the individual make more than the max to do standard contributions to Roth IRA? Sorry, I skimmed the last couple pages after I just found this thread.

I would definitely agree with not having any large portion in your own company stock. I look at it like any other concentrated position in an individual company and its not what I would ever recommend. Despite you working for the company you probably don't have any amazing insights into the companies future and if you do, you are probably restricted from trading on it.

It's an interesting perspective and may make sense for people who are expecting high healthcare costs in retirement. The HSA is essentially identical to a 401k with two key exceptions - there is no tax on withdrawals for qualified medical expenses and there is no required minimum distribution.

I find it very hard to believe that not doing the 401k match is advisable. It's an instant 50% or 100% return on your investment (75% in my case).

The Roth IRA is powerful for two reasons. Firstly, there is no tax on withdrawals so you don't have to worry about what the tax regime may be like in the future. Secondly, you can withdraw your principal without penalty if you need it before retirement - this is a biggy if you feel even slightly insecure about your continued employment prospects.

The general assumption is that pre-tax savings are better if you expect your taxes in retirement to be lower than now and post-tax savings are better if you expect your taxes in retirement to be higher than now. Core to this assumption is that your "income" in retirement is likely to be less than now hence your taxes less. But this graph is interesting:

Generally speaking, taxes are historically low and slowly creeping up. You have no idea what the picture will look like when you're in retirement but if the tax rates are higher then having some post-tax savings is beneficial.

 

[boltonguy]

We don't have state income taxes. This year's tax bill is 18k. Half to city and half to school district.

4200sqft.

that sounds like MA except we also have income taxes ...

 

[TheAlchemist]

It's an interesting perspective and may make sense for people who are expecting high healthcare costs in retirement. The HSA is essentially identical to a 401k with two key exceptions - there is no tax on withdrawals for qualified medical expenses and there is no required minimum distribution.

I find it very hard to believe that not doing the 401k match is advisable. It's an instant 50% or 100% return on your investment (75% in my case).

The Roth IRA is powerful for two reasons. Firstly, there is no tax on withdrawals so you don't have to worry about what the tax regime may be like in the future. Secondly, you can withdraw your principal without penalty if you need it before retirement - this is a biggy if you feel even slightly insecure about your continued employment prospects.

The general assumption is that pre-tax savings are better if you expect your taxes in retirement to be lower than now and post-tax savings are better if you expect your taxes in retirement to be higher than now. Core to this assumption is that your "income" in retirement is likely to be less than now hence your taxes less. But this graph is interesting:


Generally speaking, taxes are historically low and slowly creeping up. You have no idea what the picture will look like when you're in retirement but if the tax rates are higher then having some post-tax savings is beneficial.

Yes, I often have to explain to folks that its almost impossible to know/calculate if you are making the perfect decisions around account types and taxes etc. until you are on your deathbed bc you have no idea what taxes will be during retirement years. HSA is an amazing vehicle IF you plan accordingly. I think the stat is still less than 20% of HSA owners actually use it for anything other than annual medical expenses though.

My general rules of thumb for the retirement savings hierarchy would be 401k to company match, HSA, Roth IRA, 401k to limit, and so forth. Tough to say this is the best sequence because it really is situational but if you are using an average american who doesnt make an income that phases them out of Roth its decent.

 

[moose]

We don't have state income taxes. This year's tax bill is 18k. Half to city and half to school district.

4200sqft.

So if you don't own property then what would you pay?

 

[CraigT78]

So if you don't own property then what would you pay?

Sales tax, but everyone pays that too.

 

[pltrgyst]

We don't have state income taxes. This year's tax bill is 18k. Half to city and half to school district.

4200sqft.

That's not a house -- that's a mansion.

How much is dedicated to beer storage?

 

[RainmanTrail]

Holy shit that seems high. What size is your house?

We don't have state income taxes. This year's tax bill is 18k. Half to city and half to school district.

4200sqft.

Don't move to CA then. We have a smallish house (1400 sqft) and we pay about $12k/yr in property taxes plus a state income tax.

 

[allforcharity]

Wow, those property tax figures are very high. I pay about $8K on a 30-ish year old 3350 sqft house valued at $1.8MM, smack dab in the middle of the city.

 

[CraigT78]

Wow, those property tax figures are very high. I pay about $8K on a 30-ish year old 3350 sqft house valued at $1.8MM, smack dab in the middle of the city.

Is that the appraised value for taxes or the actual value.

In Texas those values can be drastically different.

 

[Schmendr1ck]

Come to Florida. I paid zero state income taxes last year and about $2.8K property taxes on a 3000 sq.ft. home.

We may do a few things wrong down here, but high taxes is not one of them.

 

[CraigT78]

That's not a house -- that's a mansion.

How much is dedicated to beer storage?

About 245 sq ft

 

[Schmendr1ck]

About 245 sq ft

Not nearly enough.

 

[allforcharity]

Is that the appraised value for taxes or the actual value.

In Texas those values can be drastically different.

It's the appraised value for tax purposes, but probably not far off. Real market value probably a tidge higher.

 

[moose]

That's not a house -- that's a mansion.

How much is dedicated to beer storage?

He paid for it by recycling his beer cans.

 

[Schmendr1ck]

He built it out of recycled beer cans.

FTFY

 

[pltrgyst]

Come to Florida. I paid zero state income taxes last year and about $2.8K property taxes on a 3000 sq.ft. home.

We may do a few things wrong down here, but high taxes is not one of them.

True! Our house is eight years old, 2400 sf, in a high-demand gated community, worth about $560K (appraisal: $380K), and taxes are ~$8K.

That is *way* better than our previous homes in VA, MD, or NJ.

 

[Darson]

Texas use the typical stealth tax tactics. My house is appraised at about $100k more than I would be able to sell it for resulting in higher taxes. And I’ve tried to appeal but the system is rigged.

 

[TheAlchemist]

True! Our house is eight years old, 2400 sf, in a high-demand gated community, worth about $560K (appraisal: $380K), and taxes are ~$8K.

That is *way* better than our previous homes in VA, MD, or NJ.

Yeaaaaaah, NJ here. Definitely in double digit annual taxes and definitely way below most of you on house value (appraised or other).

At least we are getting legal weed? Ugh, I don't even want it.

 

[inca911]

@inca911 do you have a 529 write-up as well?

A 529 Plan is a college savings vehicle sponsored by individual states, whereby fully taxed income* is put into the 529 plan for future use to pay for qualified educational expenses. There are two types, (1) Prepaid Tuition Plans where you can purchase credits at participating colleges, and (2) Education Savings Plans that are more generic with up to $10k contribution for tuition, mandatory fees, as well as room + board expenses. The 529 Plan is funded by post-tax dollars*, but the earnings on the principle are not taxed when used for these qualified expenses. Generally speaking, the investment options in these state plans are less than stellar. 529 Plans can count against a student in trying to qualify for financial aid, another strike, so be aware of that wrinkle. 529s are a small win at best, and I have traditionally passed on the concept.

If you don't use the money in the 529 Plan, you would need to withdraw it with taxes on the gains + a 10% penalty on the growth OR change it to another beneficiary for their use (e.g., other child, grandchild, or even gift of the Plan to a non-family member). That said, my company just started a benefit this year where I can convert unused PTO into funding a 529 Plan, so I started one for my son who is in college. I'll take the deduction on my state taxes, so this will be essentially be free money for me.

*The state of MN (as well as some other states) offers a state tax deduction for the first <=$1,500 contribution, as well as an income-based-phase-out tax credit of up to $500 for a 529 Plan. The state can recover both the deduction and credit if you don't use the funds for qualified expenses, so I'm only using the 529 Plan as a conversion vehicle for my company. Some states only offer tax advantages for participating in your own state plan, others (like MN) have reciprocity to other state plans. Vanguard offers a Nevada plan, which was good enough due to MN's treatment.

So in the end you get:
1, Feed your 401k to maximize your company match (in my case they match up to 8% of salary so beyond that there's no free cash) AGREED by Forrest
2, Fill up your HSA and sweep the max amount into a low cost index tracker (my HSA forces me to keep a minimum balance of $1k in cash) MY #2b RECOMMENDATION by Forrest (once you have #2a already in place: a Roth IRA emergency fund)

I recommend maxing the HSA before the Roth IRA, especially for a backdoor Roth IRA contribution where the incurred tax rate is high (i.e., high income forcing the need to backdoor it). The HSA is the only never-taxed option to pay for health expenses that are very probable to be incurred. That said, being able to access the HSA funds at age 65 without the 20% penalty for non-qualified expenses is a key factor in my moving this to the #2 spot. For me, that's the game changer. I advise doing the math for each individual's situation. With a job loss you can use the HSA to pay for your insurance premiums, which are likely going to be a primary expense.