How much do you contribute to 401k and Roth? Any investing suggestions for me?

Re: How much do you contribute to 401k and Roth? Any investing suggestions for me?

• hoffse member

  

  January 2014

  A few things.  You can't max out both a regular IRA and a Roth IRA.  IRAs as a group have an annual contribution limit of $5500 per year, per person.  If you're putting money into an IRA it should be a Roth because they are tax-advantaged.  Likewise, if your H's employer offers a Roth 401(k), that's what I would do instead of a regular 401(k), since you are high-income earners.  Assuming the tax laws don't change you will save yourself a boatload in taxes when you retire by doing it that way.  Starting in your mid-20's, we're talking potentially hundreds of thousands of dollars you will save in taxes in your retirement by using the right kind of accounts.  It depends on how long you live, but yeah.  It's massive. 

   

  Regular 401(k)s allow you to see more of your paycheck right now since the money comes out before taxes, but then you have to pay taxes on your original contributions and your gain in retirement.  Roth accounts have you pay the taxes now so they grow tax free.  

  
  

  I think that people who makes 6-figures should be able to afford to pay the taxes now on that money and use Roth accounts instead of regular 401(k)s.  If combined you two make exactly $100K, you should be seeing something like $6,000+ per month in your paychecks after taxes (depending on your state).  Putting away 15% of that into Roth accounts has you seeing about $5000+ per month in your paycheck.  Even in a HCOL area you should be able to live on that since you don't have student loans.  And a $10K car loan is pretty minimal.

  
  

  At minimum, you should be saving 15% of your combined gross income for retirement when you are starting in your 20's.  I prefer 18-20% personally, but I'm also hoping to travel a lot when we retire.

  
  

  As for how much others on this board save, it's all relative of course.  People who make more need to save more.  I put away a grand total of about $24,000 into various Roth accounts in 2013.  I don't make 6-figures (I'm close but not quite).  I do have student loans as well.  My H is a law student who graduates in May, so that was just on my income.  That said, I'm extremely cheap, and I still live like a grad student in order to meet my bottom line.  That's because we're talking about starting a family in a couple years, and I suspect our contributions will drop when that happens.

  
  

  I am changing jobs soon, and my new employer also offers a pension.  However I would not count on it.  When you are in your 20's you are so far away from retirement that who knows if you will still be at that job 30 or 40 years from now?  I think it's best to rely on yourself to fund your retirement, and any pension or social security you receive goes into your "red ferrari" fund when you retire.

  
  

  If you want some help with this, post your monthly budget, and we can help you find the places where you are leaking money.  You really should be able to afford to save at least 15% of your gross income with how much you guys make, and it's best to start that habit now before you get used to having all this money to spend.

  

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• hoffse member

  

  January 2014

  Re: investing suggestions.  Conventional wisdom says that in your 20's and 30's you should be riskier and then move to safer investments as you get older.  I agree with this, but you do need to be comfortable with the risk level you are taking on.  I invest primarily in mutual funds because they are safer than stocks.  However, I pick some funds with higher risk.  I use morningstar.com to see the risk and return levels, and I chose a mix of high-risk/high-return funds and moderate-risk/moderate-return funds.  In 2013 I averaged about a 28% return across all my funds.  I was very satisfied with that.

  
  

  A couple other things: I use Fidelity which is primarily manager-managed funds.  I like these because they tend to have a higher return (and they do beat the market now and then), but they also have more risk.  Since they are riskier I will only invest in those funds if they have at least 10 years of returns they can report and their current manager has been with that fund for at least 3-5 years.  That makes me feel more comfortable with the level of risk I am taking because it indicates to me that a fund's performance isn't a fluke.

  
  

  When you're just starting out, you might consider index funds to help you get used to the large gains and losses you will start to see in your accounts.  Index funds are pegged to a particular sector of the market.  It means you don't beat the market, but it also means you don't lose more than the market loses.  My kind of funds do have the potential to lose more than the market, and sometimes they do.... in my 20's and 30's I'm ok with that.  By the time I hit 40, I will be looking for slightly safer investments and may do more with index funds at that time.  Index funds are still great for young folks if your risk tolerance isn't as high as mine.  It really doesn't bother me to lose $1000 in the market in a single day because I trust it to come back.  I suspect I'm in the minority on that.

  
  

  Anyway, I think mutual funds - either manager-managed or index funds - are a great way to start.  You'll see some pretty serious gains over time, though do be prepared for losses.  I have a rule for myself to never get out of the market while I am young, because it will come back.  The crash came and went, and we're now way above the peak right before the crash.  A lot of people got out when the market hit rock bottom and haven't been able to bring themselves to get back in.  They would have made all their money back and then some if they had stuck it out.  

  
  

  

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• Wulfgar member

  

  January 2014

  For me, I have 7% coming out into my 401(k) and my company has been matching roughly 100% of the first 6% so my total contribution is roughly 13%.  This is lower than what I would like but I do have student loans and other debt that I am working on getting rid of.
  
  As @hoffse has stated, I would not trust on having a pension in 30 or 40 years and would make sure that you have enough put away that the pension would be a bonus.  I am doing the same with Social Security, I know that when I retire, I may get roughly half what was promised to me.
  

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• nicolen08 member

  

  January 2014 edited January 2014

  Wow, thank you both so much for taking the time to reply with such great information. I really appreciate your time. And kuddos to you both for being so responsible with your money. Most people I know waste a lot of their money, so I really appreciate talking with people who aim to be responsible with it.
  
   I feel a bit silly because I just looked over our paperwork, and we don't even have a 401k....it's called a "457 deferred compensation" plan. Is this the same thing (taking money out of ones paycheck tax-free and then paying taxes on the original contribution and the capital gains later)? Such confusion!! I really wish I took just one finance class during all my years of higher education.
  
  We definitely should be investing more. And I completely agree that we should not put all our eggs in the pension basket. You guys are great and so knowledgeable.
  
  I'm going to:
  1. See if there is a roth 457 so we can earn tax free, having paid the taxes upfront.
  
  2. If there isn't a roth 457 option, we will open two separate Roth IRA accounts for each of us and try to max those out by paying $11,000 and then fund the non-Roth 457 to the best of our ability.
  
   Does that sound better?

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• hoffse member

  

  January 2014

  Sounds much better, OP

  
  

  I think there is such a thing as a Roth option for a 457 plan - though I'll be honest, I don't know much about them.  I would ask the HR folks and then follow up with whatever investment bank services the plan.  In my experience, the investment people can sometimes give you better details than HR.  At least, that's the case in my office.  

  
  

  But really, just know what you're getting into with the tax thing.  The young, starving college kid who works full time and scrapes together a small contribution to an employer-sponsored retirement account should probably do the pre-tax retirement option.  That gives them more money in their paycheck, and their contribution is likely to be small so the taxes aren't going to be huge anyway.  But high income earners need to watch the tax thing closely, especially if your contributions are significant.

  
  

  Actually there's another option too - which is to contribute to regular investment accounts that you "earmark" for retirement instead of using an employer-sponsored account.  Again, assuming the tax law doesn't change, the taxes on regular investment accounts are lower than regular 401(k)s.  The regular 401(k)s - and I assume the regular 457s - use ordinary income rates for your taxes in retirement.  Today, that's 25-28% for most people. Regular investment accounts that you've held for more than a year are taxed at the capital gains rate, which is currently 15% and occasionally 20% if you sell a lot of your investments in a single year.  Also, in regular investment accounts you are only taxed on GAINS when you sell.  In regular 401(k)s, you're taxed on your initial contributions also - so every penny you pull out is taxed.

  
  

  The big problem with regular investment accounts is there's no "penalty" for cashing them in early.  And contributions don't automatically come out of your paycheck.  The early withdrawal penalties on retirement accounts create a huge incentive to not tap into them early.  So if you think about going the regular investment route instead of the 457 route, you just need to be completely honest with yourself about whether you think you could resist temptation to cash it out for something like your kid's college in the future.  But if you're disciplined, those will give you a bigger tax savings under today's rules.

  
  

  Again, Roths trump all of this so if that is an option, I would absolutely take it.

  
  

  If you need help finding ways to cut back in your budget so that you can save more, track your spending (or go back through your bills) for a couple months and post your budget here.  We all leak money somewhere, so it's good to take a hard look a couple times a year.

  
  

  Also - don't feel silly!  Everybody starts somewhere, and the fact that you are starting in your 20's means you are definitely on the right track. 

  

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• nicolen08 member

  

  January 2014 edited January 2014

  Thanks for the reply, hoffse!
  
  I have a lot to look into.
  
   I'm starting to think I should try to see some sort of financial planner, who can look at all our stuff and tell us what financial products offer the best tax advantages for our situation. But, I  don't know who I'd ask for this sort of service. If I asked the guy who manages our 547, I think he'd just sell us stuff that helps his company or gives him the most commission. I want an independent third party to give us advice; someone who only profits from the fee we pay for meeting with them. Does this exist? We are going to see our tax attorney next week for taxes, do tax attorneys do this sort of financial planning?
  
  I should call the Suze Orman show, hahaha! I love Suze!
  
  

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• hoffse member

  

  January 2014

  Unforunately tax attorneys usually don't do this.  The line between practicing tax and giving financial advice can get blurred, but ethically your tax attorney can't tell you to invest in one product vs. another.  Most states require a license or certification to do this, and believe it or not, being admitted to practice in front of the US Tax Court doesn't count.  

  
  

  They can help you arrange your estate in the most tax-advantaged way, and they can help you if you get nailed by the IRS... but they aren't really supposed to do the math side of things (too much).  I will be honest - I do run a lot of calculations during my job when I'm practicing tax, but it's really to double check the accountants when something weird pops up.  I've never told a client what to do about retirement, and it would make me uncomfortable to do that in the attorney-client context.  

  
  

  You can certainly ask your tax attorney about the tax benefits of one type of account over another... but don't be surprised if they don't know the answer to this off the top of their head.  It might sound counterintuitive, but most tax attorneys don't do personal income tax unless a client has been audited by the IRS.  Benefits (which include retirement) are a weird little world of their own that most tax attorneys do their best to avoid.

  
  

  There are financial planners out there - and I think you can find ones who will bill you by the hour instead of charging you a commission on products they are selling you.  Maybe look at the various investment banks in your area or google "wealth management" for your area.  I know the Merryl Lynch guys come to my firm about every 6 months and always tell us we should be using their services because they will "help us manage our personal assets in the most efficient and productive way possible"... I'm pretty sure they're all called "wealth managers" in the industry.  If you want somebody like that to look at everything, I would go for somebody who bills you hourly.  It will probably save you money in the long run. I would also go in with some specific goals in mind so you can ask them to aim you in a particular direction.  Otherwise they might focus on what they feel is the top priority.  You can ask your tax attorney for recommendations for good folks in your area.  Who knows - the Merryl Lynch guys might visit that firm too.

  

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• nicolen08 member

  

  January 2014

  Thanks again, hoffse! I will my attorney her for referrals, she's a CPA too.
  

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• emily1004 member

  

  January 2014

  We have had great results with BlackRock. But yes, it's through the Merrill Lynch. 

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