So confused about Social Security

[PigsDad]

I have 9 to 10 years left before I retire and reach 65. So I'm thinking I should put 2% in my company plan. Dang, I feel like my head spins with all the choices. I need to do a ton of research

Not knowing your full situation, but that seems like a really small amount to be saving for retirement. I've been saving ~15% for the last 20 years. I remember starting with 2% as a new hire 28 years ago (the "default" amount as a new hire), but increased the amount fairly quickly the first few years.

Most "expert" advice I have read is to save 10-15% for retirement over the course of your career.

Kurt

 

[Sugarcubesea]

Not knowing your full situation, but that seems like a really small amount to be saving for retirement. I've been saving ~15% for the last 20 years. I remember starting with 2% as a new hire 28 years ago (the "default" amount as a new hire), but increased the amount fairly quickly the first few years.

Most "expert" advice I have read is to save 10-15% for retirement over the course of your career.

Kurt

I'm currently saving $18K in my 401K and $6K yearly in my catch-up account. I'm going to reduce my contribution by 2% in my 401K and put that last 2% to max out my yearly amount allowed by law

 

[Sugarcubesea]

Not knowing your full situation, but that seems like a really small amount to be saving for retirement. I've been saving ~15% for the last 20 years. I remember starting with 2% as a new hire 28 years ago (the "default" amount as a new hire), but increased the amount fairly quickly the first few years.

Most "expert" advice I have read is to save 10-15% for retirement over the course of your career.

Kurt

I wanted to add that I have been saving the max in my company plan since I started at this company.

 

[PigsDad]

I'm currently saving $18K in my 401K and $6K yearly in my catch-up account. I'm going to reduce my contribution by 2% in my 401K and put that last 2% to max out my yearly amount allowed by law

Ahh, I figured I was missing something. Sounds like a solid plan -- congrats!

Kurt

 

[VacationForever]

The US tax code is very complicated and to best minimize taxes we have to plan ahead. I sometimes find that I am one step behind which will end up with significant future tax consequence. We live and learn.

 

[sue1947]

I have 9 to 10 years left before I retire and reach 65. So I'm thinking I should put 2% in my company plan. Dang, I feel like my head spins with all the choices. I need to do a ton of research

With 9-10 years, you have an investment timeline of 30+ years. If you invest $6500 (the max you can contribute to an IRA), that money will double every 7.2 years which will be 4 times. That means 6500 becomes $104000 in that time. Getting a tax deduction on $6500 vs $100,000; there's no contest. (the rule of 72 is easy to remember and easy to use. Divide 72 by whatever % return you expect to get on your investment and that is how long it will take to double your money. The stock market has historically returned 10% so 30 years divided by 7.2 is about 4.)
First, take any company match. Assuming your company plan isn't a Roth, I would then max out your Roth contribution and then put the rest in the company plan. Plan on pulling money out of the non-Roth accounts for living expenses early and let the Roth grow as long as possible.

Sue

 

[VacationForever]

Sue, your strategy works for early retirees like yourself. For most people, only when one is no longer working will they be able to keep their tax bracket to under 15% when doing the conversion, otherwise it is too much tax to have to pay to convert. Obviously early retirees will also need to have lots of taxable savings/investments to be able to see them through until SS and RMD kicks in. Once RMD kicks in plus SS, it is hard to be able to do IRA conversion and still be able to keep the tax bracket to under 15%

 

[isisdave]

I think it's a good idea to have a substantial amount in a Roth IRA as early as possible. During a period of under-employment before age 59.5, I had to spend some of my Roth. If you've had it open more than 5 years and don't take out more than you contributed, there's no penalty or tax. Also, youngsters can tap it for certain medical or education expenses or a first-home purchase, not that those are necessarily good ideas.

If you contribute to an IRA for your teenager, it should be a Roth as they probably don't owe any taxes anyway, and it starts that 5-year clock ticking.

 

[PigsDad]

If you contribute to an IRA for your teenager, it should be a Roth as they probably don't owe any taxes anyway, and it starts that 5-year clock ticking.

But you can only contribute to that Roth IRA if your teenager has earned income, correct? I would love to start a Roth IRA for my daughter, but between school and competitive sports, she has not had a part-time or summer job.

Kurt

 

[Sugarcubesea]

With 9-10 years, you have an investment timeline of 30+ years. If you invest $6500 (the max you can contribute to an IRA), that money will double every 7.2 years which will be 4 times. That means 6500 becomes $104000 in that time. Getting a tax deduction on $6500 vs $100,000; there's no contest. (the rule of 72 is easy to remember and easy to use. Divide 72 by whatever % return you expect to get on your investment and that is how long it will take to double your money. The stock market has historically returned 10% so 30 years divided by 7.2 is about 4.)
First, take any company match. Assuming your company plan isn't a Roth, I would then max out your Roth contribution and then put the rest in the company plan. Plan on pulling money out of the non-Roth accounts for living expenses early and let the Roth grow as long as possible.

Sue

I thought my accountant told me that since I max out my 401K / Roth Deductions of $24Kper year ($18K+$6K CU), I can not also invest $6,500 to an IRA, dang am I missing something, because I want to contribute as much as possible...thanks for all the help.

 

[PigsDad]

I thought my accountant told me that since I max out my 401K / Roth Deductions of $24Kper year ($18K+$6K CU), I can not also invest $6,500 to an IRA, dang am I missing something, because I want to contribute as much as possible...thanks for all the help.

You can definitely contribute to an IRA in addition to your 401k (I personally do the $24K 401k and $6,500 IRA contributions per year), it is just that your IRA contribution will most likely not be deductible since you have the 401k. Since your IRA contribution will be post-tax dollars, you could put that into a Roth IRA if you are under the income limits.

If you are over the income limits for a direct Roth IRA contribution, you can look into what is called a "back door Roth", where you first contribute to a traditional IRA, and then immediately convert it to a Roth IRA (no income limits for Roth conversions), which has no tax consequence since the contribution was after-tax dollars to start with. That works great if you don't have any other traditional IRAs, since any Roth conversion requires you to account for the value of all your traditional IRA account values combined. If you have other traditional IRAs, part of the conversion would be taxable.

Kurt

 

[Sugarcubesea]

You can definitely contribute to an IRA in addition to your 401k (I personally do the $24K 401k and $6,500 IRA contributions per year), it is just that your IRA contribution will most likely not be deductible since you have the 401k. Since your IRA contribution will be post-tax dollars, you could put that into a Roth IRA if you are under the income limits.

If you are over the income limits for a direct Roth IRA contribution, you can look into what is called a "back door Roth", where you first contribute to a traditional IRA, and then immediately convert it to a Roth IRA (no income limits for Roth conversions), which has no tax consequence since the contribution was after-tax dollars to start with. That works great if you don't have any other traditional IRAs, since any Roth conversion requires you to account for the value of all your traditional IRA account values combined. If you have other traditional IRAs, part of the conversion would be taxable.

Kurt

Kurt, thanks, good to know that I can contribute $6,500 IRA Roth also per year.

 

[geekette]

This is penny wise and pound foolish. You are not taking into account the NON taxable gains in a Roth. That's the best tax shelter of all. If you take $10000 from an IRA/401K and put it into a Roth, you end up with $67000 after 20 years (assuming a 10% annual return). With the Roth, $57000 is non-taxable while with your regular accounts, all $67K is taxed. Multiply that $57K by 12 years of additional $10K rollovers (59.5 to 71.5 years) and you have $684000 of which only the original rollover amounts ($120K) were taxed. Increase that by whatever multiples of $10K you can do each year and we are talking serious money.

Sue

You are not taking into account the lose of use of $ advanced to Uncle Sam from a different pocket to pay the tax to shed the pretax portion. There is an opportunity cost there that should not be ignored.

I also would not go assuming 10% annual return, that's not reasonable. you would further have to subtract the tax I paid to get to tax free status and lost earnings had I not paid that tax money in advance. Keeping my original nest egg together and paying tax as I go is better for me until I need the $. ymmv but it doesn't make me foolish.

Since I will live off dividends, gains are not something I care about in any account.

I have a Roth, it's the last pot of dough I live off of. I don't need to pay in advance to shovel everything there, it is not worth it to me to foul my cash flow to pay Uncle Sam. Further, the Roth 401k will join it when I leave this company. I'm not concerned about growing my Roth and don't need to do so artificially by converting other monies.

 

[VacationForever]

The other part to remember is tax laws change regularly. Sue1947 lives in Washington which is a no income tax state which means she only needs to work with federal income tax. Side note: Seattle is trying to change that to have high income earners pay an income tax.

There are so many considerations as to whether to convert to Roth IRA. No 2 situations are the same and hence it is not straight forward - certainly not a no brainer. What worked for Sue1947 may not work for someone else. For someone who lives in a state with income taxes and intends to move to a no income tax state, converting tax sheltered IRA to Roth IRA before the move may not be a good strategy.

It sure does not work for us. We lived in a high income tax state and while we were working, and we were paying very high tax rates at both state and federal levels. We retired last year and this year is a zero income year but there are other circumstances that say we should not generate any income by withdrawing from tax sheltered IRA money this year. Starting next year, between SS and RMD, we will be pushing close to the 15% bracket and our window of opportunity will be closed. When my annuity kicks in when I turn 60, we will be over the 15% bracket which means taxes on capital gains and dividends.
Then there is consideration of MAGI for Medicare premiums, as brought up by rapmarks.

Hindsight is 20-20 and neither are we fortune tellers for the future. So we just work with whatever are the current tax laws and not worry about the future.

 

[cgeidl]

I would look to see a social security expert for advice.When we retired we had gotten information from social security on jhow much we were to receive. When we applied they told us different and we would receive less than half because we had a job which didn't pay into social security. Even though I had over 35 good qualifying years and my wife has over 20. We received the windfall amount.Don't trust social security. only what you read from the laws and from an expert.We were very fortunate not to need social security but it would be helpful to get the full amount for which we qualified

 

[isisdave]

But you can only contribute to that Roth IRA if your teenager has earned income, correct? I would love to start a Roth IRA for my daughter, but between school and competitive sports, she has not had a part-time or summer job.

Kurt

Right. We had a business and conscripted him as janitor. But babysitting and lawnmowing money counts.

 

[vacationhopeful]

..... We had a business and conscripted him as janitor. .....

I have done that with my youngest nephew when he was 4yo. Actually, he decided HE wanted to stay and work with my maintenance guy. His mom decided she was 'beyond wanting to fight with him' and left him ... deciding he would just melt down and be crying/bawling inside of 20 minutes. He never looked back and was so happy, you would have thought he won the lottery. His mom adapted nicely.

I paid my nephew ... I figure your son got money some money also.

PS I did put the 5yo on the lunch rotation as to "whose turn it is to buy" the next and following years. He knew he was truly part of the work team.

 

[Conan]

Right. We had a business and conscripted him as janitor. But babysitting and lawnmowing money counts.

Janitor yes, since you can deduct the payment from your taxes, thereby transferring the income from you to the child.

Babysitting and lawnmowing maybe not, since even if the child's income is low enough to avoid income tax liability, reporting the income ($400 and above) will trigger social security self-employment tax.

 

[bluehende]

All I know is my 70 year old brother-in-law who lives in Wilmington, DE in a house lives on $7500 per year! His property taxes are only $1300 per year out of that! He only needs his SS check (which he took at 64 years old) to survive. (He drove an oil truck for a living.). He is a widower. I am seriously thinking of checking into DE for our future even though it is not really the kind of place we would like to live and is far from our son.

I will pipe in here as I live in Delaware. I am not sure where you are right now, but DE has attracted a lot of retirees. I live in Wilmington (suburbs) and it is a fine place to live. The big retiree area is in the southern beach area. Housing cost in this area is a little higher than in Wilmington unless you need a block or two from the beach. DE real estate is low priced compared to the bigger cities in the East.
The draw is our tax structures. Property taxes are low. We pay about 2 grand in wilmington, but we owned an equivalent 1700 sq ft home in southern DE and our taxes were 500. Yep only 500 dollars. We have no sales tax. Our state income tax can run to 7% but there is a good break for pension income. Typical retirement income should be not taxed much at all.
There are many reasons to relocate in retirement. A low cost beach area is a big draw.