BluDevAv8r
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- Nov 26, 2001
- Posts
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Retirement PLANning
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smellthejeta
The plane I solo'd in
- Joined
- Mar 31, 2003
- Posts
- 588
Neal,
This is the first time in a long time that I have had money left over at the end of the month. I'm going to move halfway across the country sometime in the next year or two, go back to making $8/hr for three months, move again, and then hopefully start the rest of my life. Since I have some relatively short term savings goals, and money to save (for once) I've been doing some somewhat serious studying about what to do with and how to save the leftover money.
So... What I've concluded is this: How much to save and what to do with it are dependent on your savings goals, age, and how close to retirement you are. I'm young; I'm saving for short term (moving, house purchase) and long term (retirement). I'm in a fairly low tax bracket now, compared to where I will be when I'm closer to retirement. Somebody closer to retirement has different goals than I do, and therefore they should invest/manage their money differently.
Let's start with me and where I'm at. Conventional wisdom states that I should fund my 401(k) to my company max and no more. Why? The company match is free money, and is essentially a 100% ROI. Guaranteed. Nothing can beat that. But here's the catch: Since my contribution is before taxes, I am opting NOT to pay taxes while I'm in the 17% bracket (or whatever it is I'm at). However, my withdrawls (or capital gains or whatever) will be taxed -- when I am more likely to be making more money and thus in a higher tax bracket. IOW, I am opting to NOT pay income taxes while I'm in the 17% bracket in exchange for paying taxes on a lot more money while I'm in the 50% bracket. The company match and compounding and hopeful growth will make up for the higher tax rate. However, anything put into a 401(k) beyond the company match is questionable, because I will be paying more taxes on it later at the expense of less taxes on it now.
So, let's look at the Roth IRA. My contributions are after taxes -- that means that I'm paying taxes on my contribution NOW, while I'm in the 17% bracket. Later on, when I'm in the 50% bracket, I pay nothing on my withdrawls.
For more on the tax thing... Money you put into the 401(k) and the Roth CAN be taken out early for emergencies, but there's a catch. Under most circumstances, early 401(k) withdrawls will hit you (or expose you) to a lot of tax consequences, such as income taxes and early withdrawl penalties. The principal of the Roth can be withdrawn at any time with no tax consequence.
Also, in regard to taxes: You talk about the tax break, but what are you trying to gain? For me (and most regional pilots in their early years), I get a deduction on student loan interest, a credit for going to school, and my medical benefits are pretax contributions. I'm not doing poorly at tax time, and in fact, usually get a fat check. Again, I'm in a lower tax bracket, so I just don't pay that much in taxes. Essentially, for every dollar I owe income taxes on now, I pay $0.17 in taxes. Later on, every dollar I owe taxes on I will pay $0.50 in taxes. It doesn't make sense to me to save that seventeen cents to pay fifty cents on it later. I'd rather pay the seventeen cents now than pay fifty cents later.
This is the first time in a long time that I have had money left over at the end of the month. I'm going to move halfway across the country sometime in the next year or two, go back to making $8/hr for three months, move again, and then hopefully start the rest of my life. Since I have some relatively short term savings goals, and money to save (for once) I've been doing some somewhat serious studying about what to do with and how to save the leftover money.
So... What I've concluded is this: How much to save and what to do with it are dependent on your savings goals, age, and how close to retirement you are. I'm young; I'm saving for short term (moving, house purchase) and long term (retirement). I'm in a fairly low tax bracket now, compared to where I will be when I'm closer to retirement. Somebody closer to retirement has different goals than I do, and therefore they should invest/manage their money differently.
Let's start with me and where I'm at. Conventional wisdom states that I should fund my 401(k) to my company max and no more. Why? The company match is free money, and is essentially a 100% ROI. Guaranteed. Nothing can beat that. But here's the catch: Since my contribution is before taxes, I am opting NOT to pay taxes while I'm in the 17% bracket (or whatever it is I'm at). However, my withdrawls (or capital gains or whatever) will be taxed -- when I am more likely to be making more money and thus in a higher tax bracket. IOW, I am opting to NOT pay income taxes while I'm in the 17% bracket in exchange for paying taxes on a lot more money while I'm in the 50% bracket. The company match and compounding and hopeful growth will make up for the higher tax rate. However, anything put into a 401(k) beyond the company match is questionable, because I will be paying more taxes on it later at the expense of less taxes on it now.
So, let's look at the Roth IRA. My contributions are after taxes -- that means that I'm paying taxes on my contribution NOW, while I'm in the 17% bracket. Later on, when I'm in the 50% bracket, I pay nothing on my withdrawls.
For more on the tax thing... Money you put into the 401(k) and the Roth CAN be taken out early for emergencies, but there's a catch. Under most circumstances, early 401(k) withdrawls will hit you (or expose you) to a lot of tax consequences, such as income taxes and early withdrawl penalties. The principal of the Roth can be withdrawn at any time with no tax consequence.
Also, in regard to taxes: You talk about the tax break, but what are you trying to gain? For me (and most regional pilots in their early years), I get a deduction on student loan interest, a credit for going to school, and my medical benefits are pretax contributions. I'm not doing poorly at tax time, and in fact, usually get a fat check. Again, I'm in a lower tax bracket, so I just don't pay that much in taxes. Essentially, for every dollar I owe income taxes on now, I pay $0.17 in taxes. Later on, every dollar I owe taxes on I will pay $0.50 in taxes. It doesn't make sense to me to save that seventeen cents to pay fifty cents on it later. I'd rather pay the seventeen cents now than pay fifty cents later.
DrunkIrishman
Cocaine is a helluva drug
- Joined
- Nov 27, 2002
- Posts
- 519
Flechas-
Start that 401K with the smallest percent that they'll allow. When I made peanuts in my first year I did 2%. Of course, 2% made no money but it did get me started in the plan so that the company match based on plan longevity would kick in. 2% really didn't cost me more than Uncle Sam took away.
Another good book to go along with Dookie's choice is Rich Dad, Poor Dad. Or you could go with my personal favorite, the Series 7 exam test prep. I figure, if my broker knows it so should I. Happy investing!
Start that 401K with the smallest percent that they'll allow. When I made peanuts in my first year I did 2%. Of course, 2% made no money but it did get me started in the plan so that the company match based on plan longevity would kick in. 2% really didn't cost me more than Uncle Sam took away.
Another good book to go along with Dookie's choice is Rich Dad, Poor Dad. Or you could go with my personal favorite, the Series 7 exam test prep. I figure, if my broker knows it so should I. Happy investing!
ThisistheDream
Well-known member
- Joined
- Jun 18, 2004
- Posts
- 293
I would say stay healthy and plan on working until we are 70. Thats going to be the retirement we are going to come to know in the future. Retiring at 60 moving to scottsdale and playing golf is a thing in the past without any pensions. If we made more money in this profession yea we could max out 401K get some IRA's etc. but with the paycuts and cost of living going sky high, the retirement that we saw our grandparents have will be for the rich rich only.
RockBass14
Well-known member
- Joined
- May 18, 2005
- Posts
- 54
The accountant I use gave me this advice:
Spread your money around.
Take advantage of your 401k, open a Roth, you can open tax advantaged accounts for you kids (educational Roth???), real estate has historically been a good investment, etc.
His point was this: you don't know what tax rates will be in 30-40 years when you retire. You can hedge against the uncertainty of tax rates by putting away both pre-tax and post tax dollars, and various assets classes.
Spread your money around.
Take advantage of your 401k, open a Roth, you can open tax advantaged accounts for you kids (educational Roth???), real estate has historically been a good investment, etc.
His point was this: you don't know what tax rates will be in 30-40 years when you retire. You can hedge against the uncertainty of tax rates by putting away both pre-tax and post tax dollars, and various assets classes.
Here's what I have been doing and my financial advisor hasn't objected...
1. 401k contribution up to the max which company will match. That provides an automatic 50% return on investment.
2. Roth IRA.
3. Small contribution to a taxable mutual fund. It's a rainy day/strike fund which I have tapped twice to pay for a car and a new hot water heater.
4. Maximize remainder of 401k, if able.
5. Traditional IRA, if able.
1. 401k contribution up to the max which company will match. That provides an automatic 50% return on investment.
2. Roth IRA.
3. Small contribution to a taxable mutual fund. It's a rainy day/strike fund which I have tapped twice to pay for a car and a new hot water heater.
4. Maximize remainder of 401k, if able.
5. Traditional IRA, if able.
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