BluDevAv8r
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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.
Heres what you do:
1. Put only up to the company match into the 401(k)
2. Max out your Roth and if you can max it out, put whatever is left over into the 401(k)
3. Buy books on money such as : Rich Dad Poor Dad, Smart couples finish rich (David Bach), Real Money-sane investing in an insane world (Jim Cramer), and Beating the street.
If you do decide to invest on your own in stocks (which I recommend) and you don't know what to invest in go to www.thestreet.com. And do your homework!
1. Put only up to the company match into the 401(k)
2. Max out your Roth and if you can max it out, put whatever is left over into the 401(k)
3. Buy books on money such as : Rich Dad Poor Dad, Smart couples finish rich (David Bach), Real Money-sane investing in an insane world (Jim Cramer), and Beating the street.
If you do decide to invest on your own in stocks (which I recommend) and you don't know what to invest in go to www.thestreet.com. And do your homework!
DwayneWorthless
The Supreme One
- Joined
- Oct 18, 2005
- Posts
- 113
atlcrashpad
Can't hold me down
- Joined
- Apr 20, 2004
- Posts
- 1,309
jrav8tor
Moonlighting!
- Joined
- May 2, 2002
- Posts
- 184
"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."
"The principal of the Roth can be withdrawn at any time with no tax consequence."
I know you probably know this already and decided to not get too detailed, but to those uniformed on Roth IRA's, you will pay taxes on any earnings earned on your contributions that are considered after-tax.
IMO, Rottie has provided some good basic advice and from my own experience in the financial services industry I agree with 100% of what he has said.
"The principal of the Roth can be withdrawn at any time with no tax consequence."
I know you probably know this already and decided to not get too detailed, but to those uniformed on Roth IRA's, you will pay taxes on any earnings earned on your contributions that are considered after-tax.
IMO, Rottie has provided some good basic advice and from my own experience in the financial services industry I agree with 100% of what he has said.
BluDevAv8r said:
401K and Trad IRA's grow tax deferred, ROTH IRA's grow tax free. No you can't use the roth ira's as a tax deduction, but unless you are making six figures, it isnt worth it. Money growing tax free is better than tax deferred, and in the end you will pay less taxes. 401k's should be contributed til the match is maxed, then an ira, preferably a roth.
Here is what it all comes down to guys...Look out for number one. Companies are not going to give you any more money than they have to. Profit sharing is more beneficial to the company than the employee, when looking at different compensation methods. 401k's are good, even better is if/when your company rolls out a ROTH 401k's, and I suggest pushing them, they are a HUGE benefit for you. You used to be able to count on the gov't (social security), your company (pension), and whatever you saved for retirement. The only variable in that thing you control is you. Making smart choices about your money isn't easy, and there are tons of books out there to tell ya how to do it. Just look out for numbero uno and you will do ok.
Ya gotta do what the execs do . . . . get "yours" upfront and under your control, as much as possible, as soon as possible, and legally free from BK lien, and to hell with the company you work for. Remember, GET YOURS, screw everybody else, and move on once the trough dries up. That's the American way of business now.
However, in this profession the way it's going, you're not going to be able to retire, so why bother saving. Given the life expectancy of pilots and the probability of your ex-wife getting most of your retirement, that's another good reason to spend your money on liquor and women now while you're young enough to enjoy them.
However, in this profession the way it's going, you're not going to be able to retire, so why bother saving. Given the life expectancy of pilots and the probability of your ex-wife getting most of your retirement, that's another good reason to spend your money on liquor and women now while you're young enough to enjoy them.
Well - for pilots I think we have some GREAT advice on this thread for retirement planning. I especially agree with the response talking about letting the professionals manage your money (i.e. mutual funds). I don't change my oil because I don't know how (pathetic, I know). Accordingly, I don't pick my own stocks because I don't have the time or energy to look at the thousands and thousands of stocks available and risk my money in such a segregated market section. I also agree with the 401(k) contribution, then IRA, then taxable mutual funds. Of course, don't forget to build an emergency / strike fund and have a debt reduction plan. For the poster who said moving to Scottsdale at 60 to play golf ins't possible anymore - why not Mr. Chicken Little? This is America...you can do whatever you want. A dual income household making $70-ish K (reasonable income for dual income house) can pack at least 10% away and make over $1,500,000 by retirement at 60. Even indexed for inflation, one can leave the full time workforce at that point and play golf in Scottsdale. If you have a 401(k) - at least contribute the match. Unfortunately, I don't have one so my ROTH is maxed out and it did 13% last year. My wife's did 17%. Meanwhile individual stock pickers and those who watch too much TV think the stock market is not a good investment and dump their money into rental real estate that costs them each month while income is tight. Also, don't forget about adequate life & disability insurance, especially if you have a family. FAR 135 and 121 pilots can get preferred plus rates (I know because I have that rate on myself). AOPA and union life insurance is typically a rip off (most group plans are rip offs). Finally, hire a professional. Their are LOTS of professoinals out there who can help with financial planning and they don't charge a fee for their service. Remember, what you do with your money is ultimately up to you...so seek guidance and advice from a professional!
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