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Planning for retirement


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Open for general discussion. I'm behind the power curve but mostly because I don't own a house and at this point may never have one fully paid off...but crunching the numbers could be workable to retire and still have the house payment. My financial advisor seems to think so. 

 

My 401 is aggressive, which has killed me this year, but hopefully enough time to rebound, but I do need to put more into bonds, which I haven't done jack with traditionally.

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I'm a college educated engineer and started building my 401k right from the start.  Started thinking about retiring ten years ago by researching states that are favorable, looking to hang it up in seven years.  Covid killed my job two years ago, but the silver lining is shortly after that I was fully vested in my pension after so I rolled it over into my 401k.  

 

When I was job hunting, I used the state research I had done to decide where to find a job because the plan was to buy the house I was going to retire in.  I could afford to be selective.

 

 

 

Found the perfect job in the perfect state, and found the retirement house of my dreams.  I had socked away six months of severance pay into savings which was used for the down payment on the house.  I'm still healthy and fit so I plan to stay there until I croak.  The new job has an excellent salary and 401k.  

 

Then I reviewed my portfolio and retirement fund projection with my financial advisor with the new salary.  Although I had bought a house eight years before retirement - due to an abusive ex who damaged my credit record I had to wait for the statute of limitations to clear my record before I could get another mortgage - my projected funds are well placed for the future.  Yes I plan to make advance payments to the mortgage principal.

My investment portfolio was conservative for many years and I weathered the financial storms pretty well.  As I approach retirement the investment is slightly more aggressive, shifting to safer shelters to weather the current economic climate.  My advisor is Edward Jones and they have been excellent.

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We got really serious about retirement about 25 years ago. We max out my wife's 403b, and contribute to a money market for emergencies, property taxes, vacations, etc. The 403b took a beating but I think all we really lost is time. (Problem is I'm running out of time.) I was self employed as a musician and didn't have a lot of reserve money to invest so mine went in the general fund. We opened investment accounts. We sold a rental house in 2020 and paid off our primary mortgage. We have no debt.  I retired last December. My wife, seven years my junior, would like to retire before she's 65. I think that's doable. 

 

I can't emphasize enough the need for a good financial planner. We use LPL Financial.  We shopped around and found someone my wife felt she could go to and cry on his shoulder should I pass into the Great Beyond.  The best part is he has York peppermint patties in a bowl on the front counter.

 

 

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lol. Yeah I think a good financial advisor is critical as they know so much more than most of us, but I would also advise caution and trying to educate one's self as much as possible. I use Fidelity and they're great, but they tried to get me to use a service where they manage my mutual funds and shift them around however they think best for a fee of 1% of my total 401K value. But when I reviewed their initial plan, one of the funds they wanted to shift me to was one that wasn't doing nearly as well as mine but was a new one...i.e. one they want to get people invested in. Pass. 

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1 hour ago, Doerfler said:

please include OT at the beginning of your thread title. This is not a financial forum

 

I beg to differ.  Regardless of what your vocation is - engineer, musician, MI developer, recording artist, music educator, journalist - they all involve planning for retirement.

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Tighten the belt and put max away in your IRA, 401k, 403b etc. for the remaining time. Go see a financial analyst to look for red flags. What haven’t you done or taken advantage of.  
 

Take it easy for a few months.  Then start to look for things to fill your new life.  Take a job doing something simple and low stress compared to what you used to do. Find new people to make music with.  Join a men’s group - hikes, golf, bowling, biking. Make some connections with people in the same life situation. Keep your health up.  Eat healthy.  Enjoy your life.  Good luck! 

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2 hours ago, stoken6 said:

Correct me if I've got it wrong, but "401k" is code for "you invest without paying tax, but you pay the tax when you draw down the investment", is that it?

 

I've got no idea on 403b.

 

Cheers, Mike.

403b is like a 401k for public employees.  Yes, it reduced your taxable income when it went in, but you pay tax when you take it out. 

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4 hours ago, stoken6 said:

Correct me if I've got it wrong, but "401k" is code for "you invest without paying tax, but you pay the tax when you draw down the investment", is that it?

 

I've got no idea on 403b.

 

Cheers, Mike.

The idea behind a 401(k) is pretty simple: if you pay the taxes now, you'll pay a higher percentage because your income is higher.  If you pay taxes when retired, you'll pay fewer taxes on the same money because you'll be in a lower tax bracket.  Whether it works out that way in reality depends on the specifics of your situation, but that's the concept behind it.

 

I have a hard time trusting financial advisors, because by definition they are looking after two people's interests: yours and theirs.  

 

At an early (adult) age I put most of my money into residential real estate and it's worked out ok so far, mainly because I made good choices in my purchases.  I probably made less than I would have in moderately aggressive stock investments, but I never lost a night of sleep thinking about how the stock market was doing.  The peace of mind is worth something.  This strategy works best if you start early and stay the course for many years.

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19 minutes ago, Adan said:

The idea behind a 401(k) is pretty simple: if you pay the taxes now, you'll pay a higher percentage because your income is higher.  If you pay taxes when retired, you'll pay fewer taxes on the same money because you'll be in a lower tax bracket. 

It's exactly how pensions are taxed in the UK 👍

 

Cheers, Mike.

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5 hours ago, stoken6 said:

Correct me if I've got it wrong, but "401k" is code for "you invest without paying tax, but you pay the tax when you draw down the investment", is that it?

 

That's a traditional IRA you're thinking of. You pay tax when you draw out. With a Roth IRA, you pay tax now so you don't have to when you pull it out. Each has their fans, but neither is inherently better than the other. It ultimately depends on what the tax rate is now vs when you pull it out (which is anybody's guess). 
 

  

10 hours ago, Doerfler said:

please include OT at the beginning of your thread title. This is not a financial forum

My bad! I asked the mods to change.

 

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401(k) plans are typically provided by your employer to allow pre-tax contributions (some employers may provide some measure of matching, many don't these days). In contrast, an IRA is self-directed - in other words, you set one up yourself, it has nothing to do with your employer. 

 

Both are designed to allow savings and interest accumulated to build without tax burden. But depending upon the type of account, the withdrawals (when you retire) are then taxed at your current effective tax rate. 

 

Roth products (there are Roth versions of IRAs and other retirement products) allow you to contribute post-tax income (after tax withholding has been taken out of your paycheck), and then eventual withdrawals are not taxed when you retire.

 

The simple rule the IRS imposes on retirement accounts is "I either tax it now, or I tax it later". Traditional products = "I don't tax it now, but I'll tax it when you withdraw". Roth products = "I'll tax it before you put it in, and I won't tax it later when you withdraw".

 

Thus the big question in retirement planning is: What effective tax rate am I paying now, and what do I think my effective tax rate will be when I retire?

 

If I am at a lower tax rate now than I will be when I retire (for example, a young person just starting out), post-tax Roth products have an advantage (the tax rate you pay now is lower than the tax rate you'll pay in retirement).

 

If I am at a higher tax rate now than I will be when I retire (for example, a 40-ish exec at the height of their earning power), traditional products have an advantage (the tax rate you pay now is higher than the tax rate you'll pay when you withdraw).

 

This is a broad oversimplification, consult with a licensed financial advisor, past returns do not guarantee future returns, and all of that boilerplate.

 

Tim

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2 minutes ago, timwat said:

 

 

This is a broad oversimplification, consult with a licensed financial advisor, past returns do not guarantee future returns, and all of that boilerplate.

 

Tim

Yes, the other aspect that is impossible to parse (predicting the future isn't very definite, is it?) is - How much will your IRA accrue over time?

That can make a huge difference. As an example, let's say you put $6,000 into a Roth IRA after paying the taxes on it. You invest in stocks and do very well, now there is $32,000 and you won't have to pay taxes on it when it is withdrawn. Perhaps you leave it in the Roth and it continues to grow.

Would you save more money on taxes if you used a Traditional IRA, paid no taxes on the $6,000 and then paid taxes on the eventual accrual ? Maybe, maybe not, depends on income when taxed and how much you take out each year - just a couple of factors. 

 

Even a great financial advisor cannot accurately predict the future. Some companies become much more prosperous and the stocks rise in value (NVDA comes to mind) and others that are very successful now may very well drop in value unexpectedly due to competition or a failure to innovate. 

 

If one invests more conservatively, will inflation (which fluctuates over time and is impossible to predict accurately) eat up your profits? There are more factors regarding uncertainty, which is why most financial advisors simple suggest diversity as a tactic - it's no less unpredictable but sufficiently confusing so the average person just forgets about trying to figure out what is actually happening. Which is not an incorrect behavior considering there is no certainty of any sort that they can rely on to improve their prospects and never will be.

 

There really isn't any bullet-proof method to insure financial security and even if there was, a drunk driver could smash into your car at 75 miles per hour and kill you dead. 

That's life... 😇

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6 hours ago, stoken6 said:

Correct me if I've got it wrong, but "401k" is code for "you invest without paying tax, but you pay the tax when you draw down the investment", is that it?

 

I've got no idea on 403b.

 

Cheers, Mike.

I  idea behind 401K was you don't pay taxes when you making money and tax rate would be higher so you defer paying taxes until you're retired/older and have less income so tax rate will be lower.     It been working for me I've never been a financial planner type of person.  As I got older I knew my retirement fund would be inheriting my parent house after they were gone.   So I did what I need to do to protect that especially when my mom got dementia and sick.   By luck I discovered my mom's will was all screwed up the lawyer that did it was an idiot.  So I hired a good lawyer who specializes in Senior law who made a new will and he also set things up for me to inherit paying little taxes.  So for me getting a GOOD elder law attorney was good for my mom and for me after she was gone.  

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If you do go the route of a financial advisor, I recommend that you make them earn their fees.

 

Example: I've gone to four of them, and hired two. One has since been fired. What I have found is that they rely on very, very standard calculations and very, very "status quo" strategies for your retirement, then sit back and take little action.

 

First: the old 4% rule. 

 

I recommend building a spreadsheet that covers your retirement years, plug-in your own assumptions, and build in your own contingencies and risks. Then, you have data to question what the financial advisor is saying, and in my experience, you'll end up in a better place. Challenging "the experts" is in your favor.

 

Second: Wait as long as possible to start taking Social Security

 

Again, using your spreadsheet, calculate various scenarios for taking SS, including at age 62, 65, 67, and 70. What I found was that if I waited for SS until full retirement age, I got more from the government, but my net worth at the end of my life was less - essentially, I was tapping the "nest egg" more while waiting for Social Security. In any case, most financial advisors will tell you to wait to get SS "because the government increases your payout by 8% every year you wait. However, I look at it differently.

 

Consider this. Let's say (completely false) my scheduled monthly payout at age 62, which is early, is $1000 per month, $12K per year. If I wait a year, my payout will be $1080 per month - great. So, with that increased $80 per month, it will take me 150 months to break even with the $12K I passed up for a year. That is a bad choice for me - so I'm getting SS early when I can and ending up with higher net work in the end.

 

One person's perspective ...

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1 hour ago, KuruPrionz said:

Yes, the other aspect that is impossible to parse (predicting the future isn't very definite, is it?) is - How much will your IRA accrue over time?

That can make a huge difference. As an example, let's say you put $6,000 into a Roth IRA after paying the taxes on it. You invest in stocks and do very well, now there is $32,000 and you won't have to pay taxes on it when it is withdrawn. Perhaps you leave it in the Roth and it continues to grow.

Would you save more money on taxes if you used a Traditional IRA, paid no taxes on the $6,000 and then paid taxes on the eventual accrual ? Maybe, maybe not, depends on income when taxed and how much you take out each year - just a couple of factors. 

 

Even a great financial advisor cannot accurately predict the future. Some companies become much more prosperous and the stocks rise in value (NVDA comes to mind) and others that are very successful now may very well drop in value unexpectedly due to competition or a failure to innovate. 

 

If one invests more conservatively, will inflation (which fluctuates over time and is impossible to predict accurately) eat up your profits? There are more factors regarding uncertainty, which is why most financial advisors simple suggest diversity as a tactic - it's no less unpredictable but sufficiently confusing so the average person just forgets about trying to figure out what is actually happening. Which is not an incorrect behavior considering there is no certainty of any sort that they can rely on to improve their prospects and

That's life... 😇

 

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For all of us non-professionals (I'm presuming that many (most?) of us don't do financial planning for a living), basic financial literacy and a yeoman's effort at retirement planning is, well, better than none at all. And in many cases, it can provide a foundation for later years that a whole lot of folks don't have (because they didn't plan in place and stick to it earlier).

 

Yes, none of us are wizards (even those of us who wear capes) and therefore cannot predict the future. We lean upon historical trends with the S&P500, nod our heads at the general logic of diversification (don't put all your eggs in one basket), and get on with our lives.

 

The Buffets and Mungers of the world chortle at the idea of diversification (as, at its root, it can be described as ignorant guessing at LOTS of possibilities rather than ignorant guessing at just one). And true, better to invest in something you have thoroughly research, understand, and believe is doing something better than anyone else in the space.

 

But most of us non-pros don't have the time, resources, training, or access to information to do that. So we trust others to give us reasonable recommendations. For the same reason we trust accountants to do our taxes, doctors to prescribe medication, mechanics to fix our automobiles, and Jacob Collier to explain negative harmony to us.

 

And we hope we didn't inadvertently trust the financial equivalent of Kyrie Irving's take on astrophysics.

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I’m not sure what the original poster is asking here? Bill5 already has a financial advisor, it is stated in his post. FWIW, Bonds have NOT been being the “stable hedge” they traditionally were and IMO are not where any retirees money should be put.

 

But if we are talking about retiring in general, the correct mindset and planning for what you are going to spend your time doing AFTER you retire is really important. I know, I just retired 3 months ago. 

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10 hours ago, timwat said:

401(k) plans are typically provided by your employer to allow pre-tax contributions (some employers may provide some measure of matching, many don't these days). In contrast, an IRA is self-directed - in other words, you set one up yourself, it has nothing to do with your employer. 

Not true. 401Ks and IRAs are not mutually exclusive. In fact it's common to have an IRA set up through your company's 401K. Of course you still have control on what funds are selected, but it's still through your employer and through whatever financial company they choose (like Fidelity or whatever). 

 

Quote

the big question in retirement planning is: What effective tax rate am I paying now, and what do I think my effective tax rate will be when I retire?

Exactly...and I think a lot of people assume it's higher now than it will be when taking it out, but that isn't necessarily the case. I'm trying to strike a balance between my traditional IRA and Roth to hedge my bets. 

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1 hour ago, aellison62 said:

FWIW, Bonds have NOT been being the “stable hedge” they traditionally were and IMO are not where any retirees money should be put.

Bond Funds have not been the stable hedge, but actual Bonds & CDs will earn what the say they will if held to maturity.  If you've reached retirement age or near, you should be allocating a healthy percentage to these principle preservation vehicles, and these days you can ladder Bonds and CDs which may not earn much, but it's a whole lot more than it's been for the last 10-15 years, and certainly better than sitting on cash.  Bond funds are speculation, and they're getting their asses kicked these days. 

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Reducing expenses as much as possible helps. Relocating may be necessary, but you have to be careful. A state may not have a personal income tax, but it may have high sales taxes, property taxes, various fees, etc. Or the cost of health care may be more or less than other states. Housing is also highly variable. Illinois shows up in stats as having high home prices, but that's because Chicago's high prices skew the results. Outside of the main city area, prices drop dramatically.

 

Relocation is a major hassle, but if you do your research, you may be able to find an option that cuts your cost of living dramatically and provides a better quality of life in the process. Also, if you are eligible for social security, wait as long as possible before tapping it and you'll end up with a lot more each month than if you withdraw early.

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I took a job with lower pay because it is in the state retirement system. When I hired in they were matching 10 percent of 401. Not much of a match and that went away after a few years but I kept contributing heavily to the 401. My goal was to build state retirement which takes 27 years to be fully covered with no penalties, and supplement with Social Security and 401. After 15 years I used a big chunk of my 401 to buy 5 years of credit in the retirement system. Really glad I did that because in a couple years it went from a great place to work to a total disaster.  I retired the month I was eligible to draw state retirement, three years earlier than I planned. Retiring early meant that it would be a few years before SS would kick in, but I sold a few music instruments that I was not using and made it work. 4 years later, I'm drawing state retirement, Social Security, and a monthly check from my 401. I'm more relaxed that I can remember. 

 

My advice, plan ahead and put as much as possible into a 401. Just do it. Don't think about how much money it is or what you could do with it. Learn to live with less. It is not that hard and it pays off big when you need it most.

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49 minutes ago, RABid said:

My advice, plan ahead and put as much as possible into a 401. Just do it. Don't think about how much money it is or what you could do with it. Learn to live with less. It is not that hard and it pays off big when you need it most.

The best advice I ever heard was realize that time can be your best friend or your worst enemy. What you put away now, if you wait, will take a LOT more money (or a lot more time) to get the same end result as your money compounds over time. 

 

That, dollar-cost averaging, and diversity in investments are the three pillars of sound investing IMO.

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The potential exists to make more money if you work your investments rather than never do anything and just unconsciously contribute to them. 
 

Of course you can overwork them. 
 

If the market is steadily declining you could shift your money into a safe cash no growth account then reinvest when the market shows a relatively reliable incline. You will continue to lose money if you do not bail. Generally, the market will eventually improve. Nothing yet has killed it, not to be mistaken for the death of a good trend. If you stay with it you could take that dive down a long road of loss before it turns around or you could get off that train and reboard on its way back up.

 

When Covid hit I pulled my money out. I had accounts with Vanguard and Fidelity. They did not want people pulling their investments of course. One argument was that if you were not in when it turned around you would miss out. Sure, I lost a little by not being in the very moment it turned around. But I saved more money by getting off the train before my investments lost more value. 

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A steady decline is a sign of a steady decline. If you do nothing the value of your money will steadily decline. The price may come back up but you could have shifted money and saved more loss while making gains with what you retained. 
 

In the long run you might make money but you would have made much more had you invested wisely. Sometimes adjusting the diversity of your accounts is the wisest thing to do. That can include getting out momentarily. We have seen more than one instance of such a scenario in the last 25 years.

 

During a downward trend triggered by an event like Russia invading Ukraine, Covid pandemic, the mortgage industry collapse or Sept.11th event, etc. it is different than a generally fluctuating market. Today I have something. Tomorrow I have nothing. I get out for the time being today. I am saving money. You must stop the bleeding.

 

If one is very attached to an investment, you could get off the train on its way down then reinvest in the same stock when its price is lower than what you originally paid and end up with more.

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