However, if you value reducing future uncertainty, you may choose to “lock in” the current marginal tax rate by doing the Roth conversion now, rather than waiting until RMD later (when the marginal tax rate could be higher or lower, but unknown now).
This is actually one of the considerations when choosing traditional versus Roth at the time of contribution. Roth “locks in” the current marginal tax rate, while traditional takes the uncertainty of the future marginal tax rate at the time of distribution, which can be higher or lower than at the time of contribution.
Obviously, future tax rates are politically determined, but for this type of retirement savings and investment planning, it is what actually may happen, not what you want to happen, that matters.
Sadly, those people in Washington are too cowardly to cut the social security & Medicare benefits, or eliminate/reduce the inflation adjustment or raise the retirement age. At inception, the average recipient only took social security for 3 years. (65-68). Now it is around 22 (62-84). No wonder the system is going broke.
We are very, very far away from the original intent of social security. It was never meant to be a retirement plan.
Yeah I hear ya. I was actually surprised to see that the difference between the full retirement age between my husband and me is only a few months with the age adjustment phased in, which is ridiculous since we’re nearly 10 years in age apart. Seems like my full age for retirement should be much later. Even my soon to be 83 year old father still goes to work - by choice not need.
Pensions which were made for retirement have tons of problems too. But the bottom line, people (and kids these days especially) need to be taught how to save when they’re young and what it means and how to build that savings. My whole life we were told not to expect there to be social security and there is no way anyone should expect to live on what they get anyway as a substitute for a job or retirement anyway. Subsidizing maybe, but so many people have no savings, and now with the pandemic, even fewer have any.
The whole FIRE movement is based on that. Save 30-50% of your income when young, and you can retire between 40-50. Great plan if life didn’t intrude, and you didn’t want a family & children. But the general idea is pretty good. It’s the same advice my Mom gave me when I was 20.
I’d have no issue at all paying more beyond the 137K but the issue really is this. The highest possible annual amount is too low. Let’s say SS taps out at 137 and the maximum is 40K. Well if you raise the 137k then you need to raise the 40 k as well. If you raise the 137 to 200K for example. Then you also have to raise the maximum annual payment as well. As it is, many people tap out of the 137K but will also get less on the back end.
I think many of those who tap out for many years also don’t really need the money for day to day expenses.
I’m glad it taps out at 137K only because SS isn’t a great savings vehicle and is pretty limited.
In terms of who can afford to pay what, you will never get universal agreement. As a high income earner my entire life and my spouse as well, I find that SS isn’t where the money is leaking out. It’ an insane and arcane tax system that allows corporations and people to write off ridiculous things. I’d be all in for a flat tax ( always have been) but the issue is, getting rid of loopholes. Why can I write off deductions to my 401K but not my kids college education? Why do I get to hold stock for more than a year then only pay 15% tax when someone who is working has to pay a much higher rate on their income. IMO there are so many inconsistencies ( primarily in the tax code) and fewer in the tax rates and so many that lean in the direction of the more money you have the more options you have. The worst case is making mid 6 figures where you work for someone else and cannot write off any corporate stuff.
FIRE is a new catchy term, but it is not really news that if you live well below your income, you will accumulate capital which can be invested to increase the capital that you have. Back in the 1990s, there was The Millionaire Next Door book that was basically about the same thing.
Considering that the economy and tax system have grown much more favorable to capital than labor over the decades, saving up enough capital so that you no longer require income from labor (nor money from family/charity/government) to pay for living costs can be a reasonable goal at any age, even if there is no intent to retire early. No longer needing income from labor means that you are protected against events that may force you out of your profession or into retirement before you intend to retire.
Of course, that may be easier said than done, especially as one gets older. Becoming financially independent of Medicare means having enough capital to be able to self-insure and self-pay any possible medical care costs.
Pretty tough to save 30-50% of income unless/even if you live in a very low cost state. We have been able to save over the years, though have no idea how much as a % of income. We’ve had blips as well as gradual curve up from saving through our 401K. I know that we have NEVER saved 30-50% in the early years yet we’re in our mid 50’s and could retire if we wanted to.
Strange thing is, people are so different. Some think X is enough to retire, some think X plus Y is enough and some don’t think they ever have enough. We’ve found that one cannot fully figure out what you will have in retirement. A good decade or a bad year (2008)can really put things in a different spot. This has been the craziest year ever. The financial advisor called to say we are up 19% for the year. So, that’s crazy to me.
Especially, as I pulled out of a lot of stocks in the Spring due to Covid.
There is some point where you have enough money to live on and the excess means you will increase spending or have additional options. Capital seems to be the only guarantee in retirement IMO as employment changes so much.
How difficult it is to save is somewhat dependent on the income level. Someone with a $20,000 income is likely to find it more difficult to save 50% of their income than someone with a $200,000 income.
It’s also a function of your expenses. Generally the more money one makes, the more they tend to spend. Nicer cars, nicer vacations, nice clothes, nicer luxuries, etc. It’s just human nature. How many people once covid hit immediately started cutting back? I know a ton who did.
People freaked at the market tanking in Feb/March and many took their money out without putting it back in. God knows how badly those people will get hit with capital gains in April, even if only at the 15% rate. Many who did come back in, came back in too late. Many lost their kid’s college tuition for this year and freaked over that. I remember many posts in different FB groups I’m in about that and wondering how those people had all of that money in all risky investments and not some of the short term expenses in more conservative ones. You need to be prepared for these unexpected events, but also the same rule still applies. Buy low, sell high. Not to run and get scared. Money in the bank/money markets aren’t earning squat right now there are not many options if not invested. But people need to be smart about it and should always be looking ahead, not just for today.
Yes, but the person with a $200,000 income has much more choice in the level of expenses and therefore the level of savings and investment than the person with a $20,000 income. Spending on luxury goods is a chosen expense, not a mandatory one.
True. Although the person with 20k income qualifies for extra assistance and subsidies so while the one with the 200k income will have more income taxes and other expenses to pay and more disposable income, at the end of the day, neither may really end up with savings, and the one with the 200k won’t qualify with any financial aid either, so while some might think that person is way better off, they may wind up with a lot of debt as well. Obviously one would assume you’d rather be the one making 200k vs 20k but when you start comparing something like 60k to 200k you may be surprised that the person 60k might actually be living a better quality of life with less debt than the person making 200k in the end. Mainly because many at 200k are really living beyond their means with some of the excesses and if they’re paying for college without receiving financial aid or unmet financial aid and then take loans, that would be a killer. I know way too many people who have put themselves in this position living way over their means and have no money, but of course let others think they do. It has caused them to lose their houses, and not be able to afford to send their kids to colleges without incurring debt. They’re screwed for retirement as well, but too bad they put that vacation ahead of those priorities. Just makes me shake my head constantly.
The $200k income person living beyond their means is exercising a choice to live beyond their means. Unfortunately, the consequences of such a choice affect their kids (in terms of limitations on their choice of college, for example) rather than just themselves. If the $200k income person had spending habits limited to $60k (minus income and payroll taxes on $60k), then they would have plenty of savings for kids’ college, retirement, etc…
But the assumption that the $60k income person will get enough college financial aid for their kids is not necessarily correct. Unless their kids have top-end academic credentials to get the best merit scholarships or admission to the best financial aid colleges, the financial aid offered by most colleges tends to fall short of making them truly affordable. Some states may make their in-state public universities affordable for all income levels, but many others do not (particularly in the northeast, such as Pennsylvania).
I beg to differ because 200k is never just 200k and even a person earning 200k that may have 3 or even 4 kids, who is not going on fancy vacations, might still live in a high tax state, in addition to federal taxes owed, medical insurance and unreimbursed expenses, housing, food, etc. then when needs are all deducted, there really is nothing extra left to save for college or retirement. $200k sounds like a lot but for a typical family of 5 it isn’t. That’s why it kills me to hear of families living under the poverty line who have nothing and the gov’t won’t do jack to help them.
There are numerous colleges that if you make less than 100k they will meet your unmet need. Take financial aid out, and there are plenty of mid-level schools that will offer substantial merit even for upper avg kids to attend. Then if you add back the financial aid those get can get by without having to pay much. Or, they can go to lower level schools or community colleges and still get an education and a pathway to a 4 year university and get a 4 year degree at a much lower cost with assistance. College is in everyone’s reach. It doesn’t have to be an 80k college.
There are many states now, including my own, that have free college for incomes of less than a certain amount. If you don’t qualify for the state flagship you can go to another one of the state school’s but it’s open to anyone. I think my state the income limit is 65k. There are also many states that give resident tuition even for OOS students so that’s a cheaper option for many than staying in state. You mention PA. I know Penn St. is outrageous. I have a kid attending one of the best undergrad business school’s in the country, where residency was gained and tuition is 13k for the year. The ROI is insane. But of course, freshman year was outrageous at 43k. So the savings is backended and it was a tough first year but will be worth it in the end.
Bottom line is it would be a lot easier for someone making $1m but even 200k isn’t that simple either.
$141k in New York, NY
$144k in Honolulu, HI
$144k in Philadelphia, PA
$145k in Washington, DC
$146k in San Jose, CA
$149k in Boston, MA
$149k in Chicago, IL
$158k in Seattle, WA
All of these numbers are significantly higher than the median household income in each place. If this $200k household spent as if it had a hard limit of the median household income where it lived, then it should be saving tens of thousands of dollars per year.
Again, you’re only looking at income tax. This doesn’t take into account property taxes, sales tax, insurance in those cities, etc.
Also, this doesn’t tax into account a self employed individual that makes 200k. Self employed taxes then are higher since they have to pay both sides of social security and medicare taxes.
You can’t just say ‘federal tax and state tax rate is this’ so you’ll have this much after tax income. This is not even close to comparing apples to apples. Furthermore a dollar in Hawaii doesn’t go nearly as far as a dollar in some of those other cities.
Please, please, please can we stop with the 200k income isn’t enough and hard to live on. And how terrible it is to pay for college.
This is a retirement thread and can we stick to that?
The conversation started was about how much to save for our children.
My children both (well did because one lost their job because of the downturn of the economy during the pandemic) have better than average jobs. The one who is married were able to live on one income.
When he lost his job, they were able to continue to live the same way they had before. The thing they had to stop was to pay down their mortgage. Their cars are paid off, they remodeled their kitchen with cash. They save plenty in retirement accounts. They did buy a house that was half of what they qualified for and paid extra on the principal. They live in a major eastern city but housing costs are not as high as some places. It’s a very nice house. No children yet so they are setting up their future financial picture.
My other child now lives with her boyfriend but that is pretty recent. They rent and when they combined household, her expenses did not go down since she had lived in a very cute studio before. She puts 15% of her after tax income in a 401k ROTH. The car is paid off. She is paying for a masters that she has the money in the bank to pay when the government starts requiring her to pay interest.
My children live good lives, save a lot and took great vacations before the pandemic. This was possible because they had parents who were willing and able to pay for their nice college degrees. One got great financial aid but it was still expensive. We told them that we would sacrifice to get them through school and then they were on their own. They picked degree that afford them these great lifestyles.
Sorry this got so long. I could go back and edit, feeling too lazy.
Most middle class families don’t have much of a stock/mutual fund portfolio that they rely on for monthly income. The increased standardized deduction really hurts donations as most don’t itemize anymore.
I haven’t read all the posts, but has anyone actually answered the original question posed “How much do YOU think YOU need to retire…and at what age will you (and spouse) retire?”
I would like to see posters respond to the question with actual figures, as I assume that’s what this was originally about. Please correct me if I’m wrong and I’ll stop checking answers.
@chipperd this is a long, lengthy and years long posts. Every so often we get that question from someone newer to here. And the answer remains the same.
It depends. It’s variable depending on your earning power when working and your expectations as a retiree.
Shawbridge, a frequent poster here has different ideas and expectations than I do for instance. Mine are by necessity less than his. Doesn’t make either of us wrong, just different. I do not have the capacity to save as much as a larger earner.
This is my expectation. I have enough that once we retiree, we will not have to get part time jobs (that is something my parents had to do and one I would like to avoid). I will be able to pay my bills and be able to do things in early retirement such as travel and explore our hobbies. We don’t have any plans of buying a second home. We luckily don’t have to think about giving money to our children. We have enough. We’ve been planning for this and our financial advisor says it’s enough. We look forward to that day.
So to me, that is the answer to the question posed originally.
@deb922 Hey when I was in my mid 20’s and had no kids and no college debt, and my husband and I were living on about 40-50k/year until I had to take a leave from my job, we too were living like kings, taking nice vacations, socking more than half of it in retirement (no Roth IRAs back then), no car loans, credit card debt, etc. But once you pull the trigger and have kids a lot of that goes out the window.
@chipperd Excellent point and exactly what I said previously as far as the donations as well. Middle class do better for the most part on the standardized deduction, but at the expense of not making charitable donations. This is why the CARES act this year allows for the extra $300 cash donation to charity to help charities who need it during the pandemic and to spur some extra giving that will allow people to take that standard deduction as well as itemize the extra $300. But if you live in a high property state tax like me, you also lost out on the deduction there since the cap is $10k in property tax deductions. It’s really changed how I go about donating and we set up a charitable foundation which we fund every other year to maximize our deductions so one year we take the standard deduction and then the next we make up for it by funding the foundation with two years of charitable giving.
As for stock funds/mutual funds. If I hadn’t invested in college and grew that and gotten into some early IPOs like Google and Facebook way back, then I wouldn’t have squat to be able to invest in now. It was a good foundation. But as you have correctly stated, most middle class don’t have these investments, they don’t have extra money to put in the market and most don’t even have money for retirement. And now with the pandemic, look how many people have probably gone through their life savings and will be even worse off so the income gap will grow even more. We should have a higher corporate income tax. Stocks are already trading at too many times their earnings anyway thanks to the Robinhood investors and people who don’t know anything about the market.
