ROTH 401k - Would you???

[OmarR]

My work offers both traditional 401k and ROTH 401k. Currently, I only contribute 20% to ROTH. 

I have:

zero debt

zero kids

a mortgage @ 2.5%

I will probably work another 20 years.

If you guys were me, would you stick to all ROTH, or contribute some to traditional 401k? Other than extra mortgage principal payments (~10 years payoff), the taxes I pay now are not a financial burden. Both of these goals just mean that the wife and I don't go out to eat as much.

[MakingProgress]

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@OmarR wrote:

My work offers both traditional 401k and ROTH 401k. Currently, I only contribute 20% to ROTH. 

I have:

zero debt

zero kids

a mortgage @ 2.5%

I will probably work another 20 years.

If you guys were me, would you stick to all ROTH, or contribute some to traditional 401k? Other than extra mortgage principal payments (~10 years payoff), the taxes I pay now are not a financial burden. Both of these goals just mean that the wife and I don't go out to eat as much.

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The question is do you expect to pay more in taxes now or in retirement?   

If you expect your tax rate to be more in retirement then keep doing what you are doing.   If you think you are paying a higher rate now than you will in retirement than tradational may be the way to go.

If you are like me and just don't know then it's a crap shoot.   I put some into a traditional tax-defered 401K and some into a Roth 401K to hedge my bets. 

[iced]

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@MakingProgress wrote:

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@OmarR wrote:

My work offers both traditional 401k and ROTH 401k. Currently, I only contribute 20% to ROTH. 

I have:

zero debt

zero kids

a mortgage @ 2.5%

I will probably work another 20 years.

If you guys were me, would you stick to all ROTH, or contribute some to traditional 401k? Other than extra mortgage principal payments (~10 years payoff), the taxes I pay now are not a financial burden. Both of these goals just mean that the wife and I don't go out to eat as much.

---

The question is do you expect to pay more in taxes now or in retirement?   

If you expect your tax rate to be more in retirement then keep doing what you are doing.   If you think you are paying a higher rate now than you will in retirement than tradational may be the way to go.

If you are like me and just don't know then it's a crap shoot.   I put some into a traditional tax-defered 401K and some into a Roth 401K to hedge my bets. 

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This is the general gist of it. If you're the type of person who's making $200k now but only plan to stockpile $1 million in your retirement account for a $40k or so per year income in retirement, Roth makes very little sense. If you're making $40k and plan to stockpile $5 million so you can have $200k a year in retirement, Roth makes a ton of sense.

I cap contributions every year, but it used to be 100% traditional. Over the last 4 years, I've been shifting it more toward its current ratio of 60% Roth and 40% traditional. My motivation in this was AGI adjustment - I was at a point where I could push just enough things on the AGI stack that I was able to qualify to drop $5500 in a Roth IRA each year as well. Once that became impossible, I just did annual rollovers instead and began shifting more heavily toward Roth as my take-home permitted. As I got pay raises, I'd increase my Roth and drop my traditional accordingly to keep my take-home relatively flat. I will probably do some traditional to Roth rollovers in the coming years as my spare tax cash permits to get it mostly Roth.

My hope is that in retirement, 100% of my income is via dividends (capital gains), interest (income), Roth sources (neither), and maybe Social Security if it still exists. It would put me in an aggregate 10% of so bracket even if I'm pulling in $250-500k or more per year.

The other risk to keep in mind is the tax laws themselves. While unlikely, there's nothing to say that they don't change the laws in 20 years and all of us saving up our nest egg in Roth get taxed anyway. I imagine that even then, for those taking home more in retirement than in working years, Roth can't be any worse than standard income rates.

[OmarR]

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@iced wrote:

If you're making $40k and plan to stockpile $5 million so you can have $200k a year in retirement, Roth makes a ton of sense.

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This would be me in a nutshell. Thank you for putting into "concise words" the general idea that was floating around in my head.

And you're right. I do wonder about the changes and "what-if's" of the future. It would definitely suck to pay taxes on something twice if the rules changed.

[Revelate]

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@iced wrote:

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@MakingProgress wrote:

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@OmarR wrote:

My work offers both traditional 401k and ROTH 401k. Currently, I only contribute 20% to ROTH. 

I have:

zero debt

zero kids

a mortgage @ 2.5%

I will probably work another 20 years.

If you guys were me, would you stick to all ROTH, or contribute some to traditional 401k? Other than extra mortgage principal payments (~10 years payoff), the taxes I pay now are not a financial burden. Both of these goals just mean that the wife and I don't go out to eat as much.

---

The question is do you expect to pay more in taxes now or in retirement?   

If you expect your tax rate to be more in retirement then keep doing what you are doing.   If you think you are paying a higher rate now than you will in retirement than tradational may be the way to go.

If you are like me and just don't know then it's a crap shoot.   I put some into a traditional tax-defered 401K and some into a Roth 401K to hedge my bets. 

---

This is the general gist of it. If you're the type of person who's making $200k now but only plan to stockpile $1 million in your retirement account for a $40k or so per year income in retirement, Roth makes very little sense. If you're making $40k and plan to stockpile $5 million so you can have $200k a year in retirement, Roth makes a ton of sense.

I cap contributions every year, but it used to be 100% traditional. Over the last 4 years, I've been shifting it more toward its current ratio of 60% Roth and 40% traditional. My motivation in this was AGI adjustment - I was at a point where I could push just enough things on the AGI stack that I was able to qualify to drop $5500 in a Roth IRA each year as well. Once that became impossible, I just did annual rollovers instead and began shifting more heavily toward Roth as my take-home permitted. As I got pay raises, I'd increase my Roth and drop my traditional accordingly to keep my take-home relatively flat. I will probably do some traditional to Roth rollovers in the coming years as my spare tax cash permits to get it mostly Roth.

My hope is that in retirement, 100% of my income is via dividends (capital gains), interest (income), Roth sources (neither), and maybe Social Security if it still exists. It would put me in an aggregate 10% of so bracket even if I'm pulling in $250-500k or more per year.

The other risk to keep in mind is the tax laws themselves. While unlikely, there's nothing to say that they don't change the laws in 20 years and all of us saving up our nest egg in Roth get taxed anyway. I imagine that even then, for those taking home more in retirement than in working years, Roth can't be any worse than standard income rates.

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Out of curiosity what math are you using to reach your walk away number iced?

[iced]

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@Revelate wrote:

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Out of curiosity what math are you using to reach your walk away number iced?

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The 4% AKA "multiply your retirement income by 25" rule. Some advisors will tell you 5% but I prefer a more conservative number that's a good aggregate of both bad years and good years.

I'm also of the mind that I should be able to live in perpetuity with my walk away number, which means if I retire with $5 million and die 40 years later, I leave $5 million to my heirs. That approach might not be for everyone.

[tacpoly]

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@iced wrote:

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@Revelate wrote:

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Out of curiosity what math are you using to reach your walk away number iced?

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The 4% AKA "multiply your retirement income by 25" rule. Some advisors will tell you 5% but I prefer a more conservative number that's a good aggregate of both bad years and good years.

I'm also of the mind that I should be able to live in perpetuity with my walk away number, which means if I retire with $5 million and die 40 years later, I leave $5 million to my heirs. That approach might not be for everyone.

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So you're expecting to have $12.5 million in liquid assets by the time you retire?  I'm curious how much you have to save per year and what kind of returns you expect from your investments to hit that?  

[iced]

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@tacpoly wrote:

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@iced wrote:

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@Revelate wrote:

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Out of curiosity what math are you using to reach your walk away number iced?

---

The 4% AKA "multiply your retirement income by 25" rule. Some advisors will tell you 5% but I prefer a more conservative number that's a good aggregate of both bad years and good years.

I'm also of the mind that I should be able to live in perpetuity with my walk away number, which means if I retire with $5 million and die 40 years later, I leave $5 million to my heirs. That approach might not be for everyone.

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So you're expecting to have $12.5 million in liquid assets by the time you retire?  I'm curious how much you have to save per year and what kind of returns you expect from your investments to hit that?  

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Our personal target currently is for around $300k/year, which is the $7.5 million range; it tends to adjust from year to year as we try to account for things we forgot and/or adjust our expected costs so it may well go up to $12.5 million (or more) in the future. If that's in reference to the $250k-$500k range above, that's why it's a range - it's a (upward) moving target for us.

Over the last two years, my SO and I combined to contribute about $90,000/year into various savings/brokerages and our total non-equity holdings across all accounts at the end of the year was around $1.2 million, and this year seems to be on the same track.

Using a simplified interest calculator, we'd pass the $14 million mark in about 30 years (around my expected retirement age) if the market averages 6% or just over $9 million at 4%. If the market does better over that time, we may be able to retire sooner.

If/when we start slipping from our plan, we need to either find a way to contribute more annually or plan a tighter budget in retirement.

[tacpoly]

That’s great.

[Revelate]

Heh, TBH I think I will be walking away from my career at 1.2M especially if that doesn’t include the condo equity.

2 and small change jobs managed to save or pay down debt 57.3% of my gross so far this year, hoping to stay above 50% assuming the second gig finds another project for me... and realistically I expect to do something which earns money during retirement just I won’t be doing it primarily for financial reasons unlike my current employment.