Am I Putting Too Much Away For Retirement?

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credit to ??After reading my most recent net worth update, some of you must be wondering why I’m putting so much money into retirement accounts like 401k’s and IRAs, especially given my mid-term goal of buying a house in a year or so. I mean, I can’t touch this money until I’m almost 60 without penalty, right? And we’ll need some taxable funds to draw from if we want to retire earlier than that. What’s up?

My reasoning is that I’m looking ahead to the future where both my wife and I will most likely earn six-figure incomes. Because I want to keep our lifestyle simple and reach our long-term goal of an early retirement, we’ll easily be maxing out all the tax-advantaged accounts available to us then, so I want to stick as much into these accounts as possible now.

As I see it, in the future we’d be ineligible for Roth IRAs or deductible Traditional IRAs, so we’d only have 401ks. Assuming we both have 401ks, we’d contribute the max each ($15,000 for 2006) for a total of $30,000. Let’s say with employer matches we get another $5,000. We plan on saving a lot more than that. 🙂 Accordingly, we’ll have money left over to place into regular taxable accounts later on. Also, I like the idea of “getting our on money in” our retirement accounts as early as possible to let the wonder of compounding do its magic.

But back to the house downpayment. Honestly, I don’t want to put too much down for the downpayment unless we need it to get a great rate. We can always increase our payments to principal later. Still, I think we can still reach $75,000-$100,000 in savings by the time we have to buy a house. If we really, really need it, we can pull another $18,000 out of our Roth IRAs without penalty as first-time homebuyers. But I don’t expect we’ll have to.

(Another new wrinkle is that that back in May, legislation was passed that effectively removes income limits for Roth IRAs. That’ll add another ~$10,000 to what we can shelter from taxes, assuming that the law isn’t changed again before then. I’m still researching all the consequences of this.)

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  1. Binary Dollar says

    No way. If you can reach your savings goal of 75k without cutting back on your retirement contributions, then you’re not putting too much into retirement.

  2. The earlier you start investing for retirement and the more money you put away will give the Rule of 72 to take over and make you even more money.

  3. It makes sense to max out 401k when you are in the 30%+ tax bracket. If you are in the 15% you might as well go after tax. Remember you are only deferring the tax till later when hopefully you will be in the lowest bracket.

  4. Dave Ramsey says to put 15% of your gross income towards retirement, then use excess funds to pay down your mortgage faster. This is what we are sticking to, partly because our loan rate is 6.75% (recent home-buyers) and is comparable to expected returns in the markets. We hope to pay the mortgage off in 5 years and then we can really start to squirrel away for an early retirement.

  5. A friend of mine took a loan against his 401k to buy his house. Don’t know if that is universal accepted or just allowed by his company.

  6. SavingEverything says

    i second vote the idea of “trying to max out retirement funding while young” (if and when you can.) Plus, if you ever get caught up in the spiraling debt and more debt and bankruptcy, at least they cant touch your retirement funds. (j/k, hopefully, that’ debt will never happen.)

  7. Is the amount of contributions to your Roth IRA greater than $18,000? Shouldn’t you be able to withdraw your contributions from a Roth IRA without penalties or taxes, even if you’re not a first time home buyer?

  8. I won’t be to quick to jump on that ROTH IRA conversion. You have to do it in 2010 and then you can’t add anymore money to it. What’s the point?

  9. Thanks Jonathan, this makes me feel better. Most of my money is resting in retirement accounts right now and I had begun to wonder if that was wise. I agree with you assessment of your situation as I seem to be in a similar one. I also think putting away tax-free money is smart because you earn interest on the part you would have lost to taxes previously so it grows faster and you earn/retain more in the long run.

    Any advice on investing in Traditional IRA’s versus 401(k)’s? They seem to offer the same advantages financially so does it just come down to what’s available and/or convenient?

  10. hey jonnathan.

    What field you and your wife are in? I have always wanted to earn six figures, but it has eluded me till now.

    Also what geographic location are u guys located in? I know NY and CA have better gross incomes, because those states have more taxes and higher cost of living.

    Please let me know.


  11. You doing very good. You are not putting too much away for retirement, actually I think it’s no such thing as too much money.

    Always pay yourself first. You and your wife are doing an excellent job!

    Kudos to both of you 🙂

  12. The income limits for Roths were not changed, still $160K for a couple.

  13. Not at all! The more you put in, the better. You’ll thank youself later. In less than 10 years (and most of it in the last 4 years), I have over $113,000 in my 401K. I don’t even miss the money that’s going into my 401K. And since my company matches the first 5% of my pay, I’m also getting free money. This is a no brainer and I wish people would realize this.

    As far as you saving for a house, buy something small first (like a condo), build up your equity, and then get something bigger. It may take a few years to get your dream home, but at least you’ll start getting all of those cool tax deductions.

  14. Suze Orman says you can withdraw principle from your ROTH IRA without any tax consequences. You may have to pay a broker’s fee though. You’ll have tax consequences if you dip into any earnings.

  15. Saving – No, the net worth is both my wife and I. I just use “my” instead of “our” interchangeably, as I’m the only one writing this blog, but it’s our money as we don’t separate it.

    aa – Almost any field can earn six-figures. Some just require time to get promoted, as opposed to 3-5 years in school. Law, business, medicine, tech, marketing, sales…

    whoDean – Yes, but if you exceed the income you can just contribute to a non-deductible IRA now, wait 3 years until 2010, and then convert to a Roth IRA. After 2010, just do a non-deductible IRA and then convert right away.

    Professor – You’re right, you can take principal out any time for whatever reason. As first-time homebuyers, you can take earnings out tax-free as well with certain restrictions.

  16. I don’t see the point in paying the mortgage off early with today’s rates and the fact that mortgage interest is tax deductible. Unless you live in a very shaky economic area, I’d stay leveraged as much as possible with the house and invest the rest.

  17. If you think you are contributing too much to a 401k, you quickly fix that and by scaling back to the minimum needed for the match, of course. Also, you can take out a 401k loan if it was really necessary. Those two points are obvious, but I think easily fixes a potential problem. My next point is, I like the stategy of maxing out the 401k for a home down payment. Since you are saving the money you would have paid in taxes, you now have that extra chunk of money for the down payment. You can elect a home 401k loan that can be paid over 30 years or sooner if wanted. Plus, you can reduce your 401k contributions to account for the interest you are paying yourself to make that a wash.

  18. I agree, as long as the interest deduction is keeping the effective interest low enough, I like being leveraged. I worry about the AMT though.

    401k loans are available to certain employers. My Solo 401k does not offer loans, but that’s fine with me.

  19. Josh, I agree with you 100% … my two homes (one rental the other primary) are at 5.25 and 5.75 30 year fixed rates. I will never pay them off. My wife and I max our our 401k’s w/6% match each year (still get hit with AMT even with two kids) both make over 100k / yr so inelgible for almost everything. and we sock away 5k per month into aftertax investment mix with merrill. At our current pace we will have over 2 million net worth within 10 years not including any raises from here.

  20. Speaking of net worth – i’ve never included retirement plans or life insurance – however – can only imagine the lump sum we would get if our employers converted our pensions from traditional to cash-balance or 401k. I know a couple from ameritech who collected two checks for over 500k with 15 years each in at the company when they converted their retirement plan.

  21. If you need some extra money later when buying a house you can always withdraw up to $10000 from one of your IRAs without penalty.

  22. I think it’s a good idea to max out the retirement now. Who knows what will happen to that income once you guys have kids? You may need to scale back on the retirement contributions then! 🙂

  23. It’s good to get as much of your money into your tax deferred accounts as possible, especially when you’re young. Roths withdrawals and 401k loans give some flexibility so that the money in there is not totally illiquid.

    I recently had access to a 401k at work and I’m putting 75% of my salary into my 401k. I am trying to put as much as I can until the end of the year. Although I won’t be able to max it out, I will be able to put about 10k into my 401k by the end of the year and I will be able to max it out next year. I do have a negative cash flow because most of my money is going into my 401k, but I have so money from balance transfers that I can use in the mean time.

  24. Quote from Suze Orman’s “The 12 Biggest Money Mistakes”:

    ” 1. Don’t borrow from your 401(k) or 403(b).

    It’s a horrible deal. For starters, your 401(k) contributions are pre-tax. Your money will get taxed later on, when you withdraw the money from the plan.

    But if you take out a loan, you’re pulling out pre-tax dollars that you will then have to repay — with money that has already been taxed. Then when you eventually retire and start making withdrawals, the money is going to be taxed again. So your loan gets taxed twice.

    The payback period can also be a problem. You’ll have to repay the entire loan in just a few months if you’re laid off or take a new job. And if you don’t have the money for repayment — and you’re not 55 or older — the loan will then be treated as a withdrawal. That means a 10 percent early withdrawal penalty and income tax on all the money. Ouch.

    Moreover, you’re shortchanging your retirement savings. Reducing the money you have growing tax-deferred in a retirement plan is going to translate into having less money when you need it.”

  25. I feel that taxes will be much higher when I retire, so I would rather pay taxes on the money now. Also, most 401k plans have extremely limited investment options and your money is illiquid. Contributing up to the match is a no brainer though.

  26. I also have an HSA… more delicious tax-free medical savings. $3,000/yr next year for an individual, I believe.

  27. Hi, I’ve been reading this blog for a while, and wish to thank you greatly for your hard work.

    I have a question, hopefully you have an answer to. I have around 40k held in a rollover IRA account. This is money from previous 401Ks. Would you recommend converting it into a Roth IRA? I have about 30 years or so before I hit retiring age, and wasn’t sure if I should converted now, and pay taxes or keep as is. Thank you!

  28. Thanks! It mostly depends on if you believe your tax rate will be higher or lower in retirement than during the conversion.

    If same or higher taxes in retirement, you should pay taxes now (convert)

    If lower taxes in retirement, you should pay taxes later (don’t convert)

    You’ll have to pay the taxes on the conversion though, hopefully out of your own pocket. This way, you’ll have “more” money in your IRA account to compound. ($100 post-tax is “more” than $100 pre-tax upon withdrawal)

    Here is a Fidelity link that basically says the same thing with more detail.

  29. What is your retirement goal? Is your contribution and return in line to meet your retirement figure and age?

    Tell me your retirement dollar goal, age you wish to retire, current balances, and I’ll answer your question. You’ll answer your own question.

    All the above posters comments are just fuzzy, emotional speculation.

    Also, just because returns are high, making your balances high and you feel good, doesn’t mean you should reduce your contributions.


  30. Okay, in Anton’s comments, he is quoting Suze Orman, which is something I have read several other places, also. I don’t understand the arguement that you are being taxed twice when taking out a loan from a 401k. You take out $5k from a 401k. You pay it back using after tax dollars because who would think they could deduct that money on their taxes, again! No taxes were paid when the money was taken out for a loan. I don’t know if I am not comprehending what people are saying, or if they are all just repeating a financial myth they heard and not thinking through it. There are a lot of things to understand about how taking a loan out can hurt someone, but double taxation isn’t one of them!

  31. I don’t think you are putting too much away, but I tend towards being conservative when it comes to the amount that should be saved for retirement. Mr. Savvy and I have about $120,000 in our retirement accounts, and we are in our mid-20s. It gives us flexibility in the future because we can safely reduce our contibutions should we choose to work less or increase our expenditures.

  32. Hey, here’s a question that might be stupid:
    If you have a 401K plan through your job, is it worth putting money into it if you’re in a really low tax bracket now (po’) and you expect to be doing vasty better with your financial life by the time you retire?

  33. Todd – The only thing double-taxed is the interest that you pay yourself on the 401k. Say you borrow $10k and “pay yourself” $1,000 in interest. That’s post-tax money. Then when you take it out in retirement, you’ll pay taxes again on that $1,000. So that’s what (I hope) they mean about double-taxation.

    Amanda – It depends if you have alternative tax-advantaged investments. Even if you have a higher tax rate later, if you have no Roth-like alternatives, a Pre-tax account like a 401k can still be better than a plain taxable one.

  34. I feel so lost with my 401k. My company has a sweet match 100% up to 6%. We’ve managed to be able to afford to put in 10%, so thats about 16% going in total.

    I feel I’m off balance with current levels but hate to make an exchange to something different for fear of losing money. Any advice? I’m 32, plan to retire at 55. We have also been contributing $8K a year (combined) to our Roth IRAs. All other forms of savings like company stock purchase goes towards travel/entertainment/extras.

    any advice?

    A quick snapshot.

    Where current Money is:

    55.61% ARIEL FUND $36,763.11
    20.60% FID BLUE CHIP GROWTH $13,616.59
    12.26% FID DIVERSIFIED INTL $8,104.34
    7.50% VANG WINDSOR II ADM $4,955.98
    1.69% PIM TOTAL RT INST $1,115.66
    1.04% SPARTAN INTL INDEX $690.34
    0.78% WFA SM CO VALUE ADM $516.05
    0.26% VANGUARD SM CAP INDX $173.08
    0.26% VANG TOT STK MKT IS $171.82
    0.00% FIDELITY US BD INDEX $0.38
    100% $66,107.35

    Where current contributions go:


    Stock Investments

    Bond/Managed Income

    Stock Investments

    Total 100%

  35. Gavin Peters says

    This all gets very complex if you plan on moving between countries. For instance, both Canada and the US recognise each others tax deferred accounts, but not tax-prepaid (probably because Canada doesn’t have such accounts). So, if your plans include a possible move to Canada, DON’T GET A ROTH IRA, YOU WILL PAY CANADIAN INCOME TAX ON INTEREST AND GAINS IN IT WHILE YOU LIVE THERE.

    However, the good news is: the Canadian IRA equivelent account (an RRSP) allows unlimited penalty free withdrawals, at your discretion. And, you can transfer your IRA to an RRSP, and the 10% early withdrawal penalty is deductible from your Canadian income tax. So, where the roth IRA is worse for someone planning a move to Canada, the traditional IRA is actually much more flexible.

    It gets even better moving to the USA. You can withdraw from an RRSP while living in the US, and pay only 25% withholding tax; probably considerably less than your income tax rate at the year you contributed. You can turn right around and put that money in a 401(k) or IRA, and get a deduction at your US marginal rate, probably well above 25%.

    If you ever plan on living abroad, there’s all sorts of tax treaty consideratoins about retirement accounts. Be sure to think and plan
    appropriately. If you’re lucky, you can find a tax specialist who handles your taxes in both countries: that way you can get a really consistant filing. I have an accountant who has made a career out of doing taxes for Canadians in the USA, and Americans in Canada.

    One other thing: people in here are making a big deal out of the difference between a roth and a traditional IRA. So far as I can tell, the only tangible difference is that you can contribute more to a roth IRA. Sure, $4000 posttax is nominally $4000 pretax, but in any meaningful sense, $4000 posttax dollars is much more. Is there some other difference that is at all relevant? Your tax rate at retirement might be a bit different than during working years, but the benefit of tax free growth swamps that.

  36. I recently was thinking I was putting away too much money in my 401k as well. However, I am going to stick with my contributions for now.

  37. I think I am putting too much as well. Roughly 75% of what I have is in retirement accounts. It amounts to almost $200k. I’m 29. I had a great job where they matched 50% of our contributions, no limit, but they reduced it after a few years..

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