Case against maxing 401k (pre-tax)

[disneysteve]

If I were King I would get rid of the 401k and allow everyone to have an IRA to which they could contribute up to the same limit.

Sounds good to me. That's always been a big complaint of mine. Only about 55% of the workforce even has access to a 401k. I didn't until just last year. So while others were putting $15,000 or $17,000 into a 401k, all I could do was put $5,500 into my Roth.

[TexasHusker]

If I was king for a day, I certainly wouldn't be thinking about my 401K!

[disneysteve]

If I was king for a day, I certainly wouldn't be thinking about my 401K!

If only for a day, probably not, but if I was in charge for good, maybe.

[Gailete]

Perhaps I missed it, but since I didn't see anyone mention it, there ARE ways to tap into a 401K before age 59 1/2. I remember when I went on disability I did some research on when and if you can get your money early. I pasted here one of the items. Do to my experience, I do want to mention that things don't always turn out how you expect. One day you can be at work and get sick at 11AM, go home and never go back to work again. Many people experience disability throughout their working careers, businesses go broke, You get married and your wife has quadruplets, all sorts of things happen between 26 and 70!

For income purposes
Section 72(t) of the tax code allows investors to take money out of their retirement plan for income, but there are restrictions.
"You'll have to take substantially equal periodic payments" over time, says Kirchner.
The shortest amount of time that payments must be made is five years. One option is taking a distribution annually for five years or until age 59 1/2, whichever is longer.
For example, early retirees may want to tap their retirement accounts before Social Security kicks in.
"The gist is that you take the payments and you pay the taxes, but you pay no penalty even if you're 52 or 53 years old," says Gordon.
There are other options for the distributions that allow an investor to take payments "over their life expectancy or do a reverse-mortgage-type amortization," Gordon says.
These periodic payments can also be spread over the course of your life and that of your designated beneficiary.


Read more: http://www.bankrate.com/finance/reti...#ixzz4hZUzOhwR
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[disneysteve]

Perhaps I missed it, but since I didn't see anyone mention it, there ARE ways to tap into a 401K before age 59 1/2.

One problem with the 72(t) withdrawals is that the amount you can take out is based on your predicted life expectancy. So if you decide to draw under that provision when you're 50 but your life expectancy is 85, the equal withdrawals are based on a 35-year timeline. Unless you have a pretty substantial amount saved, the amount you can withdraw may not be sufficient to meet your needs.

I know someone who ran into that problem. He retired at 55 and thought he could do that do hold him over until he was 59.5 and could fully access retirement accounts and pension. When he actually found out how little he could get, he realized it wouldn't be nearly enough to live on. He had to come up with a different plan for those first few years of retirement.

[Gailete]

One problem with the 72(t) withdrawals is that the amount you can take out is based on your predicted life expectancy. So if you decide to draw under that provision when you're 50 but your life expectancy is 85, the equal withdrawals are based on a 35-year timeline. Unless you have a pretty substantial amount saved, the amount you can withdraw may not be sufficient to meet your needs.

I know someone who ran into that problem. He retired at 55 and thought he could do that do hold him over until he was 59.5 and could fully access retirement accounts and pension. When he actually found out how little he could get, he realized it wouldn't be nearly enough to live on. He had to come up with a different plan for those first few years of retirement.

You are certainly correct Steve, but at the same time it is good to know that if you have a hefty retirement balance and a worst case scenario happens to you, there are ways to access your money earlier without penalty. Like I said, I wanted to see where I stood when I hit disability at 46. Now, I'm just wanting to see how long I can go without touching my retirement funds and letting them grow in the meantime. Now I am at less than a decade from when I have to take withdrawals. Where did those years go? The older I get the faster life seems to go.

I just think it is not realistic to think you will be maintaining the same job, the same savings rate into your retirement fund, etc for the next 44 years. Life has a way of upsetting the applecart. Of course for many, having the funds on hand to get a new applecart makes the problems so much less, but some things money can't keep from happening like getting a chronic illness, or having to miss 3 months of work following a car accident, etc. For this gentleman he has 44 years of law and retirement rule changes to go through. IRAs only came about in 1997, 20 years after I graduated college and started my working career. I only had 5 years to contribute before I got too sick to work. Only trying to say that things change and can change big time! I think it would be terrific if he has a wonderful amount saved towards retirement at the amount he is doing and that when he gets there he has a happy and healthy retirement.

[disneysteve]

I just think it is not realistic to think you will be maintaining the same job, the same savings rate into your retirement fund, etc for the next 44 years. Life has a way of upsetting the applecart.

Absolutely. I agree 100%. The best laid plans....

I just wanted to clarify the 72(t) rule. I see people toss that out from time to time without really understanding how it works.

The person I mentioned had planned his early retirement around that rule and when the time finally came and he sat down with his adviser to set everything up, only then did he discover that it wouldn't result in sufficient income. He didn't know about the life expectancy calculation.

But you're totally right. Any retirement plan you make at age 26 or 35 or 42 or 50 is likely to have some glitches along the way. Stuff happens. Expenses arise. Illnesses occur. Jobs shut down or you leave them for various reasons. It's important to have a plan but it's equally important to constantly revisit and tweak and adjust that plan to respond to changes along the way.

[LivingAlmostLarge]

Nope 401k can't be the end all be all. But it's a start.

[amarowsky]

Do you have any interest in retiring early? Keep maxing your 401k, Roth IRA, and throwing some money in taxable to boot and it will be an option far earlier than age 70.

Yea if I were making that kind of loot @ 26, I'd be financially independent by 36 or better (assuming 0 debt level + starting from $0 savings).

At that point, at my life style, I wouldn't have to work to maintain my current style of life. So any optional work I would choose would solely be for excess consumption / planning.

I think you should really try and estimate how much income your going to need annually when you retire + a buffer for error (say 5-10% extra). And plan on your retirement vehicles hitting that. Then invest the balance into taxable. You can really choose to "retire/enter stage 2" decades before 70. (stage 2 = the point where you don't have to work to live, so you can choose to do something that you may like more. Or even do the same thing w/ much less time taken up or responsibility if possible).

I like the idea of not necessarily retiring, but relegating to a more satisfying career, hopefully with extra free time earmarked too.