Am I saving too much for retirement?

[pat_chung]

These are my stats:

Age: 31
Amount in Roth 401k/IRAs: $175,000 -- I've maxed out 401k since age 22, and as I've left employers moving & converting-if-necessary it into Roth IRAs.
single / renting/ no children - but that could change in the future

Assuming no contributions, at age 60 I will have:
At 3% rate of return = $400,000
At 6% rate of return = $900,000
At 7% rate of return = $1,160,000
At 10% rate of return = $2,500,000

I think a 6-7% rate of return, inflation adjusted seems like conservative, good estimate

What I'm considering doing:
Switching over contributions to traditional 401k
Lowering contribution rate to 6% ( which is 9% after employer match)
Additional savings will go into non-retirement accounts

Why Reduce:
I'm worried that if I keep maxing out 401k contributions, I could wind up with 'too much' tied up in retirement -- as opposed to having 'too much' in accounts that I can use before the age of 60.

Why Switch to traditional 401k:
I'd effectively be doubling my contributions -- it would only cost me 4% to put in 9% (6% pretax = 4% post tax)
Hedge against possibility that government taxes roth withdrawals 30 years from now.


Any opinions on any of the above?

[disneysteve]

Welcome. I think you have done great so far. Now you need to keep it going.

Standard advice, with which I agree, is to invest 15% of your gross annual income toward retirement. That does not include any company match.

Start by putting enough in your 401k to get the full company match.
Then fully fund a Roth IRA for $5,000.
Then go back to the 401k to get up to the 15% of gross figure overall.

Keep in mind that Roth money can be accessed any time, any age for any reason. While I certainly don't encourage it, you can take out money you have contributed to your Roth whenever you need it. So, for example you decide to retire at age 57 and can not yet access your 401k funds, you can draw from your Roth for a couple of years.

As for switching from a Roth 401k to a traditional, I'd vote no. I would much rather pay taxes at today's historically low rates. Most people, myself included, expect tax rates to be higher in the future. I'd rather pay now and never have to pay again.

[pat_chung]

Thanks for the reply steve.

I was aware that Roth IRA contributions can be withdrawn penalty free.
I was not aware that Roth 401k contributions have different withdraw rules.

If you don't meet the requirements described above, and you take money out of your Roth 401k or 403b account without rolling it to another Roth account, you'll have a nonqualifying distribution. When you take nonqualifying distributions from a Roth IRA, your distributions are tax-free until you've withdrawn all your contributions. According to the Treasury, a Roth 401k account doesn't work that way. When you take a nonqualified distribution from this account, you have to report taxable income in proportion to the account's earnings when you take a distribution. For example, if 80% of the money in the account is from your contributions and another 20% is from earnings, your distribution will be 20% taxable even if the amount you withdraw is less than the amount of your contributions.

* i can't link to the above article since I dont have 15 posts.

[jpg7n16]

Assuming no contributions, at age 60 I will have:
At 3% rate of return = $400,000
At 6% rate of return = $900,000
At 7% rate of return = $1,160,000
At 10% rate of return = $2,500,000

That last number should be 10% rate of return, not 7%.

Any opinions on any of the above?

If your income is high enough to max the 401k year after year, I would switch to a regular 401k, and invest the tax savings in a Roth/brokerage account.

By switching to a regular 401k, you will save an extra $4125-4620/year on taxes (25-28% bracket, respectively)

Depending on your income, that $16,500 less income could allow you to qualify for a Roth. Otherwise, you can still have an extra $4k/year.


In an ideal world, I would switch to the regular 401k, and invest the tax savings into a Roth (which would allow you to withdraw contributions as noted above). And I'd keep investing 15-20% of my income, not including the company match.

[pat_chung]

That last number should be 10% rate of return, not 7%.

Thanks. I corrected my post

Depending on your income, that $16,500 less income could allow you to qualify for a Roth. Otherwise, you can still have an extra $4k/year.

With the deduction, I'd be in the phase-out segment of the income limit. I actually should've done that in the past couple of years where it would've taken me below the limit


100% of my excess income goes into the stock market, and I try not to actively trade, so I'd be looking at 15% capital gains for the most part -- so I'm not too worried about paying taxes on gains (unless of course rules change)

I'll probably run some numbers to see if paying taxes along the way is better than taking an early withdrawal penalty at various stages.

Also need to do some research (which I'll share out) on what constitutes contributions to a roth ira when things get messy (401k to roth ira converstion, roth ira account transfer / combinations, traditional 401k to rollover ira to roth ira).

As long as my roth keeps hitting its return targets every year (lets say i shoot for 10% -- 7% + 3% inflation), I can't imagine 'needing' more than a inflation-adj million in retirement (maybe those who are closer to retirement can correct me). As a million in roth = 50-100k tax-free income stream (in addition to any other savings I hope to also have by then).

Whereas I can imagine needing or wanting more at points during the next 30 years. My goal is really to save up till I have a million overall net worth, then maybe start enjoying things more (nicer cars, restaurants, etc). When I was 22 my goal was to have a million by 30. Didn't come close unfortunately

So I'm still leaning toward the shift -- I can monotor my ira to make sure its hitting or suprassing the rate to get me there and up contributions if necessary.
I'll probably never stop atleast contributting 6% to a 401k though, since the immediate rate of return (tax savings + company match) is too much.

[Hector]

it depends on your tax bracket and what do you think tax return and your income will be in retirement. If you think, you will be in lower rate in your retirement, switch to regular 401k.

[KTP]

Heh we are exact opposite. We are planning to live like paupers in retirement and expect taxes to be lower on us then. Thus 401K >> Roth 401K for us. Plus there is always that little devil on my shoulder telling me the government may change the rules as it sees fit.

[sternchen]

i believe there is no such thing as saving too much

you can never save too much

if you can save 1M dollars a month, do it

you'll be happy when you grow ole

[disneysteve]

i believe there is no such thing as saving too much

you can never save too much

I would agree that you can't save too much but would qualify that by also saying that you can spend too little. If you aren't happy or constantly feel deprived because of how much you save, there's a problem.
If you aren't taking good care of yourself, aren't eating a healthy diet, aren't getting required medical care all in order to save more, there's a problem.
If you aren't properly maintaining your car, your home and your other belongings in the interest of saving more, there's a problem.

If you can do everything you need to do and enjoy your lifestyle and still save more, that's great.

[thefrugaltoad]

I agree with Disneysteve that you should fund the 401k up to the employer match, then fund a Roth IRA $5000, and then go back and fund the 401K up to the $16,500 limit for 2011. Something else to consider is that you can fund the Roth IRA up until April 15th of the following year.

This is assuming that you have 3-6 month emergency fund and your credit card debt is minimal.

[krantcents]

It seems lately, some people are concerned about saving too much for retirement. How do you really know how much you will need? You definitely do not know how long you will live or how much things will cost in 30-40 years? What is too much? Too much is when you do not have enough money to live, eat or enjoy simple pleasures.

[Hector]

It seems lately, some people are concerned about saving too much for retirement. How do you really know how much you will need? You definitely do not know how long you will live or how much things will cost in 30-40 years? What is too much? Too much is when you do not have enough money to live, eat or enjoy simple pleasures.

I second that.

[bennkar]

I would just add a few things. You're single - is your high rate of savings (i.e. lower lifestyle) scaring off potential mates? If so, and that is important to you, you might want to cut back. However, once you are hooked up you may need more money for living (i.e. children, house, or other lifestyle inflation) than you do now, so now could be the time to save, save, save, and then back off some in later years (and let your savings do the heavy lifting). Its a balancing act, but something to consider.

[danieldroga]

There is no such thing as saving too much when it comes to your retirement plans. Remember that your retirement is a good way to ensure your life after quitting on your work. You have to allot a big amount of money in order to support your self.

[Guest]

From purely a math standpoint I don't think you can save too much for retirement either. However life is not all about money. I think the question is are you sacrificing too much of your fun life now because your savings rate is so high. There's no amount of money out there that can get your 20s and 30s back.