Investing for Retirement

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Re: Investing for Retirement

Post by dfw_pilot » Wed Aug 29, 2018 4:24 pm

Mozart wrote:
Wed Aug 29, 2018 4:21 pm
Better to optimize a single portfolio that reflects your overall risk aversion.
Couldn't agree more. I'll see if that book is in my local library.

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Re: Investing for Retirement

Post by Mozart » Wed Aug 29, 2018 5:10 pm

dfw_pilot wrote:
Wed Aug 29, 2018 4:24 pm
P.S. Love your music!
Thank you! :thumbsup:

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Re: Investing for Retirement

Post by TheSwede » Wed Aug 29, 2018 5:39 pm

Fantastic writeup, @@dfw_pilot! There's just so much to say about how to manage whatever might be left after normal living expenses of your hard-earned money!

First thing that needs to be understood is that "investment advisers", really are salesmen (and/or women) catering solely for their respective employers and their own bonuses rather than for you.

As you are hinting, the single most important thing for growing your hard earned savings is to make sure to select financial instruments with as low premium/interest as possible. It is not uncommon for "actively managed" funds in the multi billion dollar range to be handled by 1 fund manager. On part time(!). If you relate the cost of the "active management" to the earnings made for beeing able to keep 1% higher interests on that fund compared to a passive one it is easy to understand why the "advisors" push for the "actively managed" fund rather than the passive one...

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Re: Investing for Retirement

Post by pennstater2005 » Sat Sep 01, 2018 10:00 am

Well @dfw_pilot it finally happened. I've heard the stories. I was hand watering the front and saw a gentleman, dressed up, heading my way. Here's how it went.....

Him: Beautiful day to be outside, huh?
Me: Sure is.
Him: Do you mind if I ask you a few questions?
Me: Not if you're selling anything.
Him: I'm not. I'm with Edward Jones. We're opening up a branch here in ........,PA. Would you like to discuss a few options?
Me: Absolutely not.
Him: Thanks. Have a nice day.

Damn! I thought it would never happen in my small town. Didn't seem like he had much luck with any neighbors either, thank the Lord or I would've went over right after and had a few things to say :D
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Re: Investing for Retirement

Post by dfw_pilot » Sat Sep 01, 2018 10:04 am

You've reached the pinnacle of finance: being courted, lol!

Good job resisting, the force is strong with you.
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Re: Investing for Retirement

Post by pennstater2005 » Sat Sep 01, 2018 10:12 am

I had to bite my tongue though when after I asked him if he was selling anything and he said no! I wanted to say I wish you were selling water softener systems or something cause this is worse :lol:
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Re: Investing for Retirement

Post by dfw_pilot » Sat Sep 01, 2018 10:16 am

:lol:
True. I'd sleep better knowing I sold something useful like water softeners (I love mine) instead of expensive investment products and unnecessary insurance (whole life).
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Re: Investing for Retirement

Post by pennstater2005 » Sat Sep 01, 2018 10:20 am

Ohh..I would've loved for him to discuss whole life with me.
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Re: Investing for Retirement

Post by Rackhouse Mayor » Sun Sep 09, 2018 8:31 am

This is all great info. I really like the discussion on 529s as they're of particular interest to me right now. I live in a state that offers a 529 investment account as well as a "prepaid tuition plan". I can't decide whether I should pick one over the other or do a combination of both. What are y'alls thoughts on this? In MS you can contribute $20k if filing jointly. The prepaid for a 4yr plan will run appx $40k. The downside to the prepaid tuition is it's only good for tuition (no books or room and board). It also locks you in to a plan (ex: 4yr univ pricing, 2yr juco / 2yr @ 4yr univ). I asked my accountant what he's doing for his kid, and he said he went the prepaid route because he felt the cost of education would outpace the investment. However, it seems like the 529 investment fund gives you much more flexibility - you'll just have to pay more. Thoughts?

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Prepaid Tuition

Post by dfw_pilot » Sun Sep 09, 2018 8:54 am

If I was in your shoes, I'd want to know a few things:
  • What happens if my child doesn't go to college, either by choice, death, or otherwise? Is the money lost or is it transferrable?
  • What if the child decides/needs to go to an out of state or private school? Are the assets lost?
  • What type of return or discount rate is the $40k giving you?
  • Vanguard says that tuition rates increase about 5% a year (don't get me started on what a fleece that is - hint, it's politics) so do you think you can beat that in a self directed 529?
  • What are the odds that the state can hold its end of the bargain over the next 20 years? If the budget gets in trouble, taxes can be raised, but ultimately the voters decide.
It sounds like you'd want a 529 either way, to help pay for your other expenses. I love 529's because they are flexible and transferrable.

Also remember the four pillars of paying for college, and none of them include loans:
  • Pick the right school within your budget
  • Let the student have some skin in the game by paying for a portion, via work and savings
  • Pay for school out of your savings from 529's and brokerage accounts
  • Cash flow
Always remember to fund your own retirement first. Like putting on your oxygen mask before helping your children during an airplane depressurization, help yourself first, so you can then help others.
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Re: Investing for Retirement

Post by Mozart » Sun Sep 09, 2018 10:05 am

New York State offers an excellent 529 plan. Fees are low and it’s managed by vanguard.

You do not need to be a resident to open a NY 529 plan and you can use the funds for schooling is any state. Also a tax advantage if you pay NY state income tax. This plan is better than most state plans, even as a non-resident.

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The Mega Backdoor Roth

Post by dfw_pilot » Wed Sep 12, 2018 8:15 pm

The Mega Backdoor Roth

Image

Overview: The Mega Backdoor Roth is a fantastic tool for supersavers. If one's 401(k) plan allows for after tax contributions, those contributions can then be rolled over to the Roth 401(k) inside the plan, or rolled out to a Roth IRA. This is great because then future gains and distributions are then tax free. With a 2019 401(k) contribution limit of $56,000, that leaves room for up to an additional $37,00 of after-tax contributions per year if you max out your $19,000 deferral limit. Having $37,000 per year of extra Roth space is an amazing retirement tool, but should only be utilized after fully maxing out other retirement accounts first, like the Roth IRA, 401(k) and HSA.

How does it work?

Jim Dahle first coined the phrase Mega Backdoor Roth. It's a play on the term Backdoor Roth, where a contribution is made, then a conversion is done to avoid further taxation. The Backdoor Roth involves using a Roth IRA where the Mega Backdoor Roth uses a 401(k), where larger amounts of money are involved.

Inside a 401(k), there are lots of different "buckets" of money. I want to focus on three:

The most common is a Traditional 401(k), where money is deferred out of a paycheck prior to any taxation. This bucket grows tax free, but upon withdrawal, the money that was put in, plus any gains, are then taxed. Any employer match or non-elective contributions are also in the pre-tax bucket. Another common bucket is the Roth 401(k), where money goes in after tax and then grows and is withdrawn tax free. Both the Traditional and the Roth 401(k) buckets are limited to a total of $19,000, the 402(g) limit.

In between these two common buckets, is the after-tax bucket. Specifically: the Non-Roth After-Tax portion. It's a hybrid of the Traditional and the Roth. Money goes in after tax like the Roth, but all gains are taxed like the Traditional. This is because in a 401(k), all gains outside of the Roth 401(k) are taxed upon withdrawal. So any gains that an after-tax contribution makes, will be taxed in retirement.

There is a simple solution to prevent any gains on after tax contributions from being taxed: Convert those contributions to either the Roth 401(k) or a Roth IRA. Doing so allows for any future gains to be sheltered from taxes on gains, just like any Roth account.

Numbers and Examples

For someone 49 or younger, the 2019 limit on 401(k) contributions is $56,000. The elective deferral limit, or what can be deferred out of a paycheck, is $19,000. That leaves an extra $37,000 of investing space. Most employers offer either a match, a non-elective contribution, or both. Subtract off any of those employer contributions, and the remaining amount can be contributed into the "after tax bucket."

Let's say an investor maxes out her $19,000 deferral, gets a $2,500 employer match, and gets $10,000 from her employer in the form of a non-elective contribution. $56k - $19k - $2.5k - $10k = $24,500 remaining under the 401(k) limit. She could contribute ~ $2,000 a month in after tax contributions and stay under the cap.

Those $2,000 each month go in after tax, meaning she's already paid tax on those contributions. However, it will go in to the after tax bucket of her 401(k) meaning that any gains it makes will be taxed again upon withdrawal. If however, instead of leaving her $2,000 a month contribution sitting in the after tax bucket, she converted those contributions to her Roth 401(k) (called an in-plan conversion) or she rolled them out of her plan and into a Roth IRA, she would no longer pay tax on any gains. Doing this once a month or once a quarter means she would have very few gains on which to actually pay tax.

$2,000 a month at 8% is $3 million dollars after 30 years, or $1.7 million real dollars in today's money after 3% inflation. Subtract $720,000 of contributions, and that's a lot of gains to pay tax on! If she converted her $2,000 per month to her Roth 401(k) each month, she might pay taxes on a few dollars of gains, but that's it. The rest grows and is withdrawn tax free. Hence: the Mega Backdoor Roth.

What's the catch?

There's always a catch, isn't there? The biggest catch is that many people's 401(k) plan simply do not offer after tax contributions. The custodians of 401(k) plans, like Vanguard and Fidelity, keep track of the basis and all the taxable vs non-taxable gains, so employers could offer an after tax plan if they wished. However, many apparently don't. Step one in getting the Mega Backdoor Roth is to simply ask for an after tax option. Step two is to have in-plan conversions, but many plans have that already. The third and final step is to actually have both the income and the discipline to save above and beyond normal contribution limits.

This isn't for people who haven't already maxed out their other retirement accounts. Always max out the 401(k), max out a Roth IRA and a spousal Roth IRA, max out an HSA, and be saving in a brokerage account to offset Traditional 401(k) contributions prior to contributing any after tax funds to a 401(k). After tax money is great, but only after you've reaped tax deferrals through normal contribution channels.

Further Reading

Some better writers than me have tackled this topic:
Mad FIentist
Harry Sit
Michael Kitces

I am fortunate enough that my employer offers after tax contributions. It's easier than it sounds (just a few clicks inside your 401(k) and you're all set). If your employer offers it as well and you get stuck or have questions, feel free to shoot me a PM. Like I tell my co-workers: "Contribute then Convert." Contribute your after tax money, then convert it to Roth for tax free gains from then until eternity.

Coda

There are those who like tax free Roth money because they are worried the government will change the income tax laws, so they want their taxes paid now. Others like the tax deferred Traditional money because they are worried that the government will change the income tax laws so they want their taxes paid later. See what I did there? In other words, there are always guesses and theories as to what tax rates will do. My advice is to plan and make decisions based on today's tax law, and then adapt if it ever changes.

The government likes Traditional investments because it gets more taxes from them, but at a later date. The government likes Roth money because it gets its taxes up front, today. I don't see either style going away. The correct answer to Roth or Traditional? Both.

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Re: Investing for Retirement

Post by g-man » Wed Sep 12, 2018 8:55 pm

You piqued my interest. Will the conversion to a Roth 401k be counted as a "contribution"? Or is it like a ira to Roth conversion (normal backdoor)?

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Re: Investing for Retirement

Post by dfw_pilot » Wed Sep 12, 2018 9:06 pm

Good news: Conversions never count as contributions. This is because conversions have already been contributed in the past.
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Tax Loss Harvesting

Post by dfw_pilot » Thu Oct 11, 2018 3:03 pm

The market has been on a downward tear this week [mid-October 2018]. Pay little attention to it. I've said it before: when the market falls or corrects, it is the best time to turn off the financial media. Sit on your hands. "Don't just do something, stand there!" Expect 10% corrections each year, and 20%+ corrections every three. No big deal.

There is one caveat though: Tax Loss Harvesting. If you have losses in a brokerage account, there is money to be made on bad days like this! TLH doesn't work inside of tax-advantaged retirement accounts, but it's a great tool inside of taxable accounts. Essentially, if you have losses, you can sell those stocks/funds and realize the losses. You can then deduct up to $3,000 of those losses against your taxes each year. If you have $15,000 in losses, you can deduct $3,000 off your taxes each year for the next five years because the losses can carry forward.

By exchanging a fund while it is down into a similar fund (like Total Stock Market fund for an S&P500 fund), you can capture the loss, get the deduction, still keep your money in the market, and make money while doing so. It's awesome, and it's why staying level headed pays off. While everyone else panics, smart investors see opportunities.
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Re: Investing for Retirement

Post by jayhawk » Thu Oct 11, 2018 9:13 pm

Some posts disappeared....hmmm

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Re: Investing for Retirement

Post by dfw_pilot » Thu Oct 11, 2018 11:12 pm

jayhawk wrote:
Thu Oct 11, 2018 9:13 pm
Some posts disappeared....hmmm
Really? Any details?
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Re: Investing for Retirement

Post by samjonester » Thu Oct 11, 2018 11:51 pm

Great info @dfw_pilot! The information about how to invest is extremely useful. I love (and also subscribe to) the boglehead approach. One thing that makes this series of posts stand out to me is the practical tips to navigate the tax implications of different types of investment accounts.

I think the only thing that I'd like to debate is the goal setting approach from your second post.

I personally feel that setting a target retirement age and defining a income threshold during retirement has an air "living for tomorrow". My mentality for retirement savings is that it is an insurance policy against being unable to earn a sufficient income later in life. I personally feel that right now, while my kids are young and depend on me, is the most financially valuable part of my life. I'd rather front load my spending on that part of my life. Treating retirement as an insurance policy allows me to guiltlessly spend my money on my family while we can all enjoy it together, rather than feel like I'm sacrificing for a day when the kids have moved out, and my wife and I have a significantly lower cost of living.

I do realize, though, that the only reason I'm able to support this mentality is that I do something that doesn't getter harder as I will get older. I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.

Thanks again for putting this all together, especially all the cross-linking to other resources! I definitely learned a few things reading the posts.
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Re: Investing for Retirement

Post by dfw_pilot » Fri Oct 12, 2018 1:17 am

I’m glad you’ve enjoyed the series, Sam!

The great thing about this subject is that there are very few hard and fast rules and there are lots of right answers.

We definitely don’t want to miss the present by focusing too far into the future. I’m peddle to the metal because I don’t want to be a burden to my kids and also want to be able to help them when they may need it the most.

An aside: Money is Everything. It allows us to do the things we love the most and support the causes that are dearest to us.
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Re: Investing for Retirement

Post by massgrass » Fri Oct 12, 2018 8:40 am

samjonester wrote:
Thu Oct 11, 2018 11:51 pm
I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.
I'm an IT consultant and the age discrimination that I've seen in this field worries the bejeezus out of me. While most of the people I've seen pushed aside have been 50+, even being in your 40s is "old" and can be a liability. I worry about being in the situation where I want a job but the job doesn't want me, so for us retirement and college savings have been a top priority.

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