#RetirementFunds #401k #IRA #Investing #PersonalFinance #RetirementPlanning
Are we really expected to fully max retirement funds? 🤔
When it comes to personal finance, there are a lot of conflicting opinions and advice out there. One common piece of advice that many financial gurus give is to fully maximize your retirement funds before moving on to other investment options. But is this really a realistic expectation for everyone? Let’s take a closer look at this advice and see if it makes sense for the average person.
The assumption of 23k for 401k, 7k for IRA, doubled because of marriage, that’s 60k that we’re “supposed” to put aside before investing in anything else. Assuming these are Roth options and a 25% savings rate and 25% taxes, it would require a gross salary of 320k to achieve this. This number seems extremely high, and is it really the expectation that we don’t invest in anything else until we’re making well above $250,000?
## Understanding the Importance of Retirement Funds
### What are 401k and IRA?
– A 401k is an employer-sponsored retirement savings account that allows employees to save and invest a portion of their paycheck before taxes are taken out.
– An IRA (Individual Retirement Account) is a personal retirement savings account that offers tax advantages for individuals to save for retirement.
### Why Maximize Retirement Funds?
– The general idea behind maximizing retirement funds is to ensure that you have enough money saved up to maintain your lifestyle after you retire.
– The earlier you start contributing to your retirement funds and the more you invest in them, the more time your money will have to grow through compound interest.
## Assessing Your Financial Situation
### Income and Expenses
– Evaluate your current income and expenses to determine how much you can realistically afford to contribute to your retirement funds.
– Take into account other financial goals and obligations such as saving for emergencies, paying down debts, and investing in other opportunities.
### Long-Term Financial Goals
– Consider what you want your retirement to look like and how much money you will need to support that lifestyle.
– Assess the different investment options available to you and how they align with your long-term financial goals.
## Rethinking the Advice on Retirement Funds
### Reassessing the Expectation
– The advice to fully maximize retirement funds may not be feasible for everyone, especially those with lower incomes and other financial priorities.
– It’s important to strike a balance between saving for retirement and investing in other opportunities that can help build wealth and financial security.
### Exploring Alternative Investment Options
– Rather than putting all your money into retirement funds, consider diversifying your investments by exploring other options such as after-brokerage accounts, 529 plans for education savings, and real estate investments.
### Seeking Professional Financial Advice
– Every individual’s financial situation is unique, and what works for one person may not work for another. Consider seeking the help of a financial advisor to create a personalized plan that aligns with your goals and resources.
## Conclusion
In conclusion, while saving for retirement is undeniably important, the expectation to fully maximize retirement funds before investing in anything else may not be realistic for everyone. It’s crucial to assess your financial situation, set realistic goals, and explore different investment options that align with your long-term objectives. Seek professional financial advice to create a personalized plan that ensures a secure retirement while also allowing for financial flexibility and growth. Remember, the key is finding a balance that works for you and your financial situation.
> don’t invest in anything else
correct. there is no world where you are going to beat those accounts by MORE than the taxes you’d owe on those gains for it to make sense to give up the tax preferred nature.
> Assuming these are Roth options
Should probably do traditional 401k
> is it really the expectation that we don’t invest in anything else until we’re making well above $250,000?
Investing in an IRA or 401k is functionally the same as investing in a taxed brokerage, you just get tax benefits and your options are somewhat more constrained.
No. Pay off debt and have an an emergency fund, then save only 15% in retirement. After that save in a 529 and pay off your mortgage.
You max tax advantaged investments before investing in non tax advantaged. And if your income doesn’t support maxing, then do what your income supports, but hopefully at least 15%.
If you’re saving for retirement, yes. But, you’re also supposed to balance that against guidance like saving 15% for retirement.
I’m not sure about financial gurus that say that’s all you should do before other things. Are you conflating a couple different lines of guidance?
The prime directive flowchart kinda outlines a good flow and balances competing savings goals.
If you’re already saving 15% for retirement and you’re reasonably on track for retirement, then you can pivot to other goals. And, saving within tax advantaged retirement accounts may not be preferable.
>assuming a 25% savings rate and 25% taxes
those 2 numbers are pretty low no?
as someone who is maxing out retirement funds but with way higher taxes (I mentally budget around 35-40% for taxes), my savings rate is more like 70-75%, rent eats up the biggest chunk of my expense so if I’m willing to downgrade my lifestyle I can probably push it to ~80% savings
>is it really the expectation that we don’t invest in anything else until we’re making well above $250,000?
your assumption is you’re spending 75% then sure, so, cut your spendings back?
Long-term investments? Yeah, the tax advantages are pretty huge.
If you have short-term goals, you don’t want to put those in a retirement account (unless you aren’t maxing out direct Roth contributions—you should pretty much always max out direct Roth contributions if possible), but they probably also shouldn’t be “invested” in anything meaningfully more risky than CDs you intend to hold to maturity.
For purposes of retirement savings, tax advantaged beats taxable every time.
But those advantages come with restrictions: annual contribution limit, age requirements to withdraw, etc. You may decide that you are saving “enough” for retirement, even before reaching the cap, and those restrictions may no longer outweigh the advantages for your particular wants/goals.
Saving 15% of your gross income is a generally accepted level of “enough”. If you meet that and have additional money to allocate, choosing to use it in a way that gives you more flexibility (forgoing the tax advantages) is a viable choice.
>assuming a 25% savings rate and 25% taxes, we’d have to make 240k after taxes, so a gross salary of 320k.
these are some crazy assumptions.
also, some people consider savings and retirement savings the same bucket.
even if you dont consider them the same bucket, theres a spot point when it comes to “savings” before you divert everything to retirement account.
you also sound very eager to just start investing in something else other than using the retirement accounts. Why is that? the retirement accounts are investments on crack.
there is a reason they put limits on how much you can put into these accounts, the tax advantage they offer is incredibly strong. so yes, when saving for retirement these accounts should be prioritized before taxable investing.
I just assume everyone here makes an insane amount of money. 2k per month put into that is way out of my budget.
Saying that you should max tax sheltered accounts before bothering with an after tax brokerage is exactly what it says…it isnt saying that everyone is able to max tax sheltered accounts. The advice is to not bother with a taxable brokerage account if you have more room in tax sheltered options…thats it. No need to read more into that.
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> Assuming these are Roth options (I know eventually we’d hit the income limit, but contributions for us are Roth right now so that’s my frame of mind)
just going to mention it but for most people roth is not the right choice and people don’t always do their due diligence here. especially roth 401k, obviously its quite common to be phased out of traditional IRA contributions so you are forced into some roth diversity there which is good.
> My point here is that this number seems extremely high, and is it really the expectation that we don’t invest in anything else until we’re making well above $250,000?
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if you prefer to pay more in taxes go ahead and do that. most people don’t like paying taxes.
**You should listen to the gurus. That’s 100% exactly what you should do.**
What else would you invest in that would beat the tax-free gains of the Roth, and the tax-advantaged investment in the 401k? Nothing.
Any money you put in post-tax would be in a private investment (like an index fund) where the gains are not tax free, so the Roth is much smarter.
Money that doesn’t go into your 401K is taxed, so you don’t get the “discount” of investing your money pre-tax.
The only *debatable* thing in what you’re hearing is a 529, which is worth setting up at least so your relatives could add funds if they wanted to.
Otherwise – you heard it right. $23K per person into 401K, $7K into Roth (PER PERSON) then worry about what comes next.
There are some investments more important than retirements.
Education for one, RE/business is another. You’d just have to balance them
Roth contributions can be withdrawn tax free without penalty. No reason to not take advantage.
Whenever we had a new hire in my department I would go visit them the first week they were there and make sure they were enrolled in the 401K plan.
What I used to recommend to our new hires when I set them up for the 401K was to put in as much as you could afford. Then we had an automatic increase you could set up that occurred yearly. I would tell them to set that increase up in April for a 2% increase (1% if they were really strapped). Our company did pay raises that occurred in April. Typically these raises were for greater than 2%. This way they would increase their contribution every year and still see some of their raise each year too. When asked when they should stop doing this I would tell them – when you are at the 401K limit. I did this with new hires for years until I retired. I had several people thank me for doing this years later. The max can happen but it takes a while to build up to it.
being able to invest 60 thousand dollars a year tax-advantaged is a benefit, not a barrier. why in the world would you want to pay full tax on that?
That is the whole idea behind tax advantaged accounts, I’m not sure why this seems weird. Put in all you can.
> fully max retirement funds?
>
>that’s 60k that we’re “supposed” to put aside
That’s $60k IF you’re making $400k. If you’re only making $100k (combined) then you’re “maxing out” is ~15% of your income, or $15k. Above that 15%, you can invest or save in whatever medium makes sense for your situation.
The actual dollar amount of that 15% will gradually increase over the years as your natural progression through your career provides income increases. Also note that the 15% is a guideline so that when you retire your estimated retirement withdrawals will equal your income when you retire without drawing down the principle.
I’ve often wondered how much money the “gurus” think the average person makes. If I max my 403b and Roth for this year, that’s $30k. That is 46% of my gross income. It’s completely unattainable for the majority of people.
I would argue that it depends. Some states have insane tax credits or deductions for 529 accounts (for instance Indiana’s 20% credit), and taxable brokerages can be really useful for parking short term investments like t bills or notes. But for investing in equities, it doesn’t really make much sense to give up the tax advantages, unless you literally can’t contribute more to tax advantages accounts.
This sub is weird in terms of posts and comments that lead to some bias in perceived audience. It’s either “I’m 100000 dollars in cc debt and make $1k+a basket of apples a month HELP” or people making the amount of money you cite trying to min-max their savings. If you are a family with an average or slightly above household income, it’s easy to feel lost in the advice on here.
The key phrase there is “before moving on” – meaning that the retirement funds are generally the best vehicle for savings that should be used to its maximum potential before other investment vehicles, because the tax benefits. If you only have $1k to invest per year, put it all in retirement funds. If you have $10k, the answer is the same. If you have $50k available to invest, then you max out retirement options and *then* with what is left over, explore other options. Doesn’t mean you *have* to do that, though – it’s just that is what usually has the best return on investment.
> before moving on to an after-brokerage account
Yes, a 401k and an IRA are tax advantaged investment accounts while a brokerage account is an investment account subject to capital gains tax.
> investing in a 529
There are scholarships and loans for college. There are no scholarships for retirement, and the loan offerings are much worse for retirement.
> paying down the mortgage
Yes, the interest rate on your mortgage is far lower than the expected rate of return on your 401k/IRA investments (unless you bought your home very recently with higher interest rates)
> I know eventually we’d hit the income limit, but contributions for us are Roth right now so that’s my frame of mind
Actually, there is no income limit for a Roth 401k. For a Roth IRA, getting around the income limit is quite easy via the Backdoor Roth IRA (in a nutshell, you max out to a traditional IRA and then immediately do a Roth conversion on it).
> assuming a 25% savings rate and 25% taxes
Where does this assumption even come from? If you make $80K, 37.5% savings and 25% taxes would be feasible for a max out, for example.
Before a brokerage account yes, but I would still put a small amount in 529s for the kids before I am maxing out everything.
If you have the income to do so yes. Most people don’t so it isn’t even an option. Put in what you can and still enjoy your life.
The big question of taxable brokerage vs retirement funds is when will you use the money. If you aren’t going to touch a brokerage account until retirement, there is no reason to put money there before you max our retirement accounts. Why pay additional taxes? If you want that money for a purpose before you are 59.5, then it makes sense to put some money in a taxable brokerage for whatever that purpose is.
For a 529 I think that is a personal decision. It is more important to prioritize your retirement to make sure you are set for retirement and you aren’t scraping by and your kids won’t need to support you out because you didn’t save enough. However I don’t think there is anything wrong with putting some money away in a 529 for your kids to at least lower the burden of the cost of education as long as you are still putting a healthy amount of money away for retirement.
Also consider other people as ways to build up a 529. I’m in my early 30s and my parents have put more towards my kids 529 than we have. We also give that as an option for gift if people don’t want to buy us more toys that will take up more space in our home.
> My point here is that this number seems extremely high, and is it really the expectation that we don’t invest in anything else until we’re making well above $250,000?
Why would you want to make investments in taxable accounts if you can make investments in tax advantaged accounts?
There are reasons, e.g. if you want to save for something shorter term than retirement, but that’s usually funded seperately from retirement savings.
Personally I get my employer match, max out HSA, IRA, contribute to 529 and then invest modestly in brokerage
That is the recommended approach but hear me out for a second. Breathe. If you’re making a choice between saving in a 401k and saving in a taxed brokerage account, you’re doing a good thing either way.
It is optimal for your retirement to invest in a tax advantaged account, but if you have near term objectives thats okay too. You just have to understand what you’re giving up, run the numbers, and decide what is right for your family.
For example, if you have to save $60k in a retirement account before starting to save for a house, nobody would ever buy a house. If you are willing to sacrifice part of your retirement to fund your kids 529 accounts, that’s a very generous gift. Just don’t put your retirement in jeopardy or your kids will be burdened with your care during the years that THEY should be saving.
Honestly….its all moot. Regular joes cant really afford to retire anyway.
Yes, try to max them as much as possible. My wife always maxed our her 401K. I was fortunate to have both a 403b and a 457 (both have the same limits of 401K’s). I maxed out both of them for the last 12 years before I retired. We were saving approximately $75K/year pretax before I retired. Wife is still working and is still maxing out her 401K @ $30K/year.
15% of income is the savings goal for retirement.
401k max was 66k for 2023, and higher for 2024 or if you are like 55 or something.
It is good financial sense to max out retirement accounts first. But if you have a house down payment something short term in a taxable account also makes sense. What worked for me was living on my after tax after investment income. It helps if you have a career with upward trajectory where you can save incrementally more each year for sure. When I was younger I started with IRA and did some 401k. Eventually maxed out all tax advantaged accounts between my spouse and I. After that we invested in taxable accounts that we are now about to use in conjunction with sale of our current house to buy down about 50% of a new build house so we can avoid needing a jumbo mortgage.
Decide what works for you and your situation. Regardless, I think it makes sense to stick to something achievable and not think about this short term only.
Dual incomes. No kids helps too. Some people don’t spend a lot. My wife and I only spend $40k per year total with international vacations. We could easily cut that to $30K if we had to.
To max out our accounts, we’d only need a combined income of 120K or so. $60k/year each.
Going against the grain here, but no. You are allowed to spend post tax money on consumption and investment before you retire. For those goals a traditional brokerage account is often the best vehicle.
You can do what you want. Recommendations are based on tax-advantaged accounts being favored over taxable accounts. I like paying less taxes vs more taxes, but I guess I’m not everyone.
Of course, everything has its tradeoffs, and in general the money you save in tax-advantaged accounts, the tradeoff is they are generally less liquid/less accessible. But these days there are borrowing alternatives where you can use those assets as collateral.
That’s the general advice to maximize financial returns over a lifetime. If you have other goals, it’s not wrong to save an appropriate amount for retirement and also put some money towards personal goals.
There’s more to life than min-maxing financials. If you don’t expect to have gigantic financial costs in retirement, it is your choice to save less money. You just need to accept you will have less money later.
Why exactly would you be picking Roth if you couldn’t afford to invest in anything else?
For the vast majority of people a traditional IRA and Roth IRA are good options. That way you have an established Roth IRA for the 5 year roll over withdrawals if you retire early and make more on the traditional tax savings if you really can’t afford to save anything else.
Roth is if you think you’ll make way more and be taxed higher in retirement.
Otherwise go traditional for your 401k.
Retirement is for above average middle class people, working class people are pretty much expected to work til they die or enter into public assistance / family support. If you’re not making enough to max out retirement, you need to increase your income (while also still putting something into retirement now).
Personalfinance, get real, this is reality now a days. The old times where a working class person could realistically retire are gone.
When you make that kind of money you are over the Roth IRA limits anyways. So maxing it out is 23k for the 401k and whatever you can do in a HSA (if you have that option).
My advisor says at least 10% of our income should go into our retirement accounts. I’m fortunate that maxing 401k is less than 10% of my income, so we also do 529, backdoor Roth, and money market accounts to pad the rest. In an average year I save or invest 25-30% of my take-home income, depending on what kind of year I have.
Paying off debt takes priority over everything for me, because I lived through my parents going bankrupt, and I can’t handle the thought of ever owing more than I can pay.
For clarity, this approach has not always been the case. We change the strategy every year and have multiple check-in’s each year to see what needs to be adjusted. 6-7 years ago we were shoving all our money into saving for the house we built. Some years emergency bills take precedent, other years it’s money market. The only non-negotiable each year at this point is 401k and IRA max, but only because we can. Just be diligent about knocking out specific goals, and then you can begin to diversify.
Making that kind of money isn’t exactly difficult. Many professions have pay charts that move into those levels. I spent ~10 years working as a software engineer and cloud architect before I landing a FAANG job and I make $400k before taxes. My wife has been less diligent about her career but still makes $125k before taxes. I’m 37, she’s 35. So I wouldn’t worry about making the numbers work, I’d worry about being successful in my profession. You’re young, I didn’t start investing much until I was 33-34, but I have a guaranteed $60k/yr (inflation adjusted) tax free pension so I was never as worried.
ALL of the retirement advice you will see is ALWAYS (and I do mean ALWAYS) geared to upper middle class.
The whole you need a million bucks to retire? That is only if you are used to living at those income levels. Someone who has been poor their entires lives will already know how to exist and live on FAR FAR less.