Wait until 35 to save!

[Mulligan]

I was fortunate in that I didn't trust employers or the government to take care of my retirement even before I was 25 -- this all the way back into the 1980s. Even then, I thought demographics were going to put the hammer down on those of us at the tail end of the baby boom. I put 12% or more of my pay into my 401K every pay period, even when it really hurt and all my friends were "living it up" more, and eventually started earning enough to max it and two Roth IRAs for my wife and me which we've dutifully done for many years now. It was only because I learned the discipline so early, IMO, that we have a chance to retire early without employer-provided health insurance and only a puny (frozen) pension.

Had I not done these things, had I not adopted the cynical Generation X mentality about employers and government taking care of me in old age, once they took retiree health insurance away and froze my pension in my early 30s, I might be working until I'm dead. But as it is, even if they water down or means test my SS and with my tiny frozen pension, I should be able to get out by 55, maybe earlier -- and almost all of this was from adopting a LBYM attitude and saving for retirement until it hurt, even in my 20s. People in my situation who trusted the institutions to deliver on the promises we were given when we started working -- and thus didn't bother saving -- may never retire. That's the new reality, and younger folks don't have to like it (and we shouldn't) -- but it is what it is and we can either stay down and accept defeat or get off the mat and redouble our determination to beat the worsening odds.

And I would suggest that any younger person who doesn't want to work until they die or become disabled assume *zero* from your employer pensions, health insurance and SS**. Yes, even those of you who have public sector pensions planned; if they can be taken away from the private sector as most have been, they can be yanked from the public as well. Yes, you may get something and I hope you do, but the less you *assume* you'll get while you're young, the more likely you will still be to retire even if these things are taken from you -- and if they aren't taken away, it's just gravy.

** -- note: I'm not making a political statement about thinking I'll get no SS. But for planning purposes I err on the side of being conservative, and that means saving enough that I can still retire even if I, my generation or future generations get the considerably worse deal I think we will see.

Ziggy- I couldn't agree more that you shouldn't trust your retirement to anybody, but yourself. I have a government pension, that is a trust fund that is actuarially sound, but even then our cola has been reduced to achieve 100% funded status. I say this as I am lucky. I could easily have been in a poorly funded pension and got blindsided later. Even though I believe at THIS point I am in good shape, if I had to do it all over again, I would have saved more instead of just waiting for the pension. The landscape has changed drastically since the 1980's when I started, and I never did put much thought into it since then. Being an early age ER, who knows what will happen in 20 years if so much has changed in past 20 years. So I am becoming an avid saver and semi investor to prepare for something that could have an adverse effect on my future.

 

[ER Man]

I started saving at age 33 in 1989 and retired at 55 in 2011. I wish I had started saving earlier but it worked out OK, so far.

Wow. How did you pull that off?
What were your investments and spending habits?

 

[ER Man]

I started at age 29. Better late then never.

 

[arebelspy]

Wow. How did you pull that off?
What were your investments and spending habits?

22 years doesn't seem excessively short, given that he was likely at peak earning years during those times.

 

[Brett_Cameron]

living WAY below my means in a relatively low cost of living area and saving a LOT during peak earning years

as far as investments, primarily 401k with up to 75% match at times on first 6%, with large contribution rate up until the last three years

have a DB pension with 29 years of service helps the most

Retirement spending ( post taxes and medical insurance) so far = 100% pre-retirement spending, with room to adjust

post retirement no state income tax on 401k or pension

LUCK!

only 2 months in so we shall see how this works out

 

[muddy]

That is really a crappy article. They took solid economic theory. Didn't explain it and then present it in a way that is unhelpful.

The whole idea behind the article is diminishing returns on consumption. For every dollar you have in the bank an incremental dollar means less to you. So for example, if you make $50K/year you would value a $5K raise a lot more than someone that makes $250K. I think that this is both true and fairly intuitive.

Taken a step further, to maximize the value of your consumption you would (in theory) want to take all of your lifetime income and divide it evenly across all consumption periods. In economic jargon this is called consumption smoothing. By doing this you would never have diminishing returns across periods. For the majority of people that have increasing incomes over their lifetime (until the very end) this would imply that you should shift consumption from your highest earning years (at the end of your life) to the beginning of your life when you have lower income. I think this also makes sense... in theory.

However, in practice... this basic model doesn't really help any of us with decision making for a variety of reasons that you all have outlined. Namely it doesn't account for our risk tolerances and variable outcomes. If your income doesn't increase, or you lose your job, get sick, have unexpected expenses (or unplanned for expenses), etc you are screwed whereas you could have had a safety net if you saved earlier. Any quality professor in an introductory microeconomics class would explain that. And that a more complete model would include some tolerance for your risk, but the authors of this article took a basic ECON 101 model and tried to apply it in a way that is unhelpful to everyone and makes everyone skeptical of a field which is actually based on sound logic and empirical evidence, which is unfortunate.

 

[slazenger]

The save vs. spend decision (at any age) would be a lot tougher if it were "spend 1 dollar today vs. save 1 dollar today". For many of us, the real question is "spend 65-70 cents today, or save 1 dollar for tomorrow". Put in those terms, I don't find the decision very difficult until I at least reach my retirement vehicle limit.

I don't care what the age, it's hard to willfully lose 30% of what you make to taxes when you could prevent it.

 

[ER Man]

22 years doesn't seem excessively short, given that he was likely at peak earning years during those times.

He did retire at 55 instead of the early traditional 62.

Whats great about this 22 year history is that he started at age 33.

 

[ER Man]

Its great that you have pension. Are there any companies that still offer pension or is it just 401K/Roth 401 now?

Could you have done this without a pension?

I thought 401K was taxed at your Federal tax bracket?

How much will I be taxed on my 401K withdrawals? Also, can I withdraw before 59.5 without a penalty. I have heard about 72t.

living WAY below my means in a relatively low cost of living area and saving a LOT during peak earning years

as far as investments, primarily 401k with up to 75% match at times on first 6%, with large contribution rate up until the last three years

have a DB pension with 29 years of service helps the most

Retirement spending ( post taxes and medical insurance) so far = 100% pre-retirement spending, with room to adjust

post retirement no state income tax on 401k or pension

LUCK!

only 2 months in so we shall see how this works out

 

[cloud]

What? The point of this article is to encourage investing early.

 

[Brett_Cameron]

Its great that you have pension. Are there any companies that still offer pension or is it just 401K/Roth 401 now?

Could you have done this without a pension?

I thought 401K was taxed at your Federal tax bracket?

How much will I be taxed on my 401K withdrawals? Also, can I withdraw before 59.5 without a penalty. I have heard about 72t.

Could NOT have done it without a pension.

Utility I w*rked for still offers new hires the DB pension plus 401k. Most companies do not have DB pensions anymore.

401k IS taxed at federal rates but not taxed by my state.

IF you retire from a company in or after the year you turn 55, you can, IF the company 401k plan allows, withdraw from 401k without 10% penalty.
This is allowed by law but may or may not be allowed by the company 401k plan.

I plan to withdraw from the 401k in installments until after I reach 59.5 then roll over to IRA for the flexibility of varying withdrawal rates my spending plan calls for.

 

[lrak]

This article rings true for me. I'm 34 and have foolishly saved. If I look at how well my personal rate of return compared to my personal rate of inflation over my working years, my 401k and Roth IRA have honestly not been great investments.

I could certainly see coming out ahead by waiting to save for retirement until 35 during my lifetime. You just needed to spend your money wisely. For example buying long lasting goods such as paying off a house that will meet your needs for decades to come, energy efficency improvements (ie new furnace, fridge, and insulation), or paying cash for a reliable but economical vehicle that will last 15+ years. Those items aren't getting cheaper and will reduce living expenses over the long term.

Obviously if your 20-35 year old investing years were in the 70s, 80s, or 90s, your answer may have been VERY different.

 

[ER Man]

So for states that do not have state taxes do not pay state tax for 401K at withdrawal?

How do I know I can retire at 55 for my 401K? If its allowed by law then I do not need to worry about what my company offers?

Could NOT have done it without a pension.

Utility I w*rked for still offers new hires the DB pension plus 401k. Most companies do not have DB pensions anymore.

401k IS taxed at federal rates but not taxed by my state.

IF you retire from a company in or after the year you turn 55, you can, IF the company 401k plan allows, withdraw from 401k without 10% penalty.
This is allowed by law but may or may not be allowed by the company 401k plan.

I plan to withdraw from the 401k in installments until after I reach 59.5 then roll over to IRA for the flexibility of varying withdrawal rates my spending plan calls for.

 

[Brett_Cameron]

So for states that do not have state taxes do not pay state tax for 401K at withdrawal?

How do I know I can retire at 55 for my 401K? If its allowed by law then I do not need to worry about what my company offers?

No state income tax means no state tax on 401k withdrawals.

You need to read the Summary Plan Description (SPD) for your company's plan. Carefully. Talk to a representative of the company that administers your company 401k.

None of my former company's literature, websites, FAQs or anything highlighted the option to do so. It was like they WANTED me to roll over to an IRA so they wouldn't have to mess with it anymore. Or maybe they thought it was so obvious an option that they saw no need to mention it anywhere except in the SPD.

 

[ER Man]

What happens if you live in a state that has state taxes but fly over to a non state tax and withdraw?

No state income tax means no state tax on 401k withdrawals.

You need to read the Summary Plan Description (SPD) for your company's plan. Carefully. Talk to a representative of the company that administers your company 401k.

None of my former company's literature, websites, FAQs or anything highlighted the option to do so. It was like they WANTED me to roll over to an IRA so they wouldn't have to mess with it anymore. Or maybe they thought it was so obvious an option that they saw no need to mention it anywhere except in the SPD.

 

[REWahoo]

What happens if you live in a state that has state taxes but fly over to a non state tax and withdraw?

The airfare will eat into your earnings.

Kidding aside, taxes are based on your state of residency. What you are proposing won't change your tax liability and might land you in jail for tax evasion.

 

[ziggy29]

What happens if you live in a state that has state taxes but fly over to a non state tax and withdraw?

I'm pretty sure the taxes are based on your legal residency, not where you withdraw.

Which could still mean that if you live in a no-income-tax state and are contemplating a move to a state where retirement income is taxed, it may be a consideration as to when, whether and how much to take out while you are still clearly and legally a resident of the no-tax state.

 

[Brett_Cameron]

oops! The chain just broke.

 

[ER Man]

The airfare will eat into your earnings.

Kidding aside, taxes are based on your state of residency. What you are proposing won't change your tax liability and might land you in jail for tax evasion.

So I guess if you plan to retire in a non state tax then you are good to go.

 

[REWahoo]

So I guess if you plan to retire in a non state tax then you are good to go.

I don't believe a "non state tax" location exists - at least not in the US. Texas has no state income tax but we pay hefty property and sales taxes. Every state finds a way to get your money...

 

[ziggy29]

I don't believe a "non state tax" location exists - at least not in the US. Texas has no state income tax but we pay hefty property and sales taxes. Every state finds a way to get your money...

Yep -- but the best we can do is consider our own situation in terms of income, spending and homeownership. Texas is a "good" tax state for someone who has a high income, doesn't spend much and lives in a modest, low-value home. On the other hand, if you have a big, expensive residence and are spendy, it's not so good.

On the other hand, a state like Oregon, with no sales tax but a pretty harsh income tax, is better for folks who spend a lot of their money and don't have much income.

 

[rescueme]

Sorry to take the thread in another direction (retirement taxes), but some states (such as where I live) treat retirement income in a better manner than others:

Kiplinger.com

While we have a state income tax, I don't pay it since my retirement income (SPIA, T/Roth IRA's, etc.) nor my future SS fall under the requirements to report.

We also have a 1% local income tax, but again don't have to report my retirement income...

 

[ER Man]

I don't believe a "non state tax" location exists - at least not in the US. Texas has no state income tax but we pay hefty property and sales taxes. Every state finds a way to get your money...

I meant no state income tax.
Which states are tax friendly for 401k/Roth IRA?

 

[REWahoo]

You can find out all sorts of good info from previous threads by going up to that Google search box at the top of the page and searching on 'tax friendly states'.

 

[ER Man]

You can find out all sorts of good info from previous threads by going up to that Google search box at the top of the page and searching on 'tax friendly states'.

I have heard a lot about Texas Hill Country and how great of this place is for retirement. I believe its close to Austin.