Retirement Savings, Best Options

[hankster]

I've learned a lot reading the forums but have reached a point where I have to lay out some numbers and get some input:

Both age 51
401k balance $145,000
Taxable savings $40,000
Non COLA pension which should cover 2/3 of expenses at retirement
Retiree medical benefits

My income $82,000/yr
DW income $15,000/yr

We are completely debt free and presently rent. Contribute to full match on the 401k. DW will get a small pension at age 65 (< $400/mth)

She plans to work 4 more years. With only the standard deduction, I'm thinking that we should be doing 401k and traditional IRAs while we're both still working and our income is probably at its highest during the next 4 years. After she retires and income drops, maybe we should shift to Roth IRAs at that point. We have about $3,000/mth to save and have to think about a home purchase in the future when we decide where we want to be.

Recognizing that none of us know future tax rates, how would you play it?

 

[W2R]

I've learned a lot reading the forums but have reached a point where I have to lay out some numbers and get some input:

Both age 51
401k balance $145,000
Taxable savings $40,000
Non COLA pension which should cover 2/3 of expenses at retirement
Retiree medical benefits

My income $82,000/yr
DW income $15,000/yr

We are completely debt free and presently rent. Contribute to full match on the 401k. DW will get a small pension at age 65 (< $400/mth)

She plans to work 4 more years. With only the standard deduction, I'm thinking that we should be doing 401k and traditional IRAs while we're both still working and our income is probably at its highest during the next 4 years. After she retires and income drops, maybe we should shift to Roth IRAs at that point. We have about $3,000/mth to save and have to think about a home purchase in the future when we decide where we want to be.

Recognizing that none of us know future tax rates, how would you play it?

I am no financial whizkid like some of the others here, but this is what I am thinking.

Since your biggest pension is completely non-COLA, I would assume that inflation will eat away at it pretty quickly. Hopefully SS will survive and will help fill in the rapidly diminishing purchase power of that pension a little bit. However, SS was never intended to be the majority of retirees' income.

I think you need to fully fund both your 401K and your Roth IRA, including over-50 catchup. After that, comes your taxable account. Project what you will have at retirement from these investment accounts and what your yield will be, and try living on that right now. If you can lower your standard of living to meet your investment income, then you won't be depending on SS or on a non-COLA pension for survival in your old age. I know this sounds a little extreme, but personally I would rather find out after I retire that I have more money than I need, than find out that I don't have enough.

 

[ziggy29]

As W2R mentions, because your pension is non-COLA'd, I'd consider inflation-protecting my 401K and IRA assets as the top priority.

Both being over 50 and working, you have a lot of potential room for retirement account investing. In fact, if her employer allowed it, she could put her entire paycheck (minus SS, Medicare and other employee benefit deductions) into a 401K and you'd generate zero taxable income on her w*rk. Add that to a potential $22,000 to your 401K and $12,000 for two IRAs, and you have a lot of room there.

The 401Ks may have few options other than stock funds for inflation protection, but when you retire you can roll it over into an IRA and have more options for inflation-proofing your nest egg, including TIPS and perhaps a smattering of other things like commodities if so inclined.

But the bottom line is that if you can live considerably below your means when you retire and keep investing/saving the extra, that would add to the cushion you have as inflation slowly starts to eat away at the pension.