Help me plan my retirement

[sourcream]

Hello everybody,

How are you? I am 41 and I don't have much savings or investments. I was sick for around 8 years and my savings including my house was sold to raise funds. Now I am back in action. Starting a new job very soon as w-2 contractor. I want to know how to save max possible to build up savings fast. I am single.

offered salary: 145K

My employer will have a 401k plan and nothing else besides insurance which I already have. How should I invest maximum possible before tax and after tax too.

All advices welcome.

Thanks
Sach

 

[travelover]

Welcome. At 41 I'd invest in a stock index fund with a low expense ratio, as much as possible. I'd also max out a Roth IRA and if you have a HSA with your health insurance, I'd max that out, too. If you post your choices in the 401(k) here, we can help you to choose.

 

[sourcream]

Welcome. At 41 I'd invest in a stock index fund with a low expense ratio, as much as possible. I'd also max out a Roth IRA and if you have a HSA with your health insurance, I'd max that out, too. If you post your choices in the 401(k) here, we can help you to choose.

Stock index fund investment will be post tax? also, why ROTH IRA?...traditional IRA seems better as it's pre-tax.

Should I avoid HSA as I have NY Medicaid plan which is given to me at zero cost?

I will ask my employer about 401K options.

What else I can investment in both pre-tax and post-tax and how much?

My monthly expense is less than $2000 and I want to invest rest of the money wisely.

I want to invest heavily pre-tax so that I do not have to pay any tax..

Sach

 

[RobbieB]

At 145 grand a year, you'll be paying tax.

 

[sourcream]

At 145 grand a year, you'll be paying tax.

right..but I want to pay least. Just wondering how will I invest in IRA if my employer do not have IRA plan for me

 

[bada bing]

At $145K/year, you almost certainly want to use up your annual qualified contribution limits as pre-tax. You won't be eligible for a pre-tax IRA. You will get $19,500 annual limit on pre-tax 401K contributions and $3550/year on an HSA (if you have qualifying HDHP insurance). That is all a typical employee in your income with a retirement account available has available for pre-tax, income lowering contributions.

I would guess you will loose eligibility for Medicaid once your employment income reports. I'd check on that before turning down participation in your employer's plan.

For savings beyond those limits, study up on "backdoor Roth" and "mega-backdoor Roth". You should be able to arrange your existing retirement funds (if any) so that you qualify for a backdoor Roth. The mega-backdoor Roth requires a properly structured 401K plan, which your new employer may or may not have. Hopefully you have it.

 

[DrRoy]

Live as cheaply as you can, but not so much that you never have any fun.

 

[LRDave]

Stock index fund investment will be post tax? also, why ROTH IRA?...traditional IRA seems better as it's pre-tax.

Should I avoid HSA as I have NY Medicaid plan which is given to me at zero cost?

I will ask my employer about 401K options.

What else I can investment in both pre-tax and post-tax and how much?

My monthly expense is less than $2000 and I want to invest rest of the money wisely.

I want to invest heavily pre-tax so that I do not have to pay any tax..

Sach

IMO a hearty YES on the HSA. It is portable. Tax advantaged 3 ways: pre-tax contributions, earning grow tax free and no tax on withdrawals (assuming you meet the not-very-stringent requirements). At some point later in your life, you will be glad you have it. Hopefully your HSA has good investment options. If so, invest in some low-cost fund(s) and let it grow.

 

[Ready2Go]

Pre-tax is short-sighted. If you can do Roth 401k, max it out. Yes...it is post-tax but much, much better for long-term tax liability. Good luck.

 

[KarlH]

If you have a work sponsored 401k, you can currently put $26000 aside pre-tax (1000 every 2 weeks or 2000/month) from your paycheck. On top of this I would try to maximize savings and invest in a mixture of ETFs, dividend paying stocks and funds, and generally follow other people heres advice, as I am still somewhat new to the game. Overall, the pre-tax contributions will amount to about 1000000 over 20 years plus growth. Your other investments should likewise grow and put you in good shape. I'm not sure 62 is your vision of early retirement, but...

 

[tmm99]

With the salary being 145K, I don't think you can do a tax-deferred traditional IRA or straight-in Roth IRA. You will have to do an after-tax traditional IRA and then convert it to Roth IRA. That's what I did. You will still have to pay the tax up front...

 

[OldShooter]

@sachnyc, some comments:

There is really no such thing as a "W-2 contractor." You are one or the other. Probably you are a W-2 employee, but if you are a contractor your retirement savings options are somewhat different than what is being talked about here.

You use the word "insurance" in a sentence related to investments. Insurance is not an investment. You don't mention family or other obligations; if you don't have people dependent on your salary being there you may not need life insurance at all. If you do need it, buy term insurance only.

You will get a lot of specific advice here, but monkey-see, monkey-do based on SGOTI's suggestions is risky at best. You need to understand, not just do. I suggest the following three books, read in order:

"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/

"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

"The Simple Path to Wealth" by J. L. Collins (This one is sort of the lunatic fringe approach, but it's always good to explore the edges. That's why I suggest that you read it last.) https://www.barnesandnoble.com/w/the-simple-path-to-wealth-j-l-collins/1123947856

(As a first step towards LBYM, I suggest you check your local library and Amazon's lists of used copies before you buy any on these new.)

Pre-tax is short-sighted. If you can do Roth 401k, max it out. Yes...it is post-tax but much, much better for long-term tax liability. Good luck.

Well ..., er ..., it's a little more nuanced than that. There are warts and wrinkles, but basically the choice between an IRA and a Roth is a tax rate arbitrage decision. If you'll be withdrawing at a lower tax rate than you now pay then the IRA is the winner. If the same it's a wash and if the future tax rate is higher then the Roth wins. Don't know what your future tax rate will be? Welcome to the club.

 

[Ncc1701]

Does your employer offer a Roth 401K or is it just traditional? I would contribute max to a Roth 401K and do the Backdoor Roth contribution every year. Keep in mind that historically tax rates are low so the savings you would have by funding pre-tax accounts is diminished.



I am more conservative than a lot of others here. I would use VBIAX or something similar in the retirement accounts and then use VTMFX for everything else in your individual brokerage account. Quite Frankly, it really is as simple as that. Three accounts, two investments, save like crazy and give it time.


Lastly, see if you can lower living costs by moving out of the city. This of course depends on your job location and if rent/mortgage with higher property taxes makes sense but I would just hate paying 3.5% for city taxes.

 

[HI Bill]

With a $145K salary, I'd first max out the 401(k), then max out the ROTH IRA. You'll save on taxes now, and in the future. Anything over that can go to a regular brokerage account. One advantage with the ROTH IRA is that you can take out your contributions at any time, tax and penalty-free, such as for an ER, or in the event of a disability or job loss.

In 2040, you'll be 61, so you can tap 401(k) and ROTH without penalties. Just in case you're ready to retire earlier than that, if you have brokerage accounts, and retire in the year you turn 55 or later (but before 59.5), you'll want taxable accounts to draw from, between your retirement year and age 59.5. Best wishes!

 

[Rdub]

If the company is public, see about ESPP, usually an easy 15% return. With the 401k, see if you can add after tax money above your tax deferred contributions. When I was working I could put in $18.5k for pre-tax and up to another ~$35k in post tax. You can then take the post tax money and do a mega back door Roth conversion.

 

[sourcream]

Welcome. At 41 I'd invest in a stock index fund with a low expense ratio, as much as possible. I'd also max out a Roth IRA and if you have a HSA with your health insurance, I'd max that out, too. If you post your choices in the 401(k) here, we can help you to choose.

This all is very confusing. Should I get financial advisor?

I will be paid per day basis. $578 per day for next few months and then $678 after that. This year I did not have any investments so far. Roth IRA is also my option which has income limits of $139000 for 2020.

yeah, HSA looks good. but if I do not need to withdraw money from HSA, then money can be withdrawn with tax liability after 65. How many people are using HSA? 65 looks late for withdrawing money

 

[badatmath]

Your employer needs to have appropriate health plan for you do contribute to an HSA.

My employer, a Megacorp, does not have such a plan.

 

[sourcream]

Your employer needs to have appropriate health plan for you do contribute to an HSA.

My employer, a Megacorp, does not have such a plan.

they say they have HSA

 

[sourcream]

any retirement advisor who know all these things mentioned here like backdoor roth, mega backdoor roth and all suggestions given here? How much will he charge if such a person is there?

 

[pb4uski]

... There is really no such thing as a "W-2 contractor." You are one or the other. Probably you are a W-2 employee, but if you are a contractor your retirement savings options are somewhat different than what is being talked about here....

OldShooter, you missed the target entirely on this one. There is a middle ground between an independent contractor and a common law employee called a statutory employee. They are an independent contractor but are subject to withholding for social security rather than subject to self-employment tax and they receive a W-2 that is reported on Schedule C.

https://www.irs.gov/businesses/small-businesses-self-employed/statutory-employees

If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

• A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
• A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
• An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
• A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity.

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Also, use Schedule C to report (a) wages and expenses you had as a statutory employee, ...

 

[The Cosmic Avenger]

This all is very confusing. Should I get financial advisor?

I will be paid per day basis. $578 per day for next few months and then $678 after that. This year I did not have any investments so far. Roth IRA is also my option which has income limits of $139000 for 2020.

Yes, but if you can put $19.5K in a 401(k), your taxable income won't be $145K, it will be $125.5K, so you'll be eligible for a Roth IRA. Plus, if you do exceed the income limits you can always do a backdoor Roth, which is what we do. You'd need to read up about it, but basically you contribute post-tax money to a traditional IRA, for which there is no income limit, then you convert that money to a Roth.

 

[SumDay]

You asked if you should get a Financial Advisor. If you decide to do that, I'd recommend one who won't harass you to manage your assets. You just need some guidance on how much to save, and where, and how to mange a HSA with a high-deductible health care plan.

I'd suggest you find a FEE ONLY planner and sit down with them for a couple of hours. This was recommended to me from folks here on this board, and has saved us a boatload of money. It's given me confidence to manage our portfolio, with just an tune-up from her every couple of years. I found ours here:

https://www.napfa.org/

Feel free to check back in here if you have questions about what they're trying to convince you to do. Managing your money is a great deal FOR THEM. Advising you on how to manage your money is a great deal FOR YOU. JMHO, of course.

 

[pb4uski]

OP, if you are single and have $145k of income, you will be in a high tax bracket (24% plus SE tax), so IMO pre-tax savings is the way to go. You could use the employer's 401k if have some decent investment options available at a reasonable cost.

I think first you need to get an idea of how much you need to save. How much do you need to spend annually to live in your desired lifestyle? How much will you get in SS? Since you have been out of the game for the last 8 years you may want to model what you SS will be if you continue working at your current level of pay until you are 60. Then what is the gap between what you need and what SS will pay? Divide that annual gap by 4% and that will give you an idea of how much you need to save.

As an example, let's say that you need $50k a year to live in the lifestyle that you desire and expect to receive $30k in SS... that would leave $20k to come from investments... however a 2% annual inflation that $20k today would be $30k in 20 years...divided by 4% is $743k. If you can earn 5% on your investments in order to have $743k in 20 years you need to save about $22.5k a year.

You might also check into buying Quicken Deluxe (or higher) and using their Lifetime Planner to create a plan and then use Quicken to monitor your progress.

 

[OldShooter]

OldShooter, you missed the target entirely on this one. There is a middle ground between an independent contractor and a common law employee called a statutory employee. They are an independent contractor but are subject to withholding for social security rather than subject to self-employment tax and they receive a W-2 that is reported on Schedule C ...

Interesting. Thanks. I never heard of that one despite being an employer/company CEO for many years. But the point is the same, really; the OP needs to determine exactly what kind of legal relationship he has with his employer because it affects his savings options.

 

[sengsational]

Ask your company if you will be considered a "Highly Compensated Employee" with respect to 401k. Not many people run into this since it not common at large companies, but if there are not enough lower wage employees contributing then the big wage earners are prevented from putting up to the normal limits.