Spend or save

[ugeauxgirl]

I'm 2 months from my first severance check. It's going to be a huge drop from my current income (and a drop in the tax bracket too) but a little more than what we're spending now. And my husband will also be working. Thanks to a bonus, I'll have contributed quite a bit to my 401k before severance begins, but not the maximum.

When we stop getting severance checks we'll be one year from DH being eligible to receive SS. If we did take SS our w/d for expected spending rate would be 2%. if we don't take it the w/d rate (assuming zero growth of assets) would be 2.6%.

I guess I'm having a hard time switching from savings to spending. I know it makes financial sense to keep contributing, but we're going to have to raise spending at some point to keep from leaving the kids too much money.

Spend more now or keep contributing to the 401k for the next two years?

 

[HF63]

If it where me, I'll spent some of it while you still healthy.


Down the road, we never know what happens.

 

[Dalmore]

If it where me, I'll spent some of it while you still healthy.


Down the road, we never know what happens.

+1

 

[jollystomper]

If it where me, I'll spent some of it while you still healthy.


Down the road, we never know what happens.

+2


Right you, you can choose what you want to spend it on.


The day will come when you will have no choice on what to spend it on.

 

[ivinsfan]

JMO but that's a hard question because of the age difference between you and your spouse.

I know your comment about leaving the kids too much money was a little tongue in cheek but being sure the younger spouse is covered till the end is the big question.

I could quote HF63 and say "down the road you never know". I'd probably do the 401 for a couple years as your DH can pull his without penalty. Once your DH goes on Medicare and ACA is still looking good, You haven't mentioned HC is an ACA subsidy in your future...if this is the case after tax money is king.

Is there something you really want to spend on? Something you feel is missing on your current budget.

 

[RunningBum]

2 or 2.6% is an extremely safe WR, assuming you've estimated your expenses correctly. And unless you are wayyyy off, you're still fine.

There's also the question of whether you'll be in a higher tax bracket once you both start taking SS, and have RMDs. If that's the case, even if you decide to save, it should be in a Roth IRA first, and then your taxable account.

Maybe you should only fund the 401K to get the company match.

 

[Stormy Kromer]

I've been living off investment income for the past 4 years and will continue to do so for another 7 years before I start SS & IRA distribution (traditional). I contributed the max to tax deferred IRA's while working and I can tell you it would be nice to have more assets outside of the IRA. If you're going to save the money anyway I'd suggest investing it outside an IRA. You'll likely be in the same or higher bracket when you take the money and you can't beat today's LTG tax rates.

 

[teejayevans]

Down the road, we never know what happens.

Well, depends on how far down the road you look, we know the road eventually comes to an end, so you can’t take it with you.

 

[aja8888]

We are in our mid 70's.....spending on medical stuff is going through the roof, so to say. Have fun while you are young.

 

[USGrant1962]

It sounds like you are the point where you should drop your 401(k) contribution to whatever matching amount is available. At your very low WR you are probably facing significant RMDs later on (winner's problem) and maxing out 401(k) will just exacerbate that.

 

[Souschef]

One of the ideas about a 401K or IRA was that after you retire you will be in a lower tax bracket. That may be true up to your RMD age.
I have a "first world problem". My SS is taxed at 85%, my RMD pushed me into IRRMA, and I am in the 22% bracket.
USGrant's idea seems reasonable. Invest the balance in a taxable account. Your CG's will be taxed at the CG tax rate, rather than as ordinary income from an RMD.

 

[ugeauxgirl]

OP here- thanks for weighing in on this.

We do have quite a bit of money that is in a regular investment account- not retirement. But you are right in that by the time I have to take RMD's, the amount will probably push us into IRRMA and back into higher tax brackets.

Probably no ACA in our future (for the next 4 years anyway) as DH refuses to stop working.

No company match in my 401-K.

I'm not kidding about leaving too much to the kids. DH is leaning towards taking SS at 62- I can't seem to talk him out of it. A 2% withdrawal on an 80/20 portfolio might grow to an enormous amount in 40 or 50 years. If we died NOW it would be a lot of money for the kids- not many kids would be motivated to work and be responsible members of society if they were left a million+ of cash at 12 and 15. (We have a trust that addresses this) I think there is such a thing as leaving too much money to the kids. We are very proud of our accomplishment of becoming FI and we want them to be able to do that as well.

I think I'll do a bit of both. Spend a little more and save some too. Thanks again for letting me know what you think!

 

[pb4uski]

I'm 2 months from my first severance check. It's going to be a huge drop from my current income (and a drop in the tax bracket too) .... I know it makes financial sense to keep contributing...

If you expect to be in a lower tax bracket in 2020 it might not make sense to keep contributing.... assuming that by "contributing" you mean contributing to 401k or tIRA... it only makes sense if the tax you avoid payig now is more than what you expect to pay later when the money is withdrawn.

 

[ugeauxgirl]

If you expect to be in a lower tax bracket in 2020 it might not make sense to keep contributing.... assuming that by "contributing" you mean contributing to 401k or tIRA... it only makes sense if the tax you avoid payig now is more than what you expect to pay later when the money is withdrawn.

Tax bracket will drop this year and then we will go down another tax bracket in a couple of years, and should remain in the lower tax bracket till RMDs (Assuming tax law stays the same and it probably won't.) DH doesn't have as much in his retirement accounts as I do, and doesn't have as long before we have to start taking them out. We plan on withdrawing strategically from IRAs to stay in a lower tax bracket and using Roth and taxable accounts as well.

 

[ut2sua]

OP, you have a good problem. It sounds to me like you are not really excited on spending that extra $ at the moment. That is not a problem. IMO, you should build an extra fund in cash on the side and wait until you find something that will excite you to spend that $ on. The idea may come tomorrow, or a few years down the road, or you may never have the need for it. In any case, it is great to know you can do things without even thinking about the budgeting aspect of it. Personally, I am doing some of that myself.

 

[ugeauxgirl]

Thanks, it is a good problem to have, and I really like your idea. Congratulations to you too!

I saw a really cute Miata the other day. Always wanted one of those...

 

[ut2sua]

I saw a really cute Miata the other day. Always wanted one of those...

Exactly

 

[RunningBum]

Thanks, it is a good problem to have, and I really like your idea. Congratulations to you too!

I saw a really cute Miata the other day. Always wanted one of those...

I should warn you, in my experience in about 20 years you get a bit tired of the Miata.

 

[racy]

I should warn you, in my experience in about 20 years you get a bit tired of the Miata.

Took me less than that, but we sure had fun in ours for several years!
OP - go get one. zoom, zoom!

 

[athena53]

With the age difference and the 2.6% withdrawal rate I'd go for spending now. I was also married to a man significantly older (15 years in my case). Our priority was travel and I knew that if we waited till I retired at 65 to do the big trips, he'd be 80. I ended up retiring at 61 but we did a lot of wonderful trips together, even when I was employed, before he died at age 78. I'm averaging a 3.5% withdrawal rate in the 5.5 years since I retired so the assets have gone up significantly, thanks to the extended bull market. If I had to ratchet back my withdrawals in a bad market, I might have to cut charitable or travel or both but I could make the mortgage payments and wouldn't starve.

You've got room in your budget- enjoy it while you can.

 

[H2ODude]

Had two Porsches and three Miatas. Always said you cannot get more fun per dollar than a Miata. As for retirement spending abilities, when working always did max 401, 457, IRA etc. Turns out the FIDO calculator now says we can spend about 70% more after tax than what our take home was in our fifties before retirement. I'm OK with that, now helping kids and charities and doing all the travel we care to do, and still only hitting about 3-3.5% WR.

I'm not sure when the FIDO calculator adjusts for age (years left needed to provide income for) but it seemed to me it took a significant jump after the first of the year for us, I run it every month or two for giggles. Which is a little sobering, knowing that your spend rate doesn't need to be so conservative! If you WANT to spend more, closer to what the calculators say is CONSERVATIVELY OK, then for goodness sake do it. We aren't denying anything we really want, but it's been an amazing 9 years watching the egg grow. We pretty much all got here by LBYM, being conservative in spending, but don't overdo the caution if there are things left to do now.

 

[ugeauxgirl]

I should warn you, in my experience in about 20 years you get a bit tired of the Miata.

If I enjoyed it for 20 years, I'd consider this money well spent!

 

[ugeauxgirl]

Thanks all- you've talked me into it. Time to start spending a little more. And start a "Miata" account...

 

[Dtail]

Had two Porsches and three Miatas. Always said you cannot get more fun per dollar than a Miata. As for retirement spending abilities, when working always did max 401, 457, IRA etc. Turns out the FIDO calculator now says we can spend about 70% more after tax than what our take home was in our fifties before retirement. I'm OK with that, now helping kids and charities and doing all the travel we care to do, and still only hitting about 3-3.5% WR.

I'm not sure when the FIDO calculator adjusts for age (years left needed to provide income for) but it seemed to me it took a significant jump after the first of the year for us, I run it every month or two for giggles. Which is a little sobering, knowing that your spend rate doesn't need to be so conservative! If you WANT to spend more, closer to what the calculators say is CONSERVATIVELY OK, then for goodness sake do it. We aren't denying anything we really want, but it's been an amazing 9 years watching the egg grow. We pretty much all got here by LBYM, being conservative in spending, but don't overdo the caution if there are things left to do now.

IIRC, the Fido calculator adjusts at the beginning of each year and also adjusts at anytime during the year if they adjust individual items such as the medical inflation rate.

 

[H2ODude]

IIRC, the Fido calculator adjusts at the beginning of each year and also adjusts at anytime during the year if they adjust individual items such as the medical inflation rate.

Nothing like ... "Great, more money to spend!!! Ummmm, because I'm now closer to the end!!!"