WWYD Lowered 401k contribution and freaked out

[Mountaineering]

So I’ve been reading lots of threads about how folks who’ve already retired say they wish they’d done more savings in Roth and after tax vs 401k due to RMDs and such.

I just turned 42, planning to retire after I’m 50. My current spending/savings strategy has been the following annually for a few years now:
- live on 28% of cash comp, plus surplus income from 3 rental properties
- max out 401k, including after tax to IRS limits ($61k for 2022)
- invest $10k per year in federal bonds
- $12k/year in 529 (have kids)
- max out HSA and don’t touch
- contribute 50% of qualified income to deferred compensation plan (will pay out first 15 years of retirement)
- $6k in back door Roth
- save $60k cash per year (was using until now for RE investments, but holding for now)

I just lowered my 401k contribution to 6% to just get the company match and profit sharing plus hit the before tax limit on my side, it means I will save about $41k including company contributions instead of the $61k I had planned. But, I’m freaking out because I don’t know what to do with it instead and it feels counter to what I’ve done to date to buy my freedoms. I’m planning to do something else but having less in an official “retirement” account is messing with my head and I can’t figure out why.

If you had to do it over, what would you put more into if you did less 401k? Pay down house? Mutual funds? Can’t do more in Roth.

 

[Montecfo]

I'm happy with how things worked for me. I maxed out tax deferred. In most cases I was not eligible for Roth but was able to convert some in the late 90s when it was attractive to do so (lower income year, favorable tax rules.

I also maxed out HSA during those years it was possible.

In my taxable account I did some house flipping after the financial crisis for 2-3 years and built up the taxable.

I did pay down mortgage when rates were high. But that's been a long time ago. But I never took out a big mortgage and used that as a technique to prevent over-buying. With inflation raging, I'm not sure now is a good rime for mortgage paydown.

So I ended up with some account diversity but heavily tilted to tax deferred.

It seems to have worked out as I am experiencing lower tax rates now as a retiree than I did when employed.

Are you sure it makes sense to limit 401k?

As far as investments, is there a reason not to invest your raxable funds as you were the 401k funds?

 

[RxMan]

I’m a little older than you (turn 48 next month) but I plan to work another 5-7 years before early retirement so my timetable is close to yours if you are planning to retire at age 50. What I’ve realized is that if you retire before age 55 like both of us seem to want to do unless plans change then we won’t be able to take advantage of the Rule of 55 to access our 401k money penalty free unless we wait until age 55 to retire.

This means we need funds in taxable accounts that can be accessed to fund the years of retirement until we reach age 59.5 years old when the 401k money becomes available penalty free. This means that if I were you I would try to estimate your yearly expenses in retirement and multiply that number by the number of years you’ve got to fund before you can access your 401k money penalty free. When you’ve estimated this make sure you have taxable accounts with enough saved to cover those early years of retirement. You can factor rental income and other sources of money into this calculation.

The other thing I will mention is something I did when I started my new job a couple of years ago. My current employer offers a Roth 401k option so I split my contributions to my 401k account and put a little more than half of those contributions into the Roth 401k and the rest in the traditional 401k side. If you have that option I’d consider taking advantage of it.

But I would say based on your post you seem to be a super saver that can max multiple accounts every year. In this case I wouldn’t cut your 401k contributions as long as you can save elsewhere in taxable accounts to diversify your holdings with regards to tax considerations. Then as you get closer to retirement and have a better idea of what you balances will be in all of these various accounts you can develop a withdrawal strategy that meets your financial needs while minimizing taxes.

I’m looking to challenge myself to boost my taxable savings without cutting my 401k savings. But yes, if you do decide that cutting your 401k contribution is the best option for your overall plan I would continue to contribute just enough to get the most company match possible. You don’t want to leave free money on the table. Good luck!

 

[Exchme]

I think you are reading too much into folks' regret about wanting more Roths, they are really just wishing that taxes didn't exist. Backdoor Roths while working or Roth conversions when retired only make sense to do in otherwise low tax years, trying to level out the marginal tax rate you pay over your lifetime. Roths don't make sense in your peak earning years as those are likely your peak tax bracket years.

Taxable is worse than either Roths or tax deferred due to yearly tax drag, so I would max out the 401K as before.

Sounds like you are not buying stocks right now, but you should be thinking about where the market will be decades from now, which is when you will actually need the incremental money. So failing to invest in stocks now is almost certainly a mistake. Stocks are "On Sale"; buying when the markets are nervous is when you make the most money.

 

[casole]

For me full on max to 401k is forced savings so that is easier for me. I think as long as you split between Roth and Trad 401k and some after tax you'll have a good balance for "tax diversification" and be able to react to whatever tax changes may come. The deduction you get now in your higher earning years is valuable too in smoothing out the tax burden because until rmd you can control your income more.

I'd have anxiety to not fully maxing the 401k. But since there's a Roth component now... . Who knows what the future holds, rmd at 80? 75 is looking entirely possible now. Or maybe they'll need revenue desperately and lower it (not likely but hey who knows).

 

[target2019]

I just max'd 401(k) for 10 final years and delayed taxes. Then you have a decision how much to convert to Roth...

Prior to that period we had paid down and eliminated mortgage payments. If not, I would probably do some of that, as you suggested.

I'd also try to project the balances of Tax-deferred, Tax-free and Taxable into the future. It is very desirable to have flexibility in those accounts.

When tax-free muni index funds get crushed, it becomes more attractive to slowly invest there in your taxable brokerage.

Just some random thoughts. Not really a plan, though.

 

[RunningBum]

Don't base your decision on what others are doing, base it on your own situation.

The primary decision on Roth vs. deferred is your current tax rate compared to your projected tax rate in retirement, especially when you are forced to withdraw from deferred with RMDs. It's not easy to come up with your projected tax rate in 30 years, but you can probably get a rough idea. If it looks you're at a higher tax rate now than you will be then, you want to defer as much as possible.

Since you're looking to retire at 50, you've also got to make a plan for the 9.5 years before you can tap retirement accounts. I happened to have plenty in my taxable to get me there so I'm not up on all of the other options so I won't try to list your possibilities and risk giving you faulty info.

 

[Magus]

You are much better off reducing def comp than 401k for a number of reasons

 

[tulak]

The primary decision on Roth vs. deferred is your current tax rate compared to your projected tax rate in retirement, especially when you are forced to withdraw from deferred with RMDs. It's not easy to come up with your projected tax rate in 30 years, but you can probably get a rough idea. If it looks you're at a higher tax rate now than you will be then, you want to defer as much as possible.

This.

I’m maxing my tax deferred savings since I’m in 32%+ now and expect to be 22-24% later, assuming current rates.

 

[still_working]

Does your employer's 401k plan have a Roth option? If you're already amenable to now paying income taxes on the $20k that were previously deferred, having tax-free growth in a Roth may be a better alternative to taxable options.

 

[kgtest]

You have an income problem. Not a bad problem to have at all. I would max 401k to reduce your taxable income today. You can roth convert from age 50 to 59.5.

You will need some taxable savings to get you to Roth withdrawal at 55, and then IRA/401k at 59.5.

That's a 9 year withdrawal period to consider.

I have to consider my heirs, that's why Roth IRA is so attractive and why I would want it to be a high balance. I as well as my heirs shouldn't pay more tax than they need to. I don't see tax rates ever going down, so I will max roth every year I can, and the rest goes into 401k.

I basically have the same problem you do. This is how my contributions look for this year:

401k $36,750.00
403b $20,500.00
403b Match 1006.32
HSA $7,300.00
RothIRA $12,000.00
529 $500.00

2022 Total contribution:
78,056.32

If I can do this for 10 more years, I'll have at least 780k saved for retirement, plus the gains, plus what we already have saved...which is...enough. Pension raise at 65, SS raise at 70, and god willing, DW SS raise at 70 as well.

Means our withdrawal rate will decrease at 65, again at 70, and finally when DW is 70 2 years later. It will also decrease upon any inheritance which is looking like multi millions in property, inherited IRA and Inherited Roth.