401(k) allocations

[Benben]

I personally Love the REIT! I have been watching it closely for the past 4 years and it is a gem. It has out performed every other choice and thats including during the '08 meltdown! Even with the .10% expense ratio it shines.

My Background:
I am a little older than you at 42, married for 17 years with 2 kids (15 and 11). I have been with ups 7 years now, driving the past 6. I have been in the union from the get go in a right to work state but only been in the 401K for the past 5 years, but have been enrolled in the DESPP since the first month I made senority driving and buy at least 1 share per check. I have been reading a few investment books, not the heavey hitters yet, just the primers (Kelly, London, Cooper and a few by Frey et al.)

Planning for retirement has most my focus outside work for the past 9+ months. I am trying to get this aspect of my life in line and on auto-pilot so I can set it and forget it, Comming back to it only twice a year to check allocations.

My question to you, why the Roth? My current allocation is 11% into the standard 401K and 2% into the Roth. My rational is this; the standard 401 being pretax gets the most dollars into play the fastest. Being 20+ years away from retirement, I feel what I lose in taxes paid later (read when I plan to be drawing less than the 70K-80K'ish mark per year, will have to see what the tax brackets are at that time, in retirement more than makes up for the loss in Compounding by putting in less monies that have already been taxed at the 100K income bracket now. (with the current brackets, this is 15% vs. 25% BUT this is with the Bush tax breaks in place and who the hell knows what will be in play in 2035.) My wife and I take a big vacation every 2 years (just got back from Mo. Bay, Jamica last week) She really, really wants to go to Italy (being Catholic and all) when we retire so this year I started the Roth 401K and intend to use the Roth to finance this trip.

I have posted questions/comments in the retirement forum looking for discusions but that forum is on life support as nobody seems to ever post.

I

Current plan: 3K monthly from the pension, 2.5K monthly from SSI and 10-20K from the 401. This all assumes I hit all of my benchmarks: 1. House paid off and all renovations/fixes compleated 2. Kid's college paid 3. And wife and I both have brand new cars without loan payments (at the start of retirement we can use them as trade-ins for future cars)

 

[Jackburton]

By placing 17k max in Roth 401k vs Traditional you actually put more ( read your tax bracket) into your retirement. All monies grown in a Roth are also tax free making you more money because you will not pay taxes on the growth. One last major factor is just as you pointed, the Bush Tax cuts allows you to pay less in taxes now. So if you're paying less taxes on the income you bring in then you could put more after tax money into a Roth and the tax difference would be less than if the cuts weren't extended.

One more thing is when taxes are raised (not if) all that money you pull out of a Roth won't have to be reported with your pension putting you into a higher tax bracket. Perhaps in 20 years anyone making 70k or more will be considered rich, with a Roth you eliminate any worries of how your compounding pension/401k will effect your bracket.

 

[Brownslave688]

Current plan: 3K monthly from the pension, 2.5K monthly from SSI and 10-20K from the 401. This all assumes I hit all of my benchmarks: 1. House paid off and all renovations/fixes compleated 2. Kid's college paid 3. And wife and I both have brand new cars without loan payments (at the start of retirement we can use them as trade-ins for future cars)

Step 2 needs to take a back seat to financing your retirement. Think about it your kids have many many many ways to pay for their school. You have one way to pay for your retirement. Save yourself. Unless your banking on powerball coming through. Personally my plan is to make my kids pay for their own school then after they graduate and get a job in the field of their degree if I have the money I'll pay off their student loans.

 

[Brownslave688]

I think one thing you don't understand is your putting in the same money wether Roth traditional. Say you make $1500 if your taking out 10% it's based on your total pay so $150 will be taken out no matter what. Only difference is with a Roth that money will come out after your taxed on the $1500. As with a traditional your $150 will come out then u will get taxed on $1350.

 

[moreluck]

Step 2 needs to take a back seat to financing your retirement. Think about it your kids have many many many ways to pay for their school. You have one way to pay for your retirement. Save yourself. Unless your banking on powerball coming through. Personally my plan is to make my kids pay for their own school then after they graduate and get a job in the field of their degree if I have the money I'll pay off their student loans.

I always refer to it as "earning potential". Your kid's earning potential is just starting and the retiree's is basically over (except for investing )
Kids can work their way through college and they will appreciate it more. If they do go to school, then when they get their first job in their area, maybe they can negotiate for a school loan pay down or pay off.....say if they are a lawyer or a doctor.

 

[Jackburton]

There are no scholarships for retirement.

 

[UpstateNYUPSer(Ret)]

Step 2 needs to take a back seat to financing your retirement. Think about it your kids have many many many ways to pay for their school. You have one way to pay for your retirement. Save yourself. Unless your banking on powerball coming through. Personally my plan is to make my kids pay for their own school then after they graduate and get a job in the field of their degree if I have the money I'll pay off their student loans.

My ex and I did not want our kids to be overburdened with student loans upon graduation so the plan was to split their first year between us and split the remaining years equally in thirds. My daughter took care of her business and then went on to grad school on her own dime. My son partied way too hard in his first year so the ex and I shut off the spigot and he has had to pay his own way. Both will have graduated with at least a 3.5 GPA and about $20K in students loans.

If you are adamant about them paying their own way you may want to look in to emancipating them. They will receive a lot more financial aid by doing so. The flip side is you will no longer be able to list them as dependents on your tax return.

 

[Brownslave688]

Yes it's a long ways off for me so it could change. Honestly I think most college is a complete and total waste of time most jobs can be taught with on the job training for far cheaper and much less time than traditional college. Your first 2 years are a complete and total waste and at the rate tuition is skyrocketing it soon won't be worth it for many. Need fact go look at college costs they didn't go thru the roof until the government started giving aid. I'm just adamant that my kid won't get a "religious studies" or some crap degree on my dime.

 

[UpstateNYUPSer(Ret)]

Two years at a community college followed up by two more at a 4 year state school.

My son's bill for this semester after a $2,775 Pell grant is $641.50. He is an independent student who lives off campus. Books will add $400-500 to that total. If Obamacare had not been enacted he would have had almost $800 added for health insurance.

 

[Benben]

By placing 17k max in Roth 401k vs Traditional you actually put more ( read your tax bracket) into your retirement. All monies grown in a Roth are also tax free making you more money because you will not pay taxes on the growth. One last major factor is just as you pointed, the Bush Tax cuts allows you to pay less in taxes now. So if you're paying less taxes on the income you bring in then you could put more after tax money into a Roth and the tax difference would be less than if the cuts weren't extended. QUOTE]

Yes but to get 17K into my Roth I have $21,760 taken out of my check each year when you take into consideration taxes for the year. By putting the same 17K into the standard 401K I now have adjusted income of 83K. With a few charitable donations, deductions and child credits I am in the 15% tax bracket instead of the 25%. This all assuming 100K this year with all the OT we have been getting. The difference in the two tax brackets is 10K a year. Over 20+ years thats alot of coin. Or am I looking at this wrong? I can not deduct the 17K even if I paid taxes on the 17K prior to putting it into the Roth correct?

 

[UpstateNYUPSer(Ret)]

Correct--you cannot deduct after tax deductions to your Roth 401K.

You are on pace to make $100K??

 

[Jackburton]

By placing 17k max in Roth 401k vs Traditional you actually put more ( read your tax bracket) into your retirement. All monies grown in a Roth are also tax free making you more money because you will not pay taxes on the growth. One last major factor is just as you pointed, the Bush Tax cuts allows you to pay less in taxes now. So if you're paying less taxes on the income you bring in then you could put more after tax money into a Roth and the tax difference would be less than if the cuts weren't extended.

Yes but to get 17K into my Roth I have $21,760 taken out of my check each year when you take into consideration taxes for the year. By putting the same 17K into the standard 401K I now have adjusted income of 83K. With a few charitable donations, deductions and child credits I am in the 15% tax bracket instead of the 25%. This all assuming 100K this year with all the OT we have been getting. The difference in the two tax brackets is 10K a year. Over 20+ years thats alot of coin. Or am I looking at this wrong? I can not deduct the 17K even if I paid taxes on the 17K prior to putting it into the Roth correct?

No you can not deduct 17k if you are placing it in Roth. The whole benifit of a Roth is the tax free growth on earnings and tax free withdrawal since you have so many deductions currently at your disposal. There are even income limits on people who make to much to be able to participate in a Roth IRA who would kill to have a Roth 401k as there are no income limits.

I have a close driver friend that is single that gets owned in taxes as he's single. Due to his lack of deductions (all he has is intrest on his home) it makes more sense for him to do traditional pre tax. Me with two kids and a wife I can afford to take the hit now and plan to live it up in retirement with a large income at retirement. If you can take the hit now I can assure you you'll be much happier if you watch your growth over the next 20years grow tax free once you hit your retirement date. I'm on pace to hit 90-95 which will cause my 20% to end around the end of November, at which time I will take the would be contributions to my TDameritrade account to play with.

Either way you choose you're still light years ahead of 90% of drivers.

 

[Benben]

Correct--you cannot deduct after tax deductions to your Roth 401K.

You are on pace to make $100K??

Yes, there are a number of us in the building who will be right at about the 100K mark. They sent out a message Friday asking if any wanted to drive Sat air. They had to include, "must have 4 hours available" to the message as so many are well over 50 hours. Looking at the bid cover list put up Friday I have a feeling a few of us will have to be pulled in early due to the 60 hour rule. I know I will be tracking my hours just to be safe.

Soooo, back to the original topic. Where is the sweet spot in the 401K/Roth401K ratio? Or rather at what age/year? The 10K difference is pretty hard to overcome in my mind, esp with 20 years left.

 

[Jackburton]

I think you are having a pay now or pay later issue. Look around at the current state of spending with government and ask yourself where are they going to get the money later on to pay for all of this. Also ask yourself with the current generation of entitlement of other people wealth, who do you think the politicians are going to cater to with your 100k wages. Taxes will go up, it's just a matter of how much. I'll pay into it now so they can't touch my wealth when they tax man comes knocking with his bag held open.

 

[Catatonic]

I think you are having a pay now or pay later issue. Look around at the current state of spending with government and ask yourself where are they going to get the money later on to pay for all of this. Also ask yourself with the current generation of entitlement of other people wealth, who do you think the politicians are going to cater to with your 100k wages. Taxes will go up, it's just a matter of how much. I'll pay into it now so they can't touch my wealth when they tax man comes knocking with his bag held open.

So you think they will not tax Roth IRAs if they need to?
Just because they don't now does not mean they will not tax them 25 years from now.

 

[Jackburton]

Yes, there are a number of us in the building who will be right at about the 100K mark. They sent out a message Friday asking if any wanted to drive Sat air. They had to include, "must have 4 hours available" to the message as so many are well over 50 hours. Looking at the bid cover list put up Friday I have a feeling a few of us will have to be pulled in early due to the 60 hour rule. I know I will be tracking my hours just to be safe.

Soooo, back to the original topic. Where is the sweet spot in the 401K/Roth401K ratio? Or rather at what age/year? The 10K difference is pretty hard to overcome in my mind, esp with 20 years left.

Prudential website actually has a graph calculator and questionnaire you can fill out to see it for yourself. The only guessing you have is the tax bracket you'll be in when your retire. It compares the Roth vs traditional with side by side bar graphs.

 

[Jackburton]

So you think they will not tax Roth IRAs if they need to?
Just because they don't now does not mean they will not tax them 25 years from now.

Not to say congress won't go back on their word, they'd do a one time tax to current traditional IRA's/401ks before they double dipped Roths. There is far more money in traditional retirements than in Roths that the government has been salivating over for years with back room talk of doing what I just described.

 

[Brownslave688]

I still don't understand even making 100k how your going to end up in the 25% tax bracket unless your a single non parent with no mortgage to write off. Unless you feel the government will one day tax Roth accounts (I do not) then even if you put less money in the Roth account it ends up being more in the long run.

 

[clarnzz]

I appreciate all the feedback, I read through everyones comments and opinions. I love the REIT, I have coached a kid for the past few years who dad handles some big Merryl Lynch accounts as a money guy. I just feel I'm small potatoes in his world, but I'll see what he thinks and I'll share.

 

[brett636]

I have my money all over the place. Allocations are as follows:

Bond Market Index fund 5%
Balanced Fund 5%
S&P 500 Equity Index Fund 15%
S&P 400 midcap Index Fund 15%
Russell 2000 Index Fund 15%
International Index Fund 15%
Bright Horizon 2045 fund 20%
U.S. REIT Index Fund 10%


Take it for what its worth, but when I run prudential's personal performance information from 1/1/2010(earliest it will allow you too go) to present day I get an overall growth performance rate of 21.12%. I am not disappointed.

All my contributions has been to my ROTH 401k since July of last year.