IC FBGCav
Footballguy
Yeah, that is scary idea just don't think it can be a real possibility but who knows, worse things have happened.
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PBS Frontline : The Retirement Gamble, sorta Must See (1 Viewer)
- Thread starter Smack Tripper
- Start date
netnalp
Footballguy
I think he's talking about if you have a card where you get cash back on purchases and you pay the balance off each month so you don't pay any interest. And you get the cashback reward.Never thought about that angle with the credit card. So you buy stuff and pay interest on it, then when you get your IRS refund, you pay off the credit card. That's even worse. You not only get zero interest, you pay interest.
NutterButter
Footballguy
Same here. Hopefully raisinig the retirement age, removing the SS tax wage limit and means testing for the uber rich will be enough to feed the masses so that they don't have to mess with us.
Bigboy10182000
Footballguy
What's an Index Fund and how do I get in on them? I'm not retirement savy and have a 401k that I have been adding to for the past 17 years through MassMutual...not sure if any of that helps...
FUBAR
Footballguy
Depends on how you look at it I guess. First, I was talking more about the last decade plus relative to earlier years than 2016 specifically. Second, "Bureau of Labor Statistics data for non-supervisory employees (comprising the majority of employees) show average weekly earnings increased by 6.1 percent and average hourly earnings increased by 7.1 percent from April 2002 to April 2015."
There are a lot of conflicting reports for sure.
But most of the "problem" is behavioral, not pure income.
Don't Noonan
Footballguy
well played
RUSF18
Footballguy
Index funds are simply mutual funds that attempt to mirror a certain index, like the S&P. The fund will consist of investments where if the S&P index goes up 2%, the index fund will go up approximately 2%. They tend to have very low expense ratios so it can give you access to broad markets or specific industries at a reasonable price.
NutterButter
Footballguy
netnalp
Footballguy
Could also fund it by closing corporate tax dodge loopholes, corporate welfare and ending subsidies to industries that no longer need them to survive.
Then there is just waste that needs to be fixed. This morning, I see 5 city workers with two trucks in my neighborhood there to fix a 3 foot wide, 3 inch deep pothole. They'd been there two hours already as I left for work.
FUBAR
Footballguy
That's probably the case. But again, I meant to include the longer period of time than just a couple years.
James Daulton
Footballguy
The longer time period you look at the worse the data is going to look.
The average person is strapped, somewhat do to their own decisions but I'd bet largely due to the overall decline in wages coupled with cost increases.
NutterButter
Footballguy
Sure, lots of ways to fund things. Just trying to keep the changes more SS related. There's a general consensus that's the way we're going to go. SS just needs to get to a more dire state before there's action.
Dentist
***Official FBG Dentist***
I agree with this. People do have more money than ever.. and the more they have, the more corporate America works to separate them from it. Think of all the things people are buying now that they didn't used to. cable tv, high speed internet, phones with massive data plans, organic foods, craft beer, premium alcohol, restaurants, vacations, vanity products, huge homes where kids don't have to share rooms anymore, the list goes on and on.
If people lived like our grandparents lived... how many of us grew up, there would be a lot more money to save.
But... saving is hard.. it sucks... it feels better to spend for most people... and keeping up with the Jones is a terrible disease... and when you save instead of spend people think that you're not successful.
It's a choice... you can save for retirement and live well... or you can blow it all and end up like one of the MANY MANY senior citizens I see who are living in squalor.
I don't care what choice people make.. just as long as I'm not blasted with media stories about how the "system" failed people, or I'm not subjected to legislation that affects one dime of what I worked so hard to save.
Don't Noonan
Footballguy
Or perhaps we start some death panels for folks over age 85 to try and avoid paying out so much social security. Tough decisions lay ahead.
NutterButter
Footballguy
i think we're talking medicare now. that could be in trouble.
if i'm not collecting SS until 72 which i predict will be roughly the new delayed retirement age so I better get it for more than 13 years.
Dentist
***Official FBG Dentist***
netnalp
Footballguy
Basically, when people talk about the stock exchange, it isn't just one entity. There are several stock exchanges. An "index" is one of those stock exchanges or a large chunk of it. So by investing in an Index Fund it's like investing into an entire stock market or large chunk. So your risk is very low and revenue is pretty reliable because an entire market usually goes up.
Index Funds because they are representative of a stock market don't have someone actively managing it ie.making trades, buying, selling stocks. So the fees are very low around .8 or less, .5 or less is what you should look for.
A Mutual fund is actively managed by someone. So you pay more fees because you have someone making decisions trying to make the most money (though making you the most money isn't necessarily the same thing). Fees here are in usually around 3 to 1%, sometimes more some less.
Keep in mind though the annual fee of a mutual fund isn't on the amount earned annually, it's on the entire amount in the mutual fund. The mutual fund manager gets paid even if you lose money.
For the past 5 or so decades, the Index Funds have generated more revenue than mutual funds. A big part is because of the higher fees that mutual funds have.
Example of mutual funds from the Retirement Gamble in the OP:
"Bogle gave me an example. Assume you’re invested in a fund that is earning a gross annual return of 7 percent. They charge you a 2 percent annual fee. Over 50 years, the difference between your net of 5 percent — the red line — and what you would have made without fees — the green line — is staggering.
Bogle says you’ve lost almost two thirds of what you would have had."
In that example they graph shows the person in mutual funds would receive 37% of the return generated and their mutual fund manager would earn 63% of the return. You put in 100% of the money and you're the only one that loses money if things go bad. But you only get 1/3 of what your money makes.
The Vanguard Group is the investment company mentioned as having low fees that is owned by Bogle.
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NutterButter
Footballguy
FUBAR
Footballguy
I need to look at the tables closer when we approach the decision point but it's widely said that taking it early is a mistake. You're smart about this stuff so what am I missing?
inca911
Footballguy
ACTUAL CONTENT TO FOLLOW:
That is not clear/correct advice. Regardless of any tax bracket differential, you should 100% be funding a Roth IRA after making sure you get all the "free" company match funds that you can in a 401(k) or equivalent. First, Roth IRA earnings are tax free, which is the first major upside to a Roth IRA. If your Roth IRA grows $500k, you pay ZERO on that money. Second, you can get the Roth IRA principle out for any reason at any time without penalty. You can't put it back in once you pull out the principle, but it's the perfect emergency fund if you ever need it. Even the Roth IRA earnings can still be accessed in many instances without penalty (e.g., $10k for first time home purchase for Roth owner or their direct family). Finally, and many people miss this, Roth IRA distributions in retirement are not counted as income for tax purposes, so you end up avoiding significant taxation on SS/401k "income" (i.e., as the Roth IRA distribution doesn't increase your income to the level where you are taxed on your SS income). The current threshold is roughly a combined income (i.e., adjusted gross income, taxable interest, and 50% of SS benefit) above $25k, after you factor in standard deduction + exemptions. With the Roth IRA supplementing additional income above the $32k of actual income (reminder that only 50% of SS benefit is counted), the tax owed can be as little as $1k on the initial $32k of "income" (i.e., 2-3% tax rate). Without the Roth, 85% of the previously untaxed SS benefits become taxable above that current threshold. Yes, 85% of previously untaxed SS "income" becomes taxable. Assuming a 25% tax rate on that $185 ($100 additional income + $85 of SS benefit taxation), you are now going to have to effectively pay $46.25 in tax (at least until you have all 85% of your SS benefits taxed). That $32k if initial can be viewed as follows:
- $15k SS benefit (only 50%, or $7,500, counts as combined income) <--typical monthly benefit is now ~$1,200
- $17.5k from 401(k)
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netnalp
Footballguy
Thanks
Do you recommend saving up the yearly limit ahead of time and on January 1st putting it all in? or does it not make a difference compared to funding it all year?
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IC FBGCav
Footballguy
So if I have most my retirement in a tradition company 401k - I am 45. Would you roll it over and take the tax hit?
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Niles Standish
Footballguy
If you are in a high tax bracket now then a traditional 401K probably makes more sense. If you are in a low tax bracket now Roth makes more sense.
I'm not sure a roll over makes any real sense from a tax perspective because the roll over itself will create quite a bit of income. But I might be missing something.
Niles Standish
Footballguy
Just an example but pretend you're in a 25% tax bracket today and put $3,750K in a Roth IRA which earns 10% a year for 30 years (that number is 5K less the 25% tax you'd pay).
Now pretend you put $5,000 in a traditional IRA which earns 10% a year for 30 years and pull it out (and when you pull it out you are in the 25% tax bracket).
You end up with the exact same amount of money. Now obviously you aren't pulling it all out at once, but every dollar you pull out at 25% tax is going to be the same because the Roth starts with less money so in effect the gain is taxed just like in a Traditional IRA. One of the main reasons people recommend Roth is because there is uncertainty about future tax rates and since we are at historically low tax rates currently there are good odds that tax rates will be higher in 20 or 30 years. But sometimes Traditional is better than Roth. If you're in the top tax bracket today there's a good chance Traditional will treat you better than Roth. It won't definitely, but there is a good chance IMO.
Now pretend you put $5,000 in a traditional IRA which earns 10% a year for 30 years and pull it out (and when you pull it out you are in the 25% tax bracket).
You end up with the exact same amount of money. Now obviously you aren't pulling it all out at once, but every dollar you pull out at 25% tax is going to be the same because the Roth starts with less money so in effect the gain is taxed just like in a Traditional IRA. One of the main reasons people recommend Roth is because there is uncertainty about future tax rates and since we are at historically low tax rates currently there are good odds that tax rates will be higher in 20 or 30 years. But sometimes Traditional is better than Roth. If you're in the top tax bracket today there's a good chance Traditional will treat you better than Roth. It won't definitely, but there is a good chance IMO.
inca911
Footballguy
I'm not familiar enough with transitioning between retirement options once in them. You'd need to talk with an expert on that. I'd definitely start a Roth IRA tomorrow though.
wilked
Footballguy
You want to roll over a traditional to Roth when you are in a low tax bracket. A common time to do it is just after retiring. Another common time would be if you decided to take two years off work to go to Grad school. Or you are taking a year sabbatical. And on and on.
A bad time to roll over is when you are at or near max earning potential (say between 30 and 50 yrs old). Typically those are the years you will be in your highest tax bracket.
A bad time to roll over is when you are at or near max earning potential (say between 30 and 50 yrs old). Typically those are the years you will be in your highest tax bracket.
IC FBGCav
Footballguy
Thanks, I got a Roth 401K it just is no where near funded as my traditional 401K that I have through work. Guess I will just fund only to match and through rest in Roth.
IC FBGCav
Footballguy
inca911
Footballguy
One needs to factor in all the other Roth IRA benefits before making such equivalency statements. Roth IRA has so many more benefits, as described above. Once those are factored into the equation, IMHO the only thing the Roth IRA doesn't beat is free company match money in a traditional 401(k) or equivalent, or the never-taxed money that is part of a Health Savings Account's investment portfolio (i.e., and is subsequently used for health-related expenses). Note that Roth IRA does not equal Roth 401(k). If you don't have a Roth IRA currently, I can't think of a single reason to not try hard to fund one.
A lot of it depends on how long your family typically lives (good genes) and/or a distrust of the government.
I'm decades away but I would take early if I was at that point now.
IC FBGCav
Footballguy
I always heard use 401k funds first and delay SSI because you get more the longer you wait and it goes in perpetuity.
Niles Standish
Footballguy
Other than being easier to get to your money when you're younger (to me almost a disadvantage) and not having to take the money out at 70 (not a big deal IMO) are there any benefits to a Roth over a Traditional? The tax is a wash IMO (depends on individual situations what is better). I always kind of thought the advice to get in a Roth before anything other than matching 401K was lazy advice. But I very well could be missing something. I'm not an expert.
IC FBGCav
Footballguy
I think the point is the tax you pay now on is far less than what you would pay in taxes once your investment has grown over 20+ years.
George Jefferson Airplane
Footballguy
I don't think it has anything to do with how much you trust the government. Generally the break even point for social security is age 75 or 76. So if you are 62 and in failing health, or or skeptical you'll make it to 75 then start taking SSI. If you are in good health and can delay to 66 or even 70, you'll start making out when you get to 76. Really that easy.
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NutterButter
Footballguy
If you die early, then your wife just gets a nicer retirement.
netnalp
Footballguy
My understanding with the IRA's was the taxes is the main thing. Roth IRA you pay taxes when putting money in. Traditional, taxed when taking money out. Which you chose was based on where you expect your future tax bracket to be compared to your current one.
Niles Standish
Footballguy
Taxes will be identical. The reason being that you have less money to invest in a Roth than a traditional.
But run the numbers and you will see that with the same tax percentage the numbers will always equal. Assuming you are earning the same percent.
For simplicity pretend you are at 50% tax bracket today and in the future and you invest $1000 which quadruples.
In Roth you pay 50% today so your $1000 is $500 that you can invest. It quadruples to $2,000 you get that with no additional taxes.
In Traditional you pay nothing today so your $1000 quadruples and turns into $4,000. You take it out and pay 50% in taxes. So it becomes $2,000 with no additional taxes.
Same number at the end.
NutterButter
Footballguy
Your missing the point where your tax rate in retirement will most likely be a lot less. I know mine will be.
wilked
Footballguy
See I look at it differently. I don't worry about dying early (I'll be dead - won't bother me!). I worry about living a long time. A guy I work with was telling me about his great grandmother, 109 years old. Still kickin, living by herself in fact. You think she might wish she had waited til 70 to start SS instead of 62? Her monthly payment difference might be $2000/month instead of $1200/month, maybe the difference between having someone come by once a day to cook her a meal and help around the house.
Niles Standish
Footballguy
If your tax rate is lower in retirement then traditional makes more sense than Roth. I'm not missing that point at all. I'm trying to clear up the misconception that Roth gets you better tax situations than Traditional. It does when you are in a higher tax rate in the future than you are today. That certainly happens. But it doesn't happen every time.
If current tax rate = future tax rate. You pay identical taxes in Roth and Traditional.
If current tax rate > future tax rate you pay more taxes in Roth than Traditional.
If current tax rate < future tax rate you pay more taxes in Traditional than Roth.
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NutterButter
Footballguy
Excellent point. I was always planning on maxing out SS, but this is just another great reason. Living too long is my big retirement concern.
RUSF18
Footballguy
kutta
Footballguy
That's a good point. I always looked at it like wanting to extract as much as possible out because of what I put in, so take out early in case you die young. But you're right. Who cares? You'll be dead.
Hmmm.
Sand
Footballguy
You're forgetting that the market does go down, sometimes by a lot. By having the govt. hold this money you're giving up about 6 months of benefit (not a year). You shouldn't count on market gains here as the benchmark for this - better to use something guaranteed - bond rates, savings rates. A number of years ago when you could get 5%+ on savings or CDs this was a mortal sin as this added up very quickly. Now that we're essentially under 1% it's a pretty minor sin. So really right now on $2000 you're giving up about $10 guaranteed money.
George Jefferson Airplane
Footballguy
That's fine but IMO you need a lot less money at 75 than you do at 62 and I'm not passing up a single check after paying in my entire life. It's all relative, the grandma in your example could die the day after she starts collecting and she'll never see a dime. To each their own though, I'm a bird in the hand kind of dude.
I think the only reason I'd think differently is survivor benefits.
matuski
Footballguy
inca911
Footballguy
It's so much more than that. Roth IRA distributions in retirement do not count as income, therefore it has more tax avoidance benefits as described in detail above. Traditional IRA distributions will count as income and result in significant additional tax on your SS income beyond the traditional IRA taxation that will occur. With a Roth IRA you also still have 100% access to the principle, whereas a traditional IRA has significant early withdrawal penalties. Roth IRA >> Traditional IRA. Why do you think they technically "phase out" the Roth IRA at certain income levels, and continue to discuss closing the backdoor Roth IRA loophole that lets higher earners still use it? They aren't trying to do the same for Traditional IRA, and there is a reason. The Roth IRA is simply too good a vehicle for those who truly understand the benefits! I'm in a higher bracket now than I will be in retirement; however, the tax avoidance from the Roth IRA distributions makes contributing to a Roth IRA still very worthwhile vs. a traditional IRA.
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Jayrod
Footballguy
So you are saying higher taxes when older, hence the Roth is better. Basically exactly what Niles is saying. The math is the math, the only question is tax rates. If additional income triggers other taxes that is essentially a higher tax rate. But not everyone will have their SS be an issue either. Some aren't eligible for SS and some will have too much retirement income that is taxable to avoid the SS taxation no matter how much they put in a Roth. Some people are raking it in now and would be better off with tax deferral plans since they plan to live off of lower income after house paid off, no kids, etc.
Personally, I believe in a mix of investments. Some tax deferred and some Roth. That way you can plan your tax bracket with your withdrawals while taking the full advantage of all options. To say one is definitively better than another is not accurate.
All that said, I usually recommend maxing out the Roth to anyone who will listen as it is a great tool in retirement.
But I also believe firmly in including whole life in your portfolio, so what do I know?
Tom Hagen
Footballguy
If the goal is to maximize the amount you collect, waiting is probably the right answer but I think there are quality of life issues on both sides of the argument. If the extra monthly income at 62 allows you to travel and do all the things you want to do while healthy enough to do them, I think taking SS early may be the right decision. If you have the wherewithal to live the retirement you want while delaying benefits until 70 then that is probably the right answer.
I feel like my 60's will be the prime time to travel and do things so I'm not sure I would give that up so I can have more income in my 80's and 90's.
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