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PBS Frontline : The Retirement Gamble, sorta Must See (2 Viewers)
- Thread starter Smack Tripper
- Start date
Dentist
***Official FBG Dentist***
yeah, you can make a lot more than that.
just off the top of my head you could make 127K + 17.5K for 401k (if you max that out) + 2500 for HSA contributions (assuming you have high deductible insurance) so that's nearly 150K right there.
dancingbones
Footballguy
Great info in here. Thanks to all & keep it coming.
igbomb
Footballguy
Question about funding kids' college:
I've seen folks advocate this order for investing:
1. Max employer 401k contributions
2. Max Roth IRA
3. Max rest of 401k
4. Max 529
I should be able to pull off the first three year over year, but as of today I wouldn't be able to complete #4. For those following this strategy, what is the plan for paying for kids' college. Do you take out student loans, make the kid pay, or steal from one of the other accounts.
Just curious for strategies. While the above may maximize value, my retirement positioning is strong enough that I could sacrifice some of #3 to fully fund #4 if there are penalties to pull from retirement accounts to fund kids' college.
I've seen folks advocate this order for investing:
1. Max employer 401k contributions
2. Max Roth IRA
3. Max rest of 401k
4. Max 529
I should be able to pull off the first three year over year, but as of today I wouldn't be able to complete #4. For those following this strategy, what is the plan for paying for kids' college. Do you take out student loans, make the kid pay, or steal from one of the other accounts.
Just curious for strategies. While the above may maximize value, my retirement positioning is strong enough that I could sacrifice some of #3 to fully fund #4 if there are penalties to pull from retirement accounts to fund kids' college.
igbomb
Footballguy
And to clarify, I could fund some of #4 by following the cadence above, but I don't think I would hit the cap.
NewlyRetired
Footballguy
This is a topic that is very personal to each investor so rules of thumb don't always apply here.
That being said, the general rule of thumb is to never sacrifice your retirement for college payments (ie stealing from the other accounts to pay). The theory being that you only have a limited time to fund your retirement once a kid is in school, lowering those accounts could dramatically affect your retirement date.
On the opposite side, the theory continues that the child will have a life time to pay off the loans.
Of course if you are one of those people that don't ever intend to retire, this may mean much less to you.
A VERY VERY rough rule of thumb is the 20% rule. That being if you are saving ~20% of your gross income towards retirement, then you are probably safe to start funding a child's college education plan. Depending on your combined gross income that may mean investing outside of retirement umbrella's.
If you have real estate holdings or will be receiving a significant pension, or live well well below your means, this 20% number can obviously be smaller.
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Dentist
***Official FBG Dentist***
never sacrifice your retirement for kids college.
The best thing you can do for your child is ensure that you won't ever need their support financially later in life when they are trying to raise a family of their own.
not to mention there are a huge number of unknowns with college.. chiefly:
1) will they go?
2) will they be scholarship recipients for a big portion of their expenses?
3) will they stay long if they do go?
4) you can get loans for college, none exist for retirement
5) maybe a dying grandparent or rich uncle contributes to their college when they would never contribute to your retirement.
I am eternally grateful that my college was mostly paid for.. it helped jump start my own savings plan significantly...
having said that.. if my parents gave me two options:
1) pay for my college but might need my financial support later in life
or
2) i take out student loans.. .and they retire in style
I take #2 every time.
The best thing you can do for your child is ensure that you won't ever need their support financially later in life when they are trying to raise a family of their own.
not to mention there are a huge number of unknowns with college.. chiefly:
1) will they go?
2) will they be scholarship recipients for a big portion of their expenses?
3) will they stay long if they do go?
4) you can get loans for college, none exist for retirement
5) maybe a dying grandparent or rich uncle contributes to their college when they would never contribute to your retirement.
I am eternally grateful that my college was mostly paid for.. it helped jump start my own savings plan significantly...
having said that.. if my parents gave me two options:
1) pay for my college but might need my financial support later in life
or
2) i take out student loans.. .and they retire in style
I take #2 every time.
The reason for that order is that you can finance a college education but you can not finance your retirement.
For college, there are scholarships, grants and loans available to help out. If you are in a position to max out the retirement accounts and still put some away in a 529, you are doing better than most. The 529 savings, any possible scholarships/grants, extra cash flow and loans can all cover the cost of college.
For college, there are scholarships, grants and loans available to help out. If you are in a position to max out the retirement accounts and still put some away in a 529, you are doing better than most. The 529 savings, any possible scholarships/grants, extra cash flow and loans can all cover the cost of college.
igbomb
Footballguy
Thanks for the great responses! Frankly, between maxing out Roths and 401K, plus my pension which should come in a little over half of my final salary, we are quite solid for retirement. But I really like the points about the fact that we can grab loans for my kids college and then I pay them for them.
Really great advice in this thread.
Really great advice in this thread.
NewlyRetired
Footballguy
I think you misunderstood. No one is recommending you pay the loans off unless you are extremely ahead of your retirement schedule. If you are at the point where the 529/grants/etc can't pay for college, let the student get the loans and the student pays them off during their early work years. This is in general. Obviously if you are so flush with cash you can certainly help with the loans. I would not recommend planning on that until you are 100% sure.
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Doctor Detroit
Please remove your headgear
We can now contribute to a Roth 401k. Should I seek tax diversification via the Roth option or just keep piling it into my traditional 40qk with the Roth IRA as my secondary option? I would not expect to be in a higher tax bracket in retirement FWIW and I am not a high income earner now. From my understanding the traditional is best for me now since in retirement I will theoretically not be in a high income bracket (pension+401k withdrawals+Roth IRA withdrawals).
If the Roth doesn't seem best, should I even consider taking all my available money and just putting it in the traditional 401k and not putting anything in the Roth IRA right now (I don't have the ability to fully fund both at the moment). Thoughts?
If the Roth doesn't seem best, should I even consider taking all my available money and just putting it in the traditional 401k and not putting anything in the Roth IRA right now (I don't have the ability to fully fund both at the moment). Thoughts?
Obviously only generic advice, but I would start contributing to the Roth 401K to diversify some. You don't plan on being in a high bracket in retirement, but we don't know what the brackets are going to look like then- you could potentially be making less money but paying a higher rate.
FYI, employer matches for the Roth 401K go into the traditional, so you'd be technically making contributions to both.
igbomb
Footballguy
Sorry if I wasn't clear. I wouldn't steal from retirement accounts. I would simply take over their loans when and if I was comfortable enough to handle it. I'm okay with working a little longer myself if I can help pay my kids school. And, right now, we are looking good enough financially that I may be able to do that.NewlyRetired said:
wilked
Footballguy
FWIW, I am coming around to the idea that 529s are not the best option...
That said, I would not even consider 529 until all tax-advantaged accounts are full. That includes HSA. Once full it comes down to the following options:
-529 account
-Taxable account
-Prepay mortgage
-Ibonds
or something else.
Each of those will have different impact on your EFC for a particular university, and if your child is >10 years from college it is impossible to predict what the rules will be then.
That said, I would not even consider 529 until all tax-advantaged accounts are full. That includes HSA. Once full it comes down to the following options:
-529 account
-Taxable account
-Prepay mortgage
-Ibonds
or something else.
Each of those will have different impact on your EFC for a particular university, and if your child is >10 years from college it is impossible to predict what the rules will be then.
Keep the loans in their name - just help them out if you wish by giving them money to pay the loan, either monthly or in full if you can afford to do it. This way they build some good credit history at an early age.
wilked
Footballguy
If your tax rate is lower upon retirement, you should pay the taxes then, not now (do the math yourself if you are not convinced)
Having both pre and post tax money give one options upon retirement. The rules are certain to change between now and then (at least for me) and having options is a bit of a hedge
17seconds
root of all aliai
I do 529s but it doesn't seem like much of a deal. Gains exempt from state taxes? Not a big deal.
I think if your kids don't get to college until you are close to 59 1/2 it'd be better to just 401K/IRA all of it - assuming those aren't already maxed.
17seconds
root of all aliai
Might be an interesting webcast...
http://www.media-server.com/m/p/dfqrqwsf/st/Vanguard_Homepage_Banner?&Link=home_banner1&LinkLocation=HomepageOverviewContent
http://www.media-server.com/m/p/dfqrqwsf/st/Vanguard_Homepage_Banner?&Link=home_banner1&LinkLocation=HomepageOverviewContent
James Daulton
Footballguy
Going to hijack a little here...
I'm in this boat now. Have an 18 year old who will start college in the fall. We don't have any "formal" college savings for him. I also have a 14 year old who we've been paying into the Maryland pre-paid college fund for the last 4 years. 1 more year to go and her tuition and fees (up to a certain limit) will be covered. For my son (18yo), after grants and scholarships (to this point) his total annual college tuition, housing, and fees will be $22k/year. I am debating how to fund this annual nut. Originally, I was thinking that he would take loans for his 4 years, and I would put money into some type of mutual fund so that when he gets out, he has a decent sized fund from which to start paying the loan. However, it seems that all of the college loans have to be co-signed, so I don't see any advantage to putting them in his name. I could afford to pay on a monthly installment plan with the college (it'd be tight but we could do it), but I want him to have to fund some of his education. Do any FBGs with college kids have any advice for me? I'm wary of private loans as I've heard the interest rates can be excessive.
I'm in this boat now. Have an 18 year old who will start college in the fall. We don't have any "formal" college savings for him. I also have a 14 year old who we've been paying into the Maryland pre-paid college fund for the last 4 years. 1 more year to go and her tuition and fees (up to a certain limit) will be covered. For my son (18yo), after grants and scholarships (to this point) his total annual college tuition, housing, and fees will be $22k/year. I am debating how to fund this annual nut. Originally, I was thinking that he would take loans for his 4 years, and I would put money into some type of mutual fund so that when he gets out, he has a decent sized fund from which to start paying the loan. However, it seems that all of the college loans have to be co-signed, so I don't see any advantage to putting them in his name. I could afford to pay on a monthly installment plan with the college (it'd be tight but we could do it), but I want him to have to fund some of his education. Do any FBGs with college kids have any advice for me? I'm wary of private loans as I've heard the interest rates can be excessive.
Steve Tasker
Footballguy
You know, I got an email about that via my Vanguard investments, and I thought it'd be interesting, but I'm busy at that time. I wonder if it'll be available for download or stream after the fact.
wilked
Footballguy
You got your FAFSA? What type of loans are these? Stafford? You need to put more detail.
Based on what you provided... $22K a year is a lot more than I would want my son paying. But ok, that is prob water under the bridge at this point. What is your EFC? What part is loans? If you truly have to cosign the loans (note, Stafford loans you don't), I would do so but wouldn't tell my son. Make it clear they are his loans, that he understands what it means to graduate with $80K (or whatever it is) in debt (explain in terms of a ten year payback, monthly payments). Make it very clear how much more it will cost to go 5 years instead of 4, and if it is me, make it clear you are only paying for 4 years. He needs to be part of this decision. Presumably he had a cheaper option for college. I would expect him to work at school (I did as a ChemEng student with a big workload), and would expect him to put both that and his summer earnings toward his living expenses. If there is some left over, use that savings to start paying down the loans. Finally, once graduated, let him pay the loans for a while, maybe a year, show responsibility, and if so, perhaps at that point help him with the loans.
I think a lot of students are going into college with no idea of what all those dollars mean, and it is important that you communicate that to him
Not a big fan of parents covering college to such a large degree, but you should try to give equal support between siblings.
James Daulton
Footballguy
To clarify I don't want him to pay all the loans either. I can pay the entire yearly amount, but I want him to be responsible for some, lets say half right now. Other than me paying each month, what are my other options? The fasfa only gave us the standard $5,500 loan.
wilked
Footballguy
James Daulton
Footballguy
I haven't gotten any other loans or anything else yet. What additional details do you need?
moleculo
Footballguy
I'm a big fan of covering college costs for my kids. My folks did it for me, my grandparents did it for them, it's a long tradition of paying it forward, so to speak. It's a tremendous advantage to enter the workforce without being burdened with all of that debt. I was able to buy a house 2 years after graduation and am now in a position to be done with mortgages by the time I'm 53 (had I not moved to SC, I would have had that house completely paid off by the age of 40). Besides that, I was able to fully fund my 401(k) and Roth IRA between the ages of 23 and 32, which is a pretty good lump of money and will make life easier for me down the road.
Of course, my degree and eventual job was in engineering - something that we all know means (relatively) stable employment. I'm obviously not ok with paying for my daughters to get degrees in womans studies or something like that.
ETA: I know that this isn't what the financial advisors would say. This is important to me though, and I am on track with being able to retire even with funding this.
Of course, my degree and eventual job was in engineering - something that we all know means (relatively) stable employment. I'm obviously not ok with paying for my daughters to get degrees in womans studies or something like that.
ETA: I know that this isn't what the financial advisors would say. This is important to me though, and I am on track with being able to retire even with funding this.
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Your first paragraph isn't necessarily true.
If you want to hedge, then why not contribute to a Roth 401k?
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It depends on the state, but most give you a deduction from state income taxes for contributions, and the gains are exempt from both state and federal taxes for qualified education expenses. It can be a pretty big deal depending on the situation.
Steve Tasker
Footballguy
I tend to think this is more of a personal preference and the maturity of your kids than anything, though. Everyone has different priorities, and I think I learned quite a bit about the value of money knowing that I had loans to pay back when I got out of school. Some of my friends who had their school paid for them have gotten the headstart that you refer to (and that is great), and others ended up slacking off with mommy's and daddy's money and have been largely unable to get a job now 4 years out of school.
wilked
Footballguy
Show me with numbers if it is not true.
Here's me showing you with numbers:
If you have a 30% tax rate today and $10,000 to invest, 20% tax rate at retirement, money grows at 5% for 20 years...
Roth: $18,573
Traditional: $21,226
wilked
Footballguy
Put another way...
I am a big fan of the student covering his/her college costs. My folks paid their EFC, but I took out the difference in loans, paying it off the loans 5 years early. It's a tremendous advantage for them to not have to sacrifice their retirement savings to support my college, and I was proud to not be a burden on them.
That is my story... I think each of our stories have good merit, and are great examples of there being different ways to get to a comfortable place for everyone. In my case my parents never took a vacation (ever) until we all were out of college, and I am glad they didn't delay any longer than that. If they had my loans to pay off that might not have been the case.
My point above was that parents should at least let their child believe they will owe the $$ as it will give incentive for them to finish on time and with good grades. If you make it clear from the start that they have no skin in the game, you may as well budget for that 5th year now.
Steve Tasker
Footballguy
Assuming equal time value of money returns and equal tax rates today and in retirement, the two do come out with identical results.
wilked
Footballguy
So you're saying that no matter what other assumptions you use, as long as the tax rate in retirement is lower than the current tax rate, you're always better off with the traditional?
You still haven't answered why you said not to do the Roth 401k.
wilked
Footballguy
Hump, yes, assuming same investments, you will always make more in Traditional if your tax rate is lower at retirement.
DD suggested his would be lower, so I recommended Traditional.
I am not quite sure myself, so I do a little of both, max Traditional 401K, max Roth. That leaves more in Traditional, but that is ok with me. We are fairly high earners, so my guess is that we will reduce our tax rate upon retirement.
DD suggested his would be lower, so I recommended Traditional.
I am not quite sure myself, so I do a little of both, max Traditional 401K, max Roth. That leaves more in Traditional, but that is ok with me. We are fairly high earners, so my guess is that we will reduce our tax rate upon retirement.
NewlyRetired
Footballguy
I think you are confusing tax deductions and tax deferrel (two different items). All the gains in a traditional ira grow tax deferred no matter how much you make.Also, if you leave your job, most people move their 401k into a roll over ira (which for some means rolling it into a traditional ira). I did this a few times over the years as I switched jobs.
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No, you won't- if you use the assumptions you are using, primarily that you are starting with less money in the Roth than in the traditional, then that would be the case. Using other assumptions, you can end up being better off with a Roth even if your tax rate is somewhat lower at retirement.
You recommended that he diversify and put some in his 401K and some in a Roth IRA, but not the Roth 401K for some reason. That's what I'm questioning- why the Roth IRA but not the Roth 401K?
Doctor Detroit
Please remove your headgear
Thanks for talking this out guys, appreciate the help. I think for now I'll stick with traditional and keep funding my Roth with whatever I can, but I will look at the Roth 401k options if/when my circumstances change.
Random
Footballguy
See, thats the thing you are missing. You start with less money in the Roth, because its after tax money (you get 10K, pay taxes 3K, invest 7K). The traditional starts bigger (the full 10K because it is invested before it is taxed) but you pay taxes when you withdraw (using the same rate as the above would be 3K).All else equal, if your rate at retirement is >30% (used above) the Roth wins because you already paid taxes, if your rate at retirement is <30% the traditional wins because your rate is now lower than when you invested the money.
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Trust me, I'm not missing anything. You don't necessarily start with less in the Roth- you can contribute the same amount and make up the tax difference from other sources like savings, which is how many people (probably most) actually do it in practice. Running the numbers this way, you can come out ahead with the Roth even if your tax rate is lower in retirement.
Steve Tasker
Footballguy
That's not an apples-to-apples comparison though.
NewlyRetired
Footballguy
I don't think he is getting the basic principle of before tax vs after tax dollars for investing.Steve Tasker said:
I agree with most of this...Transparency is key. Make sure he understands how much you are forking over (some kids think it's their right to have their parents pay for college)...and that he understands what his bills will be like when he graduates...so make sure he is in a field that can earn that
You both make great points.
Another slight hijack...the biggest lesson that I think anyone starting college should have is that they need to understand what degrees pay off when they graduate. I'm not talking about shooting holes in anyone's dreams...but if someone told me that I could make close to 6 figures right out of college with an engineering degree in the high tech; I would be all over that.
