Currently 30, how to retire at 50?

[xeonome]

@blueberry25 You are leaving out one HUGE detail. Gains.

At my current investment rate with 7% gains annually, I'll have $1.48m in my 401k. Of that money, only $483k would be from my own contributions, while the other $1m would be from interest.

We are currently in the 22% tax bracket with a married effective rate of 15.6% at 150k/year. This is the rate I'm paying taxes into my Roth 401k.

$483k at 15.6% = $75k taxes over the next 20 years

Add in the taxes I've already paid. Let's keep it at the 15.6%, though it's actually less.

$80k contribution (the other 60k is gains) * 15.6% = $12.5k

So, on a total of $1.48m, I've paid a total of $87.5k or an effective tax rate of less than 6%.

 

[blueberry25]

@xeonome No, I am not leaving out that detail because pretax also gains.

The idea is not that $10k put into pretax is better than $10k that is put into Roth, it isn't. The idea is that if you can put $10k into Roth then you can put $12.2k into pretax for exactly the same cost to your income and that $2.2k extra that you can put in due to the pretax benefit also grows at the same annual gains. That $2.2k extra growing 7% annually more than makes up for the owed taxes and you will end up ahead of Roth AFTER you pay your taxes from the withdrawls because you will owe less than $2.2k when you withdraw $12.2k. So after 20 years of growth at 7% when that $12.2k is now $47.2k while the $10k in Roth would be $38.7k. That difference of $8,500 more than covers the taxes you will owe so you end up ahead.

Again, I am sorry, but you are mistaken. I am trying to point this out not to try to win an argument but because when I see people doing things that will cost them literally hundreds of thousands of dollars in losses by retirement I really try to point that out.

If you don't believe me then ask other people in the financial space or seek out more opinions here or on r/personalfinance.

 

[may161965]

@xeonome You are still doing the math wrong though.

A mix of traditional and Roth would almost certainly lower your taxes paid. You are ignoring the fact that with the right mix of traditional and Roth, you can lower your tax bracket now, and be in very low tax brackets in the future

 

[blueberry25]

@xeonome In case my point isnt coming across here is a good post about it

https://www.reddit.com/r/personalfinance/comments/10qwnrx

 

[nzmusicmissions]

@xeonome You are also not counting any down turns in the market. Or years where your gains may be only 1-2%. To reach your goal you need to increase your income probably by double with having kids.

 

[christianchurches]

@xeonome That's not how tax comparisons work, you're essentially saying you'd rather pay 1% taxes on $100 rather than 10% taxes on $100,000, but I'd much rather have $90k than $90. How much tax in dollars doesn't matter, your income post-tax in retirement matters. Traditional means you invest more, because it's tax free up front, your account grows bigger, but then taxes get taken out so it's more comparable to Roth at the end. Since you're paying taxes on the already-grown account, the dollar amount of taxes are larger. But 9 times out of 10, even after paying Traditional taxes, you end up with more money in retirement.

You are paying 15.6% taxes on everything combined, but the tax to consider for Roth 401k is the opportunity cost of not utilizing Traditional 401k. Traditional 401k scrapes money off the top of your income, thus saving you 22% on every dollar you invest. If you were to contribute 22% more to a Traditional account than a Roth account, you'd have the same take-home pay. The account would grow 22% larger in retirement (so $1.8m), then when you take withdrawals it's taxed as normal income, which is taxed at the effective rate. At a 4% withdrawal rate of $72k/year, the effective tax rate will be significantly less than 22%, thus leaving you with a higher income than if you went Roth. Can't say what the effective tax rate would be for sure without knowing future tax rates, other fixed income like SSI, etc, but I've run the numbers and in my case (~$100k/year single filer) it would take over 10% bump in every tax bracket to make Roth beat out Traditional.

https://www.reddit.com/r/personalfinance/comments/10qwnrx

https://www.gocurrycracker.com/roth-sucks/

Removed youtube link, Money with Katie has a good video on Traditional vs Roth

 

[blueberry25]

@xeonome Here I actually have a similar retire early plan where I retire at 55 but have a mix of after tax, pretax and Roth dollars with Roth being the lowest and then I use conversions and swaps to maintain a high income of around 150-200k depending on year while having about a 2% to 10% tax rate

https://www.reddit.com/r/personalfinance/comments/14ez8xf

The trick being that income tax is paid based on income calculated from pretax withdrawls before after tax capital gains is added in so you can live off after tax withdrawls and basically use the tax free or low tax space due to standard deduction and 10% bracket to convert pretax to Roth at like a 2% tax rate while living off after tax for a while then once you go through the after tax money and switch to your reitrement accounts you have converted much of your pretax into Roth basically taking that 22% bracket tax savings and only paying 2% tax on it. If I was all Roth I couldn't do that.

 

[herenotthere]

@blueberry25

If you are going to retire at 50 and all of your money is in a 401k and a Roth IRA....where are you going to pull your retirement income from?

With a five-year lead time, you can set up a Roth conversion ladder to withdraw any amount from a 401k without penalty.

 

[blueberry25]

@herenotthere If your plan is to retire at 50 and you are working your job and presumably at that point making well over 170k how would you from age 45 start pulling money out of your 401k to move to your Roth unless your employer happens to allow in service distributions. Also once ot os in your Roth how would you withdraw it from your Roth? Conversions from a 401k do not count as contributions and this cannot be withdrawn without penalty prior to 59.5.

 

[stephen96]

@xeonome Do you know how expensive raising children is? Daycare, medical bills, braces, etc. And $50/month will NOT put your kids through college. We’ve been saving &200/month in a 529 since my 2 kids were born and now, 18 years later, it’s still not enough. If you want to retire at 50, do t have kids

 

[xeonome]

@stephen96 I have a ramp up plan for savings. I just figured start it before they are born, by the time they are 18 it will have over $60 grand in each account without ever contributing more than $100/month. Also my step mom says the day we have a child is the day she retires to cover daycare.

I do have free health insurance with my company which is top notch, $10 copay and nothing else.

Obviously you still have clothes, toys, random new things they want/need, but I am extremely lucky to have a lot of things minimize my cost of raiding kids.

Insurance and day care alone will save me over a grand/month/child with my situation.

 

[mommy2littles]

@xeonome Once your kids turn like 13 and get phones and then 16 and get licenses and maybe cars, that 50 dollars a month is gonna look more like 400+ to cover phone plan, insurance, etc. and personally I could never be the parent that retires early but makes my kids pay that sorta stuff when they don’t have the means to(high school And college)

 

[coffrey]

@xeonome But you’re retiring at 50, that insurance coming with you?

 

[xeonome]

@coffrey I'd be out of it for 5 years, but it would kick back in when I turned 55 for the remainder of my life as part of my retirement package after working there for 25+ years. I would supplement with government health insurance for those 5 years.

 

[deniseoli]

@xeonome What about your children’s health insurance?

 

[xeonome]

@deniseoli Wife and kids are all included as well, until I die.

 

[randbrem]

@xeonome $60k won’t be enough for college. That’s enough for one year of private college now, 2 years at a public college. In 20 years it’ll be even less.

 

[thyatira]

@xeonome Want to retire by 50? Don't get married and don't have kids. With a divorce rate +/- 50%, where both parties have to restart their lives, meaning new mortgages etc. and the added cost of raising kids, you will not be betting on yourself to retire at 50.

 

[papijay]

@xeonome I’m confused on your numbers and question if you’re targeting the right annual spend for the future.

I think I’m reading you’re targeting $170k annual spend just because that is your current annual income, but $20k of your current income is a rental property that will theoretically continue to produce $20k+ whether you are working or not? So why would your investments need to bridge that $20k..

So, immediately, can you reduce your target by $20k/0.03 = $667k so you’re down to a nest egg of $2.83 million?

That reduction alone takes you from needing to save ~$60k per year assuming compounding at 8% to around ~$43k?

Depending on your rental property and mortgage duration, will your condo be paid off in 20 years further increasing your income (by removing loan/interest payment) and reducing how much you really need from your investments?

 

[karimi]

@xeonome How do you have a 529 for future children? I remember having to submit their ss#'s.........