Over-Funding Retirement? Mid-30’s, $665k in 401k & IRA. Looking for advice

[pluemusica]

Looking for some input on our financial situation.

Wife and I are in our early-to-mid 30’s, HHI is $310k before bonuses, we owe $57k left on our mortgage at 3.5% (our only debt), have $610k in our traditional 401k’s, and another $55k in our Roth IRA’s. We have $210k in a mixture of CD’s and money market accounts earning 5%+. We currently max out our 401k’s and backdoor Roth IRA’s.

The main area of question I have is, should we cut our 401k contributions down to the minimum company match (doing so would still result in us putting away $35k a year factoring in the company contributions), and instead start dumping money into a taxable brokerage account (while still fully funding our Roth IRA’s)? As it stands, if we take our $665k as a starting balance, contribute $49k per year ($35k 401k & $14k Roth IRA), assuming 7% a year over the next 27 years (we’ll be 60), we’d be at $7.8MM. Even at 4% a year, we’d still be at $4.2MM, plus whatever is in the brokerage account at that point.

My concern is that I don’t want to over-fund our retirement, compared to putting it in an account where we’d have access to funds for things before retirement, or possibly would allow us to retire early and live off the money in the taxable account until we’d be able to access the money in the traditional retirement accounts.

I think I know the answer of what we should do, but I’d appreciate the input and thoughts of others who may be more well versed when it comes to things like this. Thank you.

 

[virgelhabekott]

@pluemusica I would suggest to watch the money guys 3 bucket method on YouTube. They address similar situations.

You may want to do some taxable investments since you could retire at a young age and before you can take withdrawals from your retirement without penalty

 

[pluemusica]

@virgelhabekott Thanks for this, I’ll give it a watch this weekend. Appreciate it.

 

[indianna]

@pluemusica Go a step further and look at this on accessing funds in retirement accounts early and penalty free.

 

[doesntmatter]

@virgelhabekott Came here to say this! Suggest just hiring the money guy team. You’re at the point where you’ve hit critical mass and now need to focus on “landing the plane”.

 

[wdbkoala486371]

@pluemusica This requires more of a professional touch, whatever you’re doing…you’re doing better than 99.9% of people. If your main concern is not over saving for retirement, which is a really great concern to have…you’ll probably want to hire someone to sit down with you

 

[pluemusica]

@wdbkoala486371 Yeah, I likely will sit down with a fee-only advisor, but I want to have an idea/plan going into the meeting to compare their plan against rather than going in blind.

 

[rohitgahlyan]

@pluemusica My wife and I were in a similar situation and we sat down with an advisor and essentially were told to live life a little. So we dialed back our investments some and established a goal we wanted (boat and trip). And saved for that. At the end of the day, he ran numbers for us and we were deciding between retiring with 8 million versus 10 million. Essentially enjoy life a little, be aware of the creep and budget for it

 

[marlond]

@pluemusica You can not beat the upfront tax deferral on contributions nor can you beat the compound growth on those tax deferred contributions over time.

Placing monies in a taxable account means you are giving up on the government loan of not paying taxes and you would need to contribute 1 + x% marginal tax bracket after tax dollars to equal per pre-tax dollars saved in 401k plan.

The assumption of a straight line compound earning 7% annualized return fails to account for sequence rate of returns. Markets don’t go up in a straight line, they zig and zag. If your account is worth $1,000 and in year 1 it falls 10% it’s now worth $900. Just to get back to $1,000 the account needs to earn an annual return of 11.1% in year 2 without contributions. To get the 7% CAGR, the account would need to rise by a figure higher than 18.1% in year 2. My point is it’s not likely your account will grow to that dollar figure of $8 million.

 

[brocs0208]

@marlond Yes, but the average over the long term accounts for these losses.

 

[marlond]

@brocs0208 Yes, but it’s when the actual dollars get in the account to actually benefit from the periodic spurts in market growth that generates the most capital. $10k at 7% is going to be worth much less than $10k starting balance and annual contributions of $35k for the next 25 years. It’s simple math, not complicated.

 

[pluemusica]

@marlond I never assumed straight-line CAGR of 7%.

The averaged annualized return of the entire market has been 9.90% over the past 30 years. So accounting for an average of 3% inflation on the 10% gains leaves you with an average of 7% annual growth, inflation adjusted.

How else can you attempt to forecast what your account balance will be decades in the future?

 

[marlond]

@pluemusica The more you add to the account the more you will have at the end. You can’t beat the benefits of tax deferrals.

 

[sayen]

@pluemusica What do you want the money for and why do you have so much cash? There are ways to reach retirement funds before 59 1/2 if you early retire.

If all you would do with it is put more money into CDs or money market accounts, absolutely not. If you want to get into real estate investing, sure. If it’s just to have it more accessible for early retirement, no.

 

[pluemusica]

@sayen Good question.

The house we’re in now will likely need a roof, siding, and windows in ~5 years. So I’ve been saving to cover those costs in cash, and just putting the money in funds that guarantee a 5%+ return.

On the flip side, we may look at selling and buying a bigger/newer house in ~2 years, in which case having more funds in a safer investment would be beneficial given the short time horizon.

Either way, I’ll want to keep some of those funds liquid.

I have no real desire to get in to real estate and be a landlord. Keeping up with things around our own house is enough for me.

 

[sayen]

@pluemusica If it’s just to access the funds before 59 1/2, keep putting them in pretax retirement accounts and plan to use one of the methods described in that link I posted (most people use the Roth conversion ladder).

There’s a lot to be said about the benefits of investing in retirement accounts, especially for someone like you who keeps the rest of their money in cash because of (1) the tax savings now that you can and should invest in a brokerage account and (2) automating your investments so you never even think of about that money.

 

[thedj]

@sayen I may be missing something, but isn’t there still a penalty to pull from a Roth IRA before you’re 59 1/2? That link you posted makes it seem like once you pay the taxes to convert it to a Roth IRA, you can pull from it without a penalty.