How the hell are we supposed to retire?

Bike N Gear said:
Someone want to explain why my wife's advisor is pushing Fixed Index Annuities?
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Rates are up. And it is an equity preservation play.
You could do 5 years of fixed income and come out the other side with the same equity.

There are also downside protected, with upside potential.

They must have a great commission, cause our guy spent an hour trying to hype them.

The sp500 pays like 2.5% div. Taking out 4-5 and playing the market and the tax game (fill the tax bracket) still seems like the way to go.
 
Patrick said:
Rates are up. And it is an equity preservation play.
You could do 5 years of fixed income and come out the other side with the same equity.

There are also downside protected, with upside potential.

They must have a great commission, cause our guy spent an hour trying to hype them.

The sp500 pays like 2.5% div. Taking out 4-5 and playing the market and the tax game (fill the tax bracket) still seems like the way to go.
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Yeah. My wife is super conservative. Only concerned with how much she might lose, never with how much she could make. I think they play into that.
 
Okay, I have a good thought experiment here. 457 plan versus Vanguard non-retirement investiment account.

@Patrick @Fire Lord Jim @others

I was posed the following question from the union rep at the PD I worked for (and I am assisting with contract negotiations).

IRS rules prohibit an officer investing in an IRA above certain income limits ($89,000 for single tax filers in 2025) if you have a workplace sponsored retirement plan. Top salary is well above that ($137,000). Even for newly hired, lower paid officers, the IRA max for 2025 is $7000. The 457 limit is $23,500. So, no real option for a IRA.

The township's 457, which is administered by Equitable, offers some great benefits: pre-tax money lowering your taxable income and the money is accessible after retirement, regardless of age without IRS penalty. However, it's freaking EXPENSIVE. I really tried to be careful about expense fees and averaged about 0.70% per year, mostly by using a few basic index funds that were offered. Many of the fund choices were between 1 and 2%. It pissed me off enough that I ended up rolling over my 457 into a Vanguard IRA immediately after retirement. I saw no advantage of leaving it and had no intention of using any of the annuity options anyway, mostly because I'm not married, no kids, and already have the guaranteed income of my pension every month. So, I rolled it over into an IRA and locked it back up until 59 1/2.

The question posed: Over the 17 year period, I put $100,000 into my 457 and earned an average 5.9% per year. There is no employee match. My ending balance and rollover amount was $200,000. Would I have been better off putting that $100,000 (post-tax money, obviously) into a non-retirement account with Vanguard-level expense fees of 0.10%?

Tons of variables here between pre and post tax money, income tax brackets, marital status, expense fees, etc, etc. I clearly thought the 457 still offered worthwhile benefits, but the new officers are less convinced and want to see some math.

Pre-tax to pre-tax 457 vs a theoretical IRA with no $7000 limit, and my $200K would have been $230K in a Vanguard IRA. That's how we got started on this conversation. I don't like paying for the nice suits the Equitable reps were wearing at the township meetings.
 
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Carson said:
Okay, I have a good thought experiment here. 457 plan versus Vanguard non-retirement investiment account.

@Patrick @Fire Lord Jim @others

I was posed the following question from the union rep at the PD I worked for (and I am assisting with contract negotiations).

IRS rules prohibit an officer investing in an IRA above certain income limits ($89,000 for single tax filers in 2025) if you have a workplace sponsored retirement plan. Top salary is well above that ($137,000). Even for newly hired, lower paid officers, the IRA max for 2025 is $7000. The 457 limit is $23,500. So, no real option for a IRA.

The township's 457, which is administered by Equitable, offers some great benefits: pre-tax money lowering your taxable income and the money is accessible after retirement, regardless of age without IRS penalty. However, it's freaking EXPENSIVE. I really tried to be careful about expense fees and averaged about 0.70% per year, mostly by using a few basic index funds that were offered. Many of the fund choices were between 1 and 2%. It pissed me off enough that I ended up rolling over my 457 into a Vanguard IRA immediately after retirement. I saw no advantage of leaving it and had no intention of using any of the annuity options anyway, mostly because I'm not married, no kids, and already have the guaranteed income of my pension every month. So, I rolled it over into an IRA and locked it back up until 59 1/2.

The question posed: Over the 17 year period, I put $100,000 into my 457 and earned an average 5.9% per year. There is no employee match. My ending balance and rollover amount was $200,000. Would I have been better off putting that $100,000 (post-tax money, obviously) into a non-retirement account with Vanguard-level expense fees of 0.10%?

Tons of variables here between pre and post tax money, income tax brackets, marital status, expense fees, etc, etc. I clearly though the 457 still offered worthwhile benefits, but the new officers are less convinced and want to see some math.

Pre-tax to pre-tax 457 vs a theoretical IRA with no $7000 limit, and my $200K would have been $230K in a Vanguard IRA. That's how we got started on this conversation. I don't like paying for the nice suits the Equitable reps were wearing at the township meetings.
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Q1: Better with after tax account?

With no match and a "low" tax rate, it probably would have been better post tax -
*you* have the single person tax penalty - most won't.
as an aside, with traditional IRA - if you put-in, and take-out at the same tax rate, it doesn't make any difference on end $$.
this is where Roth wins - put in at a low rate, take out at zero in a higher bracket.

BUT - and never use but as a transition word..
Would you have had the discipline not to spend it if it wasn't locked-up in a retirement account?
Just like a mortgage - it is overpaying for a piggy bank. Money that would be saved by renting would just disappear.

Q2: 457 vs IRA

On the 457 - is it for more than just the PD? there may be enough people in the twp making a high enough salary to max it out.
and $500+/month into retirement for a young person is a lot to ask (even if it is the best thing they could do in their early 20s.)

There may be a nondiscriminatory test and contribution test for the 457 - ie, if only the higher paid people are putting in, and it isn't benefiting most,
there will be limits on the high end. @thegock, you got anything here?

Same as above - if the IRA investment didn't come straight out of the paycheck like the 457, would it have found itself in the retirement fund,
or carbon/titanium upgrade bits?

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Are you shopping for other 457 plan administrators?

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Good move rolling it into an IRA to save the fees - at 59-1/2 you might start rolling it into a Roth (maybe)

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are you going to have enough private sector work to collect some social security too?
that would be awesome!!
 
Patrick said:
Q1: Better with after tax account?

With no match and a "low" tax rate, it probably would have been better post tax -
*you* have the single person tax penalty - most won't.
as an aside, with traditional IRA - if you put-in, and take-out at the same tax rate, it doesn't make any difference on end $$.
this is where Roth wins - put in at a low rate, take out at zero in a higher bracket.

BUT - and never use but as a transition word..
Would you have had the discipline not to spend it if it wasn't locked-up in a retirement account?
Just like a mortgage - it is overpaying for a piggy bank. Money that would be saved by renting would just disappear.

Q2: 457 vs IRA

On the 457 - is it for more than just the PD? there may be enough people in the twp making a high enough salary to max it out.
and $500+/month into retirement for a young person is a lot to ask (even if it is the best thing they could do in their early 20s.)

There may be a nondiscriminatory test and contribution test for the 457 - ie, if only the higher paid people are putting in, and it isn't benefiting most,
there will be limits on the high end. @thegock, you got anything here?

Same as above - if the IRA investment didn't come straight out of the paycheck like the 457, would it have found itself in the retirement fund,
or carbon/titanium upgrade bits?

-----

Are you shopping for other 457 plan administrators?

-----

Good move rolling it into an IRA to save the fees - at 59-1/2 you might start rolling it into a Roth (maybe)

-----

are you going to have enough private sector work to collect some social security too?
that would be awesome!!
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Not really a tax guy. Sorry.
 
Carson said:
IRS rules prohibit an officer investing in an IRA above certain income limits ($89,000 for single tax filers in 2025) if you have a workplace sponsored retirement plan.
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Is this a LE/public employee thing? The single limit is $146,000. Even so the backdoor Roth is the way to go if you're over the limit.

Carson said:
So, I rolled it over into an IRA and locked it back up until 59 1/2.
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You can start a Roth ladder and get it 5 years after you start the conversion.

Carson said:
The question posed: Over the 17 year period, I put $100,000 into my 457 and earned an average 5.9% per year. There is no employee match. My ending balance and rollover amount was $200,000. Would I have been better off putting that $100,000 (post-tax money, obviously) into a non-retirement account with Vanguard-level expense fees of 0.10%?
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www.nerdwallet.com

Mutual Fund Calculator: Growth and Fees - NerdWallet

Calculate how your mutual fund fees will erode your investment dollars over time.
www.nerdwallet.com www.nerdwallet.com

Pretty easy to plug in your numbers there. $57k for the 457 fees ($211k final balance) vs 4k for Vanguard fees ($264k final balance). Take away capital gains and...

1730740850191.png

Minimal difference between the two options.
 
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Carson said:
.

Pre-tax to pre-tax 457 vs a theoretical IRA with no $7000 limit, and my $200K would have been $230K in a Vanguard IRA. That's how we got started on this conversation. I don't like paying for the nice suits the Equitable reps were wearing at the township meetings.
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This one issue or exhorbitant expense ratios is unconscionable. So many plans have high expense ratios, which is really theft from the particpants, so the salesperson gets rich. Over 20 years, I moved three multimillion dollar plans into Vanguard, low expense ratio plans. I am going to a game tonight with the tickets of a participant, who has saved thousands of dollars in the last 30 years, due to one of those moves. One of the salespeople was particulary angry over losing the account. My CEO set her straight.

For context, Vanguard index funds can comprise a plan with a 10 basis point expense ratio. My portfolio ratio is a bit lower, but I am a thrifty guy.
 
Because you asked....

The S&P 500 was around 1261 at the end of 2006, and hit 4839 at the end of 2023. That means the S&P 500 went up 3.8 times while your 457 merely doubled. Assuming a 24% federal tax and a 6% state tax, you could have opted out of the 457, paid 30% federal and state tax, and then invested the remaining 70% in VOO (S&P 500). The remaining 70% x 3.8 growth over 17 years gets you to 266% although some of the dividends would get taxed along the way as well. The 266% can be equated to $266k, beating out the $200k the 457 delivered.

Now, here's the other difference: You rolled the 457 into an IRA, and every dollar that comes out is taxed as ordinary income, at your marginal tax bracket. I'm guessing here, but that is about 22%. Once you collect Social Security, it will go higher.

The alternative scenario has $266 invested after tax. You will pay about 15% on dividends earned, and 15% on gains when you sell. And you get to choose when to sell, as in which years. And when you sell stock in an after-tax account, you only pay tax on the gain. Your pension will be taxable, your social security will be taxable, but you can top off what ever spending you need by selling stocks, and manage your tax bracket.
 
Fire Lord Jim said:
The remaining 70% x 3.8 growth over 17 years gets you to 266% although some of the dividends would get taxed along the way as well. The 266% can be equated to $266k, beating out the $200k the 457 delivered.
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I wanted to dig into this a bit more - investing in retirement is a marathon. and it includes training for a marathon.
which means you can't go as hard/long in the beginning.....but ya have to start, and it can hurt a bit in the beginning.
Using the common moniker - it hurts just as much in the end, you just go faster.

I'm also a big proponent of putting the money where there is a penalty and barriers to getting to it.

in this case, there is an investment stream, so using even increments (for simplicity) of $6k/yr (17 times is about 100k) - would be an after tax stream of $4,200/yr

using the 17 years and the roi calculator, sp500 return is 7.933%

1730769655358.png

This doesn't include div reinvestment less tax. quick check - the sp500 pays about 2% div - qualified??

Now apply that to the stream of savings post tax

1730769329388.png

or include div reinvestment less tax (1.7% boost at 15% rate)

1730771552481.png

Checking it against the 457 pre-tax - the actual rate was 7.9%
(I couldn't find the backwards calculator, so I plugged-in percentage until it was close to $200k end)

1730769482301.png

take the 30% tax by managing w/d and it is close to the post tax w/o div reinvestment...(equitable's vig)

These would also be a bit higher as the stream would come in during the period, not at the end.
just makes the table too long.
I'd also guess that the investment was end-weighted - as one makes more money, they can save more,
so the time value of the early numbers would not be as much.
 
Keep it simple. If you had money in a 457 paying 1% fees vs non IRA Vanguard paying .10% fees and both invested in an S&P 500 equivalent fund you are better off in the 457 with higher fees because you are using pre tax dollars. The up front income tax savings will more than make up for the higher fees. You also won't pay tax on capital gains and dividends. The issue lies in what are the fund options in the 457. If comparable investment options then the pre tax route is better.

If you want a side by side theoretical comparison I could throw something together. LMK.
 
Rogers said:
. You also won't pay tax on capital gains and dividends.
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The reason the above is true is because the 457 won't deliver capital gains nor dividends, both of which have favorable taxation.
A deferred account starts you with more to invest because you have postponed taxes. But you also increase future taxes by converting dividends and appreciation into ordinary income. (This is why Roth IRAs are so attractive.)

An interesting test would be to take Patrick's approach of comparing investing annual increments of the pretax 100% in the 457 to investing 70% after-tax, grow the two, and then apply the taxes on redemption.

Taxes on redemption do not occur in a vacuum. Once you trigger Social security, once RMDs start, there will be no low taxed withdrawals from deferred accounts.
 
The 457 will deliver capital gains and dividends they just won't be taxed. Two other things to consider. One if you are in a 457 plan and for whatever reason you feel like there is going to be a binary event and you want all your money in a cash equivalent investment you can easily transfer your money from say an S&P500 fund to a cash equivalent fund and there is no tax consequences. If you did this in a non IRA account and assuming the S&P500 was on a tear you would pay taxes on the capital gains. Two if you invest 10,000 and pay taxes on it at a marginal rate of 30% you have to make about a 43% return just to get back to your initial 10,000. If you look at it another way it's like loosing 3,000 on a 10,000 investment. To get your 7,000 back to 10,000 you need to make 43%. (7,000 x 43% = 3,010).
 
Wow. This is alot to unpack. I appreciate all the responses.

Yes, most officers are going to have a end-career weighted investment. I did the same, most of my COLA and raises and promotion money went into the 457 in the last 5 years. I think I maxed out the 457 in the last 3 years.

The union is definitely not shopping around for a different 457 plan administrator. I looked at a few maybe 5 years ago and they were all similar in cost.

@Patrick I have my SS quarters. Raritan Township pays into SS taxes. Each town in NJ is different. I don't know what law covers that. I did not pay into SS in Fanwood while I was there. As there is no COLA for my pension currently (removed by Christie), my general plan is pension plus part-time gig gets me to 60, then use IRA as supplement only if needed until SS kicks in. Hopefully pension COLA is reinstituted by then as well. Plus the 911 will never lose value, right??

@Cassinonorth I'm reading that the $146,000 is for married filing jointly, $89,000 for single filers.

@Fire Lord Jim @thegock @Rogers Thanks for your input here!

I think a few of the keys are: simplicity. Most of these guys are not going to put the effort into managing a bunch of accounts and are distrustful of outsiders (Equitable suits and salesman especially). Discipline. The forced savings of a 457 is likley a good thing for some of these guys. But that can also be done with the direct deposit into a Vanguard non-retirement MM and swept into their portfolio. Otherwise boats and Cadillacs show up in the parking lot. Saving in any vehicle is better than nothing, too.
 
Carson said:
Wow. This is alot to unpack. I appreciate all the responses.

Yes, most officers are going to have a
@thegock @Rogers Thanks for your input here!

I think a few of the keys are: simplicity.
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Dave,


Jim seems to know the most here, but were I u, it might be worth paying a CFP in an hourly rate to review ur decisions. I use a Harvard MBA who completed the CFP course, but he is retired and not available for new clients.

If you are paying more than ~ 25 bps on passive retirement assets, u are getting Joe Pedternoed. If you want to be a superhero for ur LEO peeps, direct a conversion to a low expense ratio plan. Sounds like someone is 🪛 ING u guys over. Fo realz.

Good read is Dr. Wade Pfau's book "Financial Planning Guide.". Especially on SS.

U can PM me with any questions that you don't want to post here. The following meme is paid for by deferring gratification:


FB_IMG_1730656985069.jpg
 
thegock said:
Dave,


Jim seems to know the most here, but were I u, it might be worth paying a CFP in an hourly rate to review ur decisions. I use a Harvard MBA who completed the CFP course, but he is retired and not available for new clients.

If you are paying more than ~ 25 bps on passive retirement assets, u are getting Joe Pedternoed. If you want to be a superhero for ur LEO peeps, direct a conversion to a low expense ratio plan. Sounds like someone is 🪛 ING u guys over. Fo realz.

Good read is Dr. Wade Pfau's book "Financial Planning Guide.". Especially on SS.

U can PM me with any questions that you don't want to post here. The following meme is paid for by deferring gratification:


View attachment 250323
Click to expand...

@thegock I agree completely. It's almost as if the 457 plans are set up to make tons of money for these insurance companies. They are all 5X to 8X more expensive than Vanguard and Fidelity. Why? Because they can; it's a near-monopoly. It appears the benefits of saving pre-tax money and not paying taxes on CG and DIVs for 20 years covers up their greed. I don't know anyone who has utilized the annuity options. After getting F'd over for 20 years, I'm not sure why anyone would want to give them the opportunity to take more of their money.

What's worse is I had to DIG every year to find the expense fees. They weren't included in the prospectuses. One year, I had to show up at Equitable's offices in uniform to get the data. It was a one page .PDF that they held closely. Borderline criminals. Unfortunately, I never got our Equitable contact on a car stop.
 
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