How the hell are we supposed to retire?

I remain skeptical of deferred plans. By all means, enter one and maximize your employer match. Beyond the employer match there's not much good. Yes, there is professional management, but as Dave points out, it is very expensive management.

Employers have to prove that the deferred plan is not a top-heavy plan, meaning that the rank and file employees must make significant use of the plan for the executives to get to use it as well. My employer chose Fidelity, and had Fidelity reps come and pitch the plan to the employees, using some snake oil technique. They make believe I am putting more money to work by not paying tax on it. They leave out the not paying tax now part.

Correctly viewed, a deferred plan is a partnership between you and the IRS. You agree to invest your money, and your taxes, and when you take the money out, you pay the taxes then. This is a great deal for the IRS as government never invests money, rather it blows the paycheck before it even collects it. You are providing a service.

You defer the enjoyment of the money and escape current taxation at today's tax bracket. But you will pay that tax when you withdraw the money at the tax rate then in effect. The snake oil pitch had us envisioning a much lower level of taxation once we were retired. But along the way, deductions were eliminated, Social Security which you paid into with after-tax dollars is taxed like a deferred plan once you start collecting. It is easy to end up in a higher tax bracket once retired.

Consider instead the Roth IRA or Roth 401k. Pay tax today and never again, no matter how much the account grows. Envision at age 70, collecting your Social Security, and taking the rest of what you need to live on from your Roth and not jumping up tax brackets. You could manage your tax liability. But not every employer offers a Roth 401k. Still, for Dave's recruits, with no match and high fees, a Roth might be a better idea. Or shrink the 457 contribution, and contribute to a Roth IRA.

For those with deferred accounts (and with the IRS as a partner in your account) there are a few ways to make this partnership shift in your favor:
  1. If your state follows federal treatment, and defers state tax on account contributions, you could move to a state with no income tax before withdrawing. You still face the federal tax, but actually made the state tax disappear.
  2. If you retire early and have a number of years between your last paycheck and when you collect Social Security and trigger RMDs, you can make a ladder of Roth conversions each year. Each year there is a standard deduction and 10-12% tax brackets. Once you are collecting Social Security and RMDs you won't see these brackets again. Don't let these low tax brackets go to waste. Structure Roth conversions each year to maximize the brackets you are willing to pay. (Note here the IRMA. Right, no one ever told you about IRMA. It is a tax disguised as an insurance premium on Medicare. It is based on your income two years prior. You can minimize it by getting your Roth conversions done by age 62.)
 
Good stuff @Fire Lord Jim !

Ah yes, IRMA....we are dealing with that right now being my spouse worked up until full retirement age. First SS check coming next month.
Nobody mentioned that - not that we could have done anything about it.

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These plans all benefit high earners who will draw less in retirement (lower tax bracket)
Consider this situation - numbers are close to real, but not exact.

Say your employer matches 100% of the first 6% put into a retirement fund.
IRS limit is $24,000/yr

What if 6% of the salary was $24,000? In other words, salary of $400k.
Not only can this person afford to invest $24k, they get a $24k match!

This might be upsetting, but in most cases, this person is paying $100k/yr in taxes....so there is that.

At the executive level, there are other deferred compensation plans too.

---------------------------

Well, remember *you* are you, and you need an actionable plan.
It can be very broad when young - take advantage of employer plans, save for long term.
Dial it in as you earn more/get older.
 
Can’t wait for the new government to get rid of all those entitlements, social security, Medicare and Medicaid….. need to get back to the good old days when the number one cause of death after age 65 was hypothermia …… aaaaah the good old days.
 
scott62 said:
Can’t wait for the new government to get rid of all those entitlements, social security, Medicare and Medicaid….. need to get back to the good old days when the number one cause of death after age 65 was hypothermia …… aaaaah the good old days.
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Nah. The deficit will just grow even larger.
 
Fire Lord Jim said:
I remain skeptical of deferred plans. By all means, enter one and maximize your employer match. Beyond the employer match there's not much good. Yes, there is professional management, but as Dave points out, it is very expensive management.

Employers have to prove that the deferred plan is not a top-heavy plan, meaning that the rank and file employees must make significant use of the plan for the executives to get to use it as well. My employer chose Fidelity, and had Fidelity reps come and pitch the plan to the employees, using some snake oil technique. They make believe I am putting more money to work by not paying tax on it. They leave out the not paying tax now part.

Correctly viewed, a deferred plan is a partnership between you and the IRS. You agree to invest your money, and your taxes, and when you take the money out, you pay the taxes then. This is a great deal for the IRS as government never invests money, rather it blows the paycheck before it even collects it. You are providing a service.

You defer the enjoyment of the money and escape current taxation at today's tax bracket. But you will pay that tax when you withdraw the money at the tax rate then in effect. The snake oil pitch had us envisioning a much lower level of taxation once we were retired. But along the way, deductions were eliminated, Social Security which you paid into with after-tax dollars is taxed like a deferred plan once you start collecting. It is easy to end up in a higher tax bracket once retired.

Consider instead the Roth IRA or Roth 401k. Pay tax today and never again, no matter how much the account grows. Envision at age 70, collecting your Social Security, and taking the rest of what you need to live on from your Roth and not jumping up tax brackets. You could manage your tax liability. But not every employer offers a Roth 401k. Still, for Dave's recruits, with no match and high fees, a Roth might be a better idea. Or shrink the 457 contribution, and contribute to a Roth IRA.

For those with deferred accounts (and with the IRS as a partner in your account) there are a few ways to make this partnership shift in your favor:
  1. If your state follows federal treatment, and defers state tax on account contributions, you could move to a state with no income tax before withdrawing. You still face the federal tax, but actually made the state tax disappear.
  2. If you retire early and have a number of years between your last paycheck and when you collect Social Security and trigger RMDs, you can make a ladder of Roth conversions each year. Each year there is a standard deduction and 10-12% tax brackets. Once you are collecting Social Security and RMDs you won't see these brackets again. Don't let these low tax brackets go to waste. Structure Roth conversions each year to maximize the brackets you are willing to pay. (Note here the IRMA. Right, no one ever told you about IRMA. It is a tax disguised as an insurance premium on Medicare. It is based on your income two years prior. You can minimize it by getting your Roth conversions done by age 62.)
Click to expand...

This is good, Jim. However, my deferred plan assets have grown significantly in the last four decades. Therefore the tax is on the contributions, plus the gains. My assessment is the effective tax rate on what was contributed plus gains is a cost that I am comfortable paying.

The last sentences regarding IRMAA (two AA) are important and require some modeling. I outsource that calculation of Medicare Specific MAGI (a 'term of art' as they say in the tax game)

N.B. My genius CFP suggested that individual income tax rates are probably at a low point, but who really knows.
 
Fire Lord Jim said:
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.
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Actually 85% of SS benefits are taxable, by my recollection. Is that wrong, Jim?
 
Carson said:
@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.
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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.
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Both youze got the answers right in front of you.
 
thegock said:
Actually 85% of SS benefits are taxable, by my recollection. Is that wrong, Jim?
Click to expand...
85% is the max. It could also be zero % if you have no income. I round that 85% up at it will count as income in computing the IRMA hidden tax on Medicare.

My point was, and Patrick found an article also stating, that it is not safe to assume you will have lower taxes in retirement.
 
Mrs. G came home a few month ago and told me she had reduced her cell bill to $25. My unlocked Pixel 7 Pro is still on the Company plan, but I was paying $45/month so, jelly.

I like DEAD POOL and that motivated me to switch to Mint Mobile yesterday. Took about 40 minutes on the CSR call and another eight minutes to extract the SIM card from my Pixel 7 Pro and configure the eSIM. $15/month plus less than $2 fees. Who's the man now, dog?


zXfjTIc.jpg
 
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thegock said:
Mrs. G came home a few month ago and told me she had reduced her cell bill to $25. My unlocked Pixel 7 Pro is still on the Company plan, but I was paying $45/month so, jelly.

I like DEAD POOL and that motivated me to switch to Mint Mobile yesterday. Took about 40 minutes on the CSR call and another eight minutes to extract the SIM card from my Pixel 7 Pro and configure the eSIM. $15/month plus less than $2 fees. Who's the man now, dog?


View attachment 250577
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Been using Mint for well over a year. Works as advertised, except in Central PA.
 
JDurk said:
Been using Mint for well over a year. Works as advertised, except in Central PA.
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Be curious to see what service is like up the Delaware north of new hope. That is where t mobile cut out for me, a little too close to my normal area.
 
stb222 said:
Be curious to see what service is like up the Delaware north of new hope. That is where t mobile cut out for me, a little too close to my normal area.
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Wife and I were Verizon Wireless for a long time. There's a Verizon tower on the property where she works and we got some type of deal because of that. Whenever it came time to upgrade phones, the Verizon store salesperson always tried to sell us the latest plan, but when they looked at the plan, we would end up staying on the plan. However, it started to get expensive. She switched first and after 1yr, I switched.

Mint is actually majority owned by T-Mobile and service signal are supposed to jump whatever tower is available. Looking at the coverage map, seems it's the mountainous areas that are the issue. We had no coverage during a trip to Rickett's Glen in Feb, and there are areas near State College where I didn't have anything. Looks like the area north of New Hope is good.
 
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