Ratio of Retirement vs. Non-Retirement Investing?
Hi all, after reading a bunch of material by JL Collins (thanks Ivory Storm for the recommendation!), I think I've got a more solid foundation and comfort level with investing. One lingering question I had was how to decide how much to invest in retirement vs. invest in a regular account that I can use anytime. For example, to save for our next house, or build up our own "long term disability" fund (as an alternative to expensive insurance) that hopefully we won't have to touch, and that we want to let grow in the stock market.
It seems wise to put as much as possible into retirement accounts, but when we can't afford to max out our Roths or 401k IRAs at this time (though we are at least able to max our HSA), I'd like to still be putting some into a regular investing account. Note that we're currently investing some each month for that "long term disability" fund, plus a 529 for our toddler.
Are there any good rules on where to draw the line? I know that the less we put into retirement accounts, the more that will hurt us in the long run, but we also feel the need to be doing some other funding in regular investments so we can access some of that money before retirement, again for things like a house or to replace lost income due to disability. I know it's possible to at least pull Roth contributions before retirement if we're in a pinch, but I'd rather be pulling from a regular investment's contributions and interest, and from something not intended to be left alone until retirement.
Curious to hear how others handle this question, and how to balance the ratio of retirement investing vs. non-retirement investing. My wife and I are both in our mid 30s so still have awhile before retirement.
You can't necessarily do everything you want to do, because the money doesn't spread that far.
There are ways to get money out of tax-advantaged accounts before age 59.5, so it generally doesn't make sense to invest in taxable for post-employment unless you are already maxing those out. People assume you can't get the money out earlier without penalty, but that's just not true.
It also doesn't make sense to invest savings for a house unless you can wait 10 years after a stock market drop for those investments to recover. Your house buying timeline would need to absolutely be that flexible.
It makes sense to invest in taxable for spending you might do in 10+ years. Anything less than that and you risk not having the money when you want it.
As for a 529, all I can say is this. The best gift you can give your children is not a college education (heck, they might not even go to college, and then what do you do with the money?), but rather not being a financial burden on them in your old age. That said, do you get a state tax deduction for a 529 contribution? If so it might be worth it, otherwise I would not bother in your position.
Others may differ in opinion, but my opinion is that unless you are maxing out tax-advantaged space there is no reason to have a taxable investments or a 529. For our kids we went a different route from 529 that doesn't require education expenses to be able to use the money, but is still tax-deferred and/or tax-free. UTMA savings accounts, I Bonds and a UTMA brokerage account in which we tax gain harvest.
Thanks nolesrule ! Always appreciate your input and thoughtfulness. 🙂
I was very intrigued by you saying that one can get money out of tax-advantaged accounts before age 59.5 without penalty, so did some searching and found this: https://www.thebalance.com/exceptions-ira-early-withdrawal-penalty-2388980. I'm putting the exceptions down here for my own future reference (the original post of course has more details/caveats):
- CARES Act Withdrawals
- You Spent the Money on Medical Expenses (our HSA/out of pocket max should cover this, but nice to know it's an option if we end up with extreme amounts of medical costs)
- You Spent the Money on Health Insurance
- You're Disabled (has to be pretty severe/long-term, but maybe that can fill the role of "long-term disability" insurance, plus our Roth contributions which we can access anytime)
- If You've Inherited an IRA
- 72(t) Payments (intriguing - seems viable in an emergency, but only if we're much closer to retirement)
- Qualified Higher Education Expenses -- (very interesting...maybe this could fill the role of a 529 if needed?)
- First-Time Home Purchase
- Qualified Reservist Distributions
Interesting to think about the 529 situation. Given that we're not currently maxing out our retirement accounts, you've got me thinking it would be better to do that, and only after that do we put excess toward the 529, if we're still using it. We're also going to get our first I-Bonds toward the end of the month, thanks to helpful info from you and others, and will continue moving savings over there in the years ahead. I'd heard of UTMA but didn't know what it was - will look into that more.
Thanks again as always - I aspire to someday rise to your level of financial know-how! 🙏
There's always the handy dandy /r/personalfinance flowchart :D. I actually use that. nolesrule 's advice is sound, of course. I can tell you though, that when I had my first kid, I was like, crap we need to get that college savings going!! So I dumped a bunch of money in a 529. And then a few months later I was like, crap we can't contribute enough to get the 401k match! My mom took over setting up 529's for the kids and now they're gigantic and I have 3 idiots. Well, the first's SAT scores come in tomorrow so the jury is still out on that one. He's finishing up an Associate's (cost $0) and today is his 17th birthday, and all that MIT money will probably end up rolling over towards the next less-than-motivated kid. So yeah, consider alternatives cuz you never know 🤣🤣.
I do have taxable investments, but they are OLD. Like, play money from my college years. And some inherited. I don't feel I've yet to make it to the point as an adult where I can go ahead and contribute new money to those accounts. Oh wait, I do have a taxable very conservative intelligent portfolio at Schwab that I use as a secondary cash holding spot, but it's not really meant for long-term growth because I could still need the cash at any time.
I'm not quite as savvy as nolesrule's on tax-efficient investing, but I know that I always shoot for those kind of accounts above all else, and I still haven't maxxed out every single avenue. You're young, have a lot of earning years AND dare I say expensive years ahead of you. Shelter your long-term savings in high growth investments in tax sheltered accounts and keep that more accessible cash conservatively saved/invested because man, you're gonna need it :).
For me 0% extra cash into retirement and 100% extra cash into non-retirement investing.
My approach is that I would rather handle the money, as opposed to pumping the cash into retirement accounts. My reasoning is that I don't want to put any extra cash into my retirement investment account because I want to control how it is invested. In Australia we have what is called Superannuation accounts, which are retirement investment accounts. There are companies that invest that for you and take %'s in fees. I still take all the risk if the Market tanks, and I pay them money to manage it in return for meagre yearly gains??? No thanks.
I can do something very similar in terms of returns (with some homework and study), still carry all the risk and not pay % management fees. I don't know how the retirement accounts work in the US, but I am assuming SOME similarities and a long way from being identical.
I will use that extra cash and invest that myself. I am still investing in my families future, but I have access to this should things come up.
I would not however invest cash that I know I am going to need. Don't invest that extra $100 bucks this week if you know next week, your going to need a new pair of pants and have to sell the shares you just bought. Treat your non-retirement investing like your retirement investing with emergency powers.
This is just my approach and I dont mean to offend anyones point of view.
Also, any of us with half a brain consider our future gov't retirement payments as pocket change, if we even get any. My experience with people from other countries show they have much more confidence in future pensions and gov't support. That just isn't our current reality and personally, I'm fine with that. Talk about wanting more control over your money!
Kinda sorta. There are personal retirement accounts and employer-sponsored retirement accounts. In the personal accounts, you can pretty much choose any investment a brokerage offers. Employer sponsored accounts generally have a limited lineup of choices based on what is available through the plan provider... the choices can range from completely awesome to "hold your nose" bad.
My last employer was "hold your nose" bad, but I was only there 4 years and moved my money to an account I had total control over as soon as I left. My current employer options were serviceable, but just last week they were switched out for less expensive really good replacements.
@silver_guitar I'm so glad it was useful to you!
I think @Annieland said on another threat that @nolesrule is on the "Boglehead" forum. Given how much I appreciate his knowledge I thought I would check it out too. It's been a treasure trove. Here it is: https://www.bogleheads.org/
What happened for me is that 1.5 years into YNAB, I am in so much gazillion times better shape than I ever was, and I have so much control over my money, that suddenly questions about priorities are . . . actually meaningful.
I never even knew it was a goal to max my 401k but this year I'm getting close to it and next year I should be there. So that creates obvious intrinsic motivation to learn about investing. I can't *believe* I am doing and learning all of this. Mind blown every day by how far this budgeting software has taken me. You got so much great perspective here. Good luck to you!
Ha, nice to read all the old gang's posts. I'm hardly on here anymore, which just means I'm doing fine and my finances are boring, which is a good thing IMO. But, I had the same question as the OP awhile ago. I max out my Roth IRA and I have a 401a at work that I put in 5% and my employee puts in 10%, pre-tax. I also have access to a 403b (both pre-tax and Roth versions), which I had re-started investing in 1% a quarter until I realized I have to invest $750 in my Roth IRA/month to catch up this year, since I used until the deadline in the summer of 2020 to max out my 2019 Roth IRA (because I was aggressively paying off debt before that). For me, it would be really hard to max out all my tax advantaged accounts, I'd have to live on a very tight budget.
I did start a taxable account with Fidelity and put a few hundred $ into the Vanguard total stock market ETF (VTI I believe) in March 2020 because the market was down and I wanted to buy when it was on sale.
I also bought some Gamestock stock to give to the cause of screwing over the hedge funds. I used my causes money. Yes, that was a YNAB win. I lost money over it, but I did contribute to the cause, which was the goal of that category, so I think it was a win. Speaking of which, apparently I need to vote as as Gamestock shareholder. I've never owned an individual stock before, so this is a first for me.
I still think I would like to start putting some % of my long term money for house upgrades and for my next car (10+ years into the future) invested in taxable, but I think getting the full match and maxing out a Roth IRA first is a must before even thinking about that.
I also bought some Gamestock stock to give to the cause of screwing over the hedge funds. I used my causes money.
Participating in stock manipulation is never a good cause. A lot of innocent people that are caught in the middle get hurt in the process. It's just as bad as the hedge fund behavior, and "a good cause" is above that sort of behavior.
It was a pump and dump. make no mistake.
I also struggle with this question. Over the years I have focused on maximizing the benefit of employer 401K plans and then rolling over to an IRA when switching jobs. And we maintain a ~6 month cash emergency fund. However, we find ourselves very short on non-retirement assets otherwise because as nolesrule has correctly stated, there is only so much money to go around. My continuing strategy right now is to put enough into the 40K to maximize the match. Fortunately my current match is a good one with both a matching component and a "cash balance" component, so I'm getting the 15% that is the usual recommended target going into retirement every paycheck, but doing it on a pre-tax basis to minimize the tax bite. Then I'm putting as much as I can muster into a taxable account invested in a good balanced fund that has historically avoided wild market swings. I'd rather be doing my 401K contributions on the Roth side but am trying to balance the 2 objectives. And at age 56 I'm not sure how much I would still benefit from Roth at this point.
I realize that Dave Ramsey says that we should be investing 15% of our own gross pay and ignoring the company match but that has just never been possible with the usual conflicts while raising a family. Unlike Dave Ramsey, I don't have 7 or 8 figure bank accounts.
Silver Guitar said:
I'm definitely leaning more toward maximizing tax-advantaged/retirement accounts now, following lots of great input here. Currently have some regular taxable investing but realize it's pulling away from retirement investing (which we're not anywhere near maxing out). Also there were some good points raised around 529/college investing that have me thinking about pulling back on those contributions a bit, in favor of securing our retirement to ensure we're fully self-sufficient in our older age. And we'll still encourage family to consider making gifts to the 529 for our kiddo's birthdays and Christmas.
I think that's a good way to go. I didn't start doing any serious after-tax investing until I was maximizing my available tax sheltered investing.
As far as college investing (I have two boys, now young men), I didn't do nearly as well as I should have although I was personally in good financial shape by the time they were going through college and I was able to help cash flow it. But the main thing that helped was that I made the decision not to take on any Parent Plus loans. So we figured it out. Between them choosing schools with the best scholarships, them working a bit as RAs, and them applying for additional scholarships, they both got excellent educations and we only ended up with one $5000 loan for my oldest son who went to a private university in total which I paid off after I incentivized him to get it down to $3000.
Scarcity, in this case, was truly the mother of invention. We figured it out. Kind of like Jesse's origin story of YNAB.
I didn't start doing any serious after-tax investing until I was maximizing my available tax sheltered investing.
Do you consider stuff like the backdoor mega roth 401(k) or whatever it is to be part of that? Or even non-tax deductible IRAs? I'm wondering how far most people (of average to above average means) actually push it. Because it's like, there's almost always something else to find unless you're way, way out there. Like I could stop spending from my HSA too.
I only started a backdoor Roth for myself last year. I haven’t done one for my husband because I don’t want to deal with the whole pro-rata headache since he has rollover iras from old jobs. I know his company has the whole mega back door thing but I haven’t fully researched the mechanics. It really is overwhelming, even when you think you’re somewhat in-the-know.
I had an old rollover IRA too. You can avoid the pro-rata headache by moving the IRA into your husband’s 401k if they allow that.