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Sesq said:   mikef07 said:   
In the end IMO there are about 8 numbers someone can speculate that returns will be (from about 5% to 12%). He chose 7%.


No need to pick. Using a future value formula its very easy to do all of the above. My personal little forecast I have a matrix where I estimate my kitty in five year increments (age 50,55,60,65). I FV my assets on hand with 1 to 8 percent real returns, and I then present withdrawal strategies from a 3% to 6% (essentially annuitize) withdrawal rate to see what my income prospects look like.

I then repeat the exercise with what I think my kitty will be with five more years of contributions. I like looking at this way since I no longer have to be married to or justify what my expected return is. If it is 1% real, then I need to work longer or plan to spend into principal. If its 6%+ real, then jackpot.


I understand all the different scenarios, but if we started a thread that said "Predict the next 10 years returns." Most would "guess" as to what it would be. The more credible or credentialed an individual would not mean their guess is more likely. It is a pure guess. What John Bogle guesses is no better or worse than the person who predicts 8% or 6% even though his knowledge in Finance is better than 99% of people out there. If he happens to be wrong and the person who guesses 8% is right it doesn't detract from John's knowledge of finance, nor does it mean that the person who was correct inherently now knows more.

ETA: assumptions of course are that the range of people's choices is within certain numbers. For example if someone said 30% returns over the next 10 years then regardless of their credentials I find this unlikely.

For example I think it will be in the 9-10% range, but make no mistake if that happens it doesn't magically mean that I know more than Bogle does now. It means my guess just happened to be correct. Nothing more.

I work for the federal government. I get a pension on top of the 401k, on top of my roth IRA, on top of social security, and get to keep my federal health insurance plan for life and pay the same premiums as though i was employed. Thx.

I wish the people in this thread that believe a 7% return is too conservative of an assumption would speak up when everyone says the public employee pension funds are way unfunded because they assume a "unrealistic," return of about 7.5%.

The difference is that public employee pensions invest based on the average age of their population, so they can continue to average out risk over a larger group of people. The other thing is that in a high inflation environment, defined benefit pensions will suffer mightily due to the cost of living caps imposed on them. A 2% or 3% cap doesn't do much if your CPI is increasing by double digits, like it did in the 70's.

Assuming you're FERS, you'll get almost the exact same in retirement as you did when you were working. 1 or 1.1% per year you worked (assume 30 years, age 60, you'll get 30% of your high 3 ) by 401k I assume you mean TSP? Which is the big unknown....but presumambly it will work out to be another 30% or so and then Social Security, which should be the last 30%.

If you're really a federal employee, welcome, hope you're high on the payscale. But please, dont make it sound so great, I'm a federal employee, and its not like we're getting a silver spoon in our mouths or something.....


tiedinribbons said:   I work for the federal government. I get a pension on top of the 401k, on top of my roth IRA, on top of social security, and get to keep my federal health insurance plan for life and pay the same premiums as though i was employed. Thx.

bump

Billion on people live without any retirement benefits from their governments or having $30-$100/month. My mother gets $150/month in my home country after working non-stop since her 18 years and thinks that she has everything she needs.
We are very fortunate here to discuss $80K/year 401 plus regular benefits and call it "middle-class"...

77Rus said:   Billion on people live without any retirement benefits from their governments or having $30-$100/month. My mother gets $150/month in my home country after working non-stop since her 18 years and thinks that she has everything she needs.
We are very fortunate here to discuss $80K/year 401 plus regular benefits and call it "middle-class"...

  This is all certainly true and is something that I fully acknowledged in the OP, but I don't quite understand what it has to do with the thread? My point here isn't that you won't be fine. My point is that even if you are in a situation to consistently max out two 401(k) (and most people aren't), you'll most likely be living pretty middle-class retirement lifestyles. So, if you are shooting for more than that, you won't be able to just rely on your maxed out 401(k). Also, if you are not able to max out two 401(k)'s, and most people aren't, at best you are probably looking at lower-middle class retirement.

 

The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

psychtobe said:   The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

I agree with all of this and have previously addressed it in this thread. Here's what I am saying. If you use the exact same numbers that I used in my OP but do not factor in inflation, in future dollars you will have about $3.8MM in retirement. If you use the 4%/year withdrawal rule, this means about $152,000/year. With the 3%/year withdrawal rule, this means about $114,000/year (plus SS, assuming that it isn't means tested, etc...). If you use these future amounts without reducing them to today's dollars, it will be very easy to conclude that you will be able to afford much nicer things in retirement than will be really possible.

I think that people do this all the time. I think that they are all well aware of inflation and are also well aware of the fact that future money is worth substantially less than today's dollars. It is just that very few people actually run the numbers to account for inflation, so they do not realize that with 3% inflation $66,000-$88,000/year in today's dollars is equivalent to $114,000-$152,000/year in 30 years. When you run these calculations, it does seem like an obvious point, but as a lot of posts in this thread make it very clear, a ton of people out there are having trouble with this issue and are continuing to run all the calculations in future dollars.

What happens though is that people always have to strike a balance between saving for the future while not living like a pauper today. After all, you can't take the money with you, so it's very common for people to have a goal for retirement income and, once they feel that their retirement contributions will allow them to achieve this goal, they feel that it's okay to allocate the rest of the money towards spending it now.

The problem is that they often decide on the retirement income that they'll need in today's dollars but use retirement accumulation projections using future dollars, which results in a massive disconnect between the two. When that happens, they simply won't be able to meet their retirement goals but often won't realize that until it's too late.
 

jesrf said:   Assuming you're FERS, you'll get almost the exact same in retirement as you did when you were working. 1 or 1.1% per year you worked (assume 30 years, age 60, you'll get 30% of your high 3 ) by 401k I assume you mean TSP? Which is the big unknown....but presumambly it will work out to be another 30% or so and then Social Security, which should be the last 30%.

If you're really a federal employee, welcome, hope you're high on the payscale. But please, dont make it sound so great, I'm a federal employee, and its not like we're getting a silver spoon in our mouths or something.....


tiedinribbons said:   I work for the federal government. I get a pension on top of the 401k, on top of my roth IRA, on top of social security, and get to keep my federal health insurance plan for life and pay the same premiums as though i was employed. Thx.

 
Agreed (former civil servant here), if you have CSRS gloat away but FERS not so much.  Other than retiree health benefits the rest of the retirement benefits are really no better (sometimes worse) than the better private sector employers in my experience.  Also if you have a marketable skill you frequently will do better to much better pay-wise in the private sector.  Like so much in life it is a trade off.  I work in the private sector and get a pension, 401k (that is a bit better than TSP other than perhaps on fund costs--though still very cheap) and retiree health benefits (albeit not as good as Fed benefits) all while making more than I could for the Federal Government (at least in my low cost of living area). 

SangioveseW said:   
psychtobe said:   The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

I agree with all of this and have previously addressed it in this thread. Here's what I am saying. If you use the exact same numbers that I used in my OP but do not factor in inflation, in future dollars you will have about $3.8MM in retirement. If you use the 4%/year withdrawal rule, this means about $152,000/year. With the 3%/year withdrawal rule, this means about $114,000/year (plus SS, assuming that it isn't means tested, etc...). If you use these future amounts without reducing them to today's dollars, it will be very easy to conclude that you will be able to afford much nicer things in retirement than will be really possible.

I think that people do this all the time. I think that they are all well aware of inflation and are also well aware of the fact that future money is worth substantially less than today's dollars. It is just that very few people actually run the numbers to account for inflation, so they do not realize that with 3% inflation $66,000-$88,000/year in today's dollars is equivalent to $114,000-$152,000/year in 30 years. When you run these calculations, it does seem like an obvious point, but as a lot of posts in this thread make it very clear, a ton of people out there are having trouble with this issue and are continuing to run all the calculations in future dollars.

What happens though is that people always have to strike a balance between saving for the future while not living like a pauper today. After all, you can't take the money with you, so it's very common for people to have a goal for retirement income and, once they feel that their retirement contributions will allow them to achieve this goal, they feel that it's okay to allocate the rest of the money towards spending it now.

The problem is that they often decide on the retirement income that they'll need in today's dollars but use retirement accumulation projections using future dollars, which results in a massive disconnect between the two. When that happens, they simply won't be able to meet their retirement goals but often won't realize that until it's too late.

  The problem is that your numbers are flawed in your OP IMO.  I literally just looked and the worst 20 year period for a good allocation of index funds (80/20 mix) ever was from 1989-2009 and it was over 7%.  The worst 25 year period was almost 9%.  So in your opinion annual returns will be the absolute worst ever and would continue throughout retirement.  For reference the worst 35 year period was over 11%.

I agree no one knows what the next 20 or 30 years will bring but my guess is that they will not be the worst ever, especially with a global economy now.

ETA:  So you used 30 years in your OP.  Worst 30 year period is over 10% (almost 11% and was from mid 1983 to mid 2013).  So what if you used 10% as the return number.  Hell what if you used 9%?

mikef07 said:   
SangioveseW said:   
psychtobe said:   The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

I agree with all of this and have previously addressed it in this thread. Here's what I am saying. If you use the exact same numbers that I used in my OP but do not factor in inflation, in future dollars you will have about $3.8MM in retirement. If you use the 4%/year withdrawal rule, this means about $152,000/year. With the 3%/year withdrawal rule, this means about $114,000/year (plus SS, assuming that it isn't means tested, etc...). If you use these future amounts without reducing them to today's dollars, it will be very easy to conclude that you will be able to afford much nicer things in retirement than will be really possible.

I think that people do this all the time. I think that they are all well aware of inflation and are also well aware of the fact that future money is worth substantially less than today's dollars. It is just that very few people actually run the numbers to account for inflation, so they do not realize that with 3% inflation $66,000-$88,000/year in today's dollars is equivalent to $114,000-$152,000/year in 30 years. When you run these calculations, it does seem like an obvious point, but as a lot of posts in this thread make it very clear, a ton of people out there are having trouble with this issue and are continuing to run all the calculations in future dollars.

What happens though is that people always have to strike a balance between saving for the future while not living like a pauper today. After all, you can't take the money with you, so it's very common for people to have a goal for retirement income and, once they feel that their retirement contributions will allow them to achieve this goal, they feel that it's okay to allocate the rest of the money towards spending it now.

The problem is that they often decide on the retirement income that they'll need in today's dollars but use retirement accumulation projections using future dollars, which results in a massive disconnect between the two. When that happens, they simply won't be able to meet their retirement goals but often won't realize that until it's too late.

  The problem is that your numbers are flawed in your OP IMO.  I literally just looked and the worst 20 year period for a good allocation of index funds (80/20 mix) ever was from 1989-2009 and it was over 7%.  The worst 25 year period was almost 9%.  So in your opinion annual returns will be the absolute worst ever and would continue throughout retirement.  For reference the worst 35 year period was over 11%.

I agree no one knows what the next 20 or 30 years will bring but my guess is that they will not be the worst ever, especially with a global economy now.

ETA:  So you used 30 years in your OP.  Worst 30 year period is over 10% (almost 11% and was from mid 1983 to mid 2013).  So what if you used 10% as the return number.  Hell what if you used 9%?
I think we previously spent quite a bit of time discussing this issue. My latest response can be found here: http://www.fatwallet.com/forums/finance/1251799/m17501725/#m1750...
 

codename47 said:   I think either way, 4 or 7%, 66k is quite a bit of coin in Ecuador, Philippines, Thailand, Panama, Malaysia, Indonesia, Singapore, Costa Rica, and many other nice places around the world. I challenge the base assumption that a happy retirement has to be in the US. You can live like a rap superstar, with a big house, 5 cars, you're in charge in any of these places with that.

You can roll with a butler, maid, cook, driver (trust me you want one), eat out every night and still have money left over.

Just imagine how you could roll if you have the 4-5M outcome...

  ok, not in Singapore. It's an expensive place.

SangioveseW said:   
mikef07 said:   
SangioveseW said:   
psychtobe said:   The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

I agree with all of this and have previously addressed it in this thread. Here's what I am saying. If you use the exact same numbers that I used in my OP but do not factor in inflation, in future dollars you will have about $3.8MM in retirement. If you use the 4%/year withdrawal rule, this means about $152,000/year. With the 3%/year withdrawal rule, this means about $114,000/year (plus SS, assuming that it isn't means tested, etc...). If you use these future amounts without reducing them to today's dollars, it will be very easy to conclude that you will be able to afford much nicer things in retirement than will be really possible.

I think that people do this all the time. I think that they are all well aware of inflation and are also well aware of the fact that future money is worth substantially less than today's dollars. It is just that very few people actually run the numbers to account for inflation, so they do not realize that with 3% inflation $66,000-$88,000/year in today's dollars is equivalent to $114,000-$152,000/year in 30 years. When you run these calculations, it does seem like an obvious point, but as a lot of posts in this thread make it very clear, a ton of people out there are having trouble with this issue and are continuing to run all the calculations in future dollars.

What happens though is that people always have to strike a balance between saving for the future while not living like a pauper today. After all, you can't take the money with you, so it's very common for people to have a goal for retirement income and, once they feel that their retirement contributions will allow them to achieve this goal, they feel that it's okay to allocate the rest of the money towards spending it now.

The problem is that they often decide on the retirement income that they'll need in today's dollars but use retirement accumulation projections using future dollars, which results in a massive disconnect between the two. When that happens, they simply won't be able to meet their retirement goals but often won't realize that until it's too late.

  The problem is that your numbers are flawed in your OP IMO.  I literally just looked and the worst 20 year period for a good allocation of index funds (80/20 mix) ever was from 1989-2009 and it was over 7%.  The worst 25 year period was almost 9%.  So in your opinion annual returns will be the absolute worst ever and would continue throughout retirement.  For reference the worst 35 year period was over 11%.

I agree no one knows what the next 20 or 30 years will bring but my guess is that they will not be the worst ever, especially with a global economy now.

ETA:  So you used 30 years in your OP.  Worst 30 year period is over 10% (almost 11% and was from mid 1983 to mid 2013).  So what if you used 10% as the return number.  Hell what if you used 9%?

I think we previously spent quite a bit of time discussing this issue. My latest response can be found here: http://www.fatwallet.com/forums/finance/1251799/m17501725/#m1750...       

  Well with index funds we are not talking about constructing after the fact by cherry picking.  Indexes are indexes.  Your opinion is that something that has never happened is more likely than something that has always happened.  SO while I can appreciate your response we are both speculating on future returns.  You are just speculating something that has literally never happened.  Also I am not using some random portfolio that I have cherry picked.  I am using an extremely popular portfolio that thousands of people (if not tens of thousands) hold.  I just find it funny that you have issue with my speculation even though it has always happened.


You should change the title of this thread to "Even maxing out two 401(k)'s will only give you a very middle-class retirement if something happens that has never ever happened."

If the world blows up maxing out two 401ks will also not give you above middle class retirement.

BTW you should get your facts straight.  Two of the biggest funds in the world have been around for 40 years and over 70 years.  

So rather than say this statement as if it is fact one would have to make sure they do a lot of things wrong for what you say to occur, such as selling low, buying high, stopping contributions, having a poor allocation, etc which all can and does occur, but to act like if you max your 401ks out you are destined for middle class or worse is laughable.  Possible?  Sure.

Hopefully you don't think that I think the opposite of what you are saying which means that maxing out 401ks means you are destined for wealth and upper middle class.  I think what you have posted is possible, but depends on many factors.  Returns is one of them.

I max out the 401(k) and I contribute the maximum to my IRA. My non-retirement accounts are about half as large as my retirement accounts. On top of that I have 529 accounts that I contribute ~$10,000 annually. My employer does not match, but I for years now I have been able to contribute an extra $10-25,000 a year to the 401(k) plan, which I have done. I do not know what my internal rate of return has been in my retirement portfolio because it is too difficult to track.

Once I amassed a pile of money in the stock market, all of a sudden (after the financial crisis) I felt like I had too much invested. Similarly, once I amassed a pile of money in the stock market, it became less important for me to invest in individual stocks, since any one investment would have only a small impact on my portfolio, and I did not want to have to a) pile a lot of money into any one stock or b) invest in many individual stocks.

Just because I felt this way did not mean I did not pile a whole lot of money into individual stocks, but I did take some money off the table and purchased some some bonds in addition to piling a lot of money into ETFs of varying sectors/markets.

I am now hovering around 45 years of age and, excluding my home, my net worth is $1.4mm. With two kids under 3, I expect to have a lot of expenses between now and retirement. I have no idea whether I will continue to be a high earner or wind up with a significant drop in earnings. Like the ant, I have tried to save for a rainy day, but like the grasshopper I hope that day never comes, and that my rain day fund turns into a nice retirement nest egg. Only time will tell if we'll have enough. We don't live with a budget, and I don't usually "do without" if there is something I want -- this results in expenses of $5,000 to $7,000 a month being charged on credit cards. It never seems to vary much; and we have done several home improvement projects that have cost a pretty penny. Having a large savings pot makes it easier to spend a lot of money, no doubt.

"excluding my home, my net worth is $1.4mm."

I am surprised even with two-thirds of that being tax advantaged, the combination of your taxable investments plus your day job doesn't put you over the contribution limits for IRAs/Roth IRAs. I guess that's where marriage helps.

I would assume that David makes backdoor Roth IRA contributions.

psychtobe said:   I would assume that David makes backdoor Roth IRA contributions.
  
Ahh just googled it.  Clever.  Seems like a lot of a paperwork shuffle for someone already with 1.4MM to pay a little less taxes on 5k of their investments each year. 

But then again, this is FW.

There are no income contribution limits for a non-deductible IRA.
And there are no income limits to contributing to a non-deductible IRA and then converting it to a Roth IRA, should one wish to have a Roth IRA (and of course, there is no advantage to a a non-deductible IRA vs. a Roth IRA... (right?)

DavidScubadiver said:   and of course, there is no advantage to a a non-deductible IRA vs. a Roth IRA... (right?)
I couldn't quite tell whether you were being sarcastic, but in case you are serious, there are tremendous advantages associated with a Roth IRA versus a non-deductible IRA. There is no advantage to a non-deductible IRA to a Roth IRA, although it doesn't always mean that it makes sense to convert such non-deductible IRA's to Roth.

A classic situation that illustrates the above phenomenon involves people with substantial deductible traditional IRA balances (including rollover balances) who do not have the option of "hiding" those balances by rolling them over to 401(k)'s/403(b)'s/TSP's. If a person in such a situation were to attempt to do a backdoor IRA, he/she would run into tax issues. Hence, although there is no advantage to having a non-deductible IRA versus a Roth IRA, it does not always make sense to convert those non-deductible IRA's.
 

LeveragedSpeculator said:   
psychtobe said:   I would assume that David makes backdoor Roth IRA contributions.
  
Ahh just googled it.  Clever.  Seems like a lot of a paperwork shuffle for someone already with 1.4MM to pay a little less taxes on 5k of their investments each year. 

But then again, this is FW.

  $5500. times two for a married couple. We've been making these non-deductible contributions since 2006, and made our first conversion when it was allowed in 2010. Since then, annually. I think a lot of folks do this; it's not a secret by any means. It adds up.

LeveragedSpeculator said:   
Ahh just googled it.  Clever.  Seems like a lot of a paperwork shuffle for someone already with 1.4MM to pay a little less taxes on 5k of their investments each year.
As psychtobe mentioned above, it's $5.5K (this year) times 2 if you are married. If you don't have any other traditional IRA balances, this is actually an ultra simple and pain free process and the paperwork consists of a couple of entries on Form 8606, which TurboTax handles without any issues.
 

geo123 said:   
DavidScubadiver said:   and of course, there is no advantage to a a non-deductible IRA vs. a Roth IRA... (right?)
I couldn't quite tell whether you were being sarcastic, but in case you are serious, there are tremendous advantages associated with a Roth IRA versus a non-deductible IRA. There is no advantage to a non-deductible IRA to a Roth IRA, although it doesn't always mean that it makes sense to convert such non-deductible IRA's to Roth.

A classic situation that illustrates the above phenomenon involves people with substantial deductible traditional IRA balances (including rollover balances) who do not have the option of "hiding" those balances by rolling them over to 401(k)'s/403(b)'s/TSP's. If a person in such a situation were to attempt to do a backdoor IRA, he/she would run into tax issues. Hence, although there is no advantage to having a non-deductible IRA versus a Roth IRA, it does not always make sense to convert those non-deductible IRA's.

  What I meant to convey was that there was no reason not to contribute to a non-deductible IRA and then immediately convert it to a Roth IRA.... it seems like it would be silly to contribute to a non-deductible IRA today and not convert it tomorrow.  I always convert as soon as the funds settle, before trading, so there are no tax consequences for the conversion.

the only complication is if you have deductible IRA balances anywhere. All conversions must be pro-rated across all accounts.

DavidScubadiver said:   
geo123 said:   
DavidScubadiver said:   and of course, there is no advantage to a a non-deductible IRA vs. a Roth IRA... (right?)
I couldn't quite tell whether you were being sarcastic, but in case you are serious, there are tremendous advantages associated with a Roth IRA versus a non-deductible IRA. There is no advantage to a non-deductible IRA to a Roth IRA, although it doesn't always mean that it makes sense to convert such non-deductible IRA's to Roth.

A classic situation that illustrates the above phenomenon involves people with substantial deductible traditional IRA balances (including rollover balances) who do not have the option of "hiding" those balances by rolling them over to 401(k)'s/403(b)'s/TSP's. If a person in such a situation were to attempt to do a backdoor IRA, he/she would run into tax issues. Hence, although there is no advantage to having a non-deductible IRA versus a Roth IRA, it does not always make sense to convert those non-deductible IRA's.

  What I meant to convey was that there was no reason not to contribute to a non-deductible IRA and then immediately convert it to a Roth IRA.... it seems like it would be silly to contribute to a non-deductible IRA today and not convert it tomorrow.  I always convert as soon as the funds settle, before trading, so there are no tax consequences for the conversion.

Assuming that you have no other deductible IRA's, that's correct. The only caveat to this is the step transaction doctrine that some people are worried about.

Personally, I think that if the IRS wanted to somehow assert a claim that there was something wrong with backdoor IRA's and wished to apply the step transaction doctrine to it, they would've done it by now or they would've issued official guidance regarding it. It's certainly not conclusive, but at this point I just cannot imagine that the IRS would do so retroactively. Having said that, if you are worried about it, then perhaps doing the conversion right away exposes you to additional risks.

Bogleheads previously had a very good discussion regarding this issue: http://www.bogleheads.org/forum/viewtopic.php?t=89497 
 

geo123 said:   
LeveragedSpeculator said:   
Ahh just googled it.  Clever.  Seems like a lot of a paperwork shuffle for someone already with 1.4MM to pay a little less taxes on 5k of their investments each year.

As psychtobe mentioned above, it's $5.5K (this year) times 2 if you are married. If you don't have any other traditional IRA balances, this is actually an ultra simple and pain free process and the paperwork consists of a couple of entries on Form 8606, which TurboTax handles without any issues.

  
I read elsewhere in my googling on it that this can be done with "self 401ks" as well.  So, presumably, "Self Roth 401k" -> Roth IRA.

http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-t...

 

if you're going to do a self-employed plan, you might want to pay up a grand or two for good 401k plan docs and features so you can do the full $50k nondeductible and then convert it to Roth.  Back door Roth IRA is small potatoes. 

LeveragedSpeculator said:   "excluding my home, my net worth is $1.4mm."

I am surprised even with two-thirds of that being tax advantaged, the combination of your taxable investments plus your day job doesn't put you over the contribution limits for IRAs/Roth IRAs. I guess that's where marriage helps.

  
Also some employers like mine allow you to make non-Roth after tax contributions to your 401k and then do an in service distribution to a Roth IRA (tax free other than any earnings while in 401k).  So this year my defined contributions will be pre-tax/Roth (limited to 17.5k) + employer contributions + non-Roth after tax contributions = 51k.  If I was over 50 that would be another $5k and a backdoor Roth is yet another $5k.  I will hit $51k on the nose by the end of this year some of which is stuff I converted from taxable (basically dump pay check into 401k and live off of my taxable stock/bond sales).  Amazing deal if your employer supports it.

psychtobe said:   The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

  
True dat.  I was a grad student living of $20K / year , and was very happy and satisfied with my standard of living.

DavidScubadiver said:   I max out the 401(k) and I contribute the maximum to my IRA.  ... this results in expenses of $5,000 to $7,000 a month being charged on credit cards. It never seems to vary much; and we have done several home improvement projects that have cost a pretty penny.
Having a large savings pot makes it easier to spend a lot of money, no doubt.

  
May I ask how much you earn pre-tax?

tolamapS said:   
psychtobe said:   The average household income is around $50,000. After federal and state income taxes and FICA taxes, the typical take home pay is probably closer to $42,000. Throw in 10% for retirement and average Americans are living off $38,000, all while raising kids and paying off a mortgage. Even if nothing else changed in retirement, making $38,000 in take home pay with no mortgage and no kids to raise would be a significant bump up in standard of living. Take away FICA and now they have $42,000 per year to spend. Your hypothetical couple is making almost double that. It's a really good standard of living. We make a lot of money, live really well, but still only spend $120,000 per year and we have two house mortgages and we spoil our kids and have to overpay for things because we are so busy with work. All that changes after retirement and we would easily maintain our extremely nice standard of living on $80,000 and probably even $70,000.

I just think you're being unrealistic about how most people actually live, and how they do just fine on $40,000 per year, and what it means to be middle class.

  
True dat.  I was a grad student living of $20K / year , and was very happy and satisfied with my standard of living.
 

  Do not forget about medical costs. I hear they go up as we age. In addition to saving all of that money, it is important to eat well and exercise -- that advice may save you more than you know.

tolamapS said:   
DavidScubadiver said:   I max out the 401(k) and I contribute the maximum to my IRA.  ... this results in expenses of $5,000 to $7,000 a month being charged on credit cards. It never seems to vary much; and we have done several home improvement projects that have cost a pretty penny.
Having a large savings pot makes it easier to spend a lot of money, no doubt.

  
May I ask how much you earn pre-tax?

  You may ask anything you wish.

$300,000 -- $25,000 of which is required to be put into a 401(k) plan on top of anything I may voluntarily contribute (whatever the laws allow).

My monthly commuting ticket is ~$330
Mortgage is ~$1600
Utilities ~ $625
Real estate taxes: ~$8,000/year
Insurance:~$6,500/year (car/term life/homeowners)
Food: ~$1,300/month (probably includes non food items as well)
 

Any other thoughts?



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