Archive for the ‘Retirement’ Category

Abandoning Early Retirement
January 7, 2017

I mentioned that I went on a brief early retirement kick a few months ago.

At the time, I had just switched to a new job that was proving to be completely unfulfilling. The pay was amazing, but I’ve learned that no amount of money can really make up for a boring job. Although I knew realistically that I could leave whenever I wanted (my old bosses wanted me back, and I had offers from another company), the day-to-day reality of waking up and going to that job wore me down.

The timing for this malaise was especially bad since we’d just bought our house and wanted to try for Baby #2.  I punched number after number into J Money’s Retirement Calculator, tweaking the numbers for every possible eventuality. I started reading blogs like Freedom 35 and Early Retirement Extreme and even Mr. Money Mustache, at least until the hyper-frugalism and frugal smugness grated too hard.

Early retirement is only slightly easier to plan for than regular retirement.  Would we keep the house or sell and move to a lower cost of living area? Would we downgrade to less demanding jobs or work part-time or just be bums? Every set of numbers had a different set of assumptions, and this can make the answer really different.

Interestingly, though, one truth became clear: people can retire – are retiring – on what we currently have saved.

And like a baby sucking its thumb or hugging a teddy bear, my calculations were soothing to me.

I’d done something similar when I hated my first job and considered going back to school full-time.  Calculating living expenses vs. savings and knowing that I could quit at any time and still finish school made it easier to go to that soul-sucking job every day.

(Of course, I’m older and wiser now and more skilled and more likely to speak up for myself.  I went to my boss and told him it wasn’t working.  He immediately changed my duties to be more in line with my experience and the job I hated quickly became a job I loved. Early retirement suddenly seemed way less important.)

Still, the knowledge that I really wasn’t tethered to a job – any job – was a little eye-opening.

Realistically, I get way too many of my feelings of self-worth from working. I also have a pretty neat job in a really cool industry where I get paid a healthy salary. And even if admitting this makes me a  terrible mother, I’m also way more partial to working than to childcare (sometimes it’s just nice to sit and drink a whole cup of coffee while it’s still hot, you know?), though Mom Guilt often sneaks in and it’s hard to balance everything.

So what do you do when you’re sort of financially independent except you’re risk averse and not interested in not working?

I was inspired by a former coworker who worked 2 days a week for about 10 years. Her resume has no gaps, and I doubt any future employers will ask her if she worked 40 hours per week during those years. I wasn’t interested in working quite that little (plus we depend on my benefits too much).

Our solution is for D and me to each work 4-day weeks.  This gives each of us a chance to get chores and errands done, or to spend an extra day with the kids. With the arrival of Baby #2, it was a good opportunity to ask our bosses for these reduced schedules.

My concern in the short term will be my control freak tendancies at work and the lack of understanding from our coworkers.  I found that three days a week was too hard – too hard to get my work done, too hard to meet with other employees, and too hard to be as involved as I wanted to be with our projects.  I also got a little bit of pushback from some coworkers. Why can’t we have a meeting on [day you’re taking off]? Can you cover XYZ that’s not only on your day off but also at 8pm? How long are you going to be part-time? Etc.

In theory, this does make our nominal budget very tight, especially since the two biggest line items – mortgage and daycare costs – are relatively fixed. That said, we can always work more if money becomes a problem.  Right now, the lowered stress and extra time with our kids seem to be in far shorter supply.

What would you do with almost financial independence but with a lot of uncertainty?

 

Converting a 401K to a Roth IRA
June 22, 2010

Chad has about $40,000 in a 401K he had with his old company, and since he’s probably not going to be returning to them, I started pondering what we should do with this account.  I started thinking about whether or not it might be beneficial to convert it into a Roth IRA.

Pros

+ If Chad remains unemployed this year, our income will be abnormally low, which means lower taxes.  Bush’s tax cuts are also set to expire after this year, so this might be our last chance.
+ We could probably handle most to all of the additional tax burden through my normal federal withholdings – I’ve been witholding extra from my paychecks since we weren’t sure when Chad would find work or how much it would pay.
+ The market isn’t doing so hot right now, which means less money being rolled over, although by the time we’d get around to converting, who knows?
+ Roth IRAs are awesome.

Cons

– Who knows what our taxes will be when we retire? I suspect they will go up, but if we live frugally & make small withdrawals, who’s to say we couldn’t be in a low tax bracket?
– If Chad does start working soon, we might exceed the phase-out limits for some things, like our student loans interest.  Not the end of the world, of course, but something to think about.
– We’ll owe about $9,000 more in taxes for 2010, which doesn’t make me happy while we’re on one income.
– I was also considering opening a deductible IRA for Chad this year & putting the full $5,000 in.  However, with paying the additional taxes and the fact that I was planning on maxing out both of our Roth IRAs this year, I feel like we’d be overloading retirement accounts at the expense of cash savings.

I’ve run the numbers through a couple of online calculators, and it looks like the conversion would be a good move… unless my predictions of the future are wrong.  Of course, I’ll have no idea if this is a good idea or a bad idea until approximately 30 years from now.  Dammit.

Why am I maxing out my 401K?
December 17, 2009

I mentioned in my 2009 Review that I had come close to maxing out my 401K this year.  I plan to try to do the same next year. 

But a recent post at Punch Debt In The Face (it is worth clicking through just to see the picture at the top of the post) made me stop and consider why I wanted to max it out. It just.. has always been something I wanted to do, and I don’t know if I ever honestly believed I’d get there.

PDITF cut back his 401K contributions, with the reasoning that he wanted more money to plan for the short term & midterm future. After all, you can’t touch that money until you turn 59.5 so once it’s gone, it’s gone. He’s also maxing out his Roth IRA, which means he’s still contributing the recommended amount to retirement (about 15%).

It’s not like he’s going to be spending the money, either – his plan is to invest/save that extra money for the short term.

Quite frankly, it sounds like he has thought out his plan. And for a minute, it threw me for a loop. After all, didn’t I whine about how much lower my cash savings rate would be next year? Maybe I’ve been so fixated on this goal of maxing out all of my retirement funds that I never bothered to ponder the alternatives.

So I did. And I’m going to stick with my plan to max out my 401K next year, because…

1. I will be saving enough cash next year.
It’s going to come out to about 25% of my take-home pay. That’s double the suggested savings rate. It just doesn’t seem like “enough” to me because I’m used to saving so much more than that.

2. I’m saving for two.
Chad can’t contribute to a retirement account if he’s not working. (Although this is misleading, since if he was working, I’d probably have him max out his as well.)

3. I’m going to have to scale back contributions anyway.
If I keep contributions at 20%, I will put in too much money in 2010. So I’m still going to get a cash bump next year, and that’s not taking into account any raise I might earn.

4. That money is not locked up forever.
I can take a loan out of my 401K if I really need money. I know they preach against this. It’s borrowing from your future! If I’m overcontributing, though, I’m just evening things out. The other argument is that losing your job means you have to pay back the loan balance immediatly or face tax penalties. Because my company is awesome, they do not require you to pay back the loan right away if you’re fired – you continue on your normal schedule. 

5. I could use the tax break.
Especially if Chad does find a job, lowering our taxable income could keep us within Roth IRA limits for a year or two extra.

6. I don’t know what I’ll want to do in my 30s, my 40s, my 50s.
That 15% contribution usually assumes you’ll be working right up until retirement. What if I decide to retire early at 45? I’d miss those last few catch up years. I sometimes toy with moving to a small town and becoming a teacher, but I could only handle that big of a pay cut if I’ve planned ahead. Or, if I do need more cash when I’m 40, I can scale back contributions then. Contributing now, while I can afford it, gives me more flexibility later.

(The most interesting part of #6 is that this is one of the same reasons PDITF decided to scale back. We forsee the same issues – what if I want/need more money before retirement? – but have chosen completely opposing strategies to handle it.)

7. You don’t get to make it up.
When I’m 30 and am positively rolling in it (a girl can dream!), I won’t be able to tell the IRS, “Look, I gave $10,000 less than the max when I was 25. Let me just sneak that in there now!”

8. Contributing now gives me the biggest bang for my compound interest bucks.
There was a blog post a year or two ago where someone did the math and said that a 26-year-old who maxed out his/her retirement accounts just that year would have a million dollars at age 65. Now, I might want to retire earlier than that, and I think the annualize growth on that was a bit high (12%), but the principal stands. To combat the uncertainties (will the market really return 12%? What if I want to retire at 55?), I’ll keep my contributions high for as long as I can.

9. No one ever regrets saving too much for retirement.
As long as I’m enjoying my life, I won’t be on my death bed thinking about how I should have spent more money. (Although, come to think of it, a 1% contribution reduction could get me a Coach purse or something. WAIT I NEED TO START OVER!)

Ramit had a survey where 62% of people in their 40s wished they’d saved more for retirement. I don’t want to be one of them.

10. If I die before I turn 60, I can leave that money to my loved ones.
Here again, the fact that I’m still enjoying my life means that even if I die before getting to use any of this money, I won’t regret it. And I’ll be able to leave it to my (hypothetical) children, to my sisters, to Chad, to my parents, my cousins. And that might be a better use than me finally buying some Marc Jacobs when I retire.

What do you think? Are you changing your contributions? Why?

Also, is it just me, or have I been doing a lot of list-based posts lately?

Question about 401K contributions
April 8, 2009

I had an interview recently for a job in Virginia.  Chad and I have talked about moving back to the East Coast to be closer to our families, so I’ve been looking for jobs there as well as here in California.

If I get offered a job in Virginia, Chad would probably quit his job and come with me.  Since we’re in one of the worst job markets in recent history, I’m wondering if this is a smart move.  I have no doubt he could find a new job eventually; he’s smarter than I am, and has relevant experience.  He has more in savings than I do, so monetarily we’d probably be fine.

Still, there’s a part of me that’s worried.

I was thinking of pulling back on my 401K contributions, (to 8%, enough to get the full match) and socking away more cash.  I’m not sure why I feel compelled to do so; after all, the move is purely hypothetical at this point.  I also have a job interview in my current city next week.  We could stay, and I could wind up kicking myself for wasting the chance to invest.  Of course if we do move, I could wind up kicking myself for not having enough cash to tide us over.

What do you think?  Should I scale back until it’s not necessary, or keep up contributions until I know for sure we’re going to have a cash flow problem?  What would you do?

Contributing to my 401K was still a good idea.
October 15, 2008

With the recent drops in the stock market, I’ve been sort of mentally slapping myself for having contributed so much to my retirement accounts.  I pondered cutting back on my contributions and saving more in a bank account, but I haven’t yet because I know it’s just reactionary.  (When the market rebounds, I’ll have more money that’s poised for growth and less that’s hoping to get back to a break-even point.)

I started wondering, had I never put any money into my 401K, would I be better or worse off than I am today?

Over the past 3-ish years, I’ve contributed $26,800 to my 401K.  My employer matches up to 6% of my salary, and that totals roughly $12,100.  My retirement account – as of the market close yesterday – was worth $30, 100, which means I’ve lost nearly $9000 on paper.

Clearly, this was a bad idea.  Or was it?

I’ve only put in $26,800 of my money in.  Technically, I’m still up $3,300.  Not a great rate of return, but roughly equivalent to what my ING account is getting.

It gets better.

The following calculations are from a webpage that my company’s 401K program put together.  The numbers are generally accurate, although I find that it underestimates how much taxes I’ll pay.

The total amount of taxes I would have paid on 401K money (assuming I had never contributed anything) in the past 3 years is $10,200.  So I’d have an extra $16,600 sitting in my savings right now.  I already max out a Roth IRA (and I’m not looking at the balance for that- I don’t have a match to offset market losses!).

So on paper, I’ve got $13,500 more than I’d have if I didn’t contribute to my 401K.  Yes, it’s all on paper and I’ll have to pay taxes on that $13,500 eventually, but ultimately, that number looks OK.

Taxes make everything a bit fuzzy, of course.  I’ll eventually pay taxes on my 401K, but taxes on growth will be deferred.  If I’m smart & balance 401K withdrawals with Roth withdrawals, I could pay less tax on the money when I’m retired.

Obviously things could have been better.  If I’d only contributed up to what my employer matches, I’d probably be in an even better position right now.  If I’m still saving over half my take-home pay, does it even matter?

Mostly I’m saved by my employer’s generous match and my own somewhat high tax bracket.

How about my readers?  Are you below the level you’ve been putting in, or has your account balance just fallen really far since January?  Find something wrong with my numbers (I should note that taxes is total taxes, not just federal)?  Or do you just wish people would stop complaining about retirement accounts they won’t be touching for another 30 years anyway?

Jumping on the bandwagon
September 17, 2008

Nearly every blog I read had posts yesterday & today about the giant drop in the stock market.

I’m there too.  My 401K is down almost $1000 since the end of last month; my Roth is down $1500 from the beginning of the year.  I usually try to ignore the news, because as the balances drop & the talking heads screech I want to move all my money into my mattress. (If I started doing that a year ago, I’d be ahead right now.)  No matter how reasonable I try to be, I’m freaking out.

It doesn’t help that Chad insists I tell him what to do with his money, and he now is yelling at me about the market’s performance.  Because I totally have control over this.

I considered reducing my contributions to my 401K.  I know you’re not supposed to do it.  I’ve been trying to find a reason to do it (I could save it for the wedding!), and the only thing that is keeping me from changing it right now is that I wouldn’t get that much extra cash by scaling things back.  A 5% decrease in contributions will be less than $100/paycheck.  Wow, I’m sure that extra $700 will cover a lot toward the wedding!

When things get tough, I turn to Excel.  Spreadsheets soothe me.  I made a pie chart to track my spending, similar to StackingPennies’ “Where is My Money Going?” post from a few months ago.

I really want to get the savings up to 50%.  The charity spending should go up, as should gift spending.  I’m going to change my federal tax allowances so that I have less withheld from my paychecks.  I checked the IRS calculator, which said I should set it at 6, but I still like to get a refund, so I’ll probably just bump it up to 2 or 3 allowances for now.  Otherwise, I guess I’m pretty pleased.

So what are you guys doing?  Silently freaking out but taking no action?  Taking everything out of the stock market and putting it into your mattress?  Plugging up your ears and singing “LALALA” to block out everything?

LALALA!