Maybe THIS Is How I Can Stop Working
September 12, 2019 7:59 AM   Subscribe

For the first time in, like, ever, I'm doing more active thinking about retirement savings. I'm ready to take a trembling step up from my current "throw some money at my IRA once a month and also do any 401ks at my jobs" habit; I have two questions inside.

1. First, I need a recommendation for a product. I have an existing IRA, but I'm not happy with the return rate on it at all (which is basically bubkis) and have been thinking about switching it. When I was looking around, I spoke to someone who told me about target-date funds; I got REALLY interested in that, because it automates the distribution so I don't have to think about it. (I do not want to think about this kind of thing more than once a year.) So I was thinking of opening such an account; but the question is, with whom? ....I have some money in a 401K account from my last job that I would use to start the target-date account with by simply rolling it over; then I'd monitor it for a year, and if it looks like it's getting a better rate then I'd roll my existing IRA over into it.

2. Second: is there a good rule of thumb for "how to figure out how much money you should save for retirement"? I've looked at several articles this morning, and the suggested amounts range from half a million to 3 million, which is quite broad. I am single with no children, and while I have always planned to work until the traditional retirement age of 69, I'd love to retire early if possible. (And if saving only half a million would do it, that might indeed actually be possible.)

Caveat: thinking about money at all gives me anxiety, so I'd like this all to be as hands-off as possible. Please understand that; my understanding of finances is only about one step above putting all your money in a sock and hiding it under your mattress. (But also understand that I've set up hands-off ways for me to meet current financial goals, and they are working a treat; within only one year I have HALVED my personal debt, and I will be debt-free by next May.)
posted by EmpressCallipygos to Work & Money (42 answers total) 34 users marked this as a favorite
Shoot, should mention some possibly-relevant things:

* I rent, I do not own a home. I have no immediate plans to buy a home. Nor do I have immediate plans to buy a car or make any major investment-type purchases.
* The only debt is a credit card and a checking-account protection loan.
* I have a traditional IRA and I have a 401K at my current job, which I'd keep. I also still have the 401K from my last job that I need to roll over into something.
* In addition to the IRA and 401K, I have four other savings accounts for dedicated purposes; one is an emergency savings I'm building up, and the other three are for more liquid short-term savings goals (a Christmas fund, a "just in case the electric bill is weirdly high" fund, stuff like that).
posted by EmpressCallipygos at 8:04 AM on September 12, 2019

i've had a positive experience with vanguard. i have a roth ira with vanguard with the money allocated to one of their life strategy funds. they are all low cost, broadly diversified, and with automatic rebalancing. you can choose the fund that has an acceptable level of growth vs risk to you. worth a look!
posted by the thought-fox at 8:12 AM on September 12, 2019 [15 favorites]

For an alternative view how much is "needed" for retirement, check out the book Get a Life: You Don't Need a Million to Retire Well.

I was once in a meeting at work with a woman who was there to talk to us about retirement. She gave us an annual figure that we should strive for living on in retirement. Everyone in the room started laughing. This was at a small nonprofit, and no one was making anywhere near that amount. I'd suggest taking any dollar amounts you're given with a grain of salt.
posted by FencingGal at 8:13 AM on September 12, 2019 [5 favorites]

Vanguard. Your goal should always be to minimize costs, because those aren't coming back and, for most people, buy you nothing. Vanguard has among the, if not the lowest, costs and it's all just about as simple as possible.

However, you need to take on one point sort of intellectually antecedent to choosing a product. Obviously the return on your investment is very important to you. All else being equal, return depends heavily on the risk of the investment. If you're in an FDIC-insured CD, the return will be very low versus inflation, and if you have a long way to go to retirement, you are unlikely to get the returns you need. Stocks are far riskier and subject you to many more short-term swings but a properly diversified stock fund is much more likely to get you the returns you need, on average, over the long run. But for most people, return-chasing through moving around their money from investment to investment is actually violently against their interests. This is because, under most circumstances, active management of funds (that is, the manager buying and selling stocks based on their opinions about the market) does not pay for itself. Most difference amongst returns on actively-managed funds is literally a result of chance. If you go chasing returns, going for this fund this year because it got 8% last year (and paying a 5.75% front-end load fee) and another one the next because your current fund then only got 4% (and paying another fee), and so on, you will end up paying tons of fees for nothing (unless you end up unbelievably lucky and all your jumps happen to coincide with good fortune for your choices). Pick a product where the type of investment matches the amount of risk you need to get near what you want (for most people, this will be a well-chosen target date fund that reduces risk as you approach retirement), decide how much of a swing you can handle emotionally (knowing that you won't need the money til x date so all returns til then are only on paper) and then get into a low-cost product and stick with it unless your life circumstances change such that your needs really do.

No one can tell you how much money you need for retirement even as a reasonable estimate without knowing what your social security payment is projected to be (I believe you're US-based?) and what your current spending is, as well as your intended retirement location.
posted by praemunire at 8:14 AM on September 12, 2019 [7 favorites]

the question is, with whom?

The classic answer to this question is with Vanguard. They offer low costs, excellent performance, and good customer service.

However, many of the other quality companies such as Fidelity have gotten competitive. So if you want to look at Fidelity or others for whatever reason, look for a fund with similar holdings and fees to the Vanguard equivalent.

And if saving only half a million would do it, that might indeed actually be possible.

Do you want to remain in NYC? I seriously doubt that half a million will be enough to retire comfortably there.

There is a general rule of thumb called the 4% rule that says that you can safely withdraw 4% of your savings a year for at least ~30-35 years.

So take your rough expected cost of living when you retire, subtract your estimated Social Security, and that's how much you need to target being able to draw at no more than 4% of your starting savings at retirement.
posted by Candleman at 8:14 AM on September 12, 2019 [1 favorite]

I should have said: target-date retirement funds that use index funds, like Vanguard's, are managed only in the lightest sense, that is, someone guesses at what year before retirement you should have a 60/40 stock/bonds mix vs. a 70/30 mix. But the funds themselves are actually simply a replication of the market itself. The manager doesn't choose individual stocks or bonds, but buys them simply to mirror their weight in the market.
posted by praemunire at 8:17 AM on September 12, 2019 [1 favorite]

Seconding Vanguard. They have relatively low-overhead funds that do what they need to do. I'm basically you, in terms of desire to actively manage funds, so I have my 401k in an appropriate Target Date fund, my Roth in Equity Income, and a small non-tax-advantaged account in LifeStrategy Conservative Growth just in case we get wildly lucky somehow (not banking on it). My family gives me shit for not being an active investor, but, eh, it's not like individual investors beat the indices with any kind of regularity, so, whatever.. at least we're lucky enough to be able to save something.
posted by Alterscape at 8:28 AM on September 12, 2019 [1 favorite]

My family gives me shit for not being an active investor

You can tell your family that individual small active investors are widely acknowledged to be the biggest suckers on the planet, to the point that large investors will literally pay money for the opportunity to be the ones taking the other side of any trade they put on, and all they're doing is funding the retirements of much richer people. This is just beyond question to anyone who doesn't make their money off arguing otherwise.
posted by praemunire at 8:34 AM on September 12, 2019 [12 favorites]

That's five people for Vanguard on top of the original recommendation I got in the first place, LOL! The person who first told me about Target-Date funds mentioned Vanguard specifically, but I hesitated when I saw that other companies also did them. I trust the near universality of the response here.

So I think we can consider question 1 answered and let's focus on 2.
posted by EmpressCallipygos at 8:46 AM on September 12, 2019 [1 favorite]

No. 2 above is a tough one. I think the book mentioned above by FencingGal is going to give you a better idea of what your post-retirement savings ought to look like, based in large part on what you determine to be

a. your anticipated expenses,
b. the sort of lifestyle you want to have, and
c. where you want to have it.

We own a home, so a large part of our retirement savings plan is to have it paid off before then. The notion of having $1M+ sitting in the bank seems to pre-suppose that we'll also be living with our current expenses post-retirement, and we're working like hell to make sure that this isn't the case. Towards this end, we've also become pretty debt-phobic.
posted by jquinby at 8:55 AM on September 12, 2019

A couple of thoughts to add.

- Was your IRA funded with pre-tax or post-tax funds. It is my understanding that you don't want combine pre and post tax funds.

- If you employer offers a 401K match make sure you contribute enough to get the maximum match.

- If you look for profession help find a fiduciary as they will be bound to work for you and your best interest.
posted by tman99 at 9:18 AM on September 12, 2019 [1 favorite]

Do consider a Roth 401(k) or IRA, in you can stand not to have your contributions be deductible from your current income. The distinct advantage is that the earnings are tax free, when you eventually take them out. A harder decision would be to convert some of your current funds into Roth, as this would increase your current taxes.

You can defer up to $19,000 in your 401(k), per year. If that amount is not enough to slash your salary below a livable wage, you can also defer an additional $6,000 per year once you reach the age of 50.

Fixed income investments pay close to nothing because rates are so low. Equity investments are more exciting, with a greater chance of real returns and a (hopefully temporary) plunge when the economy sours.
posted by Midnight Skulker at 9:20 AM on September 12, 2019

The other option besides a target-date fund is just an index fund that tracks the market as a whole, e.g. VOO is a Vanguard fund mirroring the S&P.
posted by salvia at 9:23 AM on September 12, 2019

Oh, other possibly-relevant info:

* What triggered all of this is a series of "....just so everyone knows about this...." discussions my parents have been having with my brother and I about inheritance distribution, and some similar discussions one of my aunts has also been having. I have a never-married and childless aunt who is doing something a little funky with her estate - instead of splitting the whole thing up amongst us nieces and nephews, she's doing the stock to one person, the property she owns to another set of cousins, etc. I have been informed that the particular piece I would inherit is her cash accounts; I realize that it's a crap shoot as to how much might be in there (and this is the aunt for whom I'm basically her Mini-Me, so all things being equal, I'd rather have her around for a long time and inherit twelve cents than I would have a huge payout if it meant losing her sooner). But the small chance exists that in a decade or two I might get a sudden cash infusion.

* A note that speaks to my literacy level - Midnight Skulker, I understood LITERALLY NOTHING that you said in your comment above.
posted by EmpressCallipygos at 9:25 AM on September 12, 2019

Congrats on paying off so much of your debt! The amount you need to retire depends on what you expect your future expenses to be, and how much money, if any, you expect to get from social security once you begin to take it. A lot of the early retirement blogs and communities talk about the Trinity Study and the 4% rule. My rudimentary understanding of it is that based on historical market returns, if you withdraw 4% (adjusted for inflation) of a nest egg invested a certain mix of stocks and bonds every year, there's a >95% chance that you'll end up with >$0 after 30 years (and something like a 90% chance you end up with at least as much as you started with after 30 years). So you would want to have 25x your expected annual expenses. I'm sure you can google more about it if you're curious, but I don't know enough about any of the early retirement blogs or communities to recommend any of them -- my partner and I are using that 4% rule just as a guideline for when to talk to a financial adviser about retirement.
posted by amarynth at 9:33 AM on September 12, 2019

(I'm going to attempt to keep this high level and easily understandable, but will leave out a lot of details to do so)

The amount you need to have in retirement isn't a single magical number. It's based on how much you plan to spend each year. Some expenses will go down when you retire, others will go up. You need to try and estimate that. Start by analyzing what you spend each year now. When in doubt, assume you'll spend more (it's safer that way).

Your income in retirement comes from multiple sources. If you're an American, you likely have Social Security. You can figure out how much you'll get each month/year from SSA by logging into your SSA account - they provide you an estimate, adjusted annually. You may also have pension payments, if you worked somewhere that offered one during your career.

Take the amount you need to spend each year, and subtract the amount you'll get from SSA and pensions. The number you have left over is what has to come from retirement savings (401K, IRA, etc.).

For reasons we don't need to get into, we know that we can safely withdraw about 4% of our retirement accounts each year and not risk running out of money in retirement.

4 x 25 = 100

Take your anticipated annual need (expenses minus SSA/Pensions) and multiply that by 25. That tells you how much you need to save in a retirement account to be able to fully fund your retirement.


If you need $40,000 a year, then you need to have $1,000,000 saved by the time you retire.

If you need $100,000 a year, then you need to have $2,500,000 saved by the time you retire.

If you need $250,000 a year, then you need to have $6,250,000 saved by the time you retire.

If you're young, you can likely get the amount you need by saving 15% of your income each year. If you're starting when you're older, you'll either need to save more, or wait longer to retirement.

Another upside of waiting longer is that you get a larger SSA check, up to age 70.
posted by NotMyselfRightNow at 9:39 AM on September 12, 2019 [3 favorites]

The distinct advantage is that the earnings are tax free, when you eventually take them out.

It's important to have clarity on this point. If you are paying the same tax rate when you make the contribution as when you receive the distribution, Roths and traditional IRAs are a wash. Deciding what your tax rate in retirement is likely to be requires guessing about some very complex systems' operations in the future, which we cannot reliably do, and requires careful thought. Blindly picking a Roth because you don't understand that and "earnings tax free!" sounds good is asking for trouble. If you, like many people, expect to be paying lower taxes in retirement than while working, choosing a Roth will be disadvantageous from a tax standpoint.
posted by praemunire at 9:40 AM on September 12, 2019

Guys I literally have NO IDEA what any of you who are asking me about my tax rate on my IRA are talking about. In my head, the IRA is "that thing that I transfer 40 dollars to every month and I get to claim it as a tax deduction every year, and then if I leave that money alone until I turn 70, I get it back without having to pay a penalty."

I am assuming that I have a "traditional" IRA since I the only thing I know about a Roth IRA is the fact that it exists. I had someone who did a play with me and who worked as a financial advisor hand-hold me through setting up the IRA back in 1998 and all I've done since then is put money into it.
posted by EmpressCallipygos at 9:45 AM on September 12, 2019 [1 favorite]

Seeing your note, Empress:

Your 401(k) or traditional IRA contributions are deducted from your income in the year you make them. That is, you don't pay taxes on them that year. You pay them when you receive your contribution after retirement each year. So 401(k)/traditional IRA contributions are called "pre-tax"--they haven't been taxed yet.

Roth IRA contributions are not deductible. You pay taxes on the money the year you make the contribution. When you withdraw any earnings after retirement age, you don't pay taxes. Roth IRA contributions are called "post-tax"--you've already paid the tax on that income and will not be taxed again.

While you'll need to roll your 401(k) (pretax) into a traditional (pretax) IRA because you can't change your money already in a pretax vehicle to a post-tax vehicle without going through some extra steps (and paying some taxes), you have the choice, assuming your income isn't too high and depending on whether you have a 401(k) at work, of making future contributions to either a traditional or a Roth IRA going forward. Which is the best choice vis-a-vis taxes (Roths also have greater flexibility in other ways) depends on what your taxes are when you withdraw the money.

Say you're paying a 25% marginal tax rate now.

If, in retirement, your marginal tax rate drops to 10%, you will be sad that you paid the 25% tax now on money going into a Roth, rather than the 10% you'd pay in retirement.

If, in retirement, your marginal tax rate goes up to 40%, you will be happy you paid the 25% tax now on money going into a Roth, rather than the 40% you'd pay in retirement.

Who knows what you will be paying in taxes in retirement? Nobody. You can make a more or less informed guess, but, me, I hedge my bets a bit. I have the bulk of my retirement accounts in pre-tax accounts, so lately I've been directing my contributions to a Roth, just in case. But you can't know. Probably most people will be paying fewer taxes in retirement, but...what if tax rates shoot up to deal with climate change, etc.? You can't know. People who don't understand how taxes work will advocate without thinking for a Roth, but you have to work through your own individual situation.
posted by praemunire at 9:52 AM on September 12, 2019 [3 favorites]

I write about this stuff for a living and have been active on MeFi for...well, almost forever. Mathowie and Jessamyn can vouch for me. (Just trying to establish credibility here.)

Anyhow, you are the target audience for my Money Boss Manual. That's a direct link to Google Drive. You can download the PDF and read it at your leisure. It should give some solid answers to most of your questions. I'm not pitching a course or anything. (I've already made my web money!) Just like to educate people about personal finance, and I really think this could help you.
posted by jdroth at 9:55 AM on September 12, 2019 [11 favorites]

I'd like to table any discussions of tax margins and pre-vs-post-taxes and trying to plan that out because there is no chance in hell that I would be trying to figure that out on my own, and most likely would be speaking to someone else to do that for me in a couple years.

Coming back to now:

The amount you need to have in retirement isn't a single magical number. It's based on how much you plan to spend each year. Some expenses will go down when you retire, others will go up. You need to try and estimate that. Start by analyzing what you spend each year now. When in doubt, assume you'll spend more (it's safer that way).

I have a decent enough idea of what my budget has been for the past year (I'm going to be 50 in half a year). For back-of-the-envelope purposes, is it safe to use that figure?
posted by EmpressCallipygos at 9:56 AM on September 12, 2019

I have a decent enough idea of what my budget has been for the past year (I'm going to be 50 in half a year). For back-of-the-envelope purposes, is it safe to use that figure?

Sure. It won't be perfect, for a lot of reasons, but don't get hung up on that.
posted by NotMyselfRightNow at 9:58 AM on September 12, 2019

Also, if you don't want to read an entire ebook about this, I have a one-page guide to financial freedom that glosses over the subject quickly. Again, Google Drive link.
posted by jdroth at 9:59 AM on September 12, 2019 [1 favorite]

The main thing you should take into account is items currently deducted from your paycheck, if they're not already accounted for in your budget (since a lot of people use their actual take-home pay as the input for their income in their budgets). E.g., right now, my budget doesn't include a line item for a MetroCard, because that's deducted from my paycheck and on a day-to-day basis I only worry about how to spend the money that actually arrives in my account. When I retire, I'll have to fund my MetroCard myself as a line item in my budget. As you know, they're not cheap!
posted by praemunire at 10:01 AM on September 12, 2019 [1 favorite]

Second: is there a good rule of thumb for "how to figure out how much money you should save for retirement"?

Yes. What NotMyselfRightNow said. Assume that for general hand-wavey reasons you can basically take 4% out of whatever money you have saved, forever. This is assuming it's invested, loosely. And then you still have the pot of money.

I have a decent enough idea of what my budget has been for the past year (I'm going to be 50 in half a year). For back-of-the-envelope purposes, is it safe to use that figure?

Sure. But it's probably better to have a longer amount of time just to average things like up and down health expenses, vacation, etc.

Some people really want their retirement to handle whatever comes up, Some people are presuming they're going to downsize and spend significantly less money. So some of this will be you thinking about what is going to work for you.

It's fine if you don't quite understand the tax rate stuff, but this is also why you should be reading up on it (jdroth's stuff is very good). Understanding that you can, over time, save money by taking it out of your paycheck before you see it, and then getting it out whe you are in a lower tax bracket, is good to know and saves you money.
posted by jessamyn at 10:02 AM on September 12, 2019 [3 favorites]

So 401(k)/traditional IRA contributions are called "pre-tax"--they haven't been taxed yet.

This is not entirely true - many 401K plans allow Roth deposits.

If you are paying the same tax rate when you make the contribution as when you receive the distribution, Roths and traditional IRAs are a wash.

This one I'm not so sure about. I've thought it about it a lot and I think it's incorrect. The key is how one thinks about deposits. In the scenario where I believe a Roth is better is if you're able to save the max and pay the tax. Imagine two savers, Alice and Bob. Alice puts $10K into a Roth (and separately pays ~4K in taxes that year). Bob puts $10K into a traditional account; they both choose the same investments). Wait 35 years (for simplicity I'm going to assume a 7% growth rate), that's 5 doublings (Rule of 72) so both accounts will be worth $320K. Alice paid $4K in taxes way back when and now gets $320K tax free. Bob also gets $320K but over time will probably pay $128K in takes giving him a net of $192. Bob would have to pay a effective tax rate of only 1.25% for him to come out better (in a super-simplistic analysis)

The scenario most people think about is this though: Alice has only $10K total to invest so when she does it after-tax she actually only deposits $6K, and 5 doublings of that is, guess what, $192K, the same as Bob nets.

So if you start with the same amount of invested cash (first scenario), the Roth kills it. If you start with the same amount of investable cash then they are a wash. The difference being that Alice needs $14K that first year, not $10k.

I would make the general statement: If you can max out your retirement savings and pay the tax on them now, the Roth option wins hands-down.
posted by achrise at 10:33 AM on September 12, 2019 [1 favorite]

In an effort to both educate myself, and also give you all an idea of how far you have to dumb yourselves down:

If you can max out your retirement savings and pay the tax on them now, the Roth option wins hands-down.

Assume that I cannot max out my retirement savings payments yet, so this is solely about the "paying the tax on them" part.

* I contribute to a 401K with my current employer.
* I also transfer $40 a month to my current IRA with Citibank, and then when I do my taxes, I report that and I get a deduction.

Am I paying the tax on my retirement savings in either of those cases, and if so, which one?
posted by EmpressCallipygos at 10:54 AM on September 12, 2019

Just my 2 cents, but stop worrying about Roth v Traditional, taxes now vs taxes decades from now, tax deductions, etc. Yes, those are all important topics, but you need to focus on more foundational questions and issues right now. Crawl -> walk -> run.
posted by NotMyselfRightNow at 11:00 AM on September 12, 2019 [2 favorites]

With your current 401(k), you almost surely did not pay taxes on that money when it was put in. When you take it out of the 401(k), you'll pay taxes on that money and the gains on it as if it's income you earned in the year you withdraw it. (This assumes you have a "traditional" 401(k), which most people do, as opposed to a Roth.) A traditional IRA is the same. With the Roth versions you paid taxes on that income when you put it inbut you don't pay taxes on that money, or the gains on it, when you take it out.

Also you should be reading jdroth's stuff.
posted by madcaptenor at 11:05 AM on September 12, 2019

No, if you are taking deductions for both, you're paying the taxes on neither one right now.

I totally get that you're trying to keep this simple while you're learning and I don't want to bog you down in detail. The only reason I even mention it is because you are actually going to have to choose whether to keep putting money in your traditional IRA, the one you have now, or whether you'd like to open a Roth. For you, the path of least resistance is probably just continuing to contribute to your traditional IRA. But it will certainly not do any major damage to you if you do that and put off thinking about this subissue for a year or two.

(This is not entirely true - many 401K plans allow Roth deposits.

Hers is clearly not a Roth 401k plan.)
posted by praemunire at 11:06 AM on September 12, 2019

Am I paying the tax on my retirement savings in either of those cases, and if so, which one?

No. Both are probably tax-deferred. You will pay the tax when you withdraw from those accounts, as if it is earned income.

Unless you are going to have a ton of money in those accounts, though, this is probably something you don't need to worry about. If you have $100,000 and can withdraw $4,000/year... You're just not going to be taxed a lot on it (just like your taxes would not be high if you earned $4,000/year.) Even if you have a million dollars and are withdrawing $40,000/year.... Your taxes are not going to be that high, you'll deduct the standard deduction and then be taxed as if you're earning less than $30k/year, most if not all will be below the 25% bracket.

If you are still in NYC I am happy to grab a cup of coffee and help you figure this stuff out, it's stuff I've had to learn myself and I've helped a lot of my artist friends set up their retirement accounts. I would like to think that I can talk about this stuff in a way that is fairly clear and I'm familiar with the economic issues that people have who are not highly paid especially in a HCOL city where people are often lifelong renters and people aren't maxing their accounts, they're just trying to do the best they can.
posted by matcha action at 11:09 AM on September 12, 2019

One thing I see missing in this discussion: Do you know exactly what your IRA and 401k accounts are invested in? The IRA and a 401k is simply a type of account - they're not investments.

I say this to indicate that it is very likely the financial institutions that hold your IRA and 401k accounts offer a targeted retirement product that you can buy shares in with the money in the accounts. I agree with others that Vanguard has the lowest fees and are likely to be the best choice in the end of the day but I want to ensure you're not just tossing your 40 bucks a month into a IRA cash account that isn't being actively invested because it defaults to a settlement or a money market account or something with low returns rather than a longer term investment product.
posted by Karaage at 1:32 PM on September 12, 2019

Hi Karage -

I do not know, and for me, the benefits of trying to actively choose how those funds are dispersed does not outweigh the confusion and anxiety that would result in my attempting to make such a choice. I understand I could do better if I took a more active role in deciding this, I prefer to stay hands off and I am at peace with that decision.
posted by EmpressCallipygos at 1:41 PM on September 12, 2019

That clarification is helpful but gently, I want to be clear, the need to decide how those funds are actively dispersed will not change if you move your money to Vanguard.

I note that this isn't difficult, as the only decision on how the money is "dispersed" here is that You will need to instruct your IRA and 401k account holder, even if you move it to Vanguard, that the money needs to go to a Target Retirement 2035 (or whatever year you want to retire) fund. My point is that it is likely your current financial institution can also be instructed to do that and likely has a similar target retirement fund and you may be unhappy with the rate of return because the money is currently invested in a basic account that returns little but protects the balance.
posted by Karaage at 1:48 PM on September 12, 2019

An even shorter version of Karaage's (correct) point.

A brokerage (Vanguard, Fidelity, Charles Schwab are common brokerages) holds a 401(k) and/or an IRA for you. The 401(k)/IRA account is just a "holder" of investments.

A mutual fund (Vanguard Target Retirement, Fidelity Freedom, Schwab Target are common target retirement date funds) are an actual investment.

You don't need to match the brokerage with the mutual fund. For instance, I hold Vanguard funds in a Fidelity 401(k) account.

You should find out what your actual investment is right now, because your question is equivalent to "my garage isn't fast enough - how can I change my garage to get a faster car?"
posted by saeculorum at 2:39 PM on September 12, 2019 [1 favorite]

You should find out what your actual investment is right now, because your question is equivalent to "my garage isn't fast enough - how can I change my garage to get a faster car?"

With all due respect, I believe my questions are actually more akin to "Who makes the best garage" and "how fast a car do you recommend I get"? I have no opinion whatsoever on how quickly I attain a certain point, and only found out that my current IRA rate is bad because my pro bono financial advisor told me so.

I'm going with the Vanguard Target Date fund PRECISELY BECAUSE they will be doing this kind of thinking for me, please understand that I do not want to be doing it myself.

I am going to mark this resolved because I"ve found the answers I was seeking, thank you.
posted by EmpressCallipygos at 5:03 PM on September 12, 2019

my current IRA rate is bad

No, your current investment return rate is bad (by your estimation).

An IRA (or 401(k)) has no return rate. It's only a holder of investments.
posted by saeculorum at 5:12 PM on September 12, 2019 [2 favorites]

Hi! I hope this isn't disrespectful of your decision to mark this resolved but I thought of this analogy in the shower and thought it was better than the car/garage one. Please use it if it's helpful to you, ignore if not.

1. IRA/401k accounts at different financial institutions (e.g. Vanguard, Schwab, Fidelity) are buckets
2. Investments like a target-date fund are what you put into the bucket
3. Some buckets (the ones with high expenses) are a bit leakier than other buckets (Vanguard is the best bucket, hence the unanimous recommendation. But if you're stuck with a different bucket, it's okay, not everything has to be optimized all the time)
4. There is no way to make taxes work with this bucket analogy so forget that shit! You are doing a good thing for yourself by putting investments into your bucket and that's what's important.

On point 2, if you put money into the bucket and let it sit there without putting it into a target-date fund or another investment, it's just about the same as literally putting money into a bucket, which is why people are freaking out - they want to make sure you don't miss out on possible investment returns. But you have already chosen an investment (a target-date fund), so there's nothing to worry about!

Congrats on taking an awesome step for your financial health! A Vanguard target-date fund is a great choice and sounds like exactly what you need.
posted by sunset in snow country at 6:42 PM on September 12, 2019 [1 favorite]

If you had an advisor that wasn't trying to sell you anything tell you that your current IRA investment isn't a good option then trust that. If you want to move everything to Vanguard, you can call them and tell them that and they will tell you what to do next to make it happen. Once you have that set up, it is easy to add a regular monthly withdrawal from your checking account to your Vanguard account. If you are saving more than the amount you are allowed to deduct as an IRA contribution, you can set a separate account invested in the same Target Fund and use that.

How much money do you need? I'm going to try to give you a very simple, very simplified approach that will give you some rough idea of what you are aiming for.

First figure out how much money you might be spending (very roughly) in retirement. One way to do this is to look at your current take home pay, take out expenses that go away and then add the cost for medical insurance (if you wait until you qualify for social security and medicare then you just need a medicare supplement to cover the rest. Just google the question and you can get some quotes. If you might move to less expensive state or do something else that makes your living expenses lower, then factor that in. Don't sweat the details - this whole things is so rough that you don't need to be too precise.

Now some simple math. First you need to add in enough extra to cover taxes. I would use a 15% tax rate as an over-simplified, back of the envelope number. If you are in a high tax state, increase the % to cover state taxes.
So take your income and multiply by 1.176 to get how much income you need. (Note multiply by 1.176 is the same as divide by 0.85). Next figure out how much of this number you will get from social security. (Social security sends you an estimator every year or you can look it up) This is the number that your savings needs to cover.
Now, if you have been using monthly numbers, multiply by 12 (skip if you were using annual numbers) and then multiply by 25. (That is the same 4% save withdrawal rate) Ta da! If you have this much in savings, then you are in a very excellent position for retirement.
posted by metahawk at 7:59 PM on September 12, 2019

If you are interested in the possibility of early retirement,, you can start by reading this interesting approach MrMoneyMustache has an interesting approach that recognizes that early retirement doesn't have to mean your income is zero just that you are free to earn less money and only in a way that is rewarding for you. So, if you get the place where your retirement savings are large enough, you can start earlier by using a mix of earnings from pleasurable productive activities and earnings on your savings. MrMoneyMustaches also encourages people to be frugal in their spending while still enjoying their quality of life while not needing as much to fund it.
posted by metahawk at 8:08 PM on September 12, 2019

The Roth IRA has another advantage that no one has mentioned. Once you're 70 and a half, you have to withdraw a certain amount of money from your traditional IRA whether you need it or not. You pay taxes on the withdrawal and add it into the complicated sum that determines how much of your Social Security is taxable. That's not true, now at least, of the Roth IRA -- it can sit there peacefully waiting until you need it.
posted by SereneStorm at 9:44 PM on September 12, 2019

For question 2: If you save half a million you would have about $20,000* per year to live on.

*using the 4% rule of thumb

*doesn't include any other income. So this $20,000 per year may be higher if you also will get social security.

*$20,000 per year to pay for everything, including probably taxes.
posted by halehale at 1:16 PM on September 14, 2019

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