I'm 33, unmarried, no debt, no house, 830 credit score, and $285k in 2 401ks (~66% pre-tax contributions, 33% ROTH) and $119k in a Roth IRA (~404k in retirement savings in total). I max out yearly both my 401k and IRA but likely proposing within a year and sometime after that, getting a home. I'm paralyzed by the fear of not having enough for retirement but I know in order to get to the 20% downpayment (to avoid PMI) I'll need to reduce my savings. While 10% seems to be the recommended contribution rate & there is no "right" answer about how much to save, is 10% reasonably enough (presuming I still max out my IRA yearly)? I imagine that if I didn't contribute another $ to my retirement I'd still likely have enough, but at the same time I come from a family of savers and the idea of passing up a year of maxing out my 401k is hard to swallow considering my post-tax income is enough to fund my lifestyle. I almost feel like I need psychiatric help to break me of the saving mentality but also need a professional opinion about my scenario. In the end I may just see an advisor on a fee basis but wanted to get the $0.02 from some of the advisors here. Thank You.
Hi Colin! Wow - you are a great saver. I'm totally impressed by your retirement savings thus far. I'll start by saying that meeting with a fee only planner is probably a good plan. He/she can give you a good idea of where you actually stand in terms of your retirement goal. You may want to look for someone who counsels Gen X/Gen Y clients as I do.
If saving for a house is your goal, I would ask you to think differently about saving for a downpayment. Over the years, people have forgotten that a house is a place to live and raise a family. For most of us, it's not for a quick flip investment. With that in mind, think of your house as a long-term investment and your downpayment is a portion of that investment. Where else can you purchase a large investment, leverage 80% of it, and if you hold it long enough and sell when values are up, you can get a tax free gain? Housing is a good investment.
Remember that you are not saving all this money just to go and blow it. Consider your downpayment savings as an investment in your retirement.
First off "Congrats" on saving $404k in your various retirement accounts and achieving a great credit score by age 33! I think the four key facts that you didn't provide us are as follows: 1. What is your annual income?, 2. What is your Marginal Federal Tax Rate?, 3. What is your average monthly expenses? and 4. What is your current Cash balance?
I think your desire or possible obsession to save is fine but you need to "balance" all aspects of your life and make sure that you are not sacrificing a short-term goal of a home for a long-term goal of a funded retirement. I think your desire to have a home is great and that you should now focus on creating a plan to achieve it even if you have to reduce your excess retirement contributions. Yes make sure you achieve the company match and yes 10% is a good rule but you need to start accumulating a 20% down payment for your home. DO NOT invest these funds in the market rather keep them is a safe cash account.
In addition, you need to make sure that your various retirement accounts are properly allocated to provide you with a globally diversified portfolio that meets your personal risk tolerance. I think you should contact a fee-based wealth adviser in Wisconsin to help you achieve your goals by creating a balance but integrated wealth plan. Good luck!
Rob Riedl www.EndowmentWM.com
Hi Colin, you are to be congratulated on your savings habits! It sounds like you have carefully thought out your retirement. Who knows what retirement will be like in 2048. Will the retirement age for Social Security increase or will it even exist? As you know retirement savings has shifted from the company (pensions) to the individual and you have to do the heavy lifting for your future - it is harder to save than to spend! Lets play devil's advocate for a minute. Why do you want to own a home? Real estate is an illiquid asset whereas your savings are totally liquid. In the last Great Recession (2008) one of the problems people had in dealing with unemployment was that they could not sell their homes and move to where the jobs were. You can always rent a home. Having said that, it is nice in retirement to have your housing expenses eliminated. So if you intend to have your home paid off when you retire and live there the rest of your life, that can give you some peace of mind. You might say that with low interest rates and the tax deduction for mortgage interest you are getting cheap money. The problem is you may not be able to deduct the mortgage interest. The Standard Deduction for 2013 is $6,100 for an individual and $12,200 for married filing jointly. The annual mortgage interest on a $280,000 home with 20% down borrowing $224,000 at 4.25% is $9,393 for the first year. So if you are filing jointly, as you indicated you might be, you would have to have more than $2,807 in additional deductions to be able to itemize on your taxes. Therefore the tax savings may not be there. In a rental home if something goes wrong with anything, you just call the owner. If you own the home, you own the expense. An air conditioner unit can set you back $5,000. That means you need to keep more in savings than you currently have. You said you want to have children - additional annual expenses for a child can be $10K to $15k without college savings. So while today you seem flush with cash, the future may not be. I'm not trying to be a pessimist, I have owned homes for 30+ years, I just want you to think through some of the downside of home ownership. I have also rented homes and I have had rental property. Most property owners are grateful for you to maintain their property and most will allow you to add personal touches to suit you and your family as long as it doesn't decrease the value of the home. So, if home ownership is for you, then plan to have it paid off when your retire. An alternative plan is to save as you are now so you can afford a home/cottage/condo expense in retirement. Please meet with a financial professional who can help you review your plans, put numbers on paper so you can make the best decision for yourself and your future family!
Colin, others have made some good suggestions and have congratulated you on your ability to save. Let me give you some unorthodox advice that you may not get from people who focus tax deferred investing.
Your IRAs and 401(k) plans will probably not be the only places from which you’re going to get income in retirement. I’m old enough to have to take RMD distributions from my retirement accounts and I’m not enjoying it … at all. The conventional wisdom is that at your age the tax deferral is worthwhile. The only question is what the tax rate will be when you retire.
Of course Roth IRAs are not subject to taxes when the money is withdrawn. So unless this benefit is withdrawn it’s a good tax shelter.
But the bottom line is this, keep saving but don’t obsess over stuffing all your retirement savings into “retirement” accounts. That leaves you with a lot more flexibility for things like buying a home and other expenses as you marry and have children. Good luck.
Colin - You could take the 30k in non-retirement Vanguard funds to help with the downpayment. The market has done well the last 5+ years and may be nearing a peak. You could take this money off the board while its up and not forgo the 401(k)/IRA as much.