Have I saved too much for retirement so far?

Question

I currently have a roth ira as well as a 401k from fidelity. I have around 350k in my 401k and another 10k in my Roth IRA. I just turned 40 recently. Am I saving too much for retirement and should I focus more on saving in say a regular savings account?

I have around 30k in a regular savings account along with another 30k for my children’s education fund (3 year old, 4 year old, 10 year old).

I have no car loans or student loans. My only debt is my house monthly payment around 1700 a month.

Can you clarify your question? It asks if you are saving too much in the title, but the body seems to be about where you should put future savings. I'm confused. — JohnFx, Mar 24 '19 at 16:40
Related if not dupe: https://money.stackexchange.com/q/106895/26159 — Ghanima, Mar 24 '19 at 16:45
How old are the children? 30k for two children 17 and 18 is very different from a newborn and a one year old or not yet born. And how good your retirement and savings are depends on your income. — Brythan, Mar 24 '19 at 18:02
You can also consider budgeting some funds for (later) converting your 401k to a Roth 401k or 401k->IRA->Roth IRA incrementally as your income fluctuates -- in a low-income year, you can 'use up' a lower bracket to move your 401k funds to a Roth, to give you more flexibility in managing the Roth funds later. — user117529, Mar 25 '19 at 07:39
Do you have a Health Savings Account? That might be something worth looking into. — , Mar 25 '19 at 16:38
I don't see how this question hasn't been flagged for closure as it's clearly opinion based. But it looks like people like it, so fair enough. — Cdn_Dev, Mar 25 '19 at 20:11
By children's education fund do you mean a 529 or similar tax advantaged savings account? — user3067860, Mar 25 '19 at 22:30
@DanK Unless you have the fortune to be working for an employer with a compatible high deductible plan you can't put money into one. If you have one it might be worth maxing out your taxfree contributions there too; but most people don't have the option. — Dan Is Fiddling By Firelight, Mar 26 '19 at 16:10

Harper - Reinstate Monica · Answer 1 · 2019-03-26T15:47:02.900

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Nobody ever got to retirement age and said "Wow, I saved too much".

Your wealth has a direct effect on your quality-of-life in retirement - how much you travel, whether you go to movies vs. the opera, for instance. Near to endlife, it decides how good your situation will be: the quality of your independent living, assisted living, skilled nursing or hospice care. That matters. My parents despite being middle class, did very well in that department because they saved well.

Given that you are now gettng cold feet about further retirement investing, I recommend you focus on Roth IRAs (and possibly Roth 401Ks). Roths have a slick feature relevant to your concerns. Your intitial contributions (I call it the corpus, the term is actually from endowments) can be withdrawn at any time. Which means when you contribute, your money starts earning right away (properly invested). You can't take out the growth/dividends, but you can yank the corpus back out anytime you please without penalty. (Other than the passive penalty that the money is no longer multiplying for you, and it can't be put back later). The confidence of knowing this is like money in the bank -- literally, you can use it as an "emergency fund".

If you are above the income limits for contributions to Roth IRA (or even if not), then you use the "Back-door Roth" method -- deposit into a non-deductible IRA (a traditional IRA but don't claim the deduction on your taxes) then immediately convert it to Roth.

Note: the legality of the Roth backdoor is clouded since you are doing in several steps what would be illegal if done in one step. However, there is other evidence that lawmakers and IRS know and approve. They reasonably should be aware, since it was an extremely obvious side-effect of the law which enabled it. It's also very widely discussed in the media and use in plain view, and IRS hasn't prosecuted people for it. Shrug...

I can't comment on Roth 401Ks, I have not worked with them.

edited Mar 26 '19 at 15:47

answered Mar 24 '19 at 19:37

Harper - Reinstate Monica

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I could see myself oversaving for retirement, then regretting I no longer have the physical/mental capability to enjoy my money. We took my Grandmother on a holiday with us, and she got too tired out walking around to experience the place properly, for instance. – Adam Barnes Mar 25 '19 at 00:05
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@Adam Barnes If you no longer "have the physical/mental capability to enjoy" your money, you may instead need money to cover health care costs, modifications to your house and/or vehicles because of disability, home care, or nursing facility. If you saved a lot for retirement, you could consider early retirement as an option (like JoeTaxpayer, I retired at age 50). – njuffa Mar 25 '19 at 01:08
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@AdamBarnes That argument only applies if you were saving earlier in life at the expense of experiencing it then. If you are enjoying your life now and not limiting your travels and experiences because of money, then there's no such thing as saving too much. If you find yourself not going on a holiday because you can't afford it because all of your extra cash is going into savings, then you should re-evaluate whether you need to be saving that much or whether it's better to spend it and enjoy it now. – David K Mar 25 '19 at 12:34
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@DavidK - people who have enough money to keep 350k in 401k and still enjoy life to the fullest now aren't really asking questions here. – Davor Mar 25 '19 at 13:23
The legality of a backdoor Roth contribution isn't clearly established. Any advice recommending it should include a disclaimer. – user2752467 Mar 25 '19 at 18:11
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@Davor Sorry but you are incorrect; there are plenty of people on this site with that much and more in their 401(k)s and still taking breaks from their fully enjoyed lives to ask and answer questions. Especially since 401(k) has a contribution limit, "all" it takes is maxing it out from age 22 to 40 (OP's age). Scare quotes because I acknowledge you need an above average income and dedication to saving, but you don't need to be in the 1%. – stannius Mar 25 '19 at 18:16
@JustinLardinois I hear you, but I honestly do not envision a scenario where IRS leadership reads their 1001th financial magazine article about the back-door Roth and goes "OMG they're breaking the rules, let's start auditing!" If IRS was hassling people about it, there'd be a long docket of Tax Court cases, and that would be in the press. – Harper - Reinstate Monica Mar 25 '19 at 19:11
@JustinLardinois there is actually some evidence that the IRS is well aware of the backdoor Roth and considers it acceptable. E.g. https://www.currentfederaltaxdevelopments.com/blog/2018/7/12/irs-indicates-agency-accepts-back-door-roth-ira-contribution-technique – stannius Mar 25 '19 at 19:15
Apparently lawmakers (accidentally?) settled the question of congressional intent, here. – Harper - Reinstate Monica Mar 25 '19 at 19:56
@Davor - people are different. And “life to the fullest” is a matter of personal preference. It’s very possible to have a nice nest egg, but still seek advice regarding retirement. What are you suggesting with this comment? – JTP - Apologise to Monica Mar 26 '19 at 00:52
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@AdamBarnes that's when you need it all the more. It isn't only for European ski trips. It's also for hiring help precisely when you are less able to "enjoy it"... Getting into better assisted living or skilled nursing or memory care facilities, hiring aides to backstop staff... Paying for PT/OT when Medicare chooses not to... It's the difference between laying in a soiled diaper for 5 minutes or 5 hours. Really. – Harper - Reinstate Monica Mar 26 '19 at 01:00
With respect to @Davor 's comment, the world is a big place, and while SE has many US members, wealth in the world isn't evenly distributed. Per The Global Rich List , the median world income is about $1290 per year. While we talk about 'needing' to target savings in the $millions to retire, a $100K nest egg is 'Rich' to much of the world, and the OP's $350K, literally wealth beyond one's imagination'. It's all relative. – JTP - Apologise to Monica Mar 26 '19 at 11:24
@JoeTaxpayer people earning $1290 per year are just as unlikely to be on this site as people in the top 1%. – stannius Mar 26 '19 at 16:46
@stannius and Harper thanks for the clarifications. – user2752467 Mar 26 '19 at 17:56

JTP - Apologise to Monica · Accepted Answer · 2019-03-25T23:39:02.080

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Let me focus on the retirement number. I wrote a blog post on just that, The Number. In which I offer an easily editable spreadsheet to help users see if they are on track. With a goal of having 20X one's final income(1) at a retirement age of 62, at age 40, you should have just over 5X your annual income saved. If your income is $70K or less, you are doing great, much over $100K, and you are falling behind.

If your question is about your investment mix, yes, it's good not to have all one's money in pre-tax accounts when retirement comes. I retired at 50 and will tell you first hand, it's a strange thing to look at a retirement account balance, and feel the pressure to avoid withdrawals that will be taxed at the next marginal rate, or phase out some tax benefit. I'd strongly recommend you consider a Roth 401(k) if available. If not, try to fund the Roth IRA every year. It with give you more flexibility at retirement.

More on Roth - The pretax accounts are great. While working, you get to take money 'of the top' i.e. at your current marginal bracket, but at withdrawal, you start at zero, literally, for a couple, the first $24K of income is not taxed at all, zero. That said, there is a point of diminishing return, as your withdrawals go up, your top bracket may be the same as when working or due to phantom tax brackets(2) even higher. If one can make use of the Roth during the saving phase, you get to decide when to withdraw from the account at retirement. The IRA/401(k) are subject to RMDs, by age 78, forced withdrawals are 5% of account value. This can have the nasty effect of pushing you bracket far higher than planned. Consider, you might be taking withdrawals to be at the top of the 12% bracket, but the next $1000 will be taxed at 22%. And you need a new roof. You might have more than enough money in your retirement account, but this means the $10K 'costs' you $1K more in tax than it might otherwise. Just an example.

(1) 20X final income. This is a 'rule' of thumb. It combines a 4%/yr safe withdrawal rate, and a desire to target about 80% of one's final years income as a retirement level of withdrawals. Why 80%? No FICA, and no 'saving'. If you save more, you are living on less, and that replacement ratio can be brought down. Using 20% towards the mortgage? Once paid off, you might consider 5% for home repairs, etc. It's a moving target.

(2) Phantom brackets are what happens when the next bit of income doesn't just experience your normal marginal rate, but also triggers a phase-in of another tax such as social security (at $32K, joint) or phases out a deduction such as Schedule E real estate losses (at $100K, joint). The effect, for example, is that the next $1000, potentially taxed at 22%, actually cost you nearly $400 in tax.

edited Mar 25 '19 at 23:39

answered Mar 24 '19 at 17:21

JTP - Apologise to Monica

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My question meant i had a roth ira it is not traditional roth. – JonH Mar 24 '19 at 17:27
Yes, a tiny fraction compared to the 401(k). Suggesting you keep the Roth going, and see if 401(k) Roth is an option. – JTP - Apologise to Monica Mar 24 '19 at 17:32
Didnt know there was such a thing as 401k roth. Can you elaborate or send a good explanation. Will try to google it later today. Thanks – JonH Mar 24 '19 at 17:33
It is a flavor of the 401(k) account which has tax rules similar to Roth. No deduction at time time of deposit, but no tax on growth even at withdrawal time. Same deposit limit at the traditional 401(k). The 2 flavors of 401 are a great mix. Best flexibility at retirement time. – JTP - Apologise to Monica Mar 24 '19 at 17:35
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Could you elaborate on "flexibility" regarding roth? Is there anything more substantial / not psychological? – xiaomy Mar 24 '19 at 20:57
Care to add what your income multiplier was when you retired at 50? That would be helpful to know. – user117529 Mar 25 '19 at 07:31
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@user117529 - Yes, 15. Practically speaking, the number shifts for the fact that if you are a high % saver, you are living on far less than the full income. 20X means you will withdraw about 80% of your final income per year. In our case, 60-65% was fine. This is why rules of thumb are a guideline, nothing more. Not cast in stone. – JTP - Apologise to Monica Mar 25 '19 at 09:11
@xiaomy - edited into my answer – JTP - Apologise to Monica Mar 25 '19 at 09:31
I like the 'rule of thumb' numbers and stuff. The answer would be much better if you moved your '80% of your final income' comment into the answer in order to make it clear where the 20X number came from. – Dunk Mar 25 '19 at 22:08
Edited to address the 20X 'rule of thumb' – JTP - Apologise to Monica Mar 25 '19 at 23:09
"while earning a rate of return of only 8%" Are you serious here?? "Only" 8%? – Mehdi Mar 26 '19 at 11:50
@Mehdi - I am in the US. We have a Money Celebrity who has declared that one can count on a 12% return. In comparison, mine is a reasonable assumption. In my investing lifetime, (since 1985) the market return has been 10.9% CAGR, and 100 year return, 10.28% CAGR. In light of this, I feel an 8% return is reasonable, yes "only" 8% as compared to the 12% the celeb insists on using. – JTP - Apologise to Monica Mar 26 '19 at 12:02
@JoeTaxpayer okay that makes sense, but one should consider other facts like "Past market performance is not a proof for future performance" and most experts say that one shouldn't put all savings (especially the critial ones as retirement savings) in high risk assets as stocks. anything that returns 10% annually is high risk or it would return 1 to 2% otherwise. – Mehdi Mar 26 '19 at 12:52
No argument from me. That is why the spreadsheet is not locked. You are encouraged to use a rate of return on investments that matches your risk tolerance. And also adjust the inflation number to what you believe will occur. And target your own level of replacement income at retirement. I am fully transparent as to where I got my approach, my choice of numbers. You can decide for yourself what you will choose. – JTP - Apologise to Monica Mar 26 '19 at 13:03

score 8 · Answer 3 · answered Mar 25 '19 at 14:46

What do you Want from your Money?

I hate to answer a question with a question, but really we don't have enough information to tell you if you are "saving too much."

Do you want to retire early? You might not be saving enough!

Do you want to put your kids through Ivy League college debt free? Maybe you need to shift some of your future savings to a 529 education plan.

Do you want to drive a fancy car? Maybe you should put some of that extra pay in regular old savings.

It's all about what you want from your money.

If you don't know what you want, well, over-investing in your retirement is probably a safe thing to do while you figure it out!

No Ivy League school I'd be comfortable they attend a local university, I dont mind them actually going to a community college the first two years and transferring credit but I will leave that with them when they are at the appropriate age. Don't really care about fancy cares...I think you guys answered my question and that is only I know what I need to do with my money. Based on the feedback I am going to build my personal savings account and roth ira a bit more. Goal is to retire by 50-52. — JonH, Mar 26 '19 at 15:28

score 6 · Answer 4 · edited Mar 24 '19 at 18:44

I would argue that in a world of compounding interest, that is, where time beats interest rates (as long as your investment vehicles don't fail to beat inflation) there is no such thing as "saving too much". Without knowing your goals (maybe you're up to an early retirement?) it is impossible to tell.

I have around 30k in a regular savings account along with another 30k for my children’s education fund.

The key question here is therefore not if you have saved too much for retirement but are your other financial goals are in line with your expectations, i.e. are you comfortable with the amounts in your savings account and the children's education fund? (Even a State College can run $50K for the 4 years). Nobody can tell but you yourself.

Have I saved too much for retirement so far?

4 Answers4

What do you Want from your Money?