How do you prioritize your investment accounts?

[Bean]

Curious how everyone prioritizes their investment accounts.

I have always and currently go by:
1) Up to my 401k match
2) Max out Roth IRA
3) Max out 401k
4) Create or top off taxable emergency fund
5) Taxable investments or pay off fixed debts (I avoid variable rate debt like the plague)

What is currently bugging me is 1-3 end up being a giant % of my networth that I won't see for 30+ years.  I have this urge to skip 3, still be at 10%+ in tax advantaged accounts and grow my taxable accounts to knock out all long term debt in a few years.

Basically can someone save too much for retirement and spite the present?

[MarySB]

Personally, I'd rather save "too much" than not enough. When you are young, it's tempting to be the grasshopper, not the ant, but we all know how that story ended!

[Pointedstick]

Currently, I prioritize maxing out my 401k since I'm in a high federal tax bracket and a high tax state, so the tax savings are very attractive. Next I prioritize maxing out my wife and my Roth IRAs because they're more flexible than the 401k in terms of early withdrawal (I'm going for ERE so there's no way these retirement accounts are going untouched until I'm 60). Next, anything left goes into a taxable PP, whose cash I consider my emergency fund (I still have cash savings in ING accounts for more easily-accessible money). I have no debt, but when I still did, that was priority number 1 and that's why it's all gone now.

[BearBones]

Among other things, this depends on:

1. Age. If below age 30, I might do in the order your indicated. If over 50, I would have second thoughts about #3.
2. Current marginal rate (including state). If low now, I would have second thoughts about #3.
3. Balance between taxable, tax-deferred, and Roth accounts. In an extreme example, you would not want the contribute majority of savings to 401k only to find 20 years from now that the RMD puts you into a 60+% tax bracket in retirement. The history of marginal tax rates in US tends not to be reflected by our recent memory:

[hoost]

I have mentioned it before, but I'm a fan of Dave Ramsey's plan, and it's worked for me so far.  I suspended all retirement contributions until all of my debt (minus a 1st mortgage, which I didn't have) was paid off.  This took almost 3 years.  I then built up a 6 month emergency fund.  Once I had that, I began contributing to my 401k up to the match, then max out the Roth, then add to 401k to get to 15% pretax contribution.  We put all of the extra toward our house down payment; now that we've bought a house (with about 45% down), we will continue funding retirement accounts in that order up to 15%, and put all extra cash toward paying off the mortgage.

I haven't had to give it much thought to this point, but I wouldn't think I'd want to save more than 1/2 to 2/3 of my savings in tax deferred.  Although currently with a Roth your contributions can be withdrawn without penalty, so that may be considered semi-tax-deferred.

[Pointedstick]

The history of marginal tax rates in US tends not to be reflected by our recent memory:

Or perhaps we're entering a period of mean reversion. Before 1912, federal income tax rates for high and low earners alike fluctuated around 0%.

[dualstow]

There are a few threads about the question of saving too much for retirement, I believe. At bogleheads, too.

But, I max out my Roth before year end. It's only 5K, and seems to be the perfect place to hold EDV (long bonds > zeroes).
Come April, I do my best to max out my 401K (many times what I put into the Roth).
If my retirement accounts ever equal my taxable holdings, I will stop.

(Age 42).

[Bean]

The history of marginal tax rates in US tends not to be reflected by our recent memory:

Or perhaps we're entering a period of mean reversion. Before 1912, federal income tax rates for high and low earners alike fluctuated around 0%.

I had always looked at tax diversification for retirement as Roth IRA for tax exempt and 401K as tax deferred.  However, based on this thread so far I think a case could be made for taxable investments also.  Similar to how the PP is structured; 1/3 tax exempt, 1/3 tax deferred, and 1/3 taxable.  (or some other overall structured % per each tax category)  Since you never know where taxes will be or when you might need all of the money you have saved.

Also, I am not worried about not saving enough.  I end up saving close to 40% of gross income, it is just a question of were to save it.

[Figuring It Out]

Bean, I, personally, would eliminate #3 in favor of paying down debt or building a greater emergency fund. We:

1. Pay into pension system.
2. Fund Roths.
3. Save in taxable for short term and long term goals.

Doing it this way allowed us to accumulate enough to pay off our mortgage, pay cash for cars, and pay for remodeling without debt. The key, always, is keeping your expenses low, and that means paying off debt if you have it, avoiding contracts for cable, cell phones, revolving debt. Having more money in taxable gives you greater flexibility.

Are you considering paying off your mortgage?

[Bean]

Having more money in taxable gives you greater flexibility.

This is exactly the root of what I struggle with.  All the books and math says max out 401k, but I hate not having the flexibility of a large taxable account.  Also, I would love nothing more than having a stable, taxable portfolio large enough to knock out my mortgage in 5-8 years.

My plan going forward, which will probably more for my comfort than mathematical optimization.

1) Up to my 401k match
2) Max out Roth IRA
3) Taxable Permanent Portfolio (once comfortably large enough, pay off mortgage in a lump sum)

tldr: I would rather be out of debt than roll the dice on the market in general.

[Pointedstick]

tldr: I would rather be out of debt than roll the dice on the market in general.

I think that's a perfectly sane and rational mindset. Market returns are uncertain, while debt is constant.

[sophie]

Having more money in taxable gives you greater flexibility.

This is exactly the root of what I struggle with.  All the books and math says max out 401k, but I hate not having the flexibility of a large taxable account.  Also, I would love nothing more than having a stable, taxable portfolio large enough to knock out my mortgage in 5-8 years.

That's exactly why I started this thread:

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

I was HOPING to prove that taxable savings or Roth contributions would work out better, or at least no worse, than contributing to a 401K.  Unfortunately that wasn't the case.  Maxing out the 401K is almost a no brainer, even if it hurts a bit now.

I share your dislike of debt, and have also spurned the greater rewards of the markets to prepay the mortgage.  In fact, I just sold a chunk of PRPFX to do a cash-in refinance, which many people would probably consider to be insane.

So you just have to decide how you're going to split your after tax savings:  emergency fund, mortgage prepayment, other savings, and Roth.  In deciding where on the list the Roth IRA belongs, consider that contributions can be tapped in 5 years.  So it might make sense to direct savings there for any goal more than 5 years away - i.e. everything except short term savings and emergency fund.

[BearBones]

That's exactly why I started this thread:
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

That was a good one indeed. Just looked at it again briefly, and I was wondering if you could clarify. Seems that your initial assumption was that tax rates would be lower in retirement, so the 401k was a no brainer. All would agree. But then notsheigetz, mode, and AgAuMoney commented that, for a number of reasons, tax rates might actually be quite a bit higher in retirement for many. Then you indicated that the 401K still made sense even if the rate went from total of 33 to 40%, right? My concern is that there is a very good chance that it will go up by a lot more than 7% points for many.



Yep, just another version of what I posted above... Isn't the 401k option still a bet on either a lower or a fairly similar tax rate as the present?

[sophie]

I did assume a fairly stable set of tax brackets.  The Roth IRA, by the way, assumes the same - several here have commented that they fear the tax-free investment returns will be taxed at some point in the future.

Your chart also considers the top marginal tax rates.  The peak of 90% in the 1950s and 60s were for very high wage earners, which are highly unlikely to apply to someone in retirement.  Do you happen to have one of those charts for the median marginal income tax rates or maybe 20th percentile, rather than top rates?  I think you'll find it's not nearly as bumpy.

So I ran the numbers again.  Let's assume that the marginal tax rate goes up to 50%, while the capital gains rate increases to 20% post retirement.  Pre-tax, the $10,000 investment has become:

401K: $44,865
Taxable savings: $26,659

Post-tax, we get:
401K:  $22,432
Taxable savings:  $23,327

So the 401K loses in this scenario, although not by much.  I'd say, though, that things would be getting pretty bad if retirees start getting hit with 50% tax rates.  It means that wage earners must be paying at least that, and more likely 70%+.  I'd pull out all my 401K money ahead of the tax hike and join the mobs heading out of town.

[BearBones]

All excellent points, Sophie. Thanks.

[AgAuMoney]

I have always and currently go by:
1) Up to my 401k match
2) Max out Roth IRA
3) Max out 401k
4) Create or top off taxable emergency fund
5) Taxable investments or pay off fixed debts (I avoid variable rate debt like the plague)

What is currently bugging me is 1-3 end up being a giant % of my networth that I won't see for 30+ years.  I have this urge to skip 3, still be at 10%+ in tax advantaged accounts and grow my taxable accounts to knock out all long term debt in a few years.

Basically can someone save too much for retirement and spite the present?

Sure can!  Be careful.  But plan to err, and err on the side of saving too much.  That's a much easier situation to live with.

My situation:  I'm not retired but if I could guarantee over 8% return annually I could be. 

I use your order but skip #3 and have never regretted it.  I have a lot of tax deductions now, and have for awhile so expect I'll be paying at least as much in taxes when I do retire.  With that in mind I've never maxed my 401(k).  In the early years I did do some extra (beyond the match) contributions, but the last 10-15 years I've regretted that many times.  The last few years I did 401(k) contributions I did them as Roth and only to get the match.

I've tried and am trying to create a balance between tax deferred, tax free and taxable, but I'm not there yet.  Given my current 401(k) is a huge money pit with no match I'm focusing entirely on taxable and Roth IRA for now.

[AgAuMoney]

I have mentioned it before, but I'm a fan of Dave Ramsey's plan, and it's worked for me so far.  I suspended all retirement contributions until all of my debt (minus a 1st mortgage, which I didn't have) was paid off.  This took almost 3 years.  I then built up a 6 month emergency fund.  Once I had that, I began contributing to my 401k up to the match,

Personally I would never consider giving up the free money of a match.  I'd postpone everything but that.

Oh, and I'm not a Ramsey devotee.  I bought my 1996 truck with cash, but the 2004 minivan I financed for 3 years and kept my investments.  I earned well over 2x what the loan interest cost me and didn't have to pay taxes for selling stock or liquidate any CDs (which were paying just a bit higher than the interest after account for taxes).  I should have done the same with the truck...

Other than the house, that one vehicle loan is the only interest I've ever paid.

Edit:  Reason I don't follow Ramsey -- I can do math, have been calculating returns and compound interest since I was a pre-teen, and I can live rationally so I don't need his little psychological games.

[AgAuMoney]

Or perhaps we're entering a period of mean reversion. Before 1912, federal income tax rates for high and low earners alike fluctuated around 0%.

Nice dream. 

[WildAboutHarry]

I use your order but skip #3 and have never regretted it.  I have a lot of tax deductions now, and have for awhile so expect I'll be paying at least as much in taxes when I do retire.  With that in mind I've never maxed my 401(k).  In the early years I did do some extra (beyond the match) contributions, but the last 10-15 years I've regretted that many times.  The last few years I did 401(k) contributions I did them as Roth and only to get the match.

For us: Tax Deferred >> Taxable > Roth, at an approximate 3.4:1.2:1 ratio

I usually fill the 401(k) first.  Get the match, and not lose that year's opportunity to contribute to tax-deferred accounts.  Living in a high-tax state (CA) makes the deferred route a bit more valuable, as does retiring to a no-state-income-tax state. 

I did Roth 401(k) contributions for a while, but only to get something into Roth space (we do regular Roths when we can).  A high-tax state makes Roth accounts (from a contribution standpoint) less attractive.

Our taxable accounts have been neglected, and I've considered forgoing some 401(k) contributions in favor of funding taxable accounts.  Again, that state tax "tail" wants to wag this dog.  But it may make for a more balanced portfolio, tax treatment wise.

How the funds will ultimately come out of the accounts is worth considering as well, when prioritizing where to put money during your working years.  Tax-deferred accounts eventually face RMDs, and if you cannot spend or Roth-convert those funds your income could have an undesirable spike (a good problem to have, I suppose).

[hoost]

I have mentioned it before, but I'm a fan of Dave Ramsey's plan, and it's worked for me so far.  I suspended all retirement contributions until all of my debt (minus a 1st mortgage, which I didn't have) was paid off.  This took almost 3 years.  I then built up a 6 month emergency fund.  Once I had that, I began contributing to my 401k up to the match,

Personally I would never consider giving up the free money of a match.  I'd postpone everything but that.

Oh, and I'm not a Ramsey devotee.  I bought my 1996 truck with cash, but the 2004 minivan I financed for 3 years and kept my investments.  I earned well over 2x what the loan interest cost me and didn't have to pay taxes for selling stock or liquidate any CDs (which were paying just a bit higher than the interest after account for taxes).  I should have done the same with the truck...

Other than the house, that one vehicle loan is the only interest I've ever paid.

Edit:  Reason I don't follow Ramsey -- I can do math, have been calculating returns and compound interest since I was a pre-teen, and I can live rationally so I don't need his little psychological games.

I can 100% understand not giving up the match.  I didn't cease my 401k completely when I first started getting out of debt; when I changed jobs, I just didn't sign up for the new one until I finished paying everything off.

I wouldn't go so far as to say I'm a devotee of Dave Ramsey, but I am definitely a fan.  For me, returns and compound interest were not a problem (a big reason why I invest in PP vs. following his investment advice), but having a framework (budgeting, envelope system, various guidelines, etc.) with which to organize my personal finances was very helpful for me when I started working after college.  I was not taught those skills growing up, so it was very helpful for me to get everything in line.

[AgAuMoney]

[re. personal financial organization, etc] I was not taught those skills growing up, so it was very helpful for me to get everything in line.

I bet it was.  Congratulations on overcoming that lack of early education.  Many people who don't get it early never really do get it without being forced (if they get it at all).

That early education is one advantage I cannot imagine living without.  My father earned his MBA in the 1950's and really understood all aspects of financial management, and my mother was also a college graduate as were all four of their parents.  And they all used their education and continually added to it over the years by reading anything and everything.