The Retirement Planning/ Investment/ Savings Thread (2 Viewers)

[DrStrange]

For you younger folks - I am not sure inflation protected US savings bonds are the way to save for retirement. These things are designed to yield close to zero percent after inflation. If they are taxable for you, the after-tax yield will end up less than zero. Sure, they are almost risk free (aside from the early withdrawal penalties) But very few people should be trying to take such little risk at any time in their lives.

Both equities and long-term bonds have a lot better reward structure if you have a long enough time horizon. The best case for buying I-Bonds is high inflation for years to come and flat/low/negative growth. And even then, you don't make out all that well. They seem pretty sweet at the moment. But I doubt that will last.

At least these saving bonds are better than some random crypto coin. Faint praise indeed -=- DrStrange

 

[BNM]

For you younger folks - I am not sure inflation protected US savings bonds are the way to save for retirement. These things are designed to yield close to zero percent after inflation. If they are taxable for you, the after-tax yield will end up less than zero. Sure, they are almost risk free (aside from the early withdrawal penalties) But very few people should be trying to take such little risk at any time in their lives.

Both equities and long-term bonds have a lot better reward structure if you have a long enough time horizon. The best case for buying I-Bonds is high inflation for years to come and flat/low/negative growth. And even then, you don't make out all that well. They seem pretty sweet at the moment. But I doubt that will last.

At least these saving bonds are better than some random crypto coin. Faint praise indeed -=- DrStrange

Per usual, Doc is spot on. I use them exclusively for part of my emergency fund. Slightly harder to get to, and if I needed the money in less than a year I wouldn’t have made anything, but I’ve seen nothing in the savings/MM/etc. category that comes close to the yield offered by I bonds. For me this makes good sense. Anyone have a better suggestion, please post here so we can all potentially benefit.

But to his point, I’m not even that young anymore, 15 years to no longer work (hopefully), and none of my retirement funds are invested in bonds, etc. Want it to work as hard as possible for as long as possible.

 

[MrCatPants]

Per usual, Doc is spot on. I use them exclusively for part of my emergency fund. Slightly harder to get to, and if I needed the money in less than a year I wouldn’t have made anything, but I’ve seen nothing in the savings/MM/etc. category that comes close to the yield offered by I bonds. For me this makes good sense. Anyone have a better suggestion, please post here so we can all potentially benefit.

But to his point, I’m not even that young anymore, 15 years to no longer work (hopefully), and none of my retirement funds are invested in bonds, etc. Want it to work as hard as possible for as long as possible.

I stuck part of my (not really used portion) bankroll in there for the same reasons. Want to keep it segregated, why not have it earn for a couple of years and even if I pull it early the interest penalty is a minor hit? Not a major one.

 

[owlzzthemage]

Any educated Canadian investors able to give guidance on whether to max RRSP or TFSA first on 90k/yr 26 yo?

Been putting off figuring out taxes but that shit dominates your long-run performance unless you're taking crazy risk.

 

[JustDave]

For you younger folks - I am not sure inflation protected US savings bonds are the way to save for retirement. These things are designed to yield close to zero percent after inflation. If they are taxable for you, the after-tax yield will end up less than zero. Sure, they are almost risk free (aside from the early withdrawal penalties) But very few people should be trying to take such little risk at any time in their lives.

Both equities and long-term bonds have a lot better reward structure if you have a long enough time horizon. The best case for buying I-Bonds is high inflation for years to come and flat/low/negative growth. And even then, you don't make out all that well. They seem pretty sweet at the moment. But I doubt that will last.

At least these saving bonds are better than some random crypto coin. Faint praise indeed -=- DrStrange

I've honestly never understood them as an investment but rather a mechanism for storing wealth and not really meant for people or at least most people but rather institutions.

 

[swana]

Any educated Canadian investors able to give guidance on whether to max RRSP or TFSA first on 90k/yr 26 yo?

Been putting off figuring out taxes but that shit dominates your long-run performance unless you're taking crazy risk.

Assuming you are saving for retirement? If so, then generally a RRSP is better IF your income in retirement will put you in a lower marginal tax bracket than your income today. RRSP contributions lower your taxable income BUT withdrawals are taxed as income when withdrawn... so contributing when you are in the highest tax bracket and withdrawals when you are not would be a net benefit as far as paying tax goes.

 

[owlzzthemage]

Assuming you are saving for retirement? If so, then generally a RRSP is better IF your income in retirement will put you in a lower marginal tax bracket than your income today. RRSP contributions lower your taxable income BUT withdrawals are taxed as income when withdrawn... so contributing when you are in the highest tax bracket and withdrawals when you are not would be a net benefit as far as paying tax goes.

Damn, I guess it's a question of optimism. How to know today what my income in retirement will be? It's also inflation adjusted in the future vs. real income today, right? Is there a generally quoted break-even region that tends to benefit one or the other?
EDIT: Or does it ultimately not matter because I'll have both maxxed in a few years??

 

[joker80]

@owlzzthemage it also depends on if you anticipate possibly having to use the money in the future as well. I put money into RRSPs in my 20s (no TFSA then) and ended up having to withdraw some in my late 30s to start my own business. Also if you plan on buying a house in the future, money could be taken out of RRSP savings tax free for first time home buyers as long as it is paid back within 10 years.

 

[ekricket]

. How to know today what my income in retirement will be?

It will need to be about 2.5x what you make now.

 

[timinater]

First off, hard to go wrong with either RRSP or TFSA. No one really seems to agree which is best, which again, means its hard to go wrong.

One other question, Is 90K going to be your max earning potential? My assumption is no, you'll likely earn more in the future.

RRSP's are just a way of deferring tax down the line. Why not defer that tax when you are making more money, and being taxed at a higher rate?

For example, 90K gets taxed at around 20%. Let's say you make 100K in a couple years, your first 98K* is taxed at 20% and the remaining 2K gets taxed at 26%. Going more into the future and you're making 110K, and you decide to contribute 12K to RRSP and defer tax on that entire dollar amount that is being taxed at 26%. Now, you are deferring tax at the rate of 26% on income earned, and will withdraw in retirement where (all things being equal) you'll likely pay 20% on the income rather than that 26% rate.

Lots of numbers, I know. But that's kind of my philosophy on it. Call it betting on yourself. Contributing to an RRSP in the same tax bracket you'll likely withdraw at has benefits, but you can get more benefit if you contribute to an RRSP at a higher bracket than you plan to withdraw at. Ideally you want both RRSP and TFSA. Going to withdraw too much from your RRSP and bump into a higher tax bracket? Grab some cash from your TFSA to make up the difference. You already paid tax on that cash ages ago in your working life.

Talk to an advisor, preferably a fiduciary advisor who is bound by professional ethics to provide the best advice based on your situation, rather than pushing you into a high fee mutual fund or whatever makes them the most cash.

-------------

I have a hard time choosing anything other than a TFSA to start off, especially since you can likely aggressively save there and catch up to your contribution limit. At that point, contribute the yearly max to TFSA and put as much as you can afford/to your contribution limit into your RRSP.

For me, tax free growth and no strings attached after contributions led me to focusing on a TFSA "first" and the RRSP after. I'm fortunate to have a plan through my day job that contributes to an RRSP, so I've got my hands in each savings vehicle.

* these numbers change yearly: https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/taxes/taxes-2/5.html

 

[owlzzthemage]

Advice noted, thanks for taking the time to write that out.
Logically, since TFSA uses post tax dollars and RRSP pre-tax, it makes sense that TFSA first is likely to be more optimal.
Thanks for clearing that up.

 

[Darson]

There is one more indirect benefit. Contributing to a retirement account is saving money in a place where there are some barriers to access. If you're anything like me, any spare cash gets spent pretty damn quickly so locking some away ensures you have savings that you won't be tempted to pull and buy a Porsche with. I max out all my retirement savings options for exactly this reason.

 

[MrCatPants]

There is one more indirect benefit. Contributing to a retirement account is saving money in a place where there are some barriers to access. If you're anything like me, any spare cash gets spent pretty damn quickly so locking some away ensures you have savings that you won't be tempted to pull and buy a Porsche with. I max out all my retirement savings options for exactly this reason.

The number of PCFers who took out 401k loans for Tigers is, I imagine, not zero.

 

[BSteck]

I've honestly never understood them as an investment but rather a mechanism for storing wealth and not really meant for people or at least most people but rather institutions.

I'm retired and I use them to store my next 3'ish years worth of expenses. Kind of a simple version of a bond ladder.

 

[JustDave]

I'm retired and I use them to store my next 3'ish years worth of expenses. Kind of a simple version of a bond ladder.

makes sense

 

[Taghkanic]

FWIW, Schwab’s basic money market fund SWVXX is paying out 4.27% right now. Used to be like 0.1%. Not a bad place to park cash for a while if you’re nervous about the markets. Totally liquid and no fees involved for most Schwab customers.

 

[inca911]

It's tax time, so just a friendly reminder that you can still fully fund a Roth IRA for CY2022 if you haven't already done so! There's a reason the Roth IRA is technically phased out by income + targeted for potential elimination. It's that good a retirement vehicle, especially early in a career when taxes are typically lower.

Personal Status Update: I plan to start retiring Aug2023. I am working with my current employer to receive the following compensation package until 55 as I work fewer hours (i.e., target ~20 hr/wk):

• Health/Dental coverage
• Fund 401(k) to $30k annual max (not taxable income), with as much corporate match as possible
• Compensation to fund HSA to annual max (~$5k, not taxable income)
• Compensation to fully fund Roth IRA to $7.5k max (~$9k pretax income)

I plan partial Roth IRA conversions starting at 55, keeping total annual conversions around $58k (i.e., $13k single standard deduction + $45k to fill single 10% and 12% brackets). My Cash/Brokerage accounts can cover tax on conversions. My HSA can fully fund healthcare until 65 when Medicare kicks in. My conversions will be completed before 70 so my income will be low and not trigger additional SS tax at 70 (i.e., to get delayed full benefits). My MAGI is projected to be low and not trigger increased IRMAA costs.

Please PM if you have questions or advice to share. It's an odd conversation to have with an employer, so ideas/experiences are welcomed!

 

[nezara]

It's tax time, so just a friendly reminder that you can still fully fund a Roth IRA for CY2022 if you haven't already done so! There's a reason the Roth IRA is technically phased out by income + targeted for potential elimination. It's that good a retirement vehicle, especially early in a career when taxes are typically lower.

Personal Status Update: I plan to start retiring Aug2023. I am working with my current employer to receive the following compensation package until 55 as I work fewer hours (i.e., target ~20 hr/wk):

• Health/Dental coverage
• Fund 401(k) to $30k annual max (not taxable income), with as much corporate match as possible
• Compensation to fund HSA to annual max (~$5k, not taxable income)
• Compensation to fully fund Roth IRA to $7.5k max (~$9k pretax income)

I plan partial Roth IRA conversions starting at 55, keeping total annual conversions around $58k (i.e., $13k single standard deduction + $45k to fill single 10% and 12% brackets). My Cash/Brokerage accounts can cover tax on conversions. My HSA can fully fund healthcare until 65 when Medicare kicks in. My conversions will be completed before 70 so my income will be low and not trigger additional SS tax at 70 (i.e., to get delayed full benefits). My MAGI is projected to be low and not trigger increased IRMAA costs.

Please PM if you have questions or advice to share. It's an odd conversation to have with an employer, so ideas/experiences are welcomed!

If you are negotiating with your employer and shoving as much as possible in Roth then can you structure more employer Roth contributions ie mega back door?

 

[Burke]

Most employers don't allow both after tax contributions to 401k as well as in-plan Roth conversions (those two processes are the necessary steps for a megabackdoor Roth) because it often creates a problem for large employers. The problem as I understand it relates to discrimination testing. Basically if highly compensated employees are participating disproportionally to lower compensated employees than the employer fails a discrimination test and after tax contributions need to be returned. Lots of companies just avoid the possibility of this headache...

Anyone can feel free to correct this as I am speaking without complete knowledge

 

[MatB]

Have read this thread a couple of times.

I'm currently an S-Corp and on the payroll. Putting what I can away into a SEP (25% of salary)

My wife is also recently on the payroll

Switching that to a 401k looks better for me saving pre tax. (I currently don't have a 401k). Just a SEP

MY payroll company will handle all the compliance / deductions etc. For the 401ks


Is one place better than the other?

The 3 im looking at are:

American Funds
My accountant recommended American Funds, but that uses an active advisor and there are fees involved (as all of them do) And to move things around you have to call the guy.

Vanguard
I saw that Vanguard is a passive investment (set it and forget it type) Dont love their website but at least they have one.


Betterment
I also have some retirement in Betterment account ( an older IRA and my SEP) its fully automated one that you can just log on and move the needle if you want to be more aggressive in what's you're invested in. I like the simplicity of this one.

I just moved some $$ over to their Cash Reserve account that they are offering 4.25% no fee.

 

[BiGGyT]

@Burke
The after-tax contributions are included in the Actual Contribution Percentage (ACP) test. Mostly highly compensated employees (HCEs) would be doing the mega-backdoor, so they would most likely fail testing. Safe Harbors do not exclude the ACP test for after-tax.

@MatB
Your S-Corp limits your contributions based on your W2 compensation only so you have to have enough W2 comp to allow for the maximum benefits. If you are over 50, you can defer $30k in 2023 and 25% of W2 comp assuming you have over $40k in W2.

 

[MatB]

@Burke
The after-tax contributions are included in the Actual Contribution Percentage (ACP) test. Mostly highly compensated employees (HCEs) would be doing the mega-backdoor, so they would most likely fail testing. Safe Harbors do not exclude the ACP test for after-tax.

@MatB
Your S-Corp limits your contributions based on your W2 compensation only so you have to have enough W2 comp to allow for the maximum benefits. If you are over 50, you can defer $30k in 2023 and 25% of W2 comp assuming you have over $40k in W2.

$30k AND 25% of my W2? The 25% going into the 401K and NOT the SEP?

 

[Chile85]

Have read this thread a couple of times.

I'm currently an S-Corp and on the payroll. Putting what I can away into a SEP (25% of salary)

My wife is also recently on the payroll

Switching that to a 401k looks better for me saving pre tax. (I currently don't have a 401k). Just a SEP

MY payroll company will handle all the compliance / deductions etc. For the 401ks


Is one place better than the other?

The 3 im looking at are:

American Funds
My accountant recommended American Funds, but that uses an active advisor and there are fees involved (as all of them do) And to move things around you have to call the guy.

Vanguard
I saw that Vanguard is a passive investment (set it and forget it type) Dont love their website but at least they have one.


Betterment
I also have some retirement in Betterment account ( an older IRA and my SEP) its fully automated one that you can just log on and move the needle if you want to be more aggressive in what's you're invested in. I like the simplicity of this one.

I just moved some $$ over to their Cash Reserve account that they are offering 4.25% no fee.

I'll hop on the Vanguard train here. I have a rollover 401k that went to a traditional IRA years ago. My wife and I have been funding Roth IRAs with Vanguard ETFs with Vanguard for years and we've had no complaints.

 

[DrStrange]

Investment advisor fees that are assessed as a percentage of assets are often a negative value parasite on your accounts. Not always, sometimes an active manager can be worthwhile. People need to pay attention to this - managed funds often have significant fees built into the costs.

It is rare to find an investment advisor or fund that creates enough value to justify the fees. Not impossible, also not dependable. Note that ultra high net worth investors might find private money management is worth the cost. But that often means the money manager is placing funds in non-publicly traded investments.

Investment advice that is paid on a fee basis - hourly or annually but not aid as a percentage of assets can be very useful. The more prone you are to panic sell or make emotional changes in investments, the more likely you would benefit from professional investment advice. This is different from professional tax advice.

Very broad index funds are hard for a percent of assets fee-based investment advisor to outperform. These index funds are also somewhat tax efficient if held in a taxable account. Note that index funds also have fees, just that they are normally smaller than found with an active manager.

 

[Chile85]

Investment advisor fees that are assessed as a percentage of assets are often a negative value parasite on your accounts. Not always, sometimes an active manager can be worthwhile. People need to pay attention to this - managed funds often have significant fees built into the costs.

It is rare to find an investment advisor or fund that creates enough value to justify the fees. Not impossible, also not dependable. Note that ultra high net worth investors might find private money management is worth the cost. But that often means the money manager is placing funds in non-publicly traded investments.

Investment advice that is paid on a fee basis - hourly or annually but not aid as a percentage of assets can be very useful. The more prone you are to panic sell or make emotional changes in investments, the more likely you would benefit from professional investment advice. This is different from professional tax advice.

Very broad index funds are hard for a percent of assets fee-based investment advisor to outperform. These index funds are also somewhat tax efficient if held in a taxable account. Note that index funds also have fees, just that they are normally smaller than found with an active manager.

Couldn't agree more. Warren Buffett once made a bet that helped demonstrate this. He bet hedge fund managers $1,000,000 that they couldn't beat the S&P 500 index over a ten year period. Only one hedge fund manager took the bet and he lost.

 

[MatB]

Just got off the phone with Vanguard

Seems pretty simple.

Low fees Except $20 per mutual fund per year. The rest is free for myself and spouse. No other employees

 

[CraigT78]

I've paid @Rhodeman77 a LOT of money over the years for investment advice, and it's crap.

 

[MatB]

I've paid @Rhodeman77 a LOT of money over the years for investment advice, and it's crap.

‘Rebuy’ is NOT investment advice

 

[MatB]

Ok. Had a lightbulb moment

As employer you can put in up to 25% of W2 income. But you have to also do that for any other employee.

The $30k is what an employee can contribute max. On their own pre-tax.

Can you also contribute to a ROTH the same time as the 401k. ?

 

[CraigT78]

‘Rebuy’ is NOT investment advice

This might be where I went wrong.

"mistakes were made"