New limits for retirement accounts in 2023

The limits for IRAs and IRA Roths increases to $6,500 ($7,500 if you are age 50 or older).

For 401k/403b/457, the limit is increasing to $22,500 ($30,000 if you are age 50 or older).

If you’re maxing out this year, don’t forget to update for 2023!

We started an IRA Roth for DC1

DC1 made money this summer at hir internship.  A little over $2000 to be exact.

That means that DC1 is eligible to put a little over $2000 into a Roth IRA retirement account this year.  Starting retirement savings at 15, even if it’s a small amount, even with the stock markets being volatile, could have a nicely positive impact on hir retirement funds, especially if the stock market continues its pattern of returning more than inflation takes away over the long-run.

We’ve left the $2000 in hir savings account (zie isn’t eligible for financial aid right now anyway because DH and I make too much and have too much unprotected wealth– if this wasn’t the case it might make sense for college financial aid purposes to put hir money directly into protected retirement savings since colleges are greedy with student assets) and have taken $2K of our money to put into an IRA for DC1.

It turns out that it is not as easy to open up an IRA for a minor as it is for an adult.  If you try to set up an account online it will say no!  In the end, we had to do it over the *phone* with Vanguard.  But the Vanguard person took care of things and walked DH through what needed to be done.  (This would have been more annoying if I had to do it myself.)

Once the account was open, it was attached to DH’s main Vanguard account.  At some point that will have to be disentangled, but DC1 will still be under 18 for a few more years.  If you don’t already have a Vanguard account and you want to set up an IRA for your child then you will probably want to do this with whoever your actual provider is.  (If you don’t have a provider, have you considered getting yourself annual IRAs?)  (Disclaimer:  We are not financial advisors– speak with a financial advisor with fiduciary responsibility and/or do your own research before making life changing money decisions.)

DH had them direct money to their money market account.  After it posted, we tried to buy VTSAX, the Vanguard total stock market index, with it, but they said no!  You must have at least 3K to do that.  So instead we bought VTI which is the Vanguard Total Index ETF (exchange traded fund) which didn’t have a dollar minimum amount.  The ETF tracks the Index, so hopefully it provides about the same outcome 50+ years down the line.  No trading fee for this with Vanguard which was nice.

Hopefully the magic of compounding tax free will turn this $2K into a good start on healthy retirement funding for DC1.  Though just having an account and getting into the habit of maxing out retirement savings will have an even bigger return down the road.

When did you start saving for retirement?  Did you have a summer job as a kid?  If applicable, do/did your kids have earnings under the age of 18?

Ask the grumpies: What do you think of the 4% rule

First Gen American asks:

Once you’ve hit your magic 4% rule retirement number, should you reallocate to a more conservative asset allocation. Why or why not. And what do you think of the 4% rule.

Standard disclaimer:  We are not financial professionals.  Do your own research and/or consult a fee-only certified financial planner before making important life changing decisions. 

I mean, do you have a bequest motive?  Do you plan to make a LOT more money before you retire?

4% rule

The 4% rule is ok in terms of preserving your capital until you die on average.  But it’s bad in terms of volatility and uncertainty.  You don’t know how your monetary needs are going to change over time, so it might be too risky.  It may also end up with you not actually being able to take out enough for your needs during a recession, and if you end up taking out more then you’ve broken the rule entirely.  I think the 4% rule is best if you have an additional emergency fund or have the ability to earn more money if necessary.  I don’t think there is any actual safe rule that will both preserve your capital as needed and ensure that you have enough money for your spending in uncertain times.  The 4% rule doesn’t get rid of the need for lots of money.  So, I probably wouldn’t retire just because the 4% rule says I can, especially not while still youngish and during uncertain times.

If you’re planning on continuing to work, it doesn’t matter that you’ve hit the 4% rule retirement number.  What matters is when you actually retire and stop bringing in new money.  While new money is flowing in, you don’t need as much in terms of conservative assets because your income moderates short-term risk, allowing you to reap the benefits of risky assets that aren’t actually that risky over the long-term.

100% safe vs. 100% stocks

Suze Orman famously keeps almost all her money in safe assets.  She recommends you play the stock market, but she doesn’t herself.  Some wealthy people only keep a little spending money in liquid assets and the rest are all in stocks and other risky assets. When you have a LOT of money, both of these are completely logical because you can live off money that’s eroded by inflation but you will also still be fine if the market drops 40% or more.

The standard calculus changes when you have waaaay more money than you will ever need.  You have to think about what it is you want to optimize.

If you don’t care what happens when you die, you’re probably fine no matter what you do.  If you want to keep things for your heirs, then you will need to think about tax optimization and definitely keep a lot in stocks– your horizon is even longer and your heirs benefit from step-up basis upon your death.

 

This year I put IRA Roth money into REITs

We did backdoor ROTHs again this year since that’s a good thing for high income people to do to save for the future.

With how the stock market has done compared to our local housing market, our house is no longer as big a part of our portfolio as it used to be, and since we’re high enough savings that it makes sense to diversify by branching out into things that most people need never invest in (see:  Munis), I thought it might be time to put some money into a real estate investment trust.

I read this article about why to put REITs into a Roth vehicle and thought it made a lot of sense.  Just like you would want to buy Munis outside of any tax sheltered fund because they’re already tax sheltered, you get a benefit from putting an REIT into a Roth because so much of the earnings of an REIT come in the form of dividends which are taxed at ordinary income.  Unless, of course, you put them in a Roth where those earnings accumulate tax free.

I’m not 100% sure that we really ought to have 12K in an REIT (our house is still a reasonable chunk of our portfolio, just not as large a chunk as it used to be), but I thought this would be a nice way to dip into the waters of extended diversification.  Especially since I already tried out munis which is a different kind of diversification.

I picked VGSLX which has an expense ratio of .12, which is much higher than say, an S&P or total market fund, but isn’t so bad for one of these specialized products.

Note:  Don’t be an idiot like I was this year and buy stocks in the traditional IRA before converting to the backdoor Roth.  Stick the money in whatever their cash fund is and do the converting FIRST before choosing an investment or it may take another week before you’re allowed to convert.  Update:  Though maybe not so much of an idiot since it lost money during that week, which I think means we get to take a small tax deduction, though I’m not 100% sure.  Worth the hassle?  Probably not.

401k/403b/457 contribution limits increase in 2022

The new contribution limit is $20,500.  Catch-up for those age 50 and over is still $6,500.

IRA contribution limits remain at $6,000.  Catch-up for those age 50 and over is still $1,000.

I increased my contributions for 2022!  DH can’t do his until Jan 1 though….

Ask the grumpies: Fees vs returns

Julia asks:

How do you weigh the expense ratio for a fund vs their avg returns? I tend to go for lowest fee ETFs. My husband keeps suggesting that if a fund has overall higher returns that it is worth the slightly huger fee. I’m usually looking at funds with like 0.4% or less in fees. He probably wouldn’t go over 1% but still higher than me. Is the math as simple as if the returns are higher it’s worth the fees?

Disclaimer:  We are not financial professionals.  Please do your own research and/or consult with a certified professional planner before making any life changing money decisions.

Short answer:  You’re right, he’s wrong.

Longer answer:

High fees are usually caused by active management.  Less than 50% of actively managed funds match or beat the market.  That is worse than average!  (I don’t have the cite, but the study finding that came out/got highly publicized a little over 10 years ago.)  You are better off with a fund that matches the market it is indexed to.  Yes, sometimes you will get lucky with an actively managed fund, but on average you won’t.  And, for these actively managed funds, past performance doesn’t predict future performance.  It really is just that sometimes active managers get lucky and sometimes they don’t.

Fees can also just vary arbitrarily:  Brigette Madrian did an interesting study a couple of decades ago where she took a whole bunch of S&P 500 indexes from a bunch of different companies.  These all had the same underlying index, but they had different fees for whatever reason.  These funds also had different “returns since inception” which means that the indexes that were started earlier or the indexes that got lucky and were started when the S&P 500 was at a low point *looked* like they had better returns than did younger S&P 500 indexes or those started when the market was at a high.  But the actual investment option *was the same*.  The interesting thing was that University of Chicago MBAs looked at the advertising and chose based on “returns since inception” even though such a statistic was meaningless.  Even though the funds were identical except for their fees.

Fees will also vary for other reasons I don’t completely understand but are not necessarily linked to higher performances.  Bond funds seem to have higher fees than full market stock funds.  Foreign funds, emerging markets, REIT etc.  these all tend to have higher fees than a straight up S&P 500 or Total Stock Market Index.  But even though they’re higher fee and potentially lower return, they also mitigate risk in a large portfolio.  Bonds have lower returns but also don’t move the same direction stocks do.  Other markets may have more volatile returns but they don’t completely correlate with what’s going on in your standard S&P 500.

Bottom line:  Get a cheap index, and avoid actively managed funds.  When you’re starting out, get the lowest fee Total Stock Market Index or S&P 500 Index you can get (depending on your investment options– in some company plans, the S&P 500 is the *only* affordable index fund and you have to pay a premium to get a total market fund).  If you’re lucky enough to have a cheap Target Date Fund (from Vanguard, for example), you can just set that and forget.  If you don’t have good company options, contribute to the match and then save additional money in a Vanguard IRA (traditional or Roth).

Book recommendation for your husband:  Bogleheads Guide to Investing .

Why not just do more of what you already do?

One of retireby40’s commenters asked why I don’t just do more of what I do in my free time now if I retire.  Just add 8-9 hours of that instead of working.

What do I do in my free time?  I read romance novels and surf the internet.

As delightful as both are, I do not *want* to spend another 8-9 hours/day doing that.  I would have to start reading crappy romance novels because I’d be out of the good ones and I would probably get tired of the tropes.  As for surfing the internet– the amount I do now doesn’t exactly make me *happy* as it is.

Re: romance novels, there’s something called diminishing marginal utility, which basically means that as you do more of something, the additional happiness boost you get from doing it gets smaller and smaller.  So there’s a big happiness boost from hour one of reading a romance novel, but by hour 10 you kind of want to do something else.

Re: internet surfing, I’m afraid that’s an unhealthy addiction and not really subject to rational economic theory.

So, no, I’m afraid I would actually have to come up with other stuff to do in my waking hours.  And one can only sleep so much.

What do you do in your free time now?  Would you want to add 8-9hrs/day of that if you were retired?  What else would you add?

I have no idea what I would do if I retired early

Regular readers know that I am not as happy with my job as I used to be and I really want to leave this state.  DH’s job is flexible geographically, but it’s at a start-up and could either go big or go out of business in the next couple of years and there are only 3 cities in the US where it would be fairly easy to find a new job in his specializations.

Our married and adult life we’ve followed my job.  If we changed to follow DH’s I might have to leave academia entirely and I’m not entirely sure if I would be able to or even want to make a transition to industry.  (It would be very easy to transition to government but I SO do not want to be a government policy analyst.)

We could have me do the RE part of FIRE.  DH’s job isn’t as stable as mine, but we could probably handle the time it takes to find a new position, and it would be faster to find a new position in more expensive cities.

Recently Revanche asked what I would do if I retired early.  And had I given thought to what I would do if I retired at a normal age for retirement.

Honestly, no.

I don’t want to craft.  I’m allergic to most green things, so gardening is out.  I would probably end up taking a leadership position in activism and that would make me so unhappy all the time.  I do so much more good so much less unpleasantly by getting rid of my students’ math phobia.  (And I could teach K-12 but that also sounds pretty unpleasant.  And yes, I have done volunteer tutoring before… there’s a lot of sitting around waiting for someone to show up.  Teaching Montessori sounds up my alley, but it would pay so little and I would be so sick at first.)  I don’t want to write novels.  I do like reading them.  But…

I mean, I could retire and read novels and catch up on all the movies I haven’t watched since my kids were born.  I would make elaborate dinners.  And organize things around the house.  And gradually get lonely and depressed.  I would probably set myself strict schedules to make my days go by more quickly.  I might look into fixing up my health, but also I might not.  Whether or not I got out and spent time with other not employed people would entirely depend on where we were living– I do not at all like the SAHM around here.  I picked up books at the library the other weekday when story time was starting and it was a terrifying parade without a single mask.

I could also play video games which are really engrossing but make me incredibly depressed when I stop, unfed and unwashed with bleary and dry eyes, having spent the day and much of the night playing.  (I cannot have access to video games or that is all I will do.  I don’t even take restroom breaks until I really have to.)

I would probably try training service puppies.  I have the kind of forceful personality that dogs tend to respect.  And I LOVE puppies.  Dogs, not so much.  I mean, if it were my own dog, that would be different, but I’m really a cat person at heart.  So I do think I could train puppies and then give them back.  I mean, I trained my sister’s dog and then left.  Fostering kittens sounds like a lot of heartbreak (longtime readers may remember when #2 fostered).

But yeah, I would probably end up finding a cause and try to fix it and be unhappy and stressed.  That’s what I DO when I have too much time on my hands.  Having a career is a way of keeping me safe from that.  Also keeps me from being too controlling over my kids.

In terms of what about normal retirement?  I have not actually thought about it because it depends on so much.  Do my kids have kids?  How is our health? How much money do we have?  Are we both still alive?  So many things can change and it’s decades from now so, no haven’t done planning.

So… I think even if things are terrible I’m unlikely to quit my *career* if I can help it, though I might quit my job.  I’m hoping to have something lined up, preferably in one of those three aforementioned cities.  I’ve been thinking that a SLAC might be nice, so long as the teaching load isn’t too onerous.  (I don’t want to go above 2/2.)  I don’t know.

What would you do if retired early or on time (but were not super wealthy, like if you’re partnered your partner still had to work)?

I am not ok

I have not dreaded a school year starting this much since grad school.  Or maybe even middle school.

My state government wants to kill my family and me and everyone else too in some kind of political power move.  It is unpleasant knowing that super villains are both real and in charge.  And most of the parents I know are too burned out to fight anymore.  (The irritating “liberal” White Doods, though, are still happy to tell us that everything is pointless and also anything we do is wrong.)

Last year’s thing with the associate dean really killed my desire to get up in front of a required core class, especially one where I have all the people who signed up late because it’s an 8am class and the later sections are full.  The previous year’s cheating scandal also still lingers.  And the year before the insane and potentially dangerous student who started threatening me because on the first day of class I asked him to move up a few rows (and my chair just sat there after forcing a meeting with him and listened to him accuse me of things until I left)– he did get moved to the online version of the class and went on to threaten other female faculty members and students in his other classes… nothing was done about him.

I don’t want to go into the office, and one of the reasons is because the anti-masker pro-gun faculty member who encouraged last year’s student to go to the associate dean now has an office directly next to mine.  And of course he goes in every day.  I assume he’s gotten vaccinated, but if he keeps up what he’s been doing (meeting with crazy right-wing students unmasked in his office and classroom) eventually he’ll probably get a breakthrough infection.  Who knows.  Maybe he’ll take horse dewormer and get super sick.  One can always hope.

I worry that I can’t protect my kids.  DC2 is homeschooling but DC1 or I could easily bring the virus home.  And probably zie would be ok.  But there’s also a chance zie wouldn’t. Or that there would be long-term consequences that affect hir entire life.  I will do a lot to protect my kids that I will not do to protect myself because they don’t have the power to make these decisions yet.

One of my colleagues quit this summer without another job lined up because he and his wife couldn’t stand living here anymore.  Last night I dreamed he got a last minute position at Delagar’s school where masks are required.

I wish I were taking this semester off as unpaid leave.  And indeed, if I get called into the associate dean’s office again this year, that’s what I’m going to do.  Take leave without pay for the rest of the semester.  The students can have the monotone adjunct for the rest of the semester while I do more job applications.

Maybe it won’t be as bad as I’m worrying.  But now that I think on it, this class has been wildly problematic for the last 3 years.  And this year I have nothing to protect me from the rabid Trump loving anti-masking anti-vaxxers like I did last year.  It’s not irrational to be dreading this semester.

But I do have an escape plan.  I can leave.  Heck, I could even quit my career at this point and Barista FI (though being an actual Barista sounds pretty awful).

Ask the grumpies: Roth IRA contribution max the gross or take-home income?

First Gen American asks:

Your child can open a Roth IRA if they have earned income. I am still unclear if the max contribution for that calendar year is equal to the gross or take home income.

According to the IRS, it is “your taxable compensation,” so that is going to be neither gross nor take-home, but taxable… it’s probably easiest to see this on the pay stubs themselves.  There should be a line on there.  (For me, it’s absent my pre-tax health insurance and other accounts, but not absent taxes!)

(Standard disclaimer:  We are not professionals, please consult with an actual professional or do your own research before making any life-changing decisions.)