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How much is too much retirement contribution?

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  • How much is too much retirement contribution?

    Hello everyone,

    This is my first post and I wanted to get some feedback on retirement planning.

    Background:
    I am an underpaid fellow in my final year of training and my wife is a new attending. Both of us value the idea of financial independence and responsible spending although neither of us are particularly financially savvy. We lived frugally in residency and aggressively paid down our student loans resulting in both of us being debt-free. This came at the cost of saving for retirement though and it was only last year that we decided to get serious about maxing out our 403(b)/Roth IRAs. We have just under 100K in retirement combined.

    My wife took an attending job this year that pays ~200K/y. She will have access to up to three retirement accounts through her employer--a 403b, 457 (gov), and a special state retirement program with a 1:1.5 ratio employer match up to 9% of the base salary. As the contribution limits do not overlap, the potential retirement savings is nuts: $19.5K + $19.5K + $18K + $27K (match) + 6K (BD Roth IRA)= $90K/y.

    Next year, I will likely take a job at the same hospital with a similar salary and benefits--i.e. meaning we'd be able to save a potential of $180K/y in retirement contributions.

    It clearly makes sense to max out the state plan with employer-matched contributions but we recognize maxing out the other two (per person) would tie up a lot of cash. We are leaning toward trying though. We have about 50K in liquid savings at the moment and ultimately want to buy a house in the next 1-2 years and have kids in the next 2-3y.

    Questions:
    I guess I was looking for a big picture sanity check.
    1) Am I nuts for wanting each of us to max all 3 accounts + BD roth IRA out?
    2) Would I be nuts for not maxing everything out?
    3) Any thoughts or similar experiences?


    Thank so much!

    -T

  • #2
    What a great place to be in. You might even have more space if your employer has access to the megabackdoor Roth.

    With no loans, although you didn't save for retirement much during residency and fellowship, with all of that space you're going to be way ahead of the game before you know it. I would try to max it all b/c neither of you know how long you'll be at this employer, and with the magic of compound interest you should try to max out as much as you can earlier in your career rather than later. You are still probably pretty young. You should also try to save up for a down payment while also keeping an emergency fund (which is what I had assumed the $50k in liquid assets was).

    1) No not at all
    2) Worth trying. If there's one to not max out, it would be the 403b. I assume the special state retirement program is required and since your 457 plan is governmental, assuming good distribution options, I would prioritize that over the 403b. Contribute whatever to the 403b to get the match, if there is any match on that. But that would be the first I'd cut.
    3) Our HH income is less than what yours will be and we had access to about $115k in tax-advantaged space. We maxed them. I think it doesn't hurt to try, especially early on. Also, with all of that tax-deferred space if the 403b have a Roth option, you might want to consider putting some money in there.

    Comment


    • #3
      Don't forget the HSA!

      A good chunk of that is match so what would you be left with after tax to spend? 100-150k? Sounds good to me! FIRE here you come!

      Comment


      • #4
        Too much is an individual choice.
        Congrats on the Loans.
        Start here:
        Comp- retirement (20%)= spending
        Now budget the spending and make sure you include own occupation disability insurance, a house downpayment fund and a 3-6 month efund. Build yourself an annual budget from gross pay down to what is left.
        Gut feel is when the retirement savings hits 30% you will feel the squeeze.

        90/(200+27)= 39.7%

        If you hold down the housing and autos, you can hit 40% by renting until you are two years into your job. Much will depend on those two Realistically, when you project the tax savings it will be financially beneficial to max the retirement savings.

        https://www.physicianonfire.com/4-physicians/

        I think what you will find is that keeping the living expenses down, the house and kids will be a breeze. You don’t need to plan on early retirement, you can focus on wealth, FI. But front loading retirement is best in the long term.
        Thus the recommendation, live like a resident the first five years. Max the retirement accounts will turbo charge finances. Why? You are not spending it. Doable, not nuts. But it will squeeze you. Best choice, that 10% (30% to 40%) will disappoint on expectations. Delayed gratification.

        I would be more concerned with the house and the kids. Those ramp up living expenses.

        Comment


        • #5
          We have way less tax advantage space. Compound interest will serve you well if you never get used to that new income. As Lordosis said, FI here you come!

          Comment


          • #6
            Originally posted by JBME View Post
            What a great place to be in. You might even have more space if your employer has access to the megabackdoor Roth.

            With no loans, although you didn't save for retirement much during residency and fellowship, with all of that space you're going to be way ahead of the game before you know it. I would try to max it all b/c neither of you know how long you'll be at this employer, and with the magic of compound interest you should try to max out as much as you can earlier in your career rather than later. You are still probably pretty young. You should also try to save up for a down payment while also keeping an emergency fund (which is what I had assumed the $50k in liquid assets was).

            1) No not at all
            2) Worth trying. If there's one to not max out, it would be the 403b. I assume the special state retirement program is required and since your 457 plan is governmental, assuming good distribution options, I would prioritize that over the 403b. Contribute whatever to the 403b to get the match, if there is any match on that. But that would be the first I'd cut.
            3) Our HH income is less than what yours will be and we had access to about $115k in tax-advantaged space. We maxed them. I think it doesn't hurt to try, especially early on. Also, with all of that tax-deferred space if the 403b have a Roth option, you might want to consider putting some money in there.
            I would recommend OP read the distribution options on the 457b very carefully. Changing jobs could force you to choose between a lump sum distribution or withdrawals spread over 5-10 years. Some plans allow the option to keep the money in the plan, which is ideal. If the plan does not allow that, then I wouldn’t necessarily agree that the 457b (even though governmental) is better and prioritize that over the 403b.

            180k saved with a 454k gross income (including matched contributions) is a savings rate of ~40%. HSA could bump that up a bit. I would try for it, but I wouldn’t judge if you “only” saved 20% and used the extra to build up downpayment, etc.

            With no loans the two of you are well on your way. Good luck!

            Comment


            • #7
              Yes max everything out and then save more if you can.

              prior to having kids and owning a house is the easiest and best time to save. You’ll be glad that you have that cushion if either of you wants to cut back after having kids.

              Comment


              • #8
                Originally posted by TheDangerZone View Post

                I would recommend OP read the distribution options on the 457b very carefully. Changing jobs could force you to choose between a lump sum distribution or withdrawals spread over 5-10 years. Some plans allow the option to keep the money in the plan, which is ideal. If the plan does not allow that, then I wouldn’t necessarily agree that the 457b (even though governmental) is better and prioritize that over the 403b.

                180k saved with a 454k gross income (including matched contributions) is a savings rate of ~40%. HSA could bump that up a bit. I would try for it, but I wouldn’t judge if you “only” saved 20% and used the extra to build up downpayment, etc.

                With no loans the two of you are well on your way. Good luck!
                People overly worry about 457b distributions, I used mine as a severance plan from the start. Besides, it says governmental, which could be rolled, but big deal either way, its not that much of an issue.

                Yes, I'd max out everything you can right now, you're just starting, you may not have access to this for long or change jobs, etc...Your incomes will increase, you wont be paying tons of taxes, etc...Mostly stocks, just crush this for a while, in 5-10y you can consider if you want to slow down and increase consumption, take a different job, etc.

                Comment


                • #9
                  Originally posted by TheDangerZone View Post

                  I would recommend OP read the distribution options on the 457b very carefully. Changing jobs could force you to choose between a lump sum distribution or withdrawals spread over 5-10 years. Some plans allow the option to keep the money in the plan, which is ideal. If the plan does not allow that, then I wouldn’t necessarily agree that the 457b (even though governmental) is better and prioritize that over the 403b.

                  180k saved with a 454k gross income (including matched contributions) is a savings rate of ~40%. HSA could bump that up a bit. I would try for it, but I wouldn’t judge if you “only” saved 20% and used the extra to build up downpayment, etc.

                  With no loans the two of you are well on your way. Good luck!
                  absolutely! To hit the point home, as I said in my original post "assuming good distribution options" that means NOT lump sum. I would totally change my recommendation if the 457 only allowed the OP to take a lump sum.

                  Comment


                  • #10
                    another angle to the OP:

                    you mention spouse but no kids.

                    i would HIGHLY encourage you to shoehorn every dollar into retirement you can while you are young and married w/ no kids. expenses do go up when this kids come (if this is your path).

                    my first few years out of residency i lived in my resident apartment, drove a used prius, and saved 20% while aggressively paying down loans. if i could go back and do it again i would moonlight even more and save even more money. it is impossible to be too aggressive early on, you will never be more ready to work and you will never earn more powerful dollars.

                    Comment


                    • #11
                      Originally posted by Zaphod View Post

                      People overly worry about 457b distributions, I used mine as a severance plan from the start. Besides, it says governmental, which could be rolled, but big deal either way, its not that much of an issue.

                      Yes, I'd max out everything you can right now, you're just starting, you may not have access to this for long or change jobs, etc...Your incomes will increase, you wont be paying tons of taxes, etc...Mostly stocks, just crush this for a while, in 5-10y you can consider if you want to slow down and increase consumption, take a different job, etc.
                      Thank you, I forgot/overlooked in my pre-coffee state that the governmental 457b can be rolled into a 401k, 403b or another governmental 457b. That's great flexibility. I would still, of course, favor the 403b and the presumed match. I am using my non-governmental 457b as a severance plan as well. I am not sure how much longer I plan to contribute to it for (it's been 3+ years), I think once it hits six figures, I will sit down and reconsider.

                      Comment


                      • #12
                        For now, it is likely wise to max out as much retirement space as possible. The immediate tax savings are huge.

                        One wrinkle for higher income professionals who are supersavers is the proposed new law that would limit tax deferred accounts to 10MM. Among the proposals is a requirement that would force annual lump sum withdrawals from these accounts and result in very high taxation. So some of the strategies relating to retirement accounts may change, but none of these proposals have become law at this point. And it is only a small percentage of physicians who have tax deferred accounts that reach 8 figures. Even if the OP and spouse are supersavers and they use all tax deferred space, it would take 19 years to get to 10MM if growth is 10% per year.

                        Comment


                        • #13
                          Originally posted by White.Beard.Doc View Post
                          For now, it is likely wise to max out as much retirement space as possible. The immediate tax savings are huge.

                          One wrinkle for higher income professionals who are supersavers is the proposed new law that would limit tax deferred accounts to 10MM. Among the proposals is a requirement that would force annual lump sum withdrawals from these accounts and result in very high taxation. So some of the strategies relating to retirement accounts may change, but none of these proposals have become law at this point. And it is only a small percentage of physicians who have tax deferred accounts that reach 8 figures. Even if the OP and spouse are supersavers and they use all tax deferred space, it would take 19 years to get to 10MM if growth is 10% per year.
                          unless you are really someone who needs $10m to retire, without turning this into a political or policy thread, I think the OP can avoid this being an issue by simply saving less later in one's career. Supercharge saving now so you can spend your entire paycheck later. The reverse doesn't work so well. If OP has a goal to get retirement accounts to $5-7m, and balance is $3m by the time OP is 50 (which may be possible if OP is late 30s and able to max all of this for 10+ years), then at 50 OP can stop contributing altogether and as long as he/she works another 10 years without dipping into the retirement pot, the balance at age 60 could reasonably be $6m.

                          Of course if you've been a supersaver it's hard to stop being a super saver. Good idea for the OP to make some life goals and wrap finances around those goals

                          Comment


                          • #14
                            Originally posted by MPMD View Post
                            another angle to the OP:

                            you mention spouse but no kids.

                            i would HIGHLY encourage you to shoehorn every dollar into retirement you can while you are young and married w/ no kids. expenses do go up when this kids come (if this is your path).

                            my first few years out of residency i lived in my resident apartment, drove a used prius, and saved 20% while aggressively paying down loans. if i could go back and do it again i would moonlight even more and save even more money. it is impossible to be too aggressive early on, you will never be more ready to work and you will never earn more powerful dollars.
                            OP, you should travel now and spend some money before kids (if you plan on kids). Although my wife and I did some cool trips before kids, we probably could have done more.

                            Now, we have money to travel, but have kids who are 7, 5, 3, and 2. . .

                            Comment


                            • #15
                              Crush the retirement now with max contributions--almost twenty years later it is amazing how much my early savings have grown--but do have some fun along the way.

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