What is recommended hierarchy of investments?

#1

Hello, I’m a 57 woman with two children (20, 17). Started late in the savings game, but trying to catch up. Thinking of retiring within the next 5-7 years. If all continues, looking to retire with a teacher pension. Teacher retirees I’ve talked to say their take-home pension is higher than when they were working as NYS/NYC taxes and savings contributions are no longer deducted. They’ve all told me they live comfortably with pension and social security and don’t foresee needing to withdraw $ from savings. With that in mind, I’m looking at where I am saving $ and re-evaluating whether changes are warranted.

Have:
403b - contribute max ($26,000). Currently have approximately: $284,000. Fixed 7% interest.
457 - Opened @ three years ago - contribute 19%. Currently have $73,000. Previously in tax deferred but recently changed to 457 Roth. Currently in a term fund but thinking of moving to S&P index fund (lower fees).
Roth - $7,000 (opened recently and contributed towards 2020)

Debts:
Mortgage: just closed on refinance - $175,000 15 year 2.375%

Thoughts:

  1. Thinking that if I can live comfortably on pension, then maybe I should reduce 403b contribution and max on out on 457 Roth instead. That way, there won’t be a need for mandatory withdrawals and can leave for my children tax free.

  2. Also thinking that if reduce 403b or 457 contributions either way, maybe I should contribute monthly max towards my kids’ Roth IRA’s. Currently just contribute $100 monthly. Both children earn at least $6000 per year.

  3. Or, maybe, open an outside account and contribute there.

Thoughts?

Thank you.

#2

Ruth,

Instead of taking other retirees’ word for it, I’d recommend you finding out what exactly will you get in pension and social security- what are the exact numbers. Different people have different standard of living, so one person being able to live off of one number doesn’t mean that you can too. Do others that you talked to have a mortgage like you do? Do they have kids like you do? It is important for you to understand your own numbers (yearly expenses, retirement income, unexpected emergencies like house/car repairs, etc).

Not knowing what your pension number is, I would say your debt to savings ratio is too high for somebody looking to retire in 5-7 years.

If I misunderstood your comment, and you already know your numbers and just looking for other thoughts on where to invest, then continuing to max out 403b, 457, and Roth is a good idea as well as opening a brokerage account.

#3

Mindy, yes, thank you for responding. I do know my projected pension and SS, and I expect that my take home income will be higher at retirement. I am frugal but live comfortably so I expect, absent unforeseen circumstances, that monthly pension will cover all expenses.

So, as you see it, I should just continue contributing the same? You don’t think there are benefits to maxing out on 457 Roth instead of 403b? Or pros and cons of helping fund my children’s Roths? Thank you.

#4

Do you expect your taxable income (e.g., pension, social security, withdrawal from savings account yearly, salary, etc) to be higher or lower now compared to in retirement - will that put you in a higher or lower tax bracket? If you think that your tax bracket would be higher in retirement (you said take home pay is higher so I’m not sure if that means if your taxable income would be higher or not), contributing to Roth now would be advantageous for retirement. If your tax bracket is expected to be lower in retirement, contributing to Roth now will just make you pay more in taxes than necessary.

Maxing out all tax-advantage plans in any way would be recommended.

Pension and Social Security are not protected against inflation. So after a decade or so in retirement, you may find that your cost of living go up but your retirement income remain the same. So i would recommend to continue to save and invest for yourself. Your kids are young, what you can do is educate them the importance of saving/investing so that they can start investing themselves. Think about when you’re old and gray, if you need assisted living, can you fund it with your savings and pension? If you have extra money, for sure it would be nice to help fund your kids’ IRA. But it will be better for your kids if they know to invest themselves, and it will be better if you have a good retirement plan so that you won’t need to depend on them when you’re older and weaker.

My opinion is just for discussion and us learning together, please don’t take what I say as your financial advice. :slight_smile:

#5

Um, lot’s to think about. Thank you for setting the scenarios. I’m thinking, because of pension I will probably be in same tax bracket. At 70, depending on RMD plus SS, may go higher but unsure. Will do bit of research and figure approximate RMD and see where I’ll stand. Again, thank you.

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#6

RMD is now age 72 (in case you didn’t know). Also, 457 Roth is still subject to RMD. Only Roth IRA is exempt from RMD.

Ask your employer if the Roth balance you have in 403b or 457 can be rollover to Roth IRA when you terminate. My employer allows me to split up my retirement account balance into different IRA accounts depending on the type of contribution that was made. If your employer allows your 403b and 457 account balances to be split, your contributed Roth amount can be rolled over into Roth IRA, and you won’t have to worry about RMD in Roth IRA. If you don’t rollover to Roth IRA, the balance will be subject to RMD.