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Help Me Retire: We have 25 years until retirement and are saving 25% of our income — are we doing it right? And are we saving too much?

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Dear MarketWatch,

My wife, 33, and I, 40, have our own 403(b)s, Roth accounts (maxing their contributions this year for the first time) and pensions as part of our retirement plan. 

My wife contributes 14% of her pay to her defined benefit plan and her school district contributes another 14%. She is not eligible for Social Security – it’s a quirk in our state since she is a public-school teacher. She can retire with her full pension at 58. She contributes 4% to her 403(b) and we have a plan to increase it 1-2% a year until she gets to 10%. We would tap into her 403(b) until we are required to take required minimum distributions. 

I have begun contributing to my Roth 403(b) and am planning to increase it to about $2,400 a year. I currently contribute 12% to my 403(b) account with my employer matching 2%. I am eligible for Social Security and the current plan is to defer it to age 70 while we convert a part of my 403(b) to a Roth account between my planned retirement age of 65. We do not have a taxable brokerage account. 

We are 25 years from retirement. We have a combined family savings rate of 25% for retirement. We are saving for our children’s college expenses, but that is more than a decade away. We are planning to transition their college savings to our 403(b) plans once they finish college. 

I have used retirement calculators and it seems that we will have enough to retire depending on investment returns. I have read in various places that one should have tax-deferred, tax-now, and tax-never accounts as part of their retirement plan. I am curious if tax-now accounts like a taxable brokerage are worth it considering that I can contribute more to either our tax-deferred or tax-never (the Roth 403(b)). We have not maxed out our 403(b) contributions and probably cannot until after our children graduate from college. 

I am uncertain at what point we can or should stop increasing our retirement contributions. With our expected pensions amount and my Social Security, we would have about 75% of our current income. At what point is our personal savings for retirement too much? I should also add that one of our goals is to leave our Roth accounts to our children when we die. 

Sincerely,

Saving Too Much? 

See: I retired at 50, went back to work at 53, and then a medical issue left me jobless: ‘There’s no such thing as a safe amount of money’ 

Dear Saving Too Much, 

You and your wife sound so on top of your retirement planning, which is amazing considering how far away you are from actually retiring – kudos to you! 

You mention two important retirement planning issues. The first: The right way to diversify the taxability of retirement assets. The second: What amount of savings is too much for retirement. I’m going to start with the first before tackling the second. 

Diversifying the type of retirement accounts you have can be extremely helpful come retirement. The truth is, nobody really knows what the future holds, and that includes income streams, tax rates (for people who have decades to go, like you), financial needs and so on. Having accounts that are taxed now are helpful if income tax rates later on are much higher than they are now. They’re also beneficial if you just have a lot of other taxable income during retirement. Conversely, having some assets that will be taxed in retirement would make sense if you’re in a lower tax bracket or for the years when you don’t have much money from other sources coming in. All of this is a balancing act, even though you’re juggling with figures you don’t yet know. 

“Overall, having different buckets of savings and investments with different characteristics is a good thing,” said Christopher Lyman, a certified financial planner at Allied Financial Advisors. “No one knows the future and having various options allows you to adapt to whatever situation is presented to you down the line.” 

Taxable brokerage accounts do play a role in retirement planning, even if they may not seem like it because they don’t have some of the other perks of employer-sponsored retirement accounts. When tax-efficient, which is based on the asset allocation (think a mix of exchange-traded funds and individual stocks, etc), they allow investors to save more money for the future. They also come with no mandatory withdrawal schedules and a lot of flexibility on taxability, such as choosing to distribute when there are losses versus gains, said Leslie Beck, a certified financial planner and principal of Compass Wealth Management. There’s also more leniency around inheritances, as they don’t have mandatory distribution rules that come with IRAs, Beck said. 

Keep in mind, brokerage account distributions have a few other tax-advantageous perks. They are taxed at preferential capital gain rates if they’re deemed long-term (you held the investments for more than 12 months), which are lower than ordinary income tax rates, said Brian Schmehil, a certified financial planner and the senior director of wealth management at The Mather Group. Beneficiaries also get some of the tax benefits from a brokerage account because they receive a step-up in cost basis on the investments, and could potentially avoid capital gains altogether, he said. 

These accounts can also act as a tool during a Roth conversion early in retirement, said Judson Meinhart, a certified financial planner and manager of financial planning at Parsec Financial. “The retiree can use the taxable brokerage account to cover living expenses and taxes, which allows for more IRA dollars to be converted at lower effective tax rates.” 

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey  

You seem to have college costs planned out already, but taxable accounts might help there too. If you end up needing to dip into some excess savings, this type of account is one way to do so. It can also come in handy if you retire before a traditional retirement age and need some money to bridge the gap between then and when you’re able to tap into your other retirement accounts. 

“I call the taxable brokerage account the ‘lifestyle’ or ‘bridge’ account,” said Marguerita Cheng, a certified financial planner and founder and chief executive officer of Blue Ocean Global Wealth. “It has a longer time horizon than cash reserves, but shorter than 59 ½ years old.” 

Of course, you make great points about the other accounts that you have so you might want to hold off on putting any money into a taxable brokerage account unless you have more to spare toward your savings – and that’s after maxing out the plans you already do have. And you do have to be careful – unlike 403(b) plans, the menu of investment choices is significantly longer, which can be overwhelming. 

If you have access to a Health Savings Account, you might also want to contribute to one of those as the investments have triple the tax benefits (pre-tax contributions, tax-free growth and tax-free distributions if made for eligible health expenses – in the year of the contribution or decades later in retirement). HSAs are tied to high-deductible health plans, which can be expensive for some families, but it’s worth considering. 

Now onto the question of how much savings is too much savings.

Also see: We want to retire in a few years, and have about $1 million saved. Should I move my money to a Roth, and pay off my $200,000 mortgage while I’m at it? 

The truth again? There’s no hard and fast rule on how much is too much (not quite the answer you were looking for, I’m sure). Yes, advisers say there is such a thing as “too much” but perhaps not in the way you may think. The key is to be purposeful with your money, and that goes back to your tax diversification question – if you can save more and put it in a non-retirement account, it’s not tied up to a specific age you have to reach to take the money out penalty-free. 

There are so many factors that go into finding the right amount of money to save for retirement, and those factors are likely to change in the years – or in your case, decades – until retirement. Erring on the side of caution and choosing to save a lot, perhaps even “too much,” is always the conservative, safer choice because if something bad happens, you’ll have a cushion to pay for it. That being said, if you’re saving 25% of your income for retirement alone, but don’t have the means to save for any other shorter-term goals, like college or an emergency fund or even a family vacation, you, your spouse and kids would love to take, then maybe you can dial it back. 

You shouldn’t be depriving yourself of life now because there’s no telling what the future will hold. You have to plan for the future as well as the present and strike a comfortable balance. 

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

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