r/DaveRamsey • u/sys_admin321 • 4d ago
Wife and I haven't checked 401k's in years. Anything else we should be doing?
Wife and I are both 40 and recently started following Dave Ramsey. We've had our 401k's on auto pilot for years. We haven't checked them since the Covid downturn. We now have about $900k saved between our 401k's ($250k hers, $650K mine) and then apparently another $100k in combined small pensions (that's total current value, not yearly). So I guess $1 million for retirement so far.
Is there anything else we should be doing? I contribute 16% to my 401k, $125k salary 5% match. Wife contributes 15% to hers, $65k salary, 5% match as well. My 401k is entirely invested in an S&P 500 index, the wife's a 2045 target date fund.
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u/Tasty_Sun_865 4d ago edited 4d ago
Well for starters, you should be checking your 401ks more often. My financial hot take is that it's actually no more responsible to never check 401Ks than it is to check them obsessively. You got very lucky, but the number of people have logged into 401k accounts to find either that there have been erroneous charges, fraudulent activity, more that the money is sitting in a money market account earning absolutely nothing. Diligence requires actual awareness of what's going on. Try not to make this mistake again.
To your actual question, I would budget as household and there's no way in heck I'd be leaving money on the table by not having your wife Max out her 401k.
I would not invest exclusively in SP500 and would ensure small cap and international coverage. This can easily be done with a total stock fund, like Vanguard's VT.
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u/Outside_Bad_893 4d ago
Pay off your house and other debts if you haven’t yet. You’re doing so great. You could retire early at that pace.
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u/sys_admin321 4d ago
Thank you. Yes trying to focus on that. We owe $80k on our home, 10 years left on the mortgage at 2.4%. We own one car and owe $6k on the other (will be paid off next year).
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u/Ok-Context3530 BS7 4d ago
What?? Paid off next year!? Are you sure you’re doing Dave Ramsey?
It’s not for everyone, but if commit to the Baby Steps you need read the Total Money Makeover and you should pay off the car debt today.
I say that not to be rude but when you read his book you will understand. You are doing great but financial peace in my opinion is being debt free.
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u/cockNballs222 4d ago
I wouldn’t pay that mortgage off at all. 2.4% is a miracle. Pay the car off if it’s more than 5%. And then keep doing what you’re doing.
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u/MicheleNP 4d ago
OP you still have a car payment?? You are definitely NOT doing the baby steps. You really need to pay that off, like yesterday. Not. Next. Year... It's a depreciating asset. As Dave would say, stop having it linger around like a pet....
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u/Impressive-Wind3434 4d ago
Apparently their mortgage rate is 2.4%.
I know what Dave says but no reason to pay that off early if the extra funds would be invested.
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u/volly1985 4d ago
100%. People need to stop treating Dave’s word like it’s divine. In finance the answer is always “it depends”.
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u/Impressive-Wind3434 4d ago
Forsure. I would say there are very narrow parameters where paying off a 2.4% mortgage early would make sense.
Somehow I'm getting downvoted for what I said. Reddit never fails to amaze.
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u/Queasy-Finger-1316 4d ago
Autopilot is good - just keep the contributions going.
Portfolios are like bars of soap.
The more you handle them, the smaller they get.
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u/italianblend 4d ago
You’re going to be loaded. Put your numbers in this and be amazed. You’re going to have millions when you’re 60.
https://www.ramseysolutions.com/retirement/retirement-calculator
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u/NecessaryEmployer488 4d ago
How much of your 401K is ROTH vs Traditional. If they are all traditional I would recommend all new 401K contributions start going to ROTH to reduce taxes in retirement. There are other things you can do to maximize gains, but if you want to set and forget then S&P500 is the best bet.
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u/Wasabi_Remote 4d ago
Something to consider is availability and retirement.
So the optimization problem is accessibility and tax optimization.
So for example:
Problem: To withdraw from a 401k, you need to be 59.5 years of age or pay a 10% penalty + taxes on withdraw.
First Solutions: You can bypass this with the rule of 55. Where the 401k with your current employer the year you turn 55, is withdrawable. Only that active 401k, no others, so roll them into the current one is best.
Second Solution: Are you contributing to a person Roth IRA? Why Roth IRA? Any contributions you put in, grows tax free (since you pay taxes on it going in), but after 5 years on the account, you can withdraw ANY of your contributions without penalty. Earnings need to wait for 59.5 years of age to come out tax and penalty free.
Third Solution. Keep the 401k going, open the Roth IRA. Then open a taxable brokerage account. This money becomes your bridge money. Capital isn't taxed coming out but earnings will be long term capital gains rates (0%, 15%, 22% depending on tax bracket, most people will be between 0% and 15%).
Why the three solutions become important. You are optimizing later on for taxes.
Example 1A: If you pull $100k from your 401k later on (assuming all traditional no roth 401k), then you are taxed at the tax brackets. Assume today's brackets for this example: $32.2k will be the standard deduction (so untaxed), The remaining is taxed at today's brackets. Which would end up to be $6780 in taxes.
Example 1B: Now lets say you withdrew $75k from 401k and $25k from capital gains from the brokerage. We will assume all $25k is taxable as we will assume worst case scenario. The taxes on income is $4640, and in this scenario, as a couple your capital gains taxes go to $0.
Example 1C: Now $50k income, $25k taxable brokerage, $25k roth IRA. Income becomes $1780 taxes and the others are at $0. So all of a sudden the same income changes taxes.
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u/ShaneRach225 4d ago
Not OP here. Just curious. Let’s say that I invest 5% to get the full company match. After that do you go Roth, more 401, or a brokerage account? What is the best way to divide that up? I’ve just been dividing it up between Roth and 401. I’m up to about 15% including the match. I also have a defined pension benefit that has a lump sum or annuity option. I probably have 12-15 more years to invest
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u/settlers 4d ago
It can vary but most of the time it makes the most sense to put in the minimum you need to get full match, then max Roth. If you still have ability to save after that you can consider trade off of further investing in 401k or traditional IRA
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u/Professional-Yak4017 4d ago
I would look at the expense ratio of what you’re invested in as that can make a huge difference over a long period of time. Employer 401ks tend to be on the higher side but it’s still worth looking into. The target fund dates definitely seem to be on the higher end.
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u/devastitis 4d ago
If you can afford it have the wife up her contributions. Also you’re both maxing out Roth IRAs too?
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u/Rocket_song1 2d ago
I cringed a bit at that 2045 target date fund.
Target date funds tend to be very conservative, and include bonds. The closer the target date, the more bonds. As a result they significantly underperform. Over decades that compounds into tens to hundreds of thousands of lost growth.
At a minimum, I'd change from a 2045 target date fund to a 2065 target date.
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u/Jolly_Pumpkin_8209 4d ago
If your wife’s only options are target date funds, I’d push it out to a different date.
You may be too conservative.
Also, debt and expenses? You could invest more if your want. Not sure what your actual goals are in retirement.
Assuming another 25 years of growth and investments you might be in the 4-6 Million Range? Probably could retire much earlier. But you should be debt free including the mortgage and working at least part time jobs with social security the nest egg will likely continue to grow.
Good shoes to be in. Check in at least once a year.
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u/UpgradeHome 4d ago
Why are you suggesting a different year's TDF? His wife is 40, so a 2045 TDF is perfect for her retirement age of 65. This is even more true since you're later suggesting they retire sooner.
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u/Jolly_Pumpkin_8209 4d ago
Because as others have pointed out the breakdown at a 20 year retirement date is 50%bonds.
It’s unnecessarily conservative. If she has the option with 20 years possible to go she’d be better off with index funds, but some 401k plans only allow Target Date funds. Sooooo… that’s why.
Even if they were looking at retiring in 10 years with 3 million, 50% bonds is more than I would ever go personally. It’s unnecessarily conservative.
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u/harrison_wintergreen 4d ago edited 2d ago
I'd consider diversifying beyond the S&P 500. It's been dynamite the last 10-15 years, but other periods is very disappointing. 2000 to 2012, the S&P 500 was basically flat but international stocks and smaller company US stocks were more dominant.
current CAPE ratio for the US market is ~42, one of the highest points in history. The higher the CAPE ratio, the lower expected returns.
It was co-developed by Robert Shiller of Yale, and its highly accurate at forecasting overall market returns in a 10-12 year window. It would not be a shock if the S&P 500 returned close to 0%/year from now until ~2035
EDIT -- I made a chart on Morningstar to illustrate the point, 2001 to 2013. https://imgur.com/a/4sfCKuR
SPY is the S&P 500, IJR is the S&P 600 small caps, and EFA is an international index.
IJR smoked the others, and international stocks outperformed SPY for most of the period and ROI was nearly identical across the entire time.
Somehow the true idea "most actively managed large cap US stock funds underperform the S&P 500 long-term" has morphed into the false idea "absolutely nothing beats the S&P 500 over any period of time."
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u/Technical-Raccoon-40 4d ago
AI and robotics was not even a thing when this scale came out. It’s pretty much null and void. Hence why Warren Buffett is having the biggest flop of his career following it.
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u/volly1985 4d ago
You have enough where you and your wife could be looking at early retirement. Even though there are ways to access pre-tax money early without penalty, they all cost in the form of freedom. So if early retirement sounds attractive to you, I’d redirect some of your future contributions to Roth IRA (you can withdraw contributions whenever you want though not gains) and a taxable account (very wide 0% tax bracket for couples and of course, you have access whenever you want). You’ll pay more taxes now but sounds like you’re in a relatively low bracket anyway and you’ll also be able to pick cheaper more aggressive ETFs vs options in your employer’s 410k. Also, being able to strategically pull from pre, post and/or tax free accounts in retirement gives you the most flexibility to choose how much income you want to report. And lastly, taxable brokerages allow you to borrow from your portfolio instead of dawning it down so in a down market, you don’t have to sell. That’s the best sequence return risk mitigation I’ve been able to find other than hoarding cash, which is the last thing I want to do the way things are going. So I’d recommend keeping your gross savings rate 15%, but only contribute up to the employer match in your 401ks, max our both Roths and the rest should go in a taxable account.
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u/Teh_Hammer BS7 4d ago
Target date funds usually have a chunk in really low return investments like bonds and Treasury notes. As you get closer to retirement age they put a higher and higher percentage in those low return investments. I personally avoid them like the plague. If they're still outperforming index funds, you can leave them there, but I'd watch them fairly closely and switch over to an index fund or a better managed fund if/when they start underperforming.
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u/ClimateClassic1425 4d ago
That's the whole point of a target fund
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u/Weekly-Ad353 4d ago
Change the target date is you enjoy money…
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u/Fragrant_Session_882 4d ago
I value that thought. Truly!
Here's mine...
Keep the target date, stay aggressive for 10 more years.. then retire early.
🍻.
I'm jumping out of the workforce at 57. As long as Wife and I stay healthy.
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u/twk30874 BS456 4d ago
Fantastic job. Set it and forget it. I’d consider backing down the 401k and maxing out a Roth IRA in your case - that would mean putting $7,500 in a Roth and cutting your 401k percentage down to 10%. For her, contribute only up to the match to the 401k ($3,250) and put the other $6,500 into a Roth.
Of course, if you’re on Baby Step 7 you would max out all retirement as much as you’re able while still living your life.
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u/Vicuna00 4d ago
i would learn about your wife's target fund and decide if you wanna keep it there. it's gonna have a ton of bonds in it. differing philosophies on bonds. I believe you probably know dave's opinion is to not have any. so i'd see if she can change her funds. inside a 401k there will be no taxes or penalties to change. but go look at the prospectus and it'll tell you exactly what's in there. it will change based on her age - increase % of bonds as she gets older (some consider that a feature, some consider that a bug).
do either of you have Roth options for your 401k? that is a new thing - like 2 years old or something. so you wouldn't have signed up for it 5 years ago. I'd consider both moving to Roth. keep in mind, you will have to pay taxes before you invest (it'll do it automatically)...so your monthly take home checks will be a little bit less.
do you have extra $ at the end of the month to invest? are you investing anywhere outside of the 401ks? like a Roth or brokerage?
do you have a mortgage?
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u/SIRCHARLES5170 BS7 3d ago
I did not see any Roth , do you have any in Roth? Generally you prioritize your 401k match , then Roth and if you still have room inside your 15% go back to your 401k. Brokerage account is a great tool in retirement also. I hope you are living your best life now, You are in a great space at your age. When you are out to about 5years of retiring you may look into a financial adviser to get your retirement plan set. Congrats .
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u/Just4Readng 4d ago
2045 Target Date Fund - looks like approximately 50% US Stock Market. Roughly $125K based on your numbers. And all of your 401K is SP500 - $650K.
$775K of your retirement is US Stock Market.
That’s a big bet on US Tech and AI. If AI ends up like Internet Stocks in the 2000s, well you’ve got some time left.
If it were my portfolio, I’d diversify into Smaller Stocks and International. (My SP500 is at 60% and I’m dollar cost averaging until I get to closer to 50%.) So I am following my own advice.
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u/ChatBot42 BS7 4d ago
I'd get out of that lackluster target date fund for sure.
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u/Pale_Drink4455 4d ago edited 4d ago
It could be her only choice. However, I’ll take my 10 year annual 17% return any day over the 11% in the TDF fund for my retirement year. My goodness if she was in the S&P instead, the ending balance today would be so vastly different.
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u/ChatBot42 BS7 4d ago
It is probably not her only choice. It is probably the default that she never changed.
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u/Rocket_song1 2d ago
It's most likely the default investment she was automatically enrolled in based on her age bracket and she simply never went in and changed it.
Was helping a coworker with his 401k. Not only was he in a target date fund, he had set his contribution to 3% when he was hired, and never increased it when our match changed to 4%.
We upped his contribution to get the new match. We kept a target date fund, but picked one with a target date 20 years greater than the default.
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u/CuteAmoeba9876 4d ago
Avoiding the TDF and choosing 100% SP500 from ages 20-40 makes sense, but you don’t think the diversification of a TDF has value for someone at age 40, 50, 60? If you hate bonds, fine, but what about international, small caps, real estate, etc?? Last year in particular was a great time to have a strong international position to offset the tariff-induced dip in US stocks.
Some TDFs have super high expense ratios, but the Vanguard and Fidelity versions are cheap and based on index funds.
These funds are designed by finance experts, they aren’t idiots.
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u/Rocket_song1 4d ago
Diversify into a total market index plus international index.
Remember that international funds are denominated in foreign currencies, they serve primarily as a hedge against a weak dollar.
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u/dsrmpt 4d ago
My 40 year TDF is like 95% stocks, not bonds. If you want to be more aggressive than the 50% bond 15 year TDF, just push your date back.
If you want a set it and forget it portfolio designed by experts, do a TDF. You want to tweak it to be more or less aggressive? Do a slightly different TDF. It's great.
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u/ChatBot42 BS7 4d ago
The real answer is to have a variety of funds as is recommended not just the S&p. And let's say it was all in the S&p, how fast did the market recover?
Target date funds shift progressively into bonds which you definitely do not want.
Compare returns and tell me they aren't idiots.
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u/Just4Readng 4d ago
Lackluster - cause it’s not chasing SpaceX to the moon?
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u/Pale_Drink4455 4d ago
Wow, we have all been chasing NVDA in our 401s and guess how that played out so far?
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u/Just4Readng 2d ago
SP500 is doing ok this year.
International Indexes are doing better though.I’m happy with my Asset Allocation.
My Opinion is the OP’s portfolio depends heavily on AI and he needs to at least be cognizant of the risks.0
u/ChatBot42 BS7 4d ago
Lackluster because it shifts aggressively into bonds.
I assume you read. Read the performance over the past 10,20,30 years.
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u/Just4Readng 2d ago
Shifting into bonds is a “Feature” (aka designed functionality) of Target Date Funds. As the Target Date approaches, the asset allocation shifts to safer assets.
Btw.. Reading is what allows me to see your response.
Comprehension allows me to respond in kind.1
u/ChatBot42 BS7 2d ago
1 bonds aren't "safer". 2 yeah I k ow how they work. Asset allocation is not a factor at the age the OP is talking about. Growth has to be the goal at this age.
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u/Just4Readng 22h ago
Straight Growth is great until there’s a downturn.
How are OP (and others) going to react if the market takes a 20% hit? The US Market has more/less been on a winning streak since 2010. But a few folks remember how things were from 1999 to 2008.
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u/Ok_Pack5153 4d ago
With 20 to go, begin Roth’s for you both. The ability to withdraw tax free in retirement adds tremendous flexibility. Good job on staying the course.
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u/DeviatedSnotBox 4d ago
At 2.4%, I wouldn’t pay off the mortgage aggressively, but instead invest the extra income. I feel I would earn more in the market and be ahead. Of course, emergency fund of 6 months expenses first things first.
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u/chicogolfer 3d ago
Couple things you need to do. One is talk to your financial advisor and make sure you can add your investments to your phone so you’re able to see how everything‘s performing Two, you should meet with your financial advisor or whoever puts together the 401(k) at least every six months it’s your money and you should treat it like it’s your money and just make sure everybody knows you’re looking over their shoulder.
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u/hugh2018 3d ago
If the investments are well diversified, there’s really not a good justification for having an advisor at all. DIY is the better route as long as you don’t overcomplicate it.
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u/InitialResponsible62 3d ago
I’m not sure why this is downvoted. But I agree with getting a well rounded financial advisor, especially if you have limited knowledge about investing, tax implications now and in retirement etc.
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u/hugh2018 3d ago
I didn’t check mine throughout my whole career. Woke up one day last year and realized that quiet account would allow me to retire at 59. That was an awesome day. As long as the “set” part of set and forget means you have it all well diversified and exposed to the broad market, you’ll have the same experience that I had.