I’m 62 with no debt and a part-time job. My advisers say keep saving, but my kids say spend — do I go for a Roth 401(k)?

01/05/2024

Dear MarketWatch,

I retired in 2023 at the age of 62 with no debt, owning my own home, long-term-care insurance, and 401(k) and IRA savings that at a 4% withdrawal rate would replace 90% of my pre-retirement income. I also have additional non-retirement account savings that if I withdrew 4% would make my income 140% of my pre-retirement income. My salary was never high and I lived a frugal life to accumulate these savings.

I have worked with professional advisers from major brokerages and they all seem to encourage me to continue accumulating money, but my children have urged me to start spending my savings before I die. I do not have longevity on one side of my family, but I do on the other. I earn a significant amount of income from my non-retirement investments and have not taken any gains from these accounts.

I recently started working part time, which replaces a significant portion of my pre-retirement income. I am eligible to contribute to a Roth 401(k) at my new employer. I had planned to start rolling over some of my IRA savings to a Roth account. Now, I am thinking that I should contribute to the Roth 401(k). This will not be matched.

However, if I max out contributions for tax year 2024, my earnings from this part-time job will go towards this Roth 401(k) and paying my quarterly taxes on my investment accounts and my planned Roth rollover. These actions result in me living on the money I put in a CD ladder (not accounted for in the calculations above) that I built for my first couple of years of retirement.

In the short-term, this approach feels like further delayed gratification. I would like to know if maximizing my contributions to a Roth 401(k) is the smartest thing to do.

Dedicated Saver

Dear Dedicated Saver,

You have put yourself in a fantastic position.

You might be able to do both more saving, and also a little more spending. But let’s first tackle your Roth 401(k) question.

A lot of people have been eyeing Roth conversions and contributions lately, and for good reason. They’re an excellent addition to the retirement-savings portfolio, and they have some great tax advantages later in life. They’re also very useful when you’re in a lower tax bracket now than you expect to be in retirement. But that’s where the guessing and balancing come into play, because we can never truly know what the tax rate will look like in retirement. Not even you, despite being within that time frame.

The current rates, which were created under the Tax Cuts and Jobs Act, are set to expire at the end of next year, and beginning Jan. 1, 2026, they will revert back to the higher rates they were prior to that law. That means your current Roth contributions, while taxed prior to sitting in your account, could still be at a lower rate than when you’re retired and in a lower tax bracket. Of course, that also depends on how you’re dividing up your retirement income. If you were to replace 90%, or even as much as 140%, of your pre-retirement income, and it’s all taxable, you could be in the same bracket or higher even after you retire.

That’s another reason having a Roth account is so great in retirement. It provides you with tax diversification, which is the ability to choose where the money you use in any given year comes from and what sort of tax bill you’ll get. For example, say you came into a significant amount of money in one year of retirement, you could draw down from your Roth more so than a traditional account to avoid paying more in taxes.

Keep in mind, Roth 401(k) contributions and Roth conversions have specific distribution rules. For example, the account’s earnings and conversions must be left untouched for five years, even if you’re past age 59 ½ years old, to avoid any penalties or taxes, and that clock starts over every Jan. 1 for the tax year conversions were made. (For instance, if you made a Roth conversion in May 2024, the clock started on Jan. 1, 2024.)

Savings and spending dilemma

Now on to your savings and spending dilemma. Your strategy to use your current earnings to contribute to a retirement account and pay taxes is a wonderful way to have more saved for the future, so I wouldn’t suggest you stray much from that, but your kids do have a point. Once you’ve determined you have a comfortable nest egg for retirement, which includes budgeting for the necessities like housing, taxes and food but also the unexpected and unknown, like healthcare and roof repairs, it’s OK to live a little bit. Should you nix your plans to stash more money away for the future? Absolutely not. But maybe splurge on a fancy dinner out once in a while with family, or plan a vacation you’ve been wanting to take. It could even be investing in something that will make you happy when you retire, like a new hobby.

Keep in mind, there are other benefits to consider in your equation. You didn’t mention if you currently receive or when you plan to receive Social Security, but that would in some sense offset some of your distributions. (If you already started claiming, but you’re working, be careful, as your benefits could be withheld or taxed as a result). There’s also healthcare. Your job offers retirement benefits, and if it also offers health insurance, that’s a huge bonus as you won’t have to pay for it privately until you qualify for Medicare at age 65.

If the advisers are saying you should keep accumulating, look into why that is. Do they just appreciate your good savings habits and behaviors, or do they see a gap in your retirement needs and your nest egg? It could also be that they’re looking to do business with you, especially if you are holding onto substantial assets. You mentioned the 4% rule (a distribution strategy where an investor takes 4% of an account balance every year to pay for living expenses), but maybe you can run a few more scenarios, taking into account bear markets, heavier expenses, higher tax rates, etc.

First and foremost, make sure you’re in a good financial place when you retire, which it appears you are, but that requires a lot of calculating — and sometimes, recalculating just to be sure! While you continue to do the work, give thought to the many ways you can enjoy your years before and beyond your eventual official retirement date.

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