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What if you continue to make a high income in retirement?

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  • What if you continue to make a high income in retirement?

     

    Hi everyone,

    I had a question and I tried to search but didn't find what I was looking for.

    What if you invest in multifamily real estate complexes or some other investment and you continue to make ~$400k/year even after you have retired.

    In this scenario, does it still make sense to save money in retirement accounts throughout your career? The tax advantage argument doesn't seem to apply here because you will still get taxed at a high bracket even in retirement, so why stash that money away instead of spending it?

    What would the advantage be in this situation?

    Thanks

  • #2
    …to diversify….….diversity is the only free lunch...…….

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    • #3
      Yes. Just put it in Roth accounts and/or do Roth conversions
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #4
        You can't predict the future. Pre-tax accounts will save you that money now. If you're into odds, the odds are that a retiring physician won't make $400k per year off multi-family real estate. I'm assuming since you're a resident that you aren't in that position at this time. If you're a physician making a physician income, you'll make enough to save for retirement AND be able to spend on most things you want.

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        • #5
          Not true. The 1% routinely make money off of real estate (and other business assets) over the long term. I'm happen to be generating nearly $400K annually off real estate leases, and still have a 20 year horizon until full retirement age. I suspect I will continue hold on to the asset well into retirement for cash flow and appreciation, and likely to buy even more RE. It can also be passed on for generational wealth planning. Our parents and my in-laws also want to pass multiple rental properties when the time comes, as they too found it a great cash flow generator in retirement.

          https://www.visualcapitalist.com/composition-of-wealth/

          I still max our retirement accounts. Why stash the money instead of spending it? Security, diversification, legacy planning, long term philanthropy. Want to simplify, not spend.

           

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          • #6
            “The tax advantage argument doesn’t seem to apply here because you will still get taxed at a high bracket even in retirement, so why stash that money away instead of spending it?
            What would the advantage be in this situation?”

            You delay or eliminate paying taxes. Same at 40 or 80.
            Depends on why you are saving and what your goals are.
            While traditional IRA contributions are barred for individuals older than 70 1/2, the world is in front of you. Retirement spending is fine or if you want to build wealth. Most would consider estate planning to minimize taxes.
            You are perfectly free to pay taxes earlier than required. Retirement savings defer taxes and sometimes eliminate taxes paid by beneficiaries.

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            • #7
              Yes it still makes sense.

              You’re proposed scenario of making more in retirement would be an excellent problem to deal with.

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              • #8
                If you assume the tax rates will be the same as current rates in the future when you retire, you still avoid the annual tax drag on your investment returns by putting the money in tax deferred accounts.  Very simply, the tax deferred account gets to grow more each year because you pay zero taxes on the dividends, capital gains, and any bond income.  Yes, you will pay taxes in the future on the RMDs on the back end once you reach age 70.5 and start withdrawing funds, but all those years of tax free growth add significantly to the value of your investment.

                I am in the highest bracket now and predict being in the highest bracket in retirement.  Yet I continue to max the tax deferred options every year to avoid the tax drag on the investments.

                The one thing that no one knows is whether income tax rates in the future will be the same, higher, or lower.  So if you want to guess that rates will be much higher in the future, then you could decide to pay the taxes now and invest in taxable accounts.  Personally, I have no idea what tax rates will be in the future.  As a result I have decided to avoid venturing guesses on questions that have no easy answers.

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                • #9
                  Retirement accounts sometimes offer some asset protection that other accounts do not.

                  Tax free gains

                  The ability to move assets without tax impact.

                  The tax diversity.

                  Lots of good reasons

                   

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                  • #10


                    The one thing that no one knows is whether income tax rates in the future will be the same, higher, or lower.
                    Click to expand...


                    or the rules surrounding the accounts.  Chatter now about RMDs increasing to age 72. Chatter in past (which got axed when the budget didn't pass that year) about adding RMDs to Roths which would force money out and for many people forced into an account where taxes would be generated after reinvesting.... Chatter to what social security will look like and how it is taxed (since once upon a time was tax free money).

                    i agree.  I try to save on taxes now by using tax deferred accounts.  hope for the best later.....

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                    • #11
                      The only thing I can say with certainty is that tax laws will change.  When they do you adapt.

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                      • #12
                        I can imagine a lot of problems far worse than making a lot of money during retirement.

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                        • #13
                          What's the alternative to saving more money now?  Spending it?  Will it make you happier?  What about working less?

                           

                          I personally am not a fan of investment real estate, so maybe I'm biased.  What if the land is contaminated, the rising sea levels submerge the house, the dinosaurs come back to life & eat your roof.  Diversify like the others said.  I'm planning to leave anything I don't use to charities / future generations in my last days.

                           

                          I'd rather fortify my future than bank on any particular income producer.  But if you do spend it now, spend it at publicly traded companies so the rest of us can get dividends.

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                          • #14
                            The only thing I can add is that as it becomes more clear that you'll be in the high brackets in retirement, then transitioning from pre-tax (traditional) to post-tax (Roth) plans can be good.  You pay the taxes now, but shelter a larger chunk of income.

                            No retirement plan:  100k investable--> $50k invested with tax drag, no future taxes.

                            Pre-tax:  100k investable--> 50k invested, 50k taxed --> 50k invested, 25k invested in taxable with tax drag and expected future taxes will take half of the 50k in the retirement plan.

                            Roth:  100k investable -- > 50k invested, no future taxes, no tax drag.

                             

                            Any of us fortunate enough to have this problem should probably realize that this isn't a problem worth worrying about.  For me, I have no plans to transition away from pre-tax savings until I have enough actually saved that my RMD+dividend+income would put me in the high bracket, not just thoretically.

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                            • #15
                              I'm a bit confused about transitioning to the Roth thing now when it comes to potential high taxes in retirement. I understand if you do so you do not have to pay taxes on those funds when distributed in retirement. But you do pay taxes now on the Roth conversion. That amount you pay in taxes now would have grown for you for decades. Sounds like a wash to me.

                              It only makes sense to me to pay the taxes now if you are in a lower tax bracket and expect to be in a larger tax bracket in retirement. But if you're well into the top tax bracket, wonder if it really makes a difference in the end. Also, the further one is from the distributions, the harder it is to guestimate the tax brackets and income thresholds at the time.

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