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Let's say you have $10,000 and can either put it in a 401k or a regular brokerage w/ no special tax treatment. And let's say you can get 8% market returns every year on average.
Where R = tax bracket in retirement, N = tax bracket now, c = average effective capital gains takeaway (somewhere between .85 and 1.0 if it's all long-term, depending on how long you're holding onto your positions).
Even if I spot you favorable terms of R = 25%, N = 20%, and c = 95%, the 401k option still comes out ahead.
Am I missing something? (this is very possible!)
In fact, if N = R, I don't see how the regular brokerage ever comes out ahead, since it would be 10000(1-R)*1.08^30 vs 10000(1-R)*(1+.08c)^30. As long as c < 1.0,which I imagine it has to be, 401k is always better, no? You're paying regular taxation one way or another - but at least w/ the 401k those same dollars have a chance to make money before going to the government.
Now, if you're saying an assumption of 8% returns for both is wrong, that may be valid. I grant that 401k's are more restrictive and may have more unavoidable fees/expenses and less flexibility. But that's a separate issue from deferred taxes.
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Originally Posted by CaptainNJ
it comes out ahead, especially if you expect to pay a lower tax rate in retirement. i know historically i should expect a lower rate, but im not comfortable planning on that. especially since im one of those evil people that saves a lot of money.
but it doesnt come out ahead by a lot. if you plug the numbers in a calculator available on plenty of sites, you will see a small advantage. for me, thats not enough to lock up my money out of my access for 30 years plus. id rather pay my taxes now at a right i know then wait until what happens then and wait to see what the government does with 401k's between now and then.
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Originally Posted by snowdenscold
Well, under ideal conditions for you w/ an initial $10,000 amount, I get something like $75.5K vs. $72K.
But under more realistic conditions (IMO), it's more around $75K to $60K. Now that's enough to swing my vote.
OK, this is a bit weird, but I found this article (which I didn't read beforehand) which is very similar to what I posted, although he does a better and clearer job, and highlights the dividends vs. unrealized gains difference. But we both used $10,000 starting amount, 8% returns, 30 years, etc., lol.
He also fleshes out the important point about the difference expense ratios can make more than I did.
the reason for putting equities in a taxable account is just for the capital gains rates and for writing off loses. without accounting for that your numbers are meaningless
Seriously? 70 isn't dead. My neighbor is well into his 70s and manages an entire lumber mill. My husband's grandmother is 80 and still works part time as a stock broker. My parents are 67 and climbed Machu Picchu last year. Let's not dig our graves so early eh? If you love what you do and take care of yourself you may very likely be able and happy to work when you're 70.
Yeah, I realize 70 isn't dead, but there is a mental aspect to working aside from the physical. My mom gets stressed working which leads to her insomnia which leads to other health issues. She is a director which requires overtime from her...so she ends up working 50 or so hours a week. In addition, she just got a promotion, so when they have deadlines, she's working weekends also. Pile that on top of a commute and real life and it affects her physically, mentally and emotionally.
Not all of us can love what we do. And although my mother does't hate her job, she hates the fact that she has to do it or be homeless. Same with me.
Aside from this, who wants to work when you're 70. Isn't there supposed to come a time when we get to relax and enjoy. Not everyone is going to be able to build that bridge to gap early retirement, so they'll either have to work or live on welfare until SS kicks in.
What if you are not disabled but physically and mentally unable to work at 68? Or you're fine, but you just get so depressed that you're still working that you'd rather be dead. It could happen, I know some people.
Yeah, I realize 70 isn't dead, but there is a mental aspect to working aside from the physical. My mom gets stressed working which leads to her insomnia which leads to other health issues. She is a director which requires overtime from her...so she ends up working 50 or so hours a week. In addition, she just got a promotion, so when they have deadlines, she's working weekends also. Pile that on top of a commute and real life and it affects her physically, mentally and emotionally.
Not all of us can love what we do. And although my mother does't hate her job, she hates the fact that she has to do it or be homeless. Same with me.
Aside from this, who wants to work when you're 70. Isn't there supposed to come a time when we get to relax and enjoy. Not everyone is going to be able to build that bridge to gap early retirement, so they'll either have to work or live on welfare until SS kicks in.
What if you are not disabled but physically and mentally unable to work at 68? Or you're fine, but you just get so depressed that you're still working that you'd rather be dead. It could happen, I know some people.
so whats the logic here? other people are supposed to support you at some point? thats fine and dandy, but the numbers dont work especially with the reality that less people are being born which leaves less people to support the people collecting.
your mom doesnt like that she has to work or be homeless. so what does she think should happen if she decided she doesnt want to work? it seems like you guys want working to be optional, but it cant be optional for everyone since someone has to support the non working (unless they support themselves on savings).
so whats the logic here? other people are supposed to support you at some point? thats fine and dandy, but the numbers dont work especially with the reality that less people are being born which leaves less people to support the people collecting.
your mom doesnt like that she has to work or be homeless. so what does she think should happen if she decided she doesnt want to work? it seems like you guys want working to be optional, but it cant be optional for everyone since someone has to support the non working (unless they support themselves on savings).
They should support theirselves on savings. Me and my gf make a meager 46k combined and and still manage to save money. Unless your making crap money (min.wage or the like) they should try to save into a IRA or 401k and try to live off that. Working some so your savings will last longer is understandible, but 50 hours is crazy when your 70 or older.
This isn't true at all. We all have the option of finding something we love and working at it. Unfortunately some things that people love to do don't pay real well, so sacrifices in lifestyle have to be made. And some of us are handcuffed by choices made early in life that we can't go back and correct, which is unfortunate. But ultimately we can all do waht we love and love what we do, we just have to choose to do it.
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Aside from this, who wants to work when you're 70.
People who love what they do. John Menard is 72 year old and worth several billion dollars, he still goes into the office every day. The guy in the office next to mine is 76, he has no desire to stop working. A local mortician is in his mid-80s, he finally accepted the fact that he's going to end up on the table himself one of these and brought a nephew into the business to eventually take over, but he still enjoys what he does and has no plans to quit. My MIL will be 73 next month and still drives a school bus every day with no plans to quit until they force her out.
Let's say you have $10,000 and can either put it in a 401k or a regular brokerage w/ no special tax treatment. And let's say you can get 8% market returns every year on average.
Where R = tax bracket in retirement, N = tax bracket now, c = average effective capital gains takeaway (somewhere between .85 and 1.0 if it's all long-term, depending on how long you're holding onto your positions).
Even if I spot you favorable terms of R = 25%, N = 20%, and c = 95%, the 401k option still comes out ahead.
Am I missing something? (this is very possible!)
In fact, if N = R, I don't see how the regular brokerage ever comes out ahead, since it would be 10000(1-R)*1.08^30 vs 10000(1-R)*(1+.08c)^30. As long as c < 1.0,which I imagine it has to be, 401k is always better, no? You're paying regular taxation one way or another - but at least w/ the 401k those same dollars have a chance to make money before going to the government.
Now, if you're saying an assumption of 8% returns for both is wrong, that may be valid. I grant that 401k's are more restrictive and may have more unavoidable fees/expenses and less flexibility. But that's a separate issue from deferred taxes.
one other thing that is not figured in is this. we are not dealing with flat tax rates . we are dealing with marginal rates so they are bracketed.
for 40 years each year more and more income goes through at lower and lower tax rates so deferring taxes 30 years can be a big plus.
marginal tax rates can actually be higher down the road but your actual taxes paid on the deferred account will be lower .
another few years and 100k will slide through in the 25% bracket. while the marginal rates may be the same the amount of taxes paid is less each year you wait.
so whats the logic here? other people are supposed to support you at some point? thats fine and dandy, but the numbers dont work especially with the reality that less people are being born which leaves less people to support the people collecting.
your mom doesnt like that she has to work or be homeless. so what does she think should happen if she decided she doesnt want to work? it seems like you guys want working to be optional, but it cant be optional for everyone since someone has to support the non working (unless they support themselves on savings).
This. You don't have to work when you're 70, but life doesn't owe you retirement. At 53yrs old working 50 hrs a week is perfectly normal. My husband would think 50hrs was retirement Your Mom isn't depressed and stressed out because she is working too hard. She might spend a lot of time feeling sorry for herself which of course could make you sad.
My advice remains the same. Find work you enjoy and be awesome at it. At 31 you shouldn't even have time to think about being 70.
Somewhat, regarding the 10 year future. But I'm optimistic about the economcy in the far future.
The economy cycles itself on an 80 year cycle. There was a period of economic prosperity in the early 1800s after the Revolutionary War, the late 1800s with the Civil War and in the early 1940s to the late 1960s. Many similarities can be seen between today's economic conditions and the economic conditions 80 years ago in the early 1930s.
Easy to say but it's still a what-if. If they DONT make changes to the 401k like I am worried about, then investing in it is great with the deferred taxes (and then I hedge that with investing post-tax in the Roth IRA). Either way it is a guess so saying "do this" only works in one of the scenarios.
For now I am playing the card of maxing out the 401k, hoping they don't make changes but if they do I can always withdraw at a 10% penalty if i REALLY have to (say they push withdrawal back really far and I want to retire)
Why would they push back the 401k withdrawal age when that just makes them have to wait longer to get your tax money? You have it backwards. A higher probability risk is that tax rates are higher when you withdrawal than they are now.
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Your Mom isn't depressed and stressed out because she is working too hard. She might spend a lot of time feeling sorry for herself which of course could make you sad. 
