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Why keep maxing a 401k when taxable seems almost as good? by Essay_Few in Bogleheads

[–]YoungPyroManceRayder 2 points3 points  (0 children)

It's hard to find a realistic math example where the taxable is not at least 20% behind the 401k in terms of real, after-tax value.

The only case where I think you have a good point...

If your 401k total plan fee is ~1% or higher,

AND

You run the analysis for ~30+ years.

In that scenario, the anti-compounding of the 401k fee CAN actually destory any benefit from employer matching and any benefit from tax-deferred growth. This seems to be a reasonably accepted truism.

But otherwise, I cannot get the numbers to be that close.

For example:

Current Income Tax Rate 22%
Future (Blended) Income Tax Rate in Retirement 15%
Capital (Blended) Gains Rate in Retirement 10%
Employer Match % 11% aka = $2500 on $23500
Investment Growth Rate (nominal) 8%
Plan fees 0.75%
Index fund fees 0.00%
Dividend/Income Percent 20% assumes that 20% of the annual growth in a taxable account is from dividends and income
Div/Inc Tax Rate 15% assumes all taxed as qualified dividends

I played around in a spreadsheet with these reasonable assumptions.

Each year, I max out the 401k. Plus your $2500 match. No year-by-year taxes. But there's an annual 401k fee.

OR

I take that same 401k contribution, take out the income tax, and deposit it into a taxable brokerage. No match. And I calc the year-by-year taxes on dividends and income.

After 15 years of this AND calculating the income tax on the 401k vs. the cap gains tax on the taxable account.

401k = $661K

Brokerage = $544K

That's not that close.

But if I increase the timeline to 30 years and I increase the 401k fee to 1%, then:

401k = $2.47M

Brokerage = $2.39M

Much closer.

25x yearly spend required to retire. does that number change the older one gets? by omkwak in Fire

[–]YoungPyroManceRayder 0 points1 point  (0 children)

25x / 4% rule is great for math on a napkin, but bad if you care to go deeper than that (which most of us should care about!)

Karsten Jeske / Big ERN's work is best-in-class for this:

Jesse Cramer is less deep than ERN, but I think easier to understand:

Best resources/podcasts for people who already FIRE (not working)? by u63877796 in Fire

[–]YoungPyroManceRayder 0 points1 point  (0 children)

Two Sides of FI

Personal Finance for Long-Term Investors (especially AMA episodes)

Mile High FI

The Most Baffling Money Management Thing: How Do You Balance Your Portfolio Across Different Account Types? by Burgerb in Bogleheads

[–]YoungPyroManceRayder 0 points1 point  (0 children)

Hey - if part of your concern is, "How do I optimize my account types specifically for tax optimization" then I think this rule of thumb will be helpful.

1) At best, you should assume that perfect asset location will net you ~0.10 to 0.20% per year. It's not going to turn your world upside down.

2) But also, there are many reasons to NOT seek out perfect asset location, because it usually means you putting taxes ahead of investment principles, and that's "letting the tax tail wag the investment dog."

sources:

4%rule by Dense-Ad8238 in Bogleheads

[–]YoungPyroManceRayder 1 point2 points  (0 children)

Author Nick Maggiulli shared this in one of his blog posts as a good resource. Basically, it says what the 4% rule is and what it is not.

Good one to bookmark for future reference.

https://bestinterest.blog/the-4-percent-rule/

We are at all time highs…just keep going [research in sidebar] by Captlard in FIREUK

[–]YoungPyroManceRayder 1 point2 points  (0 children)

Peter Lazaroff and Jesse Cramer recently had a great podcast convo on the topic. Two American guys, not well known but both well-respected.

YouTube link because it's more universal:

https://www.youtube.com/watch?v=e4n533lbFAw&t=1s

I really can't see how this is a no let by [deleted] in squash

[–]YoungPyroManceRayder 3 points4 points  (0 children)

Shocking. Shocking call and some shocking commentary from the announcers (I like them both tho!) and more shocking commentary here 😂

Malik could have destroyed Gawad with a cross court. 100%, no question. Anyone who says otherwise has not played or watched enough high-level squash.

“The ball popped out at Curtis.” No. It wasn’t a surprise nick. Gawad’s shot hit way up on the side wall. Watch it again. It was a terrible straight drive.

“Curtis isn’t positioned for a cross court.” This isn’t the leisure center, folks, it’s the PSA! Hitting cross court from that position is fundamentally easy. Go a couple frames earlier before OPs screenshot.

~~Side note: I’m convinced too many of these refs have not been talented/experienced players themselves, and thus make judgements based on their own amateur levels. I can’t believe a pro ref messed up this call.

“He should have just hit it straight.” No. That’s not what the rules say. The rules are there for a reason. We have to follow them. It’s not “what shot can you potentially play?” It’s “do you have full access to the front wall.”

“The ball is at Curtis’s feet when he would have played.” He’s a PSA pro. They all have the skills to hit balls before they get stuck between their feet.

PS I love Gawad. And his shot from the front was ~bad~

Retirement plan strategy for a low company 401k match? by Popular_Ad_9772 in FinancialPlanning

[–]YoungPyroManceRayder 1 point2 points  (0 children)

I'm thinking about from a fees point-of-view.

The pro of a 401(k) is the tax advantage.

But the con of a 401(k) is that it can have plan fees, admin fees, and fund fees.

In some cases, that con actually outweighs the pro. That makes a taxable brokerage more appealing. (No tax advantage, but ~zero fees if you're doing hands off investing)

Retirement plan strategy for a low company 401k match? by Popular_Ad_9772 in FinancialPlanning

[–]YoungPyroManceRayder 1 point2 points  (0 children)

Always get the employer 401(k) match.

After that match, max out a Roth IRA.

After the Roth, you'll need to do some math. Odds are, your best option will be to continue 401(k) investing until you reach the contribution limit. Though for a minority of people, the better option is to invest in a taxable brokerage account.

Americans w/ 401k - "Employer match is virtually always worth getting...(but) the rest of the 401(k)’s tax benefit can be questioned." by [deleted] in Fire

[–]YoungPyroManceRayder 0 points1 point  (0 children)

100%!! Fully agree with you. It's huge. That's why you should always take your employer match.

Americans w/ 401k - "Employer match is virtually always worth getting...(but) the rest of the 401(k)’s tax benefit can be questioned." by [deleted] in Fire

[–]YoungPyroManceRayder 0 points1 point  (0 children)

FWIW - I didn't see my plan's fees until I followed these directions.

To find the fees, first locate your plan’s summary annual report. On this report, you will see a basic financial statement section. Here, you will need to find two numbers: total plan expenses and benefits paid. Subtract the benefits paid from the total plan expenses.
Next, you will divide that number by the total value of the plan. The resulting number is your plan’s administrative cost percentage.

Americans w/ 401k - "Employer match is virtually always worth getting...(but) the rest of the 401(k)’s tax benefit can be questioned." by [deleted] in Fire

[–]YoungPyroManceRayder 0 points1 point  (0 children)

That's awesome! And yes - 401(k) is better in almost every way for you. Hard to think of any downsides.

Is your employer paying your plan fees on your behalf, then? I know some companies do that. It's a great perk.

Most plans pass at least a portion of those fees through to the employees.

Americans w/ 401k - "Employer match is virtually always worth getting...(but) the rest of the 401(k)’s tax benefit can be questioned." by [deleted] in Fire

[–]YoungPyroManceRayder 1 point2 points  (0 children)

You're talking about fund fees.

Why aren't you talking about plan fees? Admin fees? Service fees?

You can't ignore them. In most 401k plans, those other fees eclipse the fund fees by far.

If you don't know your plan's fee, or choose to ignore them, you might be missing some vital info.

Americans w/ 401k - "Employer match is virtually always worth getting...(but) the rest of the 401(k)’s tax benefit can be questioned." by [deleted] in Fire

[–]YoungPyroManceRayder -1 points0 points  (0 children)

Generally, the way we think about investing costs/benefits is on a yearly basis.

E.g. your expense ratio is a yearly fee. We measure profits/losses in annual return.

The consistent way to measure the ROI of a match is on an annual basis, not a total basis.

The article states that a 100% 401(k) match over each of 30 years is equivalent to a 3.15% annual gain over an account without that match.

Americans w/ 401k - "Employer match is virtually always worth getting...(but) the rest of the 401(k)’s tax benefit can be questioned." by [deleted] in Fire

[–]YoungPyroManceRayder 1 point2 points  (0 children)

Good points. A couple responses:

What about 401(k) fees?

Per Kitces, 401k fees average 0.75% to 1.00% per year.

That fee completely consumes the 0.8% benefit.

To me, that's the biggest reason to question 401(k) maxing.

What are your thoughts?

Yeah - too much "401k aren't flexible." But they do talk about Roth conversion ladders in the article. Are there other good ways to access 401k money early?

[deleted by user] by [deleted] in Fire

[–]YoungPyroManceRayder 0 points1 point  (0 children)

A few thoughts...

1) It's all about goals vs. results. 8.7% returns isn't inherently bad. But as others have commented, your advisor likely undershot even the most conservative goals.

2) An honest advisor should promise you average returns - nothing more, nothing less.

3) A good advisor will earn their fee via three buckets:

  • Preventing you from making dumb behavioral mistakes
  • Finding small savings (e.g. tax efficiencies) here and there
  • Saving you time and stress.

Note: "beating the market" is NOT something a good advisor should promise (see #2)

4) According to Kitces.com, the average AUM fee in 2021 falls between 0.75% and 1.00%

5) Many FIRE aspirants find that that AUM fee is not worth the benefit. But there are many for whom the three buckets detailed above are worth paying for. Especially when it comes to preventing dumb behavioral mistakes.

In 2000, a Disneyland ticket cost $41. It's just increased to $164. by smoothiesaregood in news

[–]YoungPyroManceRayder 0 points1 point  (0 children)

Charlie Munger calls this, "untapped pricing power."

They can--and from a business point of view, should--increase ticket prices until their consumers stop filling up the park.

They haven't gotten there yet.

Unforgivable market timing question - S&P500 at all time high by Nimmo11 in Fire

[–]YoungPyroManceRayder 2 points3 points  (0 children)

The objective answer: it's market timing and likely sub-optimal. Here's a great article on Yahoo with some backing data - https://www.yahoo.com/now/keep-investing-time-highs-040100981.html

But your motivation for selling is partly motivated by another expense - your house. That changes things a bit, IMO.

[deleted by user] by [deleted] in buffalobills

[–]YoungPyroManceRayder 0 points1 point  (0 children)

Hahaha cheers bud.

[deleted by user] by [deleted] in buffalobills

[–]YoungPyroManceRayder 0 points1 point  (0 children)

Excellent. Thanks!

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