Comments on: My Imaginary 401(k) http://poorerthanyou.com/2007/08/17/my-imaginary-401k/ Money issues for college students and 20-somethings, without being boring. Sat, 20 Mar 2010 15:17:38 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Lazy Man http://poorerthanyou.com/2007/08/17/my-imaginary-401k/#comment-14847 Lazy Man Fri, 17 Aug 2007 21:01:07 +0000 http://poorerthanyou.com/2007/08/17/my-imaginary-401k/#comment-14847 I hate to be a Debbie Downer, but you have to remember that inflation chugs along at 3-4% as well, so a million dollars isn't going to give you a million dollars worth of buying power. If you want to go with that 8%, it's really closer to 4%. Remember how much difference that 1% made going from 8% to 9% and 9% to 10%? Well now it's working against you since you just lost 3-4% off the top. That makes $15,500 really worth about $90,500 after 45 years. That's still a nice salary for a year though right? Well you have to pay income tax on that. At 28% you'll be left with around $65,000. There are some 401k administration fees and mutual fund fees along the way and this will bite into the profits more. I'm not trying to scare people from saving, they should definitely max out their 401Ks. However, I want to save people from thinking as I once did - you can just invest for 2-3 years and then retire rich with your millions, never having to contribute another penny. If there is no match, you may be better off foregoing the 401k and investing in a Roth IRA. This is especially true if you are in a low tax bracket now and expect to be in a higher one in the future (as the example seems to indicate). One thing I'm unclear on, since I don't get a match... is the $15,500 limit a contribution by yourself or does that include your company's as well. If the account is limited to stop at $15,500, then you be getting more than that, you'll just be contributing less. I hate to be a Debbie Downer, but you have to remember that inflation chugs along at 3-4% as well, so a million dollars isn’t going to give you a million dollars worth of buying power. If you want to go with that 8%, it’s really closer to 4%. Remember how much difference that 1% made going from 8% to 9% and 9% to 10%? Well now it’s working against you since you just lost 3-4% off the top. That makes $15,500 really worth about $90,500 after 45 years. That’s still a nice salary for a year though right? Well you have to pay income tax on that. At 28% you’ll be left with around $65,000. There are some 401k administration fees and mutual fund fees along the way and this will bite into the profits more.

I’m not trying to scare people from saving, they should definitely max out their 401Ks. However, I want to save people from thinking as I once did – you can just invest for 2-3 years and then retire rich with your millions, never having to contribute another penny.

If there is no match, you may be better off foregoing the 401k and investing in a Roth IRA. This is especially true if you are in a low tax bracket now and expect to be in a higher one in the future (as the example seems to indicate).

One thing I’m unclear on, since I don’t get a match… is the $15,500 limit a contribution by yourself or does that include your company’s as well. If the account is limited to stop at $15,500, then you be getting more than that, you’ll just be contributing less.

]]> By: Stuff Worth Reading, Because It’s Friday And You’re Probably Just As Bored As I Am | Punny Money http://poorerthanyou.com/2007/08/17/my-imaginary-401k/#comment-14846 Stuff Worth Reading, Because It’s Friday And You’re Probably Just As Bored As I Am | Punny Money Fri, 17 Aug 2007 20:13:59 +0000 http://poorerthanyou.com/2007/08/17/my-imaginary-401k/#comment-14846 [...] Than You is addicted to crack. No, wait, she’s just talking to herself about her imaginary [...] [...] Than You is addicted to crack. No, wait, she’s just talking to herself about her imaginary [...]

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