Anyone NOT maxing out your 401(k) even though you're making decent money?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

'

Another millennial here l. I'm with you! I thought I was the only one.

Oh, youngins. Please don't fall behind your investing peers because of political fear mongering.

+1

I'm cusp millennial/Xer and hearing this makes me cringe so hard. What are you investing in instead? My guess is artisanal brunch. That's not a plan, fam.

But it's locally sourced! That makes it OK, right?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You are pessimistic about the future of the economy and your solution is "spend the money now and save less." That is a bad plan.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

'

Another millennial here l. I'm with you! I thought I was the only one.

Oh, youngins. Please don't fall behind your investing peers because of political fear mongering.

+1

I'm cusp millennial/Xer and hearing this makes me cringe so hard. What are you investing in instead? My guess is artisanal brunch. That's not a plan, fam.

Another "cusp millennial" here (born in 82), and I am also cringing. Best time to save/invest is when you're young. They'll look back on this with regret.

[Anonymous]

Anonymous wrote:

Anonymous wrote:You should both be maxing out your 401ks. It isn't taxed. It's silly not to do this. It's like a 35% return on your money.

This badly misunderstands the tax advantages of a 401(k). There are two such advantages. 1-The possibility that your marginal tax rate will be lower in retirement than it is now, and 2-Avoiding the need to pay annual taxes on dividends and realized capital gains (e.g. from rebalancing).

For #1, if you believe that you will be in the same tax bracket at retirement as you are now, there is no tax advantage from investing with pre-tax money instead of post-tax money. If you believe (say) that you will pay 28% of your marginal income dollar in taxes when retired, versus 35% now, then the tax advantage from using pre-tax money to invest is 7%.

For #2, if you were to buy and hold index funds in a non-retirement account, you would pay little or no capital gains taxes, but you would still pay taxes on dividends annually. Say that you expect a return of 8% from your portfolio, and that you will have to pay taxes equal to 5% of the gains each year. In this case, holding the funds in a non-retirement account is equivalent to a reduction in annual return from 8% to 7.6%. This reduction will be greater if your dividend tax rate is higher, you invest in funds that pay relatively more dividends, or if you have more realized capital gains each year (say because of rebalancing).

For most people, the savings from #2 will be greater than those from #1.

NP here. Isn't #2 basically a wash? Say you gain $100 dollars from rebalancing. You're either paying tax on the gain now or later right? To make the math easier assume #1 is the same now as in retirement (unlikely but this will make the point easier for me to understand).

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You should both be maxing out your 401ks. It isn't taxed. It's silly not to do this. It's like a 35% return on your money.

This badly misunderstands the tax advantages of a 401(k). There are two such advantages. 1-The possibility that your marginal tax rate will be lower in retirement than it is now, and 2-Avoiding the need to pay annual taxes on dividends and realized capital gains (e.g. from rebalancing).

For #1, if you believe that you will be in the same tax bracket at retirement as you are now, there is no tax advantage from investing with pre-tax money instead of post-tax money. If you believe (say) that you will pay 28% of your marginal income dollar in taxes when retired, versus 35% now, then the tax advantage from using pre-tax money to invest is 7%.

For #2, if you were to buy and hold index funds in a non-retirement account, you would pay little or no capital gains taxes, but you would still pay taxes on dividends annually. Say that you expect a return of 8% from your portfolio, and that you will have to pay taxes equal to 5% of the gains each year. In this case, holding the funds in a non-retirement account is equivalent to a reduction in annual return from 8% to 7.6%. This reduction will be greater if your dividend tax rate is higher, you invest in funds that pay relatively more dividends, or if you have more realized capital gains each year (say because of rebalancing).

For most people, the savings from #2 will be greater than those from #1.

NP here. Isn't #2 basically a wash? Say you gain $100 dollars from rebalancing. You're either paying tax on the gain now or later right? To make the math easier assume #1 is the same now as in retirement (unlikely but this will make the point easier for me to understand).

#2 is NOT a wash. The benefit of tax deferral is not intuitively easy to understand, but it is powerful. https://www.bogleheads.org/wiki/Tax_basics#Tax_deferment

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You should both be maxing out your 401ks. It isn't taxed. It's silly not to do this. It's like a 35% return on your money.

This badly misunderstands the tax advantages of a 401(k). There are two such advantages. 1-The possibility that your marginal tax rate will be lower in retirement than it is now, and 2-Avoiding the need to pay annual taxes on dividends and realized capital gains (e.g. from rebalancing).

For #1, if you believe that you will be in the same tax bracket at retirement as you are now, there is no tax advantage from investing with pre-tax money instead of post-tax money. If you believe (say) that you will pay 28% of your marginal income dollar in taxes when retired, versus 35% now, then the tax advantage from using pre-tax money to invest is 7%.

For #2, if you were to buy and hold index funds in a non-retirement account, you would pay little or no capital gains taxes, but you would still pay taxes on dividends annually. Say that you expect a return of 8% from your portfolio, and that you will have to pay taxes equal to 5% of the gains each year. In this case, holding the funds in a non-retirement account is equivalent to a reduction in annual return from 8% to 7.6%. This reduction will be greater if your dividend tax rate is higher, you invest in funds that pay relatively more dividends, or if you have more realized capital gains each year (say because of rebalancing).

For most people, the savings from #2 will be greater than those from #1.

NP here. Isn't #2 basically a wash? Say you gain $100 dollars from rebalancing. You're either paying tax on the gain now or later right? To make the math easier assume #1 is the same now as in retirement (unlikely but this will make the point easier for me to understand).

You just earned $1000 . You want to invest it, and withdraw after 30 years, in retirement. Continuing with my examples, suppose your current tax rate is 35%, your tax rate in 30 years will be 28%, your expected annual return is 8%, and in a non-retirement account you would expect to pay .4% a year in taxes on capital gains and dividends.

If you put the $1000 in a 401(k), in 30 years it is worth: (1-.28)*1000*1.08^30=$7,245.11
If you pay current taxes on the $1000 and put it in a non-retirement account, in 20 years it is worth: (1-.35)*1000*1.076^30=$5,851.69.

To isolate the effect of #2, now assume that your tax rate both now and in 30 years will be 35%. Then, the $1000 would be worth (1-.35)*1000*1.08^30=$6,540.73 after 30 years in a 401(k), versus (1-.35)*1000*1.076^30=$5,851.69 after 30 years in a non-retirement account.

You are missing that there is a compounding effect from not having to pay the tax on gains every year.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

The more I see this, the more I think it's not actually a thought-out financial plan, but rather a post hac rationalization for excessive consumer spending. "I want that new Tesla, but the only way I can afford it, and my new condo, is to severely limit my savings. Well, it's not like the stock market is going to do anything anyway . . . "

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

The more I see this, the more I think it's not actually a thought-out financial plan, but rather a post hac rationalization for excessive consumer spending. "I want that new Tesla, but the only way I can afford it, and my new condo, is to severely limit my savings. Well, it's not like the stock market is going to do anything anyway . . . "

THIS. I'm a millennial who is very much into investing (older one - in my 30s), and I feel like I hear this year after year. People always say -- oh I could invest it, but it's not like the market is doing well anyway, so let me just get the Benz or Tesla or vacation or whatever. And sometimes they are right that the market isn't doing well right that moment -- it's had a week or 2 of a slide or lateral movement. Yet they fail to look at it long term. I've heard coworkers say it this year -- that it's been a bad year and it isn't worth investing beyond the bare minimum; and yet the S&P is up 5%+ YTD despite the volatility, so there's a 5% return they missed out on.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

The more I see this, the more I think it's not actually a thought-out financial plan, but rather a post hac rationalization for excessive consumer spending. "I want that new Tesla, but the only way I can afford it, and my new condo, is to severely limit my savings. Well, it's not like the stock market is going to do anything anyway . . . "

Very well could be the case. The funny thing is, the "disallusioned [sic] millennial" who kicked off this sub-thread also bragged about having "really sound personal finance habits." The level of cognitive dissonance is astounding.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

+1. Compounding isn't just going to go away -- it is a financial theory. So why does disillusionment matter? It IS possible that rates of return will be lower and you won't be able to roughly calculate a 6% return going forward and will have to more conservatively use 3-4%, and yet that IS still a return and a FAR BETTER return than what you get by just "putting something away for a rainy day" -- presumably in a 0.2% interest savings account. I really don't get what disillusionment has to do with this. If anything if we're looking at future returns in the 3-4% rates yearly rather than 6-7%, you need to be saving MORE to compensate for that, not less.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

The more I see this, the more I think it's not actually a thought-out financial plan, but rather a post hac rationalization for excessive consumer spending. "I want that new Tesla, but the only way I can afford it, and my new condo, is to severely limit my savings. Well, it's not like the stock market is going to do anything anyway . . . "

THIS. I'm a millennial who is very much into investing (older one - in my 30s), and I feel like I hear this year after year. People always say -- oh I could invest it, but it's not like the market is doing well anyway, so let me just get the Benz or Tesla or vacation or whatever. And sometimes they are right that the market isn't doing well right that moment -- it's had a week or 2 of a slide or lateral movement. Yet they fail to look at it long term. I've heard coworkers say it this year -- that it's been a bad year and it isn't worth investing beyond the bare minimum; and yet the S&P is up 5%+ YTD despite the volatility, so there's a 5% return they missed out on.

Yeah, it would be terrible to invest in the market when it's down. They should wait until it's at the peak, and THEN invest.

*headdesk*

[Anonymous]

Sorry to go off topic guys but what is considered millennial? I'm born in 83, is that millennial?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You should both be maxing out your 401ks. It isn't taxed. It's silly not to do this. It's like a 35% return on your money.

This badly misunderstands the tax advantages of a 401(k). There are two such advantages. 1-The possibility that your marginal tax rate will be lower in retirement than it is now, and 2-Avoiding the need to pay annual taxes on dividends and realized capital gains (e.g. from rebalancing).

For #1, if you believe that you will be in the same tax bracket at retirement as you are now, there is no tax advantage from investing with pre-tax money instead of post-tax money. If you believe (say) that you will pay 28% of your marginal income dollar in taxes when retired, versus 35% now, then the tax advantage from using pre-tax money to invest is 7%.

For #2, if you were to buy and hold index funds in a non-retirement account, you would pay little or no capital gains taxes, but you would still pay taxes on dividends annually. Say that you expect a return of 8% from your portfolio, and that you will have to pay taxes equal to 5% of the gains each year. In this case, holding the funds in a non-retirement account is equivalent to a reduction in annual return from 8% to 7.6%. This reduction will be greater if your dividend tax rate is higher, you invest in funds that pay relatively more dividends, or if you have more realized capital gains each year (say because of rebalancing).

For most people, the savings from #2 will be greater than those from #1.

NP here. Isn't #2 basically a wash? Say you gain $100 dollars from rebalancing. You're either paying tax on the gain now or later right? To make the math easier assume #1 is the same now as in retirement (unlikely but this will make the point easier for me to understand).

You just earned $1000 . You want to invest it, and withdraw after 30 years, in retirement. Continuing with my examples, suppose your current tax rate is 35%, your tax rate in 30 years will be 28%, your expected annual return is 8%, and in a non-retirement account you would expect to pay .4% a year in taxes on capital gains and dividends.

If you put the $1000 in a 401(k), in 30 years it is worth: (1-.28)*1000*1.08^30=$7,245.11
If you pay current taxes on the $1000 and put it in a non-retirement account, in 20 years it is worth: (1-.35)*1000*1.076^30=$5,851.69.

To isolate the effect of #2, now assume that your tax rate both now and in 30 years will be 35%. Then, the $1000 would be worth (1-.35)*1000*1.08^30=$6,540.73 after 30 years in a 401(k), versus (1-.35)*1000*1.076^30=$5,851.69 after 30 years in a non-retirement account.

You are missing that there is a compounding effect from not having to pay the tax on gains every year.

I guess that last sentence is the part I didn't realize. I didn't realize there was a tax consequence to the portfolio rebalancing.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:*raises hand* we're contributing but not maxing out. We have really sound personal finance habits but very little faith in the future of the economy. Signed, disallusioned millennial.

I am curious where you put your money that you consider safer than a 401k, given your lack of faith in the future of the economy. Gold bullion? What investments do you think are immune to the collapse of the US economy?

None are. That's the point. Stay out of debt, have an emergency fund, live within means, put some away for a rainy day. If there's something you want to buy or do that will enrich your life, so it now. Spend the money. There's no guarantee that you and/or your money will be there later.

You're disillusioned enough to believe that the market (stocks or bonds) won't outperform your checking and savings accounts with their 0.1% interest rates? Or you're disillusioned enough to believe that the theory of compounding won't apply anymore?

I'm cringing just thinking about this -- and I'm an (older) millennial too.

The more I see this, the more I think it's not actually a thought-out financial plan, but rather a post hac rationalization for excessive consumer spending. "I want that new Tesla, but the only way I can afford it, and my new condo, is to severely limit my savings. Well, it's not like the stock market is going to do anything anyway . . . "

THIS. I'm a millennial who is very much into investing (older one - in my 30s), and I feel like I hear this year after year. People always say -- oh I could invest it, but it's not like the market is doing well anyway, so let me just get the Benz or Tesla or vacation or whatever. And sometimes they are right that the market isn't doing well right that moment -- it's had a week or 2 of a slide or lateral movement. Yet they fail to look at it long term. I've heard coworkers say it this year -- that it's been a bad year and it isn't worth investing beyond the bare minimum; and yet the S&P is up 5%+ YTD despite the volatility, so there's a 5% return they missed out on.

Yeah, it would be terrible to invest in the market when it's down. They should wait until it's at the peak, and THEN invest.

*headdesk*

Are you just looking for someone to lecture? I'm the millennial that invests plenty -- maxing out all retirement options + a brokerage account and plenty of buying on all kinds of market shocks. I DO understand that you buy low and sell high. All I'm saying is that I have run across lots of people with confirmation bias -- i.e. I'll buy the car bc what good is investing, look how bad the market is -- while looking at headlines for the last week where the market went down 0.5% -- while ignoring that overall it's up 5% YTD.

So save your lecture for someone who needs it.