Reply to Is saving/investing actually a crappy way to get rich?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I was just running some numbers in an investment calculator and, frankly, they’re a little depressing.  I’m in my early 30s, single, and have finally gotten my income to the point that[b] I make $210K, am debt-free, and I’m able to save $100K per year.
[/b]
Even saving at that level, which seems like a huge amount, I have to work for decades and would still have to live a modest lifestyle if I retire semi-early.

In the calculator, I assumed 8% returns, 3% inflation, and a 15% tax rate on my investments.  With those assumptions, $100K per year invested for 20 years becomes $2.36M in today’s dollars (it’s almost $5M in nominal terms, but of course, that means nothing).

Using the 3% rule at that time, that means I can pull out about $70K per year to live on, which is not that much more than I currently spend trying to live a frugal lifestyle and stack my investments heavily.  And of course, that assumes that I stay in relatively good health so I can afford my own insurance and medical bills before Medicare.  Throw kids into the picture, and thoughts of early retirement would be over.

I don’t know – that seems kind of…underwhelming.  I guess I always thought that saving $100K would be a fast track to riches.  But now, more and more, it seems like you really need exorbitant incomes or significant risk-taking/entrepreneurship to be able to live a really good life at a relatively young age.  Am I out of touch here?  Missing something?  Thoughts?[/quote]

I think what you're doing feels underwhelming because you're heavily restricting yourself to just save 100K so essentially you're suffering for 20 years for barely any outcome.

But also, your math is wrong. You end up with 3.4M after accounting for inflation.  Further, accounting for 15% capital gains means that, you take out 4% of 3.4M (136K), but you'll only see 85% of it (115K).

Not sure what you did for your math.  Did you assume that you'd be paying capital gains every year or something?  You only pay capital gains when you sell, which I assumed would only happen at the time of you actually withdrawing the funds.
[/quote]

Yes, it takes out 15% for taxes every year.  It's a basic phone app so it's obviously flawed, but I figure I'll probably be doing some Roth so will be taxed at ordinary income the first year for those.  Some brokerage since I want to retire early -- even though I'm only paying taxes on dividends/cap gains, it's 15% plus 8% for MD.  Plus, if I factor in a lot of pre-tax contributions, then at early retirement, I have to pay ordinary income tax on my meager $70K of withdrawals. Overall, these are just approximations/back of the napkin numbers.[/quote]

I think you should try to actually model it out using excel or Google sheets, rather than an app, so you can control every input.  It should only take 30 minutes to one hour if you keep the inputs simple (e.g., the inputs you laid out here, inflation %, return %, taxes, and 100K a year of contributions).  While you note that withdrawals on pre-tax contributions will require you to pay income tax, you don't need to pay the capital gains tax when you sell them in the interim (i.e., you want to sell a stock because you think it's going to go down and then reinvest it somewhere else during the 20 year period).  Thus, it's actually quite worth it to use a pre-tax account.

In Washington DC, if you withdraw 70K a year from your traditional 401k, you'll only pay around 18% in average income taxes.  This is less than if you earned 70k in wages, because you don't have to pay social security or Medicare taxes on income that's not wages (I'm 70% sure this is the case).  This is barely higher than paying 15% in capital gains tax, and you used pre-tax dollars to get this result, meaning it's actually better.

I understand that you came into this knowing that your app's calculations could be off, but in my opinion, it's too inaccurate.  It literally gave you a number that's 2/3rds the outcome you were actually going to get.[/quote]

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