<p>2% is breaking even with inflation. You can’t get ahead with that.</p>
<p>CA’s income tax is graduated, that 13.3% marginal rate is the highest bracket, which applies to incomes in excess of a million dollars per year for a couple.</p>
<p>The total (non-marginal) rate paid for a couple with $100K in income is less than 4%. For $200K in income, the total rate is about 6.5%.</p>
<p>That chart contains only the highest incremental rates, so it is not very relevant to most people.</p>
<p>@giterdone, that’s EXCLUSIVE of capital gains, and yes, I’ve done quite well with those funds. </p>
<p>My 4 percent return in my example is after tax. It is conservative. Well at least more conservative then some. :)</p>
<p>I own some bonds…</p>
<p><a href=“http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html”>http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html</a></p>
<p>I am cherry picking. I am using the 2000 high as a starting point. Makes the returns look worse. Since I am going to be an old man…and old men tend to get more conservative with age…and I cant predict the future…</p>
<p>If the returns end up better… Then I will have more…or my kids will have more…</p>
<p>I guess I could have used 2009 as a starting point. :)</p>
<p>I would hate to be fired for generating 8 percent annual returns over the last 14 years… Tough crowd.
<a href=“http://www.advisorperspectives.com/dshort/commentaries/SPX-Dow-Nasdaq-Since-Their-2000-Highs.php”>http://www.advisorperspectives.com/dshort/commentaries/SPX-Dow-Nasdaq-Since-Their-2000-Highs.php</a></p>
<p>That 2% number is about right. </p>
<p>It means that if you have a million bucks, you’ll get a before-tax return of about 20,000, which is about half of the salary of a junior teacher, or locksmith (although it should be maintainable in perpetuity). Nice, but being a millionaire aint what it used to be. </p>
<p>OK, $20,000 of the $80,000 will be dividend and $60,000 from sales of stocks. The total income will be about $35,000 assuming stocks appreciated 30%. For married couple, the tax would be about $2,700. Not bad.</p>
<p>If it’s all in 401K paying ordinary income tax, that’s tough. That makes me think tax-deferred contributions are not a good deal.</p>
<p>If my memory serves me right, CA doesn’t tax retirement income. If all one’s income is from 401k/IRA, they can stop being shocked with 13%</p>
<p>
</p>
<p>They are only a “for certain” good deal if you would have invested them anyway in something that was taxed at your full rate. Since capital gains are taxed at a lower rate than salary income and so are dividends, it is open to question whether you should be maximizing your IRA or 401K to invest in equities. It’s not clear cut, though, because you get an original investment amount that is much larger than it would have been (depending on your marginal tax rate). </p>
<p>
Roth 401Ks have not been available (at least to me) until only the last few years. There was no other choice for most of my career.</p>
<p>Mathematically, investing pre/post tax in 401Ks and IRA is identical, if the tax rates are the same.</p>
<p>Perhaps it is better in the long run investing outside of retirement vehicles like IRAs, but there are some significant advantages:</p>
<ul>
<li>employer match in many cases starts you off with a 50+% return right off the bat</li>
<li>in theory your income will be lower in retirement, so your tax rate will be lower. So the tax savings now are worth more.</li>
<li>decades of tax-free growth will provide some advantage to paying taxes as you go with an account outside of retirement savings.</li>
<li>non-retirement savings are fair game for college financial aid. If you pile up $500K outside of an IRA/401K, you can forget about much FA regardless of how low your income is.</li>
<li>I think there is significantly less chance of raiding the stash if it is tucked away in a 401K or IRA.</li>
</ul>
<p>All great points, notrichenough. Though it seems that if you can convert it to a Roth as soon as possible, that would be the optimum solution (if you can come up with the taxes outside of the conversion). Or contribute to the Roth after the employer match, before the 401K. Which begs the question of why I’m not fully doing that.</p>
<p>Anyone who thinks they can consistently generate more than 8% CAGR using anything like a conventional investment strategy is dreaming.</p>
<p>And then are the geniuses who run university endowments.</p>
<p><a href=“http://www.cnbc.com/id/101230647”>http://www.cnbc.com/id/101230647</a></p>
<p>^They can afford a lousy return since they don’t pay tax on it. :)</p>
<p>
Are you talking about a backdoor Roth? This doesn’t work if you have significant tax-deferred IRA assets, if my understanding is correct.</p>
<p>EMM1, interesting link.</p>
<p>@notrichenough - why won’t that work? I thought anyone can covert a traditional IRA to a Roth (there is no income limitation - you just have to pay the taxes). I haven’t heard there is a rule that you cannot do that if you have “significant tax-deferred IRA assets”. Can you please elaborate? Thanks.</p>
<p>“Are you talking about a backdoor Roth? This doesn’t work if you have significant tax-deferred IRA assets, if my understanding is correct.”</p>
<p>Anybody can convert their IRA’s into a Roth, regardless of income. Unless they’ve changed the law recently. That is not a back door. The back door Roth is when you contribute to a non-deductible IRA and convert to a Roth. Though there’s all sorts of rules about when you can convert a 401K. I don’t think I can do it until I retire or quit my job, but other people have said they were allowed to do it. We were able to convert a decently sized IRA in 2010.</p>
<p>Lies, d@mn lies, and statistics.</p>
<p>Yale University’s endowment earned an investment return of 12.5% in its last fiscal year, surpassing the return rate of rival universities, including Harvard University.</p>
<p>Yale’s endowment fattened to $20.8 billion, from $19.3 billion in the prior year, the university said Tuesday.</p>
<p>That’s better than its annual average return of 11% over the last 10 years, it said. During that time, the endowment has grown from $11 billion.</p>
<p>While the size of Harvard’s endowment is much larger than Yale’s, the return rate lags. Harvard announced on Tuesday that its endowment was valued at $32.7 billion at the end of the most recent fiscal year with a return of 11.3%.</p>
<p>Jane Mendillo, president of the Harvard Management Company, said that the university has “made a strong recovery since the global economic downturn of 2008-2009.”</p>
<p>However, Harvard said the endowment’s return slipped below its 20-year annual average of 12%.</p>
<p><a href=“Yale beats Harvard on endowment returns”>http://money.cnn.com/2013/09/25/news/companies/yale-harvard-mit-endowment/</a></p>
<p>
The problem is, if you have significant IRA assets, most of the converted amount will not be considered part of the non-deductible IRA, so you have to pay taxes on it, after having already paid taxes on the non-deductible IRA, which is what I meant by “not work”. You lose the advantage of the back door.</p>
<p>It may be very advantageous for some. Depends upon your situation, depends upon the IRA and what other IRA assets you have. We converted a traditional IRA worth about 120K, paid about 45K taxes on it. Painful, but now it’s worth 335K, and the gains will never be taxed. It is aggressively invested, and I hope there are many more gains to come. I know jym626 did a painful conversion too, but she probably doesn’t regret it.</p>
<p>I think the entire point of the back door Roth is that it’s a way to contribute to a Roth though you are over the income limits for it. But it does get confusing if you have other retirement funds, there are ways to screw it up.</p>
<p>My understanding is if you have a sizable tax deferred IRA, say $90,000 and nondeductible IRA $10,000. If you want to covert $10,000 or 10% of the combined, nondeductible contributions, IRS will treat $9,000 coming from tax deferred and only $1,000 nondeductible. </p>
<p>Getting back to the major dental issue. If you blow out a knee or hip, your medical insurance covers it. If you have major dental work and require implants, you pay most of it. I think our dental insurance paid $1000 of a $25,000 bill for 5 implants. Be prepared. Dental problems have a domino effect. One tooth is gone and it is the anchor for a bridge of 2 others. My DH wasn’t a candidate for dentures because of other factors.
Our biggest hurdle for retirement are 2 items. The first item is the16 year old child’s college tuition. The second item is the mortgage. I have given some thought to renting out our home for the last few years of the mortgage if it becomes an issue. Our house is small so there is no need to downsize and it is in a hot market for both rentals and vacation rentals. We have been landlords in the past and I have no fear of doing it again. Anyone have done VRBO or considered this as an option?</p>