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Financial Planning / Foolish 401(k)s
|Subject: 401k vs. personal investment||Date: 1/5/2013 7:56 AM|
|Author: bergmanm||Number: 24984 of 25318|
My employer offers a 401k program *without a match* and based on my calculations I am not convinced it's so much better than investing the same amount of money myself in diversified indexes which I am comfortable at.
First there's the funds vs. S&P argument that mutual funds perform poorer:
And now the math of 401k vs. own investment using the compound interest formula:
My own investment - 600 per month after tax (7200 total, 8% rate of return, 30 years)
7200 * (((1+0.08)**30 - 1) / 0.08) = 815639.12
401k - 1100 per month pre-tax (13200 total, same rate of return but with 1.6% fee = 6.4% return, 30 years)
13200 * (((1+0.064)**30 - 1) / 0.064) = 1120053.13
With the 401k when taking funds they will be taxed - I calculated the retirement tax assuming my income is only 2333 per month. This results in 1840 after tax or 78% of the money.
So the 401k actual post tax is worth: 873641.44
There's 70k difference between them. Is the 70k worth having the money in a 3rd party who's investment strategy I don't control and the money is locked until age 67?
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