No. of Recommendations: 2
I am a 30-year-old fool who is lucky enough to realize the importnace of early investing for retirement early. After trying to decide whether to invest using a 403b or a taxable Rule Breaker portfolio, I now know that the taxable Rule Breaker is the way to go.

I did the math using A taxable rule breaker portfolio will kick the pants off a tax-sheletered tax-deferred stock index fund even after taxes are considered.

Let's say I invest $400 every month into a 403b. Using an index fund, I can expect a return near 11%. In 35 years, I will have amassed $1,971,319. However this amount is taxed when I start withdrawals, making the actual amount near $1,182,791.

On the other hand, if I invest $400 every month into a taxable Rule Breaker portfolio, I am actually investing only $240 month after taxes, and my Rule Breaker annual return needs to be at least 18% to amass $1,233,824 in 35 years (taking into consideration that the gains are taxed annually). Unlike the 403b, this amount is not taxed at withdrawal because it was already taxed during growth.

Thus, as long as the taxable Rule Breaker returns an average of at least 18% during the next 35 years, the taxable account is the smarter way to go. Considering the fact that the Rule Breaker has averaged over 60% since 1994, hoping that it will average over 18% is a risk I am willing to take despite the fact that 1994-2000 is a short time period. Also, if the Rule Breaker portfolio does lousy during the next 35 years, there's a good chance that stock index funds will do lousy as well. Thus, it's all relative. It doesn't matter what the return is as long as it is a few percentage points better than the index.

By the way, on the unlikely chance that the Rule Breaker will return 60% over the next 35 years, my $240 a month will turn into $ 2.8 billion after taxes!

The only disadvantage of having so much money in a taxable account is that if I have kids, I won't be able to get college financial aid for them. Money in 403b on the other hand is not considered when evaluating a family's worthiness for college financial aid. Of course, the other disadvantage is the liquidity of taxable accounts, which means I can spend the money anytime I want instead of waiting until I am 59. Luckily, I have good saving discipline.

An advantage of investing for retirement using a taxable account is that if my net worth becomes gigantic, I can retire anytime instead of waiting until I am 59 1/2 to be allowed to redeem shares.

Keep in mind that this strategy may less valuable if your employer matches investment contributions. I can only suggest that you do the math yourself using No, I am not a calcbuilder employee making a shameless plug!

Knowledge is power! The more knowledge you have, the more powerful your investments will be.
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