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What up Fools

I'm 22, a recent college grad, and basically don't know where to start as far as investing. This is what I'm thinking...Feel free to lend some advice.

I have opened two accounts with Sharebuilder. One individual and one Roth IRA. I'll start with the Roth. I am thinking about putting 1,000 in the Roth right now, and 250 month to get to the max 4,000. Sharebuilder automatic investments are $4, and they charge a $25 IRA mainteance fee. Now, if I subscribe to the Standard monthly plan (which costs $12 a month, but is offered for $99 for a year subscription) I get 6 free automatic trades a month, plus they waive the $25 maintenance fee. After the 6 free auto trades they cost $2. Having the Standard subscription also gives a little more access to some tools and what not. Finally, I really don't have a clue in what I need to put in the Roth. I'm thinking VTI, SPY, AGG. Should I be more risky?

I have about 1,500 a month to invest (1250 after the IRA). The small biz I work for currently doesn't offer a 401k, so what other retirement options do I have? I also want some money in some higher risk/reward situations? FYI- The 25 dollar IRA fee is also waived if I'm subscribed to the Standard program in my individual account.

THANKS IN ADVANCE!
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I have opened two accounts with Sharebuilder.

Once your IRA gets big, look into Folio(fn). Fees are a bit higher than SB, but you get automatic dividend reinvestment and free "window" trades.

Finally, I really don't have a clue in what I need to put in the Roth. I'm thinking VTI, SPY, AGG. Should I be more risky?

It's 48 years till you retire, so yes.

Tech and Oil should continue to out-perform.
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You are really making things a lot more difficult than they need to be. For now I would suggest just putting your retirement funds into low cost index mutual funds without any fees. Until you have more to invest the fees are too high a percentage of your total account and it is unlikely that you will be able to make up the higher expenses by somehow being able to pick above average stocks.

Note, that when I said index funds, there are probably a couple of dozen different indexes that you can choose from, not just the S&P 500, so you could pick one that is more aggressive because of you age.

Greg
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Watty56 said:
[Suggested low-fee index funds]

Note, that when I said index funds, there are probably a couple of dozen different indexes that you can choose from, not just the S&P 500, so you could pick one that is more aggressive because of you age.


I second that. I'm 29, so I split my 401(k) funds between an S&P 500 index fund, a Wilshire 4500 index*, a Morgan Stanley EAFE (international) index, and a couple of actively-managed funds. As a whole, my portfolio is relatively risky, but with 30+ years left until I retire, that's fine with me. While you're young and your portfolio's relatively small, a low-cost mutual fund can be quite a bit cheaper than buying individual stocks, even through a low-cost provider like Sharebuilder. Once you've built up a few thousand dollars, then you'll be able to build a well-diversified stock portfolio.

If you haven't owned stocks yet, you might want to start a mock portfolio. Pick a few companies, keep track of their performance for a few years, "buy" and "sell" as appropriate, and see how you perform against the market. It'll help you to assess your tolerance for risk, and see whether you're willing to put in the time that investing in individual companies requires. I hear MSN has a good tool for tracking a mock portfolio.

You'd also asked what your retirement options are without a 401(k). Your most obvious choice in tax-advantaged accounts is an IRA (Roth or otherwise,) but bear in mind that index funds are generally very tax-efficient. Even in a regular taxable account, they won't make too huge of an impact on your tax bill.

--
Raven
* The Wilshire 4500 Completion index is the Wilshire 5000 index, which is basically the entire stock market, minus the S&P 500 companies.
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Here's a couple of my thoughts...

I have a regular account at Sharebuilder, but I opened my Roth IRA at Firstrade, because they don't have any maintenance fees, and all orders are only 6.95. The name of the game, especially at this early stage, is to get the most money possible working for you, which means:

1. Increase savings
2. Decrease expenses

So let's run some numbers....

It's August 2007, so you've got 4 full months left until the end of the year. If you put in $1000 into the Roth now, you could $750 in for the last 4 months and max out your 2007 contributions. With your $1500/mo, this is definitely the first course of action I would take.

With a Roth IRA, having 6 free trades/month really means nothing, because at this stage of the game, you don't want to be trading in and out of stocks. Maybe after you've got a couple of years of equities education (by reading TMF or other investment newsletters), and a little pool of money set aside for trading, that is only 5-15% of your total assets, then you may want to get into a more active role.


Everything I've read says asset allocation is key, so for the sake of argument we'll pretend you've decided this allocation would work for you (it may or may not - I'm just making this one up):

* 30% international
* 20% total market index
* 20% large cap value / S&P 500
* 20% small cap value
* 10% commodities (gold/silver/oil ETF)

For 2007's max contribution of $4000, that looks like this:
* $1200 - international
* $800 - total market
* $800 - large cap value
* $800 - small cap value
* $400 - commodities

Cost-wise, how do your options break down? (A good rule of thumb is to keep your expenses below 2%)

1. Standard plan @ Sharebuilder ($99 annual fee, 6 free automatic buys) -- you could contribute to all 5 ETFs every month (assuming Sharebuild allows partial share purchases), and you are paying 2.5% ($100/$4000 for 2007) in expenses. The risk of building up small positions over time is that eventually you need to cash out of a position, and if it hasn't grown substantially, you end up paying a much higher percentage fee. Ex. If you've only got $400 in your commodities ETF and you decide you don't like that asset in your portfolio, cashing out will cost you $14.95, which is an additional 3.7% expense ratio!

2. Basic plan @ Sharebuilder ($4 auto buys, $25 IRA fee) -- best case scenario is that you accumulate money in your account until you can afford 1 buy for each asset, and you've spent $20 in commissions (5 assets x $4) + $25 fee = 1.1% expense ratio. Worst case here is buying month -- $4 of $750 is 0.5%, and $4 of $250 is 1.6%, which doesn't include the $25 annual fee. And you still have the $15.95 commission for each position when you eventually sell.

3. Firstrade ($6.95 trades, no IRA fee) -- best case here again is accumulating money in your account until you can make 1 trade per asset, which is 5 assets x $6.95 = $34.75, or 0.87% expense ratio on $4000. Sells here are also $6.95, in case you needed to cash out of a position early.

So for me, I decided Firstrade made the most cost-effective sense. Now at Sharebuilder, if you expect to be using the remainder of your $1500/mo in building up a nice portfolio in a regular account with the standard plan, then your IRA waives the $25 fee and your automatic-buys are only $4, which is a great deal. But sells are still $15.95, so you really have to be committed to buy & hold or the commissions will eat you up.

Another thing to consider that I haven't seen mentioned yet -- it's really a good idea to have a nice cash "emergency fund" saved up; how much varies by person, but generally 3-6 months of living expenses, in a good savings account or CD yielding 4-5% (at current rates). Having this pool of cash gives you a lot of flexibility in case the unexpected happens -- your car dies, you get laid off from work, a medical emergency, etc. I would recommend building up your efund & Roth IRA first, and maybe other Fools will chime in with other retirement account options available to you.
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Draknor,

Your thoughts are VERY good and well thought out. Congratulations!

As one alternative you might consider a target retirement fund. For a cost of .21% plus I believe a $25 fee (which is waived if you get your statements online) you would get the following distribution in the 2050 fund:

https://flagship.vanguard.com/VGApp/hnw/funds/holdingsSec?FundId=0699&FundIntExt=INT

Roughly 72% Total Stock Market Index
18% International Stocks
10% Bond fund

Eventually you might want to go with your plan, but your costs here would be MUCH lower. You could also accomplish most of what you want with individual funds at Vanguard.

Again, congratulations on the study and thought that you have accomplished to date.

Hockeypop
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I think you should first figure out what investments you want, and then pick the brokerage firm that allows you to invest in those things the most cheaply.

If you go with your Standard sharebuilder plan, you'll be paying an automatic 4.8% in fees right off the top (12/250 =4.8%)! That's a HUGE amount. Ick.

If I were you, I'd start off with a nice plain index fund and/or target retirement fund for your Roth. You can get that really cheaply. For instance, I use Vanguard funds and my Roth IRA with them is free and no transaction fees. So I can contribute monthly for free.

Generally, its cheaper to invest monthly in a regular index fund straight through the mutual fund company (Vanguard funds from Vanguard, etc.). If you're going to go with ETF's, try investing a one time lump sum. That'll keep your fees down.
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Fees, ...Fees, ... Fees

It doesn't matter what the investments are-Mutual Funds, Index Funds, ETFs, Stocks, CDs, Bonds, or some combination of two or more of that list, you do need to really understand fees. This is especially true during the initial IRA accumulation stage (< $10000). I think if you can keep total fees under 2.5% during this stage you build a great foundation for your future.


The Sharebuilder IRA fee structure seems targeted for a long-term DCA (Dollar-Cost Averaging) customer i.e. a customer who makes periodic infusions into their investment(s), but fewer or no sale transactions (The real-time transaction fee of $12.95 - $15.95 likely to dissuade a customer from selling too quickly). Because of the "back-end load" set-up, it seems your best alternative among existing options with Sharebuilder is the basic set-up, even with the $25 maintenance fee.


Hohum
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I think if you can keep total fees under 2.5% during this stage you build a great foundation for your future.

Why is god's name would anyone want to pay 2.5% in fees? Why would anyone suggest that paying up to 2.5% in fees makes sense. If you have any desire to retire at any point in your life, you should keep your total fees (of any kind) well below 1%.
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Ditto resnullius. I think sometimes you can't avoid fees if you are in a captive (company's own) 401K or other retirement plan, but you most definitely should minimize these. 2.5% ??? Ridiculous. Most full service money managers only charge 1.0-1.5% (of course, they invest in funds, which have their own fees, and the actual rate is higher...)

To me, there would seem to be very little incentive to put money into a company plan if the Co. is not sweetening the pot ("free money"). Otherwise, why not just invest it yourself, tax deferred or taxable...?

I have read that, sometimes, you might be better off to NOT put your money into a tax-deferred investment (such as IRA or 401K). The fees are certainly one issue. I think the main argument here is this: Yeah sure you get the money in pre-tax, but when you take it out you are taxed at standard income tax rates (+ a penalty if you took the money too soon). I think this may have applied to the "Traditional IRA" but is still something to consider.

There are ways to get your investment costs very close to zero...the REHP (web site, not the cesspool the TMF Board has become) has some excellent info on this, as do many of the TMF books.

www.retireearlyhomepage.com

Good luck to the OP, and I say find out what the fees are and demand to know why you should be paying them. Much cheaper alternatives often exist.
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Why is god's name would anyone want to pay 2.5% in fees? Why would anyone suggest that paying up to 2.5% in fees makes sense. If you have any desire to retire at any point in your life, you should keep your total fees (of any kind) well below 1%.


2.5% is certainly higher than I'd want to pay myself, but I think what Hohum was going for was that the 2.5% would be a one-time commission on the purchase, and ideally the participant would hold his/her position for many years. So the annualized expense would be much less. If you can buy in a big enough lot that the commission is under 1% of the total position, even better. But in the beginning, it's hard to buy in lots big enough to get commissions below 1%. This is exactly why I'd go with index funds while building that initial $10,000 or so. Below that level, my average position was about $500, so even at $9.99 per trade, I'd start off 2% in the hole*. In the OP's case, we're looking at lots of probably $200 per stock per month, with a $2-$4 commission on each purchase. That's better than most working folks can manage.

Anyway, IWSG, fees eat away at your returns. The younger you are, the more pronounced the effect can be. If you go with mutual funds, your best bet statistically is to find one with low fees, like index funds**. If you decide to invest in individual stocks, you're usually better off buying into solid companies, reinvesting dividends, and holding for many years. Frequent buying and selling just generates more commissions for your broker.

--
Raven
* Note: I'm invested at least partly in small-caps, such as those found in the Hidden Gems or Rule Breakers newsletters. My normal advice of holding only 8-10 positions doesn't really hold when one of your companies could go belly-up overnight. I've never had it happen (knock knock), but it could.
** I know, I'm getting a little redundant. And repetitive. But for those of us who aren't fond of the volatility of individual stocks, who don't have the time or desire to research companies and read quarterly reports, or who just don't trust ourselves to sell when the market gets rough, index funds are a cheap and simple way to build wealth.
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Why is god's name would anyone want to pay 2.5% in fees? Why would anyone suggest that paying up to 2.5% in fees makes sense. If you have any desire to retire at any point in your life, you should keep your total fees (of any kind) well below 1%.

You are apparently not aware of fees in the initial years and/or have not experienced a downturn during initial investment years!
2.5% on a $4000 max contribution IRA = $100

If the OP does two round-trip transactions in the first year (Buy $4, Sell $15.95) + $25 Maintenance Fee = $64.90
IRA Contributions $1000 + (250*8) = $3000 (Using OP's numbers from initial post)
64.90/3000 = 2.16%

Why would he sell so early? If the OP was invested in individual stocks in the last month, one or more might be down 5, 10, or 15%. Even something as broad as SPY in the last month, that holding would be down 6-7%. It is easy to say, "You need to be a Long Term Buy and Hold investor". Markets misbehaving cause irrational behavior, and it is not unusual for a new investor to panic and sell.

With a $3000 account, and including the $25 maintenance fee
Two round-trip transactions in the current market: 2.16%
Three round-trip transactions in the current market: 2.828%




Hohum
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With a $3000 account, and including the $25 maintenance fee
Two round-trip transactions in the current market: 2.16%
Three round-trip transactions in the current market: 2.828%


Looks like a good reason to find a different discount broker.

IF
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I have read that, sometimes, you might be better off to NOT put your money into a tax-deferred investment (such as IRA or 401K). The fees are certainly one issue. I think the main argument here is this: Yeah sure you get the money in pre-tax, but when you take it out you are taxed at standard income tax rates (+ a penalty if you took the money too soon). I think this may have applied to the "Traditional IRA" but is still something to consider.

That's one of the criticisms that people have against tax-deferred investment vehicles like Traditional IRA's and Traditional 401(k)'s. Normally, dividends and long-term capital gains are taxed at a lower rate than regular income. Traditional retirement vehicles don't make that distinction, so everything's taxed as ordinary income. So you could wind up with a bigger tax bill than you would have had in a taxable account. Oh yeah, and the tax hit comes after you've retired.

Suppose you open a Traditional IRA, you invest $4,000 in a basket of companies you believe in, and you forget about the account. You don't add more or sell anything. Thirty years later, you get a letter in the mail saying that it's time to take withdrawals, and your holdings have grown to $70,000. [For simplicity, let's suppose this is all capital appreciation, and none of your companies paid dividends.] In a taxable account, you'd have paid 10% tax (10% x (70K - 4K) = $6,600) on your long-term capital gains. However, Traditional IRA distributions get taxed at your marginal tax rate. If you're in the 25% bracket, that's (25% x 70,000 = $17,500). Even factoring out the deduction you got up front, you're paying almost $10,000 more in taxes.

Roth IRA's and Roth 401(k)'s sidestep this problem by not taxing eligible distributions; the more important distinction here is that if you're going to max out your Roth vehicles, and invest further in taxable accounts, the less tax-efficient investments (like REIT's, high-churn mutual funds, taxable bonds, and income-producing stocks) should be in the tax-advantaged accounts, and the more tax-efficient investments (index funds, municipal bonds, and stocks you plan to hold for many years) can be in the taxable accounts. Overall, this should maximize your tax breaks. IWANTSOMEGREEN, as young as you are, I see no reason why you shouldn't max out your Roth IRA contributions before considering other investments.

--
Raven
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In a taxable account, you'd have paid 10% tax (10% x (70K - 4K) = $6,600) on your long-term capital gains. However, Traditional IRA distributions get taxed at your marginal tax rate. If you're in the 25% bracket, that's (25% x 70,000 = $17,500). Even factoring out the deduction you got up front, you're paying almost $10,000 more in taxes.


Raven, good points, but couple of questions:

1) why you use 10% for capital gains? isn't it now 15% (and was 20% recently)?

2) Traditional IRA distributions get taxed at your marginal tax rate
well, while this is true, some people usually note (and I agree with them), that, depending on how much income you have that year from different sources, your effective tax rate can much smaller.
Imagine, this is your only taxable income, then, even you are in 25% bracket, you will pay much less tax on 70,000 than 25% (don't know right now how much, but first come deduction/exemptions, then lower tax brackets, and only at the end - your marginal rate), I don't think the effective tax will be more than 15%
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2.5% is certainly higher than I'd want to pay myself, but I think what Hohum was going for was that the 2.5% would be a one-time commission on the purchase, and ideally the participant would hold his/her position for many years.

Still sucks.
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You are apparently not aware of fees in the initial years and/or have not experienced a downturn during initial investment years!

Keep telling yourself that...someday it might make sense, but not a lot of sense.
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why you use 10% for capital gains? isn't it now 15% (and was 20% recently)?

D'oh! You're right. If your marginal rate is 15% or lower, you only pay 5% tax on capital gains. If your marginal rate is 25% or higher, you pay 15% tax. So assuming our example occurs within a higher tax bracket, that $6,600 is closer to $9,900.

2) Traditional IRA distributions get taxed at your marginal tax rate

well, while this is true, some people usually note (and I agree with them), that, depending on how much income you have that year from different sources, your effective tax rate can [be] much smaller.


Very true. If the IRA distributions were your primary source of income, the taxpayer's effective tax rate would be somewhat lower, which would dampen the effect of the higher tax rate. I would expect that, all things being equal, the capital gains would still come out ahead; if the taxpayer had little or no other income, then the capital gains would be taxed at a mere 5%, and that's hard to beat. But the IRS rules aren't clear enough to allow for a quick-n-easy simulation here.

I personally have nothing against IRA's and 401(k)'s, traditional or otherwise; saving regularly is probably the best chance a working Joe or Jane has of retiring comfortably, and these vehicles help that to happen. But asset allocation can save you a lot of money when tax time comes around.

--
Raven
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Keep telling yourself that...someday it might make sense, but not a lot of sense.

Okay, how about max 2.5% first year, decaying function as contributions increase...does that sit better with you?


Hohum
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Okay, how about max 2.5% first year, decaying function as contributions increase...does that sit better with you?

What is it with the fees. There's no reason at all to pay 2.5% the first year or any year. The only thing this accomplishes is to make the fund manager and salesmen (i.e., financial planners) rich with your money. No load, low fees, and tax efficient is the only sensible way to invest for 99% of investors.
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What is it with the fees. There's no reason at all to pay 2.5% the first year or any year. The only thing this accomplishes is to make the fund manager and salesmen (i.e., financial planners) rich with your money. No load, low fees, and tax efficient is the only sensible way to invest for 99% of investors.

You are being particularly dense. Hohum did a good analysis of the fees involved if the OP decides to continue to use Sharebuilder. I suggested a different discount broker to lower the fees. I didn't see you suggest one. It appears that you keep arguing that Hohum is incorrect for the broker in question.

IF
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You are being particularly dense. Hohum did a good analysis of the fees involved if the OP decides to continue to use Sharebuilder. I suggested a different discount broker to lower the fees. I didn't see you suggest one. It appears that you keep arguing that Hohum is incorrect for the broker in question.

IF



Thanks for the support IF!

A big part of my argument was based on the OP's choice of IRA broker. Someone else in the thread also pointed out rough Shareholder costs vs Firstrade. In a subsequent post, I did mention that the 2.5% should be viewed as a first year item, and subsequently tail downwards.

From a practical standpoint, I agree with your assessment that another discount broker (e.g. Firstrade, Scottrade, etc.) might be better options. At that decision point, the issue for the OP is- eat the $25 IRA maintenance cost for year one (and pay an out-of-pocket transfer fee), and move the money to a broker with reasonable fees for smaller IRA accounts?


Oh well, C'est la vie
Hohum
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The only thing this accomplishes is to make the fund manager and salesmen (i.e., financial planners) rich with your money.
------------------------------------------------------------------------

Not all financial planners are salesmen...for the gazillionith time.

buzman
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I have about 1,500 a month to invest (1250 after the IRA). The small biz I work for currently doesn't offer a 401k, so what other retirement options do I have?

Regular accounts of all kinds can be used to save for retirement. Just call it "retirement account." Some people need to put their money in a different mental pocket to keep from spending it on giant TVs and fancy vacations.

Vickifool
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Suppose you open a Traditional IRA, you invest $4,000 in a basket of companies you believe in, and you forget about the account. You don't add more or sell anything. Thirty years later, you get a letter in the mail saying that it's time to take withdrawals, and your holdings have grown to $70,000. [For simplicity, let's suppose this is all capital appreciation, and none of your companies paid dividends.] In a taxable account, you'd have paid 10% tax (10% x (70K - 4K) = $6,600) on your long-term capital gains. However, Traditional IRA distributions get taxed at your marginal tax rate. If you're in the 25% bracket, that's (25% x 70,000 = $17,500). Even factoring out the deduction you got up front, you're paying almost $10,000 more in taxes.


Raven,
you are overlooking that most people can get by with less "income" in retirement because they no longer have to earn enough to have some left for savings!

After you subtract the exemption and standard deduction, you can "earn" quite a bit before hitting the 25% tax bracket. And, even then, only the part that exceeds the 15% bracket is subject to the greater taxation.

Vickifool
This ignores the inevitable tax increases to pay for the current war spending.
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>> you are overlooking that most people can get by with less "income" in retirement because they no longer have to earn enough to have some left for savings! <<

That's a good point that tends to make some people overestimate what they will need in retirement.

If you're saving 20% of your income for retirement, assuming you've planned appropriately, that's immediately 20% of your income that you won't need for retirement. And add the reduced taxes on top of a smaller income, perhaps less in commuting expenses, and maybe that a retired couple might be able to have one car instead of two, et cetera, et cetera, and if people live simply, there's a good chance they'll need less than they think they will.

#29
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vickifool said:
you are overlooking that most people can get by with less "income" in retirement because they no longer have to earn enough to have some left for savings!

An important consideration, but sort of a tangent. A 25% deduction now could mean paying 15% tax later, depending on how much you earn now and withdraw later. Again, this is a very basic example; this is probably why one shouldn't plan their retirement on books like The Great 401(k) Hoax, which rely exclusively on such over-simplified examples.

After you subtract the exemption and standard deduction, you can "earn" quite a bit before hitting the 25% tax bracket. And, even then, only the part that exceeds the 15% bracket is subject to the greater taxation.

Also true; my actual tax rate is about half of my marginal rate, because of the standard deduction, student loan deductions, and so forth. Still, as I mentioned in an earlier post, capital gains are taxed at 15% if your marginal tax rate would be 25% or higher, and a mere 5% for those with a marginal tax rate of 15% or less. 5% is pretty hard to beat.

Such considerations become more important if one needs or wants to save more than the law allows in tax-advantaged accounts, or if they plan to earn a paycheck while drawing from said retirement accounts (semi-retirement, second career, that sort of thing). At lower tax brackets, higher churn rates, or anything more realistic than "set it and forget it", it's impossible to create a model that covers everybody's situation. But this example can still be useful for understanding tax efficiency.

--
Raven
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That's a good point that tends to make some people overestimate what they will need in retirement.

If you're saving 20% of your income for retirement, assuming you've planned appropriately, that's immediately 20% of your income that you won't need for retirement. And add the reduced taxes on top of a smaller income, perhaps less in commuting expenses, and maybe that a retired couple might be able to have one car instead of two, et cetera, et cetera, and if people live simply, there's a good chance they'll need less than they think they will.



I think it depends on the individuals whether or not they really get to keep that 20% that was initially earmarked for savings. In our case, we will have to provide our own medical insurance, and that's a big expense that we don't pay for now.

For my planning purposes, I do use 100% of my paycheck as that's what we live on now. I have done things like reallocate the mortgage to medical expenses, the kids' college savings to a travel fund to visit them wherever they may end up, and have done other things like decrease groceries but increase dining out.

I have a spreadsheet that has estimates of what we spend now on things, and I use that to estimate what we'll spend in retirement so that I have some sort of planning guideline. That still says that we need 100% of my paycheck, so that's how we plan.

We've always put DH's earnings into savings, so I just ignore those as we won't need that during retirement, but in reality, he expects to keep doing a little bit of that to have something to keep him busy.

I just find the exercise of thinking all this through and writing it down to be useful in determining things like target savings goals and target retirement dates. We're still hoping that it will be somewhere between the day the kids graduate college in 6 years and 8 years out.
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the kids' college savings to a travel fund to visit them wherever they may end up

Thanks for the idea ! I've been floundering now that college is just about done.

The groceries for us decreased more than the cost of additional eating out but the last 2 were male athletes and in the summers, it could look like locusts had raided the pantry.

rad
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