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A few things...

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.

Are the investment choices main-stream mutual funds? What is the management company? What are your choices?

First there's the funds vs. S&P argument that mutual funds perform poorer:

You will get no argument from me here!

My own investment - 600 per month after tax (7200 total, 8% rate of return, 30 years)


401k - 1100 per month pre-tax (13200 total, same rate of return but with 1.6% fee = 6.4% return, 30 years)

I'm not sure this is a completely fair comparison in terms of amounts invested. For this to be accurate, you would have to be paying about 45% in Federal/State income taxes on the money that would otherwise have gone into the 401(k).

For most people, it would be a better comparison to say that you are investing $700/month on your own. Unless... you don't think you are disciplined enough to do the same equivalent amount either way.

(If that discipline thing is a factor, then the 401(k) wins no matter what because it happens before the money hits your account. You can counter the discipline issue by having your payroll deposited to multiple accounts with the investment money going straight to the company where it will be invested.)

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

You are missing 3 very important factors here...

1. Part of this gain is from dividends; there will be annual taxes that must be paid on these.

2. Almost all mutual funds -- even very efficient index funds -- have capital gains distributions during the year; there will be annual taxes that have to be paid on these.

3. When you eventually start using this money and selling shares, you will have to pay taxes on the capital gains.

Because of these 3 factors, you don't really have $815,639.12 in this example.

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

Are there no lower-fee options in the account?

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.

Why do you expect to pay 22% in taxes in retirement? For just income taxes, my wife and I pay less than 25% combined (Federal/state) with dramatically more income than you are projecting.

You can add in your expected Social Security distributions and build a model tax return based on today's rates -- or any other rates. At the least, you get the standard deductions.

And don't forget that "bracket creep" increases the levels at each tax bracket over time. So if your numbers are not inflation-adjusted, you will actually owe LESS in taxes than this return will show.

Unless you will spend your retirement in an ultra-high tax state and/or tax rates go up substantially, I don't see your combined tax rate in retirement being 22% using the numbers you have given. After all, 30 years from now, the current 10% Federal tax bracket likely will extend to over $15,000 in taxable income (after deductions) and the current 15% bracket will likely extend to over $60,000!

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?

As I have indicated, I don't think your calculations are correctly handling the critical issues. You may not be making a fair comparison in terms of amounts invested; you may not be looking at the returns on your 401(k) correctly; you are not handling taxes on the non-401(k) investments correctly; and you may not be looking at taxes correctly.

Another likely are you to stay in the current company for 30 years? If you ever change jobs, you can roll the 401(k) over to an IRA at Vanguard or Fidelity or another company of your choice and drop the fees to the same level as the other account. At that point, the 6.4% return you have used would rise us to match that of the other account...but without the annual taxes from distributions.

There really are a ton of things to consider, including many things which we cannot know until after the fact. One way to handle this -- split the difference and put $550 into your 401(k) each month and $300-400 into your taxable account each month.

I hope that helps!

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