PBS Drops Another Bombshell: #WallStreet Is Gobbling Up Two-Thirds of Your 401(k)

[progree]

21. I'm not sure I'm following much of any of this

Last edited Mon Apr 29, 2013, 03:18 PM - Edit history (1)

[font color = blue]I didn't have the numbers, but as you get older, you can see this happening. [/font]

The OP doesn't "have the numbers" either. You can see what happening?

[font color = blue]And at the end, you pay those deferred taxes that you were told would be so great . . . . [/font]

Tax deferral saves a lot of money. Using the 50 year and 7% return example of the OP:

Say your tax rate is 20% combined state and federal (a low-ball number).

A. No tax deferral. You pay 20% taxes every year.
====================================

Thus your annual after-tax rate of return is 7% * (100-20%) = 5.6%

A dollar invested over 50 years grows to 1.056^50 = $15.247 after taxes

B. Tax deferred growth:
====================================
A dollar invested over 50 years grows to 1.07^50 = $29.457 before taxes.
Then you pay 20% taxes on the gain: 20% * (29.457 - 1.00) = $5.691 in taxes
Leaving after taxes: $29.457 - 5.691 = $23.766

Summarizing, after taxes:
=========================================

A. No tax deferral: Your after tax amount is $15.247
B. Tax-deferral: Your after tax amount is $23.766

I'll take B.

And at higher tax rates, the advantage of tax-deferral grows. And if one's tax bracket in retirement is lower than in one's working years (which is usually the case unless one manages to pile up a large nest egg), the advantage of tax-deferral increases.

[font color = blue]But "nobody could have known" that the stock market would crash just as baby boomers were about to retire. [/font]

Hmm, why did I keep reading last month that we were setting new all time record highs for the DOW and S&P 500? And as of Friday 4/26/13 close, at 1582, we're within 0.7% of setting yet another new high on the S&P 500 -- an index of about 75% of U.S. stocks by market capitalization.

[font color = blue]The 401(K)s are an obvious scam. [/font]

How so -- did you read post #11 where Xcel Energy pays the management fee, offers lots of funds with expense ratios between 0.10% and 0.20% and matches employee contributions up to 5% of wage/salary? If that's getting fucked, I'm gurgling in ecstasy.

That said, I don't doubt some employers are screwing their employees by using a high-cost 401k management firm that offers only high-expense ratio funds, and getting a kick-back.

[font color = blue]They are the reason that hedge fund manager (or former hedge fund manager) Pete Peterson hates Social Security so much. If Wall Street weren't robbing us blind on our 401(K)s, a guy like Pete Peterson would not be so anxious to destroy Social Security.
[/font]

Huh? Fill me in. What's a 401k got to do with Social Security? 401k and IRAs are ADDITIONAL to Social Security. I hadn't heard that he wants to destroy Social Security, my understanding is that he's saying that without changes, it will not be able to meet promised benefits after 2033. The Social Security Trustees say the same thing. And they've been optimistic in recent years -- they have been advancing the trust fund exhaustion date each year for the last several years (for example in the 2002 report they projected trust fund exhaustion in 2041. Now they are forecasting exhaustion in 2033).

[font color = blue]The anti-Social-Security cabal doesn't want seniors to compare when they retires. Because Social Security is reliable and secure compared to the stock market and banks.[/font]

So long as Congress goes along and makes the necessary changes (And I hope they do. My favorite: raise the fricking maximum earnings cap so that the wealthy pay the same rate on all their income as we small fry do).

Just to be clear, I think Social Security is the foundation of our retirement security. I am absolutely and totally against privatizing Social Security or any part of it, even as an individual's choice to make.