Have to differ, there. Vanguard Index Funds of course are the best store of money. But I'd say often the best solution is forgoing the government vehicles, which effectively make your funds illiquid for decades for questionable benefit.
Why? 401ks (non-Roth) are not tax-free; they're tax deferred. Which is a big difference. When you withdraw from them when you're retired, you pay income tax on them. The relevant measure then is how your marginal tax rate while working in 2013 compares to the marginal tax rate in 2050 when retired (or whenever).
This is hard to calculate, but consider:
1) If you're putting in 16k/year over 40 years, you almost certainly will be hitting the top marginal tax rate.just from the required disbursements.
2) Do you expect income taxes will be higher or lower in 2050 than in 2013? Particularly note: if lots of people are using 401ks, which they are, 401k income's gonna be one pretty honeypot that can be easily hit by increasing the income tax, which already exists and would just need a rate tweak.
Compare it to the alternative: invest the money outside of government vehicles, ideally in Vanguard index funds. Then you pay two taxes: the initial one on income (which is your average tax rate, not your marginal which is typically significantly higher), and the long term capital gains rate (which is much lower than either the marginal or average income tax rate). You can totally ignore capital gains if you're using Roth.
Whether that is better than the 401k alternative by itself depends a lot on the particularities of your financial situation. But even for those for whom a 401k might theoretically make better financial sense, I'd argue that the greatly increased flexibility is worth the minor extra cost you might pay.
I currently invest in a Roth 401K, and part of me is thinking that I should just be going into Vanguard Index funds since the plan my company offers me doesn't have any good low cost index funds (just targeted retirement).
I've been thinking that a non-Roth 401k is ultimately a bad deal because of the tax issue, besides increasing in tax brackets generally as you get older until you retire.
This is kind of strange given that the article isn't really about investing at all. If you can cut through the Friedman word salad his point seems to be "a 401(k) world requires you to learn much more about investing in yourself."
This article is, like so many of Friedman's, basically garbage. I guess he's saying that like you need to figure out what the best 401(k) investments are, so too do you need to figure out how best to shape your skillset for the market? I can barely find a thesis in this article other than "things are changing due to technology, some of this is good and some of it is bad."
It's possible, though, that the next six months will be critical.
I guess (but I'm still not sure) that his main point is that there is no place for somebody that doesn't "learn how to invest" himself.
It used to be that people could choose to be extra flexible and get a better position because of that. Today, as he states - I'm not sure I agree, people have to be extra flexible to get anything at all.
TL;DR - Friedman's been doing minor variations on this "the world is increasingly hyperconnected" bullshit for years and years. It's bad writing and it means nothing.
Several years ago I had the idea of using Markov chain algorithms to auto-generate Thomas Friedman articles. I was going to build a site around it called mechanicalfriedman.com. I just discovered someone else beat me to it:
"everyone guaranteed a "fair pension" based on social criteria"
Let me translate it into humanspeak for you: this means existing retired, who paid low taxes, will get paid nice pensions out of your high taxes; and when you retire, you'll receive nothing and go begging, since the schema will go bankrupt.
Invest in real estate and skills that let you work for long.
And in USA most real estate is worthless in the long run.
Meaning that over the long term no large pot of money goes unlooted. The public doesn't have enough influence to stop, say, some form of nationalizing of 401k accounts into pension plans wherein what they are invested in is decided by government employees. Large segments of the public would even go along with it. That then turns into looking like just another tax and entitlement because the funds can be siphoned off and spent immediately, much like social security.
The present status quo regarding finance in the US cannot continue indefinitely. Sooner or later the obligations cannot be met. There are all sorts of failure modes and unpleasant things that can happen along that road, as more funds are sought, or various institutions collapse, and the looters become ever more brazen. Some form of prettified confiscation of 401k accounts isn't anywhere near the worst of them.
> Meaning that over the long term no large pot of money goes unlooted.
Actually, if you look at average fees charged by financial institution, and the divertion of returns on capital to hedge funds and high-frequency traders, 401k funds are already being effectively looted.
> some form of nationalizing of 401k accounts into pension plans wherein what they are invested in is decided by government employees.
Hahhaaahaahaaaaa. That's a good one. But in cae someone else doesn't get the joke and takes you seriously, let me explain the joke. Wall Street already has your 401k money, they don't need to siphon it off via tax cuts for the wealthy like we did with the Social Security surplus.
I wish the the "About" page gave the faintest of technical details about its implementation... A couple different Markov chains for varying generic topics, with buzzwords inserted to give the text a shred of focus?
30 comments
[ 3.7 ms ] story [ 82.1 ms ] threadWhy? 401ks (non-Roth) are not tax-free; they're tax deferred. Which is a big difference. When you withdraw from them when you're retired, you pay income tax on them. The relevant measure then is how your marginal tax rate while working in 2013 compares to the marginal tax rate in 2050 when retired (or whenever).
This is hard to calculate, but consider:
1) If you're putting in 16k/year over 40 years, you almost certainly will be hitting the top marginal tax rate.just from the required disbursements.
2) Do you expect income taxes will be higher or lower in 2050 than in 2013? Particularly note: if lots of people are using 401ks, which they are, 401k income's gonna be one pretty honeypot that can be easily hit by increasing the income tax, which already exists and would just need a rate tweak.
Compare it to the alternative: invest the money outside of government vehicles, ideally in Vanguard index funds. Then you pay two taxes: the initial one on income (which is your average tax rate, not your marginal which is typically significantly higher), and the long term capital gains rate (which is much lower than either the marginal or average income tax rate). You can totally ignore capital gains if you're using Roth.
Whether that is better than the 401k alternative by itself depends a lot on the particularities of your financial situation. But even for those for whom a 401k might theoretically make better financial sense, I'd argue that the greatly increased flexibility is worth the minor extra cost you might pay.
I've been thinking that a non-Roth 401k is ultimately a bad deal because of the tax issue, besides increasing in tax brackets generally as you get older until you retire.
See this frontline for details: http://www.pbs.org/wgbh/pages/frontline/retirement/world/401...
This article is, like so many of Friedman's, basically garbage. I guess he's saying that like you need to figure out what the best 401(k) investments are, so too do you need to figure out how best to shape your skillset for the market? I can barely find a thesis in this article other than "things are changing due to technology, some of this is good and some of it is bad."
It's possible, though, that the next six months will be critical.
It used to be that people could choose to be extra flexible and get a better position because of that. Today, as he states - I'm not sure I agree, people have to be extra flexible to get anything at all.
http://www.rollingstone.com/politics/blogs/taibblog/contest-...
TL;DR - Friedman's been doing minor variations on this "the world is increasingly hyperconnected" bullshit for years and years. It's bad writing and it means nothing.
http://thomasfriedmanopedgenerator.com/
There goes my billion dollar exit...
http://nypress.com/flathead/ http://nypress.com/flat-n-all-that/
It's a risk.
Invest in real estate and skills that let you work for long.
And in USA most real estate is worthless in the long run.
That's the most popular form of savings confiscation.
The present status quo regarding finance in the US cannot continue indefinitely. Sooner or later the obligations cannot be met. There are all sorts of failure modes and unpleasant things that can happen along that road, as more funds are sought, or various institutions collapse, and the looters become ever more brazen. Some form of prettified confiscation of 401k accounts isn't anywhere near the worst of them.
Actually, if you look at average fees charged by financial institution, and the divertion of returns on capital to hedge funds and high-frequency traders, 401k funds are already being effectively looted.
> some form of nationalizing of 401k accounts into pension plans wherein what they are invested in is decided by government employees.
Hahhaaahaahaaaaa. That's a good one. But in cae someone else doesn't get the joke and takes you seriously, let me explain the joke. Wall Street already has your 401k money, they don't need to siphon it off via tax cuts for the wealthy like we did with the Social Security surplus.
(don't stop at the ad-hominem attack on Friedman, though those are fair game, given how much of an hack Friedman is).
http://www.thomasfriedmanopedgenerator.com/