Let me explain Why, ways to save $2,220 a year. It’s a very specific number.
For some reason a long dormant post of mine about the Myth of 401(k) Tax Breaks got revived and along with it, some very strong arguments for why I’m wrong. The premise of the post is that if you forego the tax break you get from your traditional 401(k) and instead opt for a Roth 401(k) or plain after-tax investment account, you’ll actually end up paying less taxes (assuming you get lousy or no matching and you live and stay in the 12% tax bracket, which I hate to say most of us will).
how many houshold in all bracket with 77% in the 15% or less (source: https://taxfoundation.org)
I think the main argument for many of the nay-sayers is that if you don’t take the tax break you wouldn’t invest that 12% you saved and therefor end up with less.
So if, with a tax break, you can invest $1. Without the tax break you can only invest $0.88. Under that assumption they are correct. You can’t make up for the lost $0.12 of investment.
I take argument with that assumption. It is my assumption and believe that most individuals in the 12% tax bracket CAN forego the tax-break and still find ways to invest that 12% difference.
Hence the $2,220 in the title. If you’re in the 12% tax bracket and are lucky enough to be able to max out your 401(k) with $18,500, it is my believe you can find ways to save an additional $2,220, opt for a Roth 401(k)/after-tax accounts and re-invest that $2,220.
Here is the fun part, I really don’t have to get too creative. I’ve written lot’s of posts that show you how to save amounts, way past that number.
Here’s how we saved
We saved on average $1,000 a year by buying a Hybrid. Gas prices have come down somewhat since, but there’s still savings to be made.
We saved about $1,200 a year by Finally cutting the cord and switching to Antenna and streaming.
We saved $350 a year by switching our house entirely to LED lights. I’ve created a calculator so you can figure out your savings.
I saved thousands by buying refurbished. Granted, not an annual savings of thousands but I do save at least hundreds a year by checking out eBay and Facebook Market place for used items prior to buying new.
Did you know you can save thousands in the long run on your debt simply by choosing between the Avalanche or Snowball method. Check out the third scenario of $45,000 in debt in Snowball vs. Avalanche: Which one is better for you? Not, which one is best?
Are you paying too much for insurance? We were. We were paying over $2,000 a year in Flood insurance until I hired an engineer to verify I really was in the flood plain. I wasn’t. Chances are you’re not in the Flood Insurance Program but I’m convinced that if you take a closer look at your different insurance plans, you can find coverage you really don’t need or want.
Instead of buying tickets to the local (and reciprocal non-local venues) we buy memberships and save about $4,000 a year.
I know interests rates are getting higher but have you considered refinancing your home. If the bank would let me refinance today, I’d be able to lower my monthly payments by $410 and pay the same full amount in interest. That’s a $4,900 savings annually.
Do you really need to eat out twice a week. We used to spend about $360 per month on dining. We’ve reduced that amount to $140 a month by going way less. Funny, thing the kids seem to appreciate dining out much more now and on top we saved over $2,640 annually.
Can you save that much?
Full disclosure at the time we made those savings I was in the 25% tax bracket so there was some more chaff that could be separated from the wheat. We managed to save about $23,000 a year. I’m asking you to save less than a tenth of that.
Yeah but what about the standard of living
One comment on the other post made a strong mathematical argument, and had a plan B in case that didn’t convince me: if nothing else, how about the loss on Standard of living from passing up the 401(k) tax break and not spending the tax deferred money.
I’d like to counter that that most of the savings above actually added to the daily standard of living.
More importantly, by doing with less, during the years that I could, I was able to retire 4 years ago at the age 43. I have a lovely family that is still together. Happen to live in a comfortable house on the water where I can go fishing off the deck in my own backyard. We can still afford beer and chips and did I mention I no longer have to work? Standard of living doesn’t get any better than this (my humble opinion).
Don’t confuse wants with needs and google the term “Delayed gratification”
I always find your mathematical arguments interesting and I can’t find fault with this. But for me, psychology often trumps math.The penalty for accessing funds early from a 401k makes it more sacrosanct to me. Thus it’s easier to set money aside and let it do its thing. I put in 5%, my employer matched 8%, and I maxed out the last few working years.
Thanks.
When you get matching like that, the 401(k) is the only way to go. In my case I wish my employer would have offered a Roth 401(k) but I only know that now that I’m distributing early.
The only reason I’m pulling out of the 401(k) (via the Roth IRA conversion is because I retired way too early. The money taken out goes right back into a Roth IRA, allowing me to access it’s principal 5 years from now at the earliest.
My issues with 401(k)’s are also of a psychological nature. My main beef with 401(k)s is that despite the fact that they made me oodles of money, I don’t really feel financially independent. These accounts have all sorts of strings attached. I have enough to last a lifetime, yet, I can’t get to most of it (not directly). It’s the minutia of laws that tell when and when I cannot touch it, or when I have to distribute and for how much. Oh, and if you break those rules you’re allowed for a stiff penalty.
I fully realize that I agreed (at the time) with these strings attached by the perceived tax advantages. Had I know then, what I know today I might have played it differently (still would have gone with whatever it took to at least get the corporate matching, no one should walk away from that).
There is definitely good advice in here for everyone. The American way has recently been “new” and “big” when those are “wants” not “needs” … I haven’t gone hybrid yet, but I did cut the cord and have done some of the other things. I don’t miss anything.
Thx Mark,
I think that’s an eye opener for many when they do start cutting some cost. It doesn’t have to come at a loss of quality of life. Cutting the cable not only may save to money, it may also bring the family closer as your less glued to the screen all the time.
Hey, Maarten. Excellent post, as always. Don’t ask me why, but when Mrs. Groovy and I started investing, we contributed to our 401(k) and 403(b) up to the match and put $3,000 every month in our taxable brokerage account investments. We didn’t max out our 401(k) and 403(b) until the last four or five years of our careers. The end result is that when we retired at 55, roughly 50% or our portfolio was readily available for use (brokerage account investments) and 50% couldn’t be touched (penalty free) until 59.5. This worked out very well. No cash flow issues early in retirement, and no serious tax hurdles to jump through. Love the way your mind works, my friend. Cheers.