# The Money Mustache Community

## Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: DanBrewMan on July 26, 2013, 01:35:44 PM

Title: 401(k) vs. after-tax investments and retirement math question
Post by: DanBrewMan on July 26, 2013, 01:35:44 PM
This is more of a general question, but here's some background just in case: I'm 27.  I want to max out my 401(k) until there's enough of a balance that by the time I'm 60, I'll have enough old man money to last me forever with a 4% withdraw rate.  But, if I do that I will easily have enough well before age 40 with not much in after-tax investments.  Once I achieve the 401(k) balance I want, I would transfer those savings into after-tax investments that I would use to retire before age 60.  Here's the hangup though.  I would need many years to build up after-tax investments to the point that I could confidently retire early and have enough to last me until age 60.  If I get the after-tax account building earlier, then I could retire earlier because the after-tax account would begin growing sooner.

So here's my question: Is it really *best* to max out the 401(k)?  Would it be better to find a balance between the after-tax investments and the 401(k)?

I ran some numbers and that seems to be the case.  If I contribute \$13k per year until age 40, I'll have a large enough balance by age 60 to have a \$40k age 60 income at a 4% WR (I am including employer contributions, 2%, and matching, 5%, in my calcs).  By not maxing the 401(k), I have the extra after-tax cash to invest which will also enable me to have an after-tax balance high enough to give me \$40k per year until age 60.

When I max the 401(k) until the balance is high enough and then shift to after-tax investments, I'd have to work several more years to get that after-tax balance high enough.

Am I missing something?
Title: Re: 401(k) vs. after-tax investments and retirement math question
Post by: matchewed on July 26, 2013, 02:17:58 PM
Yes because you're operating under the assumption that using after tax accounts solely to get you to retirement age is the only option.

Other options -
Building income streams (various methods)
Roth Pipeline
72(t) distributions
If your taxes are low enough just taking the hit on the 10% penalty

Once you eliminate your first assumption the rest of your concerns go away. If you cannot move past that assumption then you are correct in prioritizing after tax investments. But mathematically speaking utilizing and maximizing tax deferred investments makes you save more money as you pay less in taxes and pocket that towards savings.
Title: Re: 401(k) vs. after-tax investments and retirement math question
Post by: DanBrewMan on July 26, 2013, 02:39:13 PM
Ah!  This information settles my concerns. :)  Thank you!  Now it makes a lot more sense to max out the pre-tax investments.
Title: Re: 401(k) vs. after-tax investments and retirement math question
Post by: Eric on July 26, 2013, 02:47:44 PM
Have you seen MMM's post on this Dan?

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

My personal investments are as much into tax-deferred (401k)as possible, since my taxes are higher now then they will be upon retirement.  Plus there are ways to access that money before age 59.5 without penalty.  A couple are mentioned in the above post (check out stategy 2 & 3), and there are lots of threads around discussing how it's done.