The following is a guest post by FS reader, Jamin Eberhart on your largest ongoing living expense. He received his MBA, worked in biotech and now consults for biotech companies. He is extremely focused on building his freedom fund, and struggles just like me to find the right balance between living it up and being fiscally responsible.
The news media is always talking about how the top three costs for households are:
- Housing (rent or mortgage)
- Car (loan payments and interest)
- Education or Child Care (student loans or child schooling)
Your Largest Ongoing Living Expense
The truth is, they are wrong. Taxes are by far and away the largest cost that most households face. “Why is this important?” you might ask. “Aren’t taxes unavoidable?” you lament. The short answer, like many things in life, is yes and no. Will you be able to avoid paying taxes altogether? No. Can you take steps to lessen your tax bite and chip away at the single greatest expense you have? Yes! The how is for a later post. For now, let’s focus on step one… recognizing that you have a tax problem.
Let’s do some quick math. For simplicity, we will assume that our happy couple makes a combined income of $100,000 per year in the United States (married, filing jointly). Here are some of the immediate payroll taxes they face:
Note that I did not include some biggies like state income tax, property tax, and sales tax since at this income level, most if not all of those taxes can be written off against federal tax withholdings within limits. Already our lucky couple is paying nearly one third of their money to the government before having a chance to do anything productive with it for themselves. And yes, that employee funded amount for social security, medicare, and medicaid counts since that is a very real, direct salary cost to employers which could otherwise be paid to their staff.
Unfortunately, this tax chart isn’t even close to the full picture. All of those “little” taxes add up. State tax. City tax. Property tax. Gasoline tax. Alcohol tax. Airport tax. Cigarette tax. Estate tax. Public utilities tax. Telephone tax. Vehicle registration tax.
Endless Taxes Until You Make Money Differently
The list goes on and on and the net effect can easily add another 10% in total taxes. Since I don’t have the time or inclination to write up an exacting review of the total US tax burden, I am grateful that author Jeremy Sands has already done so with his paper, The Real US Tax Burden.
The key takeaway is this: the average American household earns ~$53,600 per year and pays $24,600 in all taxes combined for a … drumroll please… 54% effective tax rate. How does it get that high? A bunch of different taxes add up quickly.
For example, in California state income tax is about 8.5%, CA sales tax can be as high as 10% (in San Francisco it's 8.75%), FICA is 6.2%, property tax is 1.12%, etc. If your household makes more than $53.6k per year guess what… it just keeps getting worse and worse.
It's so much better to earn investment income instead of W2 income. Investment income is taxed at a lower rate and doesn't take work to make!
Your Largest Ongoing Living Expense Needs To Be Managed
Another way to think about this astounding figure is based on what this average household needs to earn in order to buy anything from a bottle of shampoo to that lovely new car. For the average person, they need to earn double what the price tag reflects to actually complete the purchase.
That morning latte at Starbucks, that’s not $4 but rather $8 of earnings down the drain. That new $35,000 luxury sedan? That will be $70,000+, not even factoring in interest and maintenance costs. Sobering, yet extremely important to recognize if you want motivation to curb spending.
Related: Follow The TITTS Ratio To Save More Money
Government Taking Your Money
Yet another way to think about this is that all forms of government in the US (federal, state, county, city/local) confiscate over half of the average household’s income every year, and yet they still cannot balance the national budget and always need more money. How much is enough when half of the productive effort of the nation is squandered just to keep up with the government’s reckless, ever expanding spending?
And to be clear, this is a discussion that neither the Democrats nor the Republicans want you to think about. None of them want you to think about your true total tax burden because they don’t want you to violently protest to their power when you learn the truth.
This is why the presidential debates always spout figures based only on the federal income tax rate versus your total tax rate… you know, the one which actually matters the most to you.
All this is from a country which was intended by its founding fathers to never impose a federal tax on its citizens and managed to thrive for 137 years without a federal income tax (the 16th amendment to the US Constitution was passed in 1913 which allowed for the previously unconstitutional act of collecting federal income tax).
How To Reduce Your Largest Ongoing Living Expense: Taxes
To be clear, I highly recommend that you pay whatever taxes which are legally required of you. Don’t be foolish and evade taxes, it isn’t worth it. That being said, however, there are a number of completely legal ways to reduce your tax burden:
- Max out anything that allows you to defer taxes. 401k’s. 403(b)’s. Traditional/Roth IRA’s. SEP IRA’s. This is the #1 option open to most employees who don’t own their own business.
- Start your own business. You’d be amazed at how many personal expenses can be legitimately paid for out of your business’ account (thus saving you from paying taxes on your income first, and then paying for the expense)
- Buy less stuff. Governments have a hard time taxing money which is just sitting there earning interest, hence they tend to tax events and transactions (your monthly paycheck, dividend payments, store transactions, utility payments, …). The less you buy, the less they can take out of every transaction and the more that you can keep for a rainy day.
- Go a bit Galt.
- Become an awesome employee at an awesome company that has 401k match and profit sharing, AND become a freelancer so you can potentially put away over $100,000 tax free.
ONE LAST EXPENSE TO THINK OF (Sam addition)
Although this article makes a claim that taxes are our largest ongoing expense, there could be one more expense that's even greater and psychologically more devastating. That expense is getting a divorce!
Not only will have you have to potentially pay alimony, child support, and divvy up your assets, you may also have to pay wasteful lawyer fees! We'll talk in more detail about the cost of marriage and divorce in future post.
Related: How To Pay Little Or No Taxes For The Rest Of Your Life
Wow, didn’t read everyones post but there are so many ways that your hypothetical couple could reduce their tax bill that you showed. Lets start with the standard deduction of $12600 this is STANDARD for your married couple! If they have kid/s they get an even better deal. If you max both IRAs that is another $11000, and if you max both 401ks that is another $36k. This amounts to nearly $60k for just a family of 2(but maybe more). I haven’t even gone into the more creative tax credits, and Social Security doesn’t tax all income(rental property, dividends and some others). If they live in a state with not income tax and low property taxes its even better(we live in Clarksville Tenn.). Taxes on vehicles are low too average is about $66 a year each regardless of vehicles value. Property taxes on our new 2200sqft house is less than $2000 a year and there is no school tax or other BS taxes that I have heard of. There is a high sales tax in the area of 9.5% but other areas are cheaper(depends on city/county). There is no tax on (only sales tax, not property) personal trailers, just vehicles, motorcycles, and motorhomes(that I can think of). No yearly tax on boats, or motors(Missouri). Fishing and hunting is cheap. Tennessee is a great place to live!
My husband is paying “child support” where a the X is using funds to pay for her Louie,Shopping, etc- that’s another story, but back to the point I’m trying to get information on: If one is paying “child support” – there is no Tax deductions for that- only for “child care”. How can one lower a tax bracket in that area to reduce “child support” (only due to the fact that the kids mom is using it 85% for her purposes & not the child). I’m trying to look at is from a taxable point of view where I don’t need legal counsel for that. thanks in advance. Mali.
have you written an article about “more detail about the cost of marriage and divorce in future post” yet? particularly child support. Thanks.
Ooooo that sounds interesting, reminds me of a recent documentary I watched called Divorce Inc. It was very informative and a bit scary!
Good reminder just in time for tax time. Property taxes eat up a huge chunk in Texas, even after accounting for the value of the write-off. Great post!
Thanks for including the employer’s contribution to the Social Security heist. The link below is a Facebook page: Social Security – Get Me Out Now
https://www.facebook.com/notes/608867659234350/
The link below is an analysis the W2 and comes to the same conclusion that our tax rates are more like 32%.
American Tax system extremely complicated to navigate as an immigrant. If someone comes to America in his late 30s, say after saving some money in the home country in tax deferred/tax free pension plan (or 401K equivalents) etc, he needs to very carefully assess the tax implications of the tax deferred products in his home country. The draconian penalties in FBAR and FATCA are very unnerving.
One of the troubling thing as an immigrant is how differently USCIS and IRS treat you. USCIS considers you as an alien until you get a permanent residency or citizenship, which could take many years (e.g. 7-10 years for asian/indian tech workers). But IRS considers you as a tax resident or ‘US Person’ (and equivalent to a citizen) for taxation purposes after completing 180 days in a financial year. Now with the complications of ever changing immigration rules and uncertainties of visa approvals during this long tenure, it becomes very difficult to take advantages of tax deferred products in the US. Further the tax deferred instruments in your home country are not really tax deferred here. e.g. One would not want to keep money in IRA, which is available when you are 59.5 year old, but your visa was denied due to a mistake in paperwork. Then acts like Patriot act etc make operating US based accounts for non-citizens from abroad very cumbersome and almost impossible.
Most of the migrant workers who come on visa and leave the country after completing the visa limit diligently pay social security and medicare taxes to the US government, but unlikely to get any benefit whatsoever on that money. I think legal non-immigrant workers are beneficial for government in that regard. :)
I agree that no one forced me to come to USA. I am just saying.
Ahh the big tax ogre bullies. The other day I was looking over my last years w2 and noticed that the government gets a good three times or more in taxes then what I am able to save. That’s just post income, I haven’t even yet paid tax for buying stuff. I just don’t get why the government is allowed to take so much at this 15k / year level that I’m not allowed to build up savings.
Ah, your situation is exactly why I wrote this post: https://www.financialsamurai.com/a-savings-and-tax-guide-titts-ratio/
I wonder how Many people realize the government is taking more than one can save?
There are a lot of innacuracies and half-truths needed to get to a 54% effective tax rate. If that figure were true, then on a macro level, you would expect the tax revenues as a percent of GDP to be in that ball-park, but it’s just not.
https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP
The U.S. is right around the middle of the chart at 26.9%. Compared to most developed countries, it’s actually a relatively light burden. I wouldn’t want to live in a lot of the countries at the bottom of the list.
You’re right about being able to massage the tax numbers to whatever you like.
However, the point is that taxes are the biggest burden for most Americans, whether they know it or not. It’s a good idea to figure out tax law and optimize income and expenses to minimize takes.
This post: A Savings Guide Based On The Taxes You Pay is a must read for anybody who pays taxes and wants to save more!
I think the ideal amount to pay is a 25% effective tax rate.
Sam,
Great article as I never added all the taxes up so didn’t realize the total impact of tax is so high. This is the first time I see the result of a thorough study and came up with a number for average family.
I do have one question: why is the effective tax rate 54%? $24,600 tax paid divided by $53,600 total income is 0.46 so shouldn’t it be 46%? What am I missing? Thanks.
Good catch. If you look at the study linked in the article, it is $53,652.50 – 29,034.33 (total taxes paid) = $24,618.17 (remaining for household) = 54.12% effective tax rate. Taxes paid should be the 29k figure with 24.6k left over to spend, invest, save, ….
Great article! Taxes can be sneaky little devils that rear their heads where you (perhaps I should write “I”) least expect it! I’ve almost maxed out my 401 (k), but like mysticaltyger, housing is my biggest expense. Thanks
Amazing that housing is your biggest expense. You should feel GOOD about that.
Feels good about having your biggest expense go to funding your own life.
As much as I don’t like paying taxes, the largest expense for me is housing. Because I contribute a lot of my relatively low income to my 401K, it puts my income low enough that I qualify for the “retivement savings contribution credit” most years. Sure, I’d like taxes to be lower and not wasted, but my small apartment here in the SF Bay Area is most definitely my highest expense.
Well, that was depressing… I wish we lived in some sort of government where the people make the decisions about who gets to spend money. Oh wait we do, the people just don’t care. The downfall of America will be the apathy of her citizens.
I’m glad you covered this! It’s our biggest expense. This article is very timely because we’re unveiling our 2014 expenses next week and I purposely left this category out because our share of taxes is so big that we didn’t want it to distract the readers from the rest of the article. I’ll include a link back to your article. BTW, I’ve been following your blog for a while. We just launched ours last month. Great job on this blog!
Congrats for launching your blog! Would be fun to check out your taxes, if you so dare to show em. I’m doing my taxes now and realized a lot of new taxes I didn’t recognize before.
My wife make slightly more then me. Last year we figured out my entire salary was paid into income tax. This is a sad state of affair :(.
Our country thanks you! Thoughts on the taxation breadth?
It’s just amazed me that years ago, the topic of money is taboo, the topic od taxes saving is only for the rich with teams of accountant/tax lawyers, and with the help of the information technology and internet = voila! Here we are, all of great mind come together in this website and freely discuss about it.
Sale taxes, business taxes are republican father to republican son to continue to preach. You pay the person $1 for his plumbing service, he then use the $1 to buy the a meal at the restaurant. Then the restaurant will pay his employee will then pay for for his son bike, etc. with each stop there is at least 5% sell tax. Of course plumbing services will be more than $1 but just as an example of how republican wants to cut small business taxes to stimulate the consumption economy which is driving the American ecomomy to the ground.
Then come the democrat father to tell the democrats son, we should collect the taxes from the rich to cover the poor, spreading the ecomomy, close the gap. With many porks later. The ss is running out of money by 2030 or so. heheheh and the government will run out of money again in 2 weeks of we don’t raise the debt ceiling.
Say what? You can’t escape death and tax, son. Hihihih
Taxes are part of belonging to a first world country. The article is a joke, if you throw in enough variables then you can make the results anything you want.
I started a side hustle last year & had no clue how ridiculous the tax burden is. Now that I’m paying quarterly estimates, it feels like highway robbery…37% tax rate on profit!?! If I make 100k, pony up for 40k to Uncle Sam….$10,000 dollars pissed down the drain. Guess that’s reality setting in…
I’m still learning the deductions & I opened a SEP IRA, but the taxes are still outrageous. It’s almost as if the government doesn’t want you to succeed as a small business owner. I can’t imagine paying 100k in taxes…my head would explode!
I think It would be awesome to one day pay 100k in taxes. I’d be financing one or two government workers and would’ve made a nice sum of change for myself in the process.
Welcome to self employment taxes, where you pay BOTH ENDS of the FICA tax, whoo hoo! If more people started their own side hustles/businesses, more people would realize how many fees and taxes there are.
For your SEP IRA, remember… 25% of profits before taxes after deductions can be contributed, not revenue, or net profits.
Best income level is ~$200,000.
I learned this the hard way this year as well… I thought I made a decent chunk of change for my age and vertical. Then I had my taxes done… With self employment tax as well as having to pay back 100% of Obamacare subsidies my tax on AGI is a whopping 47%!
I made decent money, paid off all my student loans and bought a used Honda in cash (Compliments to my man Sam!) Then I find out about how we get raped for not having W2 income. Oh well moving forward I know what to expect, just a shock when you first learn.
Maximize them there deductions and IRA’s guys! Keep your head up and we keep on keeping on folks.
Yikes, 47% is a lot man. Here’s hoping to some lower rates in your future. At least you can feel better knowing that you are helping the other half of the population who isn’t pay any or much taxes. Gotta help subsidize for the greater good! :)
“What y’all call money, I pay more in taxes” – Jay Z
Yeah, we should try not to worry about taxes, tax implications, etc. The more money you make, the more taxes you pay. It’s a good problem to have. The taxes we pay, pays for people salaries, etc.
I liked the spirit of this post, though the no-tax ideal is anecdotal. Overall, this encourages me to take up 401(k)s and IRAs with renewed interest and heartily advocate for a more efficient bureaucracy.
Thankfully, more and more people my age (20s & 30s) are politically identifying as Independent (including myself). This allows us to sidestep the quagmire of Democrats being permissive of government waste and Republicans being demeaning towards government initiative. My hope is the conversation will be elevated in the decades to come, and real progress will occur.
Identifying as independent is probably going to grow in trend given the deadlock in government.
Jamin could’ve just written a post highlighting effective ways to reduce one’s tax obligations. That would’ve made his post much more credible. Instead he comes across as being immature by adding his misguided rants about how he feels government is completely incompetent and unjust by taking away his hard earned dollars.
No one enjoys paying taxes, but at the same time people don’t complain about the services they get from the government, their own tax deductions, the jobs created by private employers due to the peace and stable society that’s only possible by having a powerful military and police, and a judicial system that can enforce the rule breakers. Of course it’s not perfect and can be improved, but does Jamin feel other society’s tax rules are better than in USA?
In Austin it is about 2.5-3% but they had been keeping assessed property values artificially low for years. Now that there is a major boom, they “are bringing assessed values more in line with market values” and grabbing more in taxes.
In Texas we have the homestead exemption, which caps the amount the value can be raised but since we bought the house last year – the exemption doesn’t transfer from old owner to us. So bam, 38% increase.
Impressive. The property tax rate is 1.17% in San Francisco, CA and we have Proposition 13 which CAPS property tax growth by at MOST 3% a year (based on an inflation index).
You have people who bought $10 million mansions 70 years ago paying less taxes than new couples buying a $1 million home today.
Yep, taxes are a big drain. Though we don’t have state income tax, the high property taxes are killing us. From last year my property taxes went up 38%…38% in a single year on top of Federal tax, gas, sales, county, city, vehicle registration and inspection, etc. etc. etc. Death and taxes, Franklin had it right!
Whoah, is that possible? A 38% increase seems absurd.
What is the property tax rate in TX?
Great insights Jamin. I must admit I rarely think about tax when I’m looking at cutting expenses, but it’s definitely the most significant (although mortgage has probably taken it over at this point!). I often assume the tax ‘is what it is’, and just fiddle around the edges come tax time, but I’d love to look more closely at this especially if I get around to starting my own business.
I totally agree, they’re out to tax you at every turn! And then it gets BETTER, after you spend the money and it gets taxed, the company you spend the money at gets taxed, then when they pay the employees, it is taxed again and the vicious cycle starts over! What a great world we live in if you’re the government’s tax man!
On a side note, is there an email I can email you at Sam? I’ll be coming out to the Bay Area next weekend (Saturday-Tuesday) to tour Berkeley and maybe we can meet up for lunch and a good old finance/money chat or something! Sounds like you do that occasionally with people here sometimes so if you have time let me know!
Good article, yet I strongly disagree with one of the ways to reduce your tax liability being to max out your 401k or any other tax deferred retirement vehicle. Ideally, by deferring taxes in the future you are reducing your current years taxable income, however, when you are ready to take that money you will be taxed at the “then” tax rate. So will taxes be higher or lower 15 – 20 years from now? Of course the answer is higher (just look at our current government situation and our nation’s history on taxation)! So essentially you are choosing to take a higher tax hit, down the line when you need your money the most, to avoid the smaller tax deduction now.
I know this isn’t the way society teaches you to think (since people are so gung-ho over their 401k and other tax deferred products), but that’s because the government has you right where they want you. Knowing that people love instant gratification, they give you an option to make you feel brief satisfaction, only to wipe the rug from under you later on when they take the majority of your hard earned money in taxes. Win – win right?
Oh by the way, didn’t even mention about 59 1/2 age rule, where you’ll pay a 10% penalty to the government every time you touch the money in your 401k before that age. Question, what’s the likelihood that, at your current age, before you turn 59 1/2, that you have an emergency where you need to take some money from your 401k? Answer, highly likely! Don’t you think the government knows this? You’ll give them 10%, on top of the taxes they take, EVERYTIME you take money!!! Wake up people! Time for a new perspective…
In all fairness Chris, a lot of people believe they will be retired by 59.5 – and a lot of the PF community actually will. If they fall into the 10% bracket from their current 25 or 27% then they will be paying less on the money in the future. You are basing your argument on a thin assumption of the “then” tax rate being higher.
Also, at that rate long term capital gains will be taxed at 0% – the tax code is kind to people smart enough to put money away and retire early. Or does the government have us “where they want us” with that one too. As a former government employee, I can assure you that they are not efficient enough, let alone competent enough, to formulate a grand scale master plan to pull one over on all of us unsuspecting citizens.
Also, by deferring taxes now people are able to put more of that money into the market sooner. Tax deferred investments will grow significantly faster than tax advantaged contributions simply because there is more invested earlier.
So reducing your tax burden with tax advantaged accounts is actually a fantastic way to plan for your golden years if you are going to retire early. So while you think you might have the secret to financial life, I would happily disagree with you – much like many other PF bloggers out there. If you plan on working until 65, maybe post-tax is best for you. It seems to me that the vast majority of serious PF folks will get out of the rat race long before that by consuming less, minimizing expenses, minimizing taxes, and investing wisely.
You make a valid point. It’s one reason, that I only pay 6% to my employer for the 10% match to my 401k (FREE MONEY :D) and don’t take another tax deferred strategy! I’m a huge saver (80-90%) of every paycheck as an engineer but with this I can invest it as I see fit without regulations and not have any higher taxes to deal with later on (where I agree with you, taxes will be much higher in the future than it is now to address our spending problem… and more importantly our growing debt problem). When I retire I also expect my income to be A LOT higher than it is now despite being retired, so the last thing I want is for the government to be able to tax more money at an even higher rate later on!!!
I do disagree with the 401k withdrawal to a degree though. I’m not sure how all the of 401ks work for you guys but here you can borrow up to 50k against yours at the going interest rate and pay yourself the interest and principle! You avoid the taxes, and fee since it’s just a loan so that can help with whatever situation you’re in allowing you to repay it into the 401k so you can withdraw it at retirement time to be taxed! I hate fees though, I heard you still have to pay a couple hundred a quarter in fees to god knows who? But it’s an option, you also get the 10k withdrawal for your first house.
However, for some circumstances (say you lose a job and can’t pay the loan back you would have the 10% fee + taxes I believe). So you’re right in the fact the government will get you!
BUT, for someone unlike me (maybe many of you too) a 401k is good!!! Most people DO NOT save money at all, due to lack of discipline and marketing America having them sold on consumerism! They need those rules and safety account to deter them from spending their money before retirement! For me, it doesn’t matter if the money is in a 401k or a savings account, it’s sole purpose is to be used to invest to make me more money (thus why I save 80-90% – the thought of spending any money irritates me because it can no longer work for me!) and not be spent on consumer items (though I do splurge here or there as I have a decent salary). Of course, it’s all delayed gratification! No point having loads of Benjamin’s if we don’t plan on spending them eventually!!!
BTW, I was chit chatting with a retired portfolio manager in my state who used to make 3-4 million a year and he seemed to think 750k was the perfect salary, where past that there would be no added enjoyment! So alas, someone who didn’t want 3x their salary to feel rich!
Good material, I love reading about money! keep it coming :D
Jon – I respect your point of view about this topic, but I will say that you are in the minority when it comes to saving. Your 80 -90% savings habit far supercedes the rest of the population, where saving 30% is a feat. So your views are a little skewed.
Remember 401k and other deferred products are meant for “retirement” not just for savings purposes. Not only can you not guard yourself from market risk (ala 2008), but the free money that they match is only an incentive to lock you in on taxation and fees. The 401k was created for the employer not the employee. Understand that the employer only receives benefits if a certain % enrolls in the plan, so who really benefits?
I do agree though that Americans have become sold on consumerism, but is it fair for the government to tax and penalize people heavily that try to save? While you may believe the 401k is helping people save, the facts are that 80% of people take money from their 401k before 59 1/2. And most people take the withdrawal out of desperation anyway, so they choose not to use the loan option, because they can’t see themselves ever paying it back. As a result, people take the tax hit and penalty more often than not.
You are a rare case Jon. As I said before not all of us have the advantage of saving 90% of a engineer’s salary! :)
By the way, did you know that no one in government, nor any of the top 10% wealthiest Americans have a 401k??? I wonder why…
I know, I am 100% in the minority here! I’ve been fortunate enough to be able to do some extreme saving which I’m sure won’t hold up forever, but I’m exploiting it while it lasts to boost my savings and investable income! I also agree, 30% seems to be a feat these days (many are happy with 5-10% – just last month my friends dad said save 3-4% a year and you can maybe retire at 60)! But if you starve the beast early you aren’t used to spending more so it doesn’t matter! I also intend on spending it all eventually just have to accumulate my millions first!
You make a valid point on the 401k… but regardless, if I don’t donate I don’t get the 10% match and that’s lost money! So I (as the consumer/investor) is getting a 166.7% immediate return by putting my 6% in! I’m not sure where else you can get that (though I would prefer to just have it paid to me directly lol).
All money is just meant to ensure we can live until we die (or rather have money to spend until then)! So yes, technically the money in the 401k is for retirement but the money I save is for investing in my future (property, stocks, bonds etc) which will benefit me throughout my life and during retirement. That’s one of the reasons I prefer money out now over IRAs, 401k, etc. Flexibility! Then I can invest in real estate, choose stocks without limitations on the number of trades I can do a month etc and more importantly have the money when I want it without limitations or some other entity taking a cut! All about optimization and not allowing any other entity to get my money (taxes are just one form of an entity seizing my money, paying other expenses or fees is the same thing too IMO).
Now, perhaps they lock me in on fees and taxes but I still have to pay taxes on my money. Heck, I could honestly put my 6% in, get the 10% match withdraw it for a 10% fee + taxes and still end up better off than not having donated a penny to the 401k. But it allows for financial advisers to stay relevant and get a % of my wealth. But remember, the system is set up to have the money move as many times as possible in the system to get taxed multiple times! It’s a brilliant scheme, I’m upset I didn’t invent it!
They have been sold on consumerism with it comprising 70% of our economy. No, it is not fair that they penalize savers (I assume you mean the lowly bond interest rates?), it will just end up hurting people later on by them not being able to support themselves! Good thing, Social Security will be solvent until the end of time ;)! However, even with bad incentives I’d rather have the money to spend later than spend it now due to a bad incentive and lose the cash forever (I can still invest in the mean time)!
Hmmm, I’ve never heard the 80% statistic for the withdrawals but I’m not surprised if that’s the case. I hear some 70% live paycheck to paycheck so any small financial setback would put many in need of tapping their 401k to potentially stay afloat. Come to think of it my sister has a 401k and she moved companies and my dad won’t tell her about it out of fear she’ll just withdraw it and spend it now rather than wait until retirement (darn culture of irresponsible Americans!)
I think more people could increase their savings if they truly wanted, they make decisions and live by them (literally paying for it with their money). If you make 100k and do the 30% generic rule you have less money. If you go cheaper and buy a small house you have more discretionary income. Most are unwilling to sacrifice the larger house (among other things)! Heck for me, I would buy a house but the property taxes irritate me! As if living in the community where I live and supporting it financially via other taxes isn’t enough, but I’m extreme and don’t expect anyone else to be like that!
I don’t agree with the government and top 10% on not having a 401k… I was an intern for the Air Force and DOD (government) for 4 years and everyone has a 401k and pension that is full time so I’m not sure where you get that figure! Both my parents are/were engineers for the DOD too (1 is retired), both have pensions and a 401k where they put in 5% and are matched 5%.
Also, checking wikipedia and seeing the stats on the top 10% as a single individual 77.5k puts you in the top 10%, and 118.2k puts you in the top 10% of households. So again, I can comment on the 401k for the top 10% – my parents household is much higher than the top 10% for a household and many of my friends family are higher than that as well and 100% of them have a 401k, then me as a single meets qualifications as well, again 401k. So I’m curious who told you that stat! If you have an incentive for free money, you take it regardless of income!
It’s worth mentioning that self-directed IRAs do allow rental properties, private equity, etc to grow tax-deferred.
I hope everybody makes more money in retirement than while working. But I doubt it, hence my stance against Roth IRAs.