The Four Pillars of Investing
What to Expect From This Course
Compound interest, diversification, fees and taxes make up the core pillars of a solid investing strategy.
This course consists of:
- 1 Activity (13 minutes)
- 6 Articles (about 1 hour)
You can complete it in about 1-2 hours, or you can spend an hour a week for 2 weeks.
About the Author
Hi, I'm Adam! I help millennials invest to reach financial independence sooner than they ever thought possible. Want to see what you could do to reach FI sooner? You're in the right place!
Vitaliy
May 10, 2020
Adam, you mentioned in the Taxes section: “Withdrawals from a 401K account are taxed at your ordinary income rate – which is usually MUCH higher than the capital gains rate you’d pay on after-tax investments. And also to withdraw from your 401K or IRA first if you can!” — If the taxes are much higher with 401K withdrawals why would you want to with from there first? Is it to get the stand deduction from the income tax? Or is there another explanation. Thank you for your time.
Adam
May 10, 2020
Good question! The answer involves a little math and some assumptions about the future.
If your current tax rate is 24% and you invest $10,000 today in your 401(k), you’re effectively saving $2,400. If you invested $10,000 after taxes, you’d only invest $7,600.
Fast forward 30 years. That $10,000 in your 401(k) has grown to ~$76,000. The $7,600 in your after-tax account has only grown to ~$57,000 (probably even less since you’ll pay taxes on the dividends each year).
The big variable is your tax rate in retirement. If your tax rate was 24% (the same as when working) then you’d pay 24% of $76k, and end up with the same amount in the end as if you have invested in an after-tax account.
The big advantage is that there are ways to lower your tax rate in retirement – either by withdrawing some money from a Roth IRA, withdrawing some money from a taxable account, or lowering your expenses. If you withdraw some money from a Roth IRA instead of a 401(k), your income goes down and you end up in a lower tax bracket.
The same is possible by withdrawing some of your money from taxable accounts or lowering your need for money in retirement. You might be in a tax-bracket today based on your $100,000 income, but after retirement, you may only need $60,000 in spending – lowering your taxes right there since you’re not needing to save money each year anymore.
In other words, you’ll end up with more money after-taxes if your tax rate in retirement is less while working. For most people that’ll be true!