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401k "Shaft" Detector.

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401k "Shaft" Detector.


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This article was first posted July 1, 1999. Revised July 22, 1999.

See also, "Are you getting the shaft in your 401k?"

The Retire Early 401k "Shaft" Detector is a spreadsheet offering a quick and easy way to determine if your 401k plan is the best vehicle for retirement savings. Happily, most are. However, if your employer doesn't match your contributions and the 401k plan has average to high fees and expenses, you might actually be better off saving for retirement in a taxable account, or God forbid, a variable annuity.

Download Microsoft Excel Version,
(32k zip file, expands to 78k Excel file)
Release date: 07/17/99

Note: you'll need pkunzip.exe to unzip the file once you download it.


User Instructions.

The Retire Early 401k "Shaft" Detector spreadsheet is shown below (Figure 1.). There are 16 input parameters that the user must define in the second column of the spreadsheet. Each of the 16 parameters are explained in detail below Figure 1.

The spreadsheet assumes a 30 year accumulation phase and a 20 year distribution phase. (In other words, 30 years working, 20 years retired.) The results will vary with periods of different lengths. The key parameter is the "Total of After-Tax Income during Distribution Phase." If the spreadsheet calculates a higher after tax income for either a taxable account or a variable annuity, the message "You've been shafted in your 401k" is prominently displayed in the Results column.

You may want to print this page so that you can refer to these instructions while you work with the retirement planning spreadsheet.

Figure 1.


The Retire Early Home Page
401k "Shaft" Detector.
Version 1.1 Release Date: July 17, 1999
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This spreadsheet determines if you should invest through your 401k plan
or if a taxable account would actually be better. If your 401k plan fees
are too high, they may actually negate the tax advantages of a 401k.
If you recieve a significant portion of your investment return in the form of
interest of dividends, then a low fee variable annuity might be attractive.
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For simplicity, the annual contribution is assumed to be made mid-year. This
approximates the effect of regular weekly or monthly contributions.
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Salary $40,000 Enter your current salary.
% increase 5.0% Enter your estimated annual salary increase.
.. .
Yearly Contrib. 10.0% % of salary to either 401k or taxable account
Company Match 0.0% % of salary (401k only)
.. .
Plan Fees, Commissions and Expenses
401k Plan 1.80% Total annual expense ratio during accumulation phase.
401k Plan 0.18% Total annual expense ratio during distribution phase.
Taxable Acct. 0.18% Total annual expense ratio during accumulation phase.
Taxable Acct. 0.18% Total annual expense ratio during distribution phase.
Variable Annuity 0.58% Total annual expense ratio during accumulation phase.
Variable Annuity 0.58% Total annual expense ratio during distribution phase.
.. .
Tax Rates
Income Tax 28% during accumulation phase.
Income Tax 28% during distribution phase.
Capital Gains 20% during accumulation phase.
Capital Gains 20% during distribution phase.
.. .
Investment Return
Capital Apprec. 9.00% .
Dividends and Interest 1.00% .
. ________ .
Total Return 10.00% .

Input parameters.

Salary. Wage or salary income. Include bonuses and overtime.
% increase. Annual average salary increase you expect over your working lifetime.
Yearly Contrib. % of salary to either 401k, taxable account, or variable annuity.
Company Match. % of salary your company matches (401k only.)

Plan Fees, Commissions and Expenses
401k Plan. Total annual expense ratio during accumulation phase. (Make sure you include all expenses not paid by your employer.)
401k Plan. Total annual expense ratio during distribution phase. (It's very likely you can reduce your expenses once you retire by rolling over your 401k into an IRA. The 0.18% expense ratio shown assumes an investment in the Vanguard S&P500 Index Fund.)
Taxable Acct. Total annual expense ratio during accumulation phase.
Taxable Acct. Total annual expense ratio during distribution phase.
Variable Annuity. Total annual expense ratio during accumulation phase. (The 0.58% expense ratio shown is representative of a Vanguard Variable Annuity. Don't let an insurance salesman talk you into something with higher fees and expenses. Never pay a load or buy a variable annuity with a surrender charge.)
Variable Annuity. Total annual expense ratio during distribution phase.

Tax Rates
Income Tax during accumulation phase. (Include Federal State and Local income taxes.)
Income Tax during distribution phase.
Capital Gainsduring accumulation phase. (For most people it's 20%, unless your in the 15% income tax bracket, then it's 10%.)
Capital Gains during distribution phase.

Investment Return
Capital Appreciation. From a tax standpoint, you're better off getting your investment return as capital gains rather than interest and dividends. That's why long-term buy and hold equity investors have historically done well. The 9% capital appreciation, 1% dividends and interest shown is representative of an S&P500 Index Fund.
Interest and Dividends If you get a large portion of your return from interest and dividends, a variable annuity may offer more after-tax income in retirement than a taxable account.
Total Return Sum of capital appreciation and interest and dividends. The return on the S%P500 since 1926 has averaged between 10% to 11% per annum.

Run some scenarios.

The 401k Shaft Detector allows you to input different parameters and see the results immediately. Find the lowest fee investments available and make your own calculation.


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Copyright 1999 John P. Greaney, All rights reserved.

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