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Young and hopeful
Old 07-30-2007, 03:20 PM   #1
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Young and hopeful

Hey folks,

DH, 30 and I, 28 have recently made the decision that we'd like to retire early. We decided on age 58 because at that point DH will get full pension, and while I am hoping to retire the same year (at age 56), I'm willing to keep working if necessary. From what I've been reading, it REALLY looks like we have our work cut out for us, and I'd love your opinions on how we're doing so far, and where we could use some improvement. We're currently setting aside 10% (DH) and 15% (Me) in our 401k's (both lifestyle plans) as he gets a great match and I don't. I'm going to check things out in the other forums to see if I can get an idea of how we're doing, and perhaps post a little more if I have additional questions. Glad to be here
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Old 07-30-2007, 04:05 PM   #2
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Welcome to the forum, Cbear. Be sure to read lots of the old threads here, as well as some reading of the usual recommended books.

Yes, you do have your work cut out for you but you are young enough that your goal is more than attaniable. I found that while you are just accumulating in the early years, it almost feels hopeless. But then, almost like magic, you reach a point where compounded returns start to really pile up and the exponential growth is really pretty nice. DW and I didn't really get started til closer to age 40, due to prior educational debts. Now, at 58, the end/beginning is in sight.

Congratulations on setting the goal. It's a big step.
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Old 07-30-2007, 04:52 PM   #3
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Hi Cbear, and welcome!

You might want to check out the current issue of Money magazine. They had a nice story on how much you should save, depending on how much you make and how much you already have saved, to retire early.

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Old 07-30-2007, 05:00 PM   #4
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CBear....

Also remember to put a value on that pension.... My sister is sitting pretty because of her retirement for working 40 years as a teacher.... if not for that, they would be in the crapper as they did not save enough.

You both putting in 15% or so, you will reach it... just learn to LBYM some, but do not go to overboard, live life and enjoy...
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Old 07-30-2007, 05:42 PM   #5
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CBear....

Also remember to put a value on that pension.... My sister is sitting pretty because of her retirement for working 40 years as a teacher.... if not for that, they would be in the crapper as they did not save enough.

You both putting in 15% or so, you will reach it... just learn to LBYM some, but do not go to overboard, live life and enjoy...
Great point TP.
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Old 07-30-2007, 06:48 PM   #6
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Originally Posted by Cbear1883 View Post
Hey folks,

DH, 30 and I, 28 have recently made the decision that we'd like to retire early. We decided on age 58 because at that point DH will get full pension, and while I am hoping to retire the same year (at age 56), I'm willing to keep working if necessary. From what I've been reading, it REALLY looks like we have our work cut out for us, and I'd love your opinions on how we're doing so far, and where we could use some improvement. We're currently setting aside 10% (DH) and 15% (Me) in our 401k's (both lifestyle plans) as he gets a great match and I don't. I'm going to check things out in the other forums to see if I can get an idea of how we're doing, and perhaps post a little more if I have additional questions. Glad to be here
Cbear,

Looks like we're in the same boat. We I ran some #'s using Firecalc and Financial Engines [which is free for me], and showed DW that with us currently saving around 15% of our income, and both pension plans, the soonest we'd be able to retire is when I'm 60 and she's 58. That shocked her into planning mode. So our plan is to do something like (1) increase 401(k) contributions 1% each year for a couple of years, and (2) contribute to Roth IRAs and college funds when the kids are out of daycare and into school. $1200-1400/month in daycare really puts a crimp into saving.

- Alec
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Old 07-30-2007, 07:43 PM   #7
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Welcome to the boards

Yes, you may have your work cut out for you but this pleace is a good source of advice.
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Old 07-30-2007, 10:53 PM   #8
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Welcome to the board. I am sure you will see there is a lot of experience and knowledge available to you; you need only to search for it or ask.

It would appear you are on your way to an early retirement. Remember early is relative so what is early for some may be on-time or late to others so don't sweat the age thing just do it when you are ready..financially as well as emotionally.

One point from your post...
The salary with the best match should be the one with the highest contribution; at least up to the match point. The salary without a match is only deferred from income tax on the annual gains. You might want to consider taking some of the money being placed in this account and open a Roth IRA instead. The tax advantage later on will be a better when you reverse the cash flow and start taking money out.

Good luck and it is nice to have you on the board.
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Old 07-31-2007, 08:37 AM   #9
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Thanks for the replies everyone!
Rich-I have heard that from a lot of people; that all of a sudden it seems like your money starts growing incredibly quickly. If you have any books that you recommend, I'd appreciate any suggestions.

Coach-I'll pick it up today and take a look. I have a subscription to Smart Money which I really enjoy, I'm assuming they're similar?

Tex-OHHH I do! But unfortunately, I'm not sure how MUCH value. I have to look into the literature on what exactly he's looking at so I can get a better idea of how much we'll be getting.

Steve-The reason I'm putting aside more is actually only because I make about 3/4 what he does. He only gets a match on the first 5% of what he puts away. They match $1 for $1 for the first 3% and .50 for $1 for the next 2%, then he also gets 1% automatically put away even if he doesn't save ANYTHING. Anyway, it averages out that they're putting in exactly half of what he is (I hope SOME of that made sense LOL), so it wouldn't benefit us to put any more into his 401k.

Also, I've been reading lately that you want to put as much as you can into tax deferred accounts FIRST, then into IRA's/Mutual funds, etc. Is that wrong? I have an extra $200/mo that I've been putting into a savings with HSBC (5.05 I believe). It's small at the moment, only around $800, but when it gets larger I'd like to move it, but I don't know where.

Regarding your comment about taxes...I am L O S T when it comes to the tax part when I start withdrawing. I get the upfront part, but then I am confused about what will have to be paid, and when, at the time I decide to retire. Also, what I'm going to DO with our 401k's when we reach retirement. These are a few of the reason's I'm here. Plus then when we're ready to start taking SS...ugh it's enough to make your head spin. So anyway that's my (long-winded) story.
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Old 07-31-2007, 03:17 PM   #10
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Originally Posted by Cbear1883 View Post
DH, 30 and I, 28 have recently made the decision that we'd like to retire early. We decided on age 58 because at that point DH will get full pension
...
From what I've been reading, it REALLY looks like we have our work cut out for us
...
We're currently setting aside 10% (DH) and 15% (Me) in our 401k's
Well, I like playing with numbers, so here's a few quick things (btw, if you get into this retirement thing, you'll get to love spreadsheets

At 7% return, saving 15% of your salary yearly will allow you to retire in around 37 years taking 85% of your salary (taking away that 15% off the top). That's without a pension. Of course with a pension included, your actual nest egg can be much smaller (depending on the pension size

Now you're only 28/30, so your salaries will likely change a lot over the years, as will the pension, your savings rate, etc. For example, looking at those above numbers, if you change your rate from 15% to 20%, you can retire in about 30 years, shaving 7 years off the plan. So slight changes can make a big difference.

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Originally Posted by Cbear1883 View Post
If you have any books that you recommend, I'd appreciate any suggestions.
I'd highly suggest the 4 Pillars of Investing (by Bernstein), you can search in Google for it. I think it's an excellent book on how to invest yourself, how asset allocation works etc.

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Originally Posted by Cbear1883 View Post
Tex-OHHH I do! But unfortunately, I'm not sure how MUCH value. I have to look into the literature on what exactly he's looking at so I can get a better idea of how much we'll be getting.
You'll want to assume that over the years the pension could change, but having an idea of how large it will be can help you make your calculations. Also, you'll want to know what happens to the pension if you pick an earlier date.

Also, does the pension plan include anything for health care?

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Originally Posted by Cbear1883 View Post
Also, I've been reading lately that you want to put as much as you can into tax deferred accounts FIRST, then into IRA's/Mutual funds, etc.
Well, an IRA is generally a tax deferred account (401k / IRA are basically the same thing tax wise). Mutual funds are a thing you can buy in any type of account, they're basically groups of stocks.

The three main categories of accounts are:

Tax deferred (401k, IRA, 403b), when getting the money later from these accounts, you pay income tax on it. You pay no tax up front.

Tax free (Roth IRA, Roth 401k), these accounts are somewhat opposites of the Tax deferred accounts. You pay your normal taxes on your money, and then you can fund these accounts. When withdrawing money later in life, you pay no taxes on the money, no matter how much it has grown.

Taxable (Brokerage accounts), these accounts allow you to purchase investments after tax, and then when the investments are sold (or give dividends), they are taxed at a different rate than income (capital gains tax rate, dividend tax rate, etc). This type of account is what you do with your money once you max out the two above types of accounts usually.

So depending on a lot of things (your current income, your future income plans, your tax estimates in retirement), would determine what kind of accounts you want to max out. In most situations it would be best to max out your 401k first, and then worry about all of your other accounts. That's 15.5k right now into each 401k account. Being able to do that usually takes people a long time

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Originally Posted by Cbear1883 View Post
It's small at the moment, only around $800, but when it gets larger I'd like to move it, but I don't know where.
In general, I'd highly recommend index funds (they're a type of mutual fund). Their idea is that they are a large collection of basically all the stocks in a specific sector. They try to match the market in general. The 4 Pillars of Investing book will talk about them.

I believe they're the safest investment, and the most likely to bring you into retirement successfully.

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Regarding your comment about taxes...I am L O S T when it comes to the tax part when I start withdrawing.
Well, thankfully retirement is a long way off It will be good to look into it, but 20+ years can change a lot with the tax code. Who knows what each tax rate will be, what kind of taxes there will be, etc.

In general at this point in your life you want to focus heavily on a few things:

1. Getting your contributions to your 401k up to your maximum as fast as possible. These early investments make a huge difference.

2. Reducing expenses. This will allow #1 to happen, and the lower your expenses, the less money you'll need in retirement.

3. Family planning. Are you going to have kids, or do you have them already? Make sure you're planning for their college expenses, etc, as that can be a huge cost later in life.
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Old 08-01-2007, 09:30 AM   #11
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HobbyDave-Thanks so much for taking the time to explain so much for me!

Quote:
Well, I like playing with numbers, so here's a few quick things (btw, if you get into this retirement thing, you'll get to love spreadsheets
LOL I'm obsessed! I spend (sometimes work) time playing with what-if calculators all day long, mapping out strategies...my husband thinks I'm nuts! He'll thank me later

To answer a few of your questions...

DH works for the USPS, so he gets regular raises and COL increases which will bump the amount he's putting in, and I get a raise annually as well so the picture should change. At the moment we're concentrating all of our extra efforts towards paying off our 2 cars, home equity loan, and then the mortgage. We should be able to do all 4 in 6 years if we really buckle down, I might even throw in my $200/month that I'm saving to shave that time down even more (I quit smoking, so DH said I should keep the money I'm saving as a reward, but no mortgage is rewarding enough ). Once we do that, it will free up over 1100.00/month (yes, we have a very small mortgage!). My question though is, based on our annual incomes, I don't think we could EVER get to a point that we're putting away the annual max. It would be a HUGE chunk of our income put somewhere we'd have NO access to it. So in that case should we be saving in other vehicles? That's what I mean when I ask is it ALWAYS the case that people should max out 401k's first?

Also, he says (I'll double check though!) that the NALC gives it's retired employees and their spouses the option to continue their health insurance permanently. The plan (since my employer pays 100% of my insurance) was to wait until a few years before retirement and put me on his because I have to already be on there when he retires in order to stay on there after retirement. As I said before, he isn't very good at details so I'll have to double check on all of this information, but I'm pretty sure he's right. The only thing I'm worried about is possible health problems in the meantime, and then they won't put me on. Any thoughts?

When it comes to pension...he'll get something if he retires earlier, but 58 for him is full pension. His plan is actually to retire at 57 and use his accumulated vacation (or was it sick) pay to cover his last year. The guy never takes time off, and he said everyone who retires does it, so unless the USPS changes their rules about taking their time, he should be able to take a years retirement, paid. OR, he'll work his last year, and then we'll be covered until closer to 59 1/2. It will all depend on DH's health. Its a very tough job on your knees, ankles and heart (just for starters) and he's already having knee problems, so a lot could change in 30 years.

Also, based on most of the calculations I've done, even with what we're saving now it shouldn't take us 37 years. How did you come up with that amount? (in other words, what am I doing wrong!! LOL) We should have very little expense in retirement fortunately...all he really wants is a small boat and a fishing pole and he'll be happy, and I just want a hammock, a cup of coffee and a good book. We'd love a place on/near a lake somewhere. We're not world travelers or anything like that, but we'd like to have the option if we want to go somewhere every other year or so. Anyway, the kids thing, none right now, and no plans to have any, however I'm not so naive as to think that we'll definitely feel the same way in 5 years...

Thanks again for your help
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Old 08-01-2007, 10:24 AM   #12
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My question though is, based on our annual incomes, I don't think we could EVER get to a point that we're putting away the annual max. It would be a HUGE chunk of our income put somewhere we'd have NO access to it. So in that case should we be saving in other vehicles? That's what I mean when I ask is it ALWAYS the case that people should max out 401k's first?
Since you're young, and probably not making that much money, you should look at contributing to a Roth IRA after you've contributed enough money to the 401(k)'s to get the employer match. That way, no matter what happens to future tax rates [either go up or down], you have hedged your bets. You would have tax-deferred money [401(k)] that would benefit from lower tax rates in retirement/withdrawal, and tax-free money [Roth] that would benefit from higher tax rates in retirement/withdrawal.

Our plan is to:

1) get employer matches
2) max out Roth
3) max out rest of 401(k)'s

4) contribute to taxable accounts and college savings plans

If your 401(k)'s have pretty high expenses [like expense ratio over 1.5%], then after contributing to get the employer match, it is generally better to contribute to a tax-efficient stock index fund in a taxable account rather than maxing out the 401(k) [i.e. skip #3].

- Alec
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Old 08-01-2007, 11:27 AM   #13
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HobbyDave-Thanks so much for taking the time to explain so much for me!
No problem, I enjoy spending time at this, rather than doing my real work

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Originally Posted by Cbear1883 View Post
At the moment we're concentrating all of our extra efforts towards paying off our 2 cars, home equity loan, and then the mortgage.
One suggestion if you're not doing it already, I'd put aside an automatic transfer of funds into a high yield savings account to pay for your next cars in cash. I'm not sure how fast you go through cars, how new they are, etc, but even more than getting rid of your current car loans, you'll want to make sure you never have car loans again.

So I actually have our last car loan still sitting there making payments on it, but we also have around $16k saved for purchasing a new car (or used more likely) in cash once one of ours dies.

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Originally Posted by Cbear1883 View Post
My question though is, based on our annual incomes, I don't think we could EVER get to a point that we're putting away the annual max. It would be a HUGE chunk of our income put somewhere we'd have NO access to it. So in that case should we be saving in other vehicles? That's what I mean when I ask is it ALWAYS the case that people should max out 401k's first?
Well, since your incomes are low and may stay low, as someone mentioned, a ROTH Ira would be a fine investment choice. A brief explanation:

Lets say you make 40k, and you pay 10k in taxes on that 40k of income. Now in retirement, you could pull 40k from your 401k, and would again pay 10k in taxes (since 401k money is treated as income). Or you could instead pull 20k from your 401k (paying little to no taxes), and pull 20k from your Roth IRA (non taxed).

Now the best thing is that you never paid taxes on that 401k money. The Roth IRA money was taxed in the past, so again you are paying no taxes currently.

Now there is an argument that the 401k is still more efficient in the end than a Roth with current tax rates, but as tax rates may increase in the future, it may be a good idea to pay your taxes now rather than later

In general, for tax flexibility in the future, it is good to have your investments in multiple types of accounts. It will allow you to increase/decrease your tax burdens year by year as your need allows.

My recommendations:

1. If possible, see if you can get your expenses to be lower than either of your salaries. That will give you a huge security blanket, that if one of you loses their job, the other job can cover expenses.

2. Get an emergency fund of at least 3 months expenses. My wife and I are 29/30, so we're around the same age, also with no kids. I think around 3 months expenses is good enough, as you don't have kids and therefore should be somewhat flexible with your expenses. Paying off your debts will also help make you more financially secure, as will #1 above.

3. Max out your 401k match (as you're doing).

4. Max out yours & your husbands Roth IRAs.

5. If you have extra funds, put them into your 401k, Taxable account, emergency fund, etc. Likely this won't be a huge problem for a number of years.

Quote:
Originally Posted by Cbear1883 View Post
Also, he says (I'll double check though!) that the NALC gives it's retired employees and their spouses the option to continue their health insurance permanently.
Does this require retiring at full retirement age? That will be a big if. As your plans could change drastically, you will want to look into all options, including what happens if he retires at age 47, 50, etc.

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The only thing I'm worried about is possible health problems in the meantime, and then they won't put me on.
Well, I'm not a health insurance expert, but I thought if you were married and the insurance was company provided, that they were forced to cover you no matter what (it's not like buying on the open market, where people could just refuse you). So I would think that you could always switch over to his insurance, no questions asked. That's certainly something you'll want to look into.

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Originally Posted by Cbear1883 View Post
When it comes to pension...he'll get something if he retires earlier, but 58 for him is full pension. His plan is actually to retire at 57 and use his accumulated vacation (or was it sick) pay to cover his last year.
...
Its a very tough job on your knees, ankles and heart (just for starters) and he's already having knee problems, so a lot could change in 30 years.
Well as you said, a lot can change. If your savings rate increases (once the money starts growing, it becomes somewhat addictive to save extra), you could end up with enough funds to retire earlier. I don't think either of you would be upset if you found you could retire at age 50 instead of 57

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Originally Posted by Cbear1883 View Post
Also, based on most of the calculations I've done, even with what we're saving now it shouldn't take us 37 years. How did you come up with that amount? (in other words, what am I doing wrong!! LOL)
Well, again remember that I'm not counting in your pension at all. This is very very general numbers, no taxes, expense changes, etc included.

Take 100,000 (the amount doesn't matter, as this calculation is all about percents)
Assumptions: You save 15%, your expenses are 85%, and your investments increase at 7% per year, no inflation included (it's probably more realistic to assume 5% with no inflation per year, but you also will likely save more each year, so I'm calling it a wash). Your expenses in retirement will be the same as they were while working.

After year 1, you will save 15,000.
After year 2, you will have (15,000 * 1.07 = 16050) + 15,000 = 31050
After Year 3, you will have (31050 * 1.07 = 33223.5) + 15,000
etc etc,
After year 36, you will have about $2233701.90.

Taking 4% off that amount per year would yield about 89348.076 per year, which is right around those expenses. So in year 37 you could retire.

There are lots and lots of ways to calculate this information, and this is about as simple as it gets (and least accurate). The best thing to do is to play with the FIRECalc tool (link is on the bottom-right of the message board pages). That takes into account a lot more options.

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Originally Posted by Cbear1883 View Post
We should have very little expense in retirement fortunately...all he really wants is a small boat and a fishing pole and he'll be happy, and I just want a hammock, a cup of coffee and a good book. We'd love a place on/near a lake somewhere. We're not world travelers or anything like that, but we'd like to have the option if we want to go somewhere every other year or so. Anyway, the kids thing, none right now, and no plans to have any, however I'm not so naive as to think that we'll definitely feel the same way in 5 years...
Well, of course this can make a large difference in your retirement plans as well. If you live near a city now, your expenses could drop once you move to the country. For example, my parents have a place on a lake in northern Wisconsin where they plan on retiring. It's a wonderful place to fish / swim / water ski / read. And since you're at least 15 minutes (well, I've timed myself at 8 minutes when I was younger, but don't tell the cops) from the nearest tiny town, you're unlikely to blow lots of money at shops. So that type of retirement lifestyle could certainly be cheap.

As I mentioned above, my wife and I are 29/30, and we're also not planning on kids (but not completely crossing them off the list). That makes a very large difference in our savings rate and our future expenses. We could have a whole different long conversation about having kids or not

Anyway, I think I've blabbed enough and I don't think I missed any of your questions
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Old 08-01-2007, 02:21 PM   #14
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Since you're young, and probably not making that much money, you should look at contributing to a Roth IRA after you've contributed enough money to the 401(k)'s to get the employer match. That way, no matter what happens to future tax rates [either go up or down], you have hedged your bets. You would have tax-deferred money [401(k)] that would benefit from lower tax rates in retirement/withdrawal, and tax-free money [Roth] that would benefit from higher tax rates in retirement/withdrawal.

Our plan is to:

1) get employer matches
2) max out Roth
3) max out rest of 401(k)'s

4) contribute to taxable accounts and college savings plans

If your 401(k)'s have pretty high expenses [like expense ratio over 1.5%], then after contributing to get the employer match, it is generally better to contribute to a tax-efficient stock index fund in a taxable account rather than maxing out the 401(k) [i.e. skip #3].

- Alec

I recommend something kind of like this but a bit different...

1> Get employer match

2> Put money into 401(k) until you get to the bottom of the 25% tax bracket (for some of my friends, that is not a lot of money)

3> Put money into ROTHs...

4> Put money into taxable accounts....


I NEVER tell anybody to max out a 401(k) unless they are in a higher tax bracket... it makes no sense to put money in there when all you are saving is 15% marginal...
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Old 08-01-2007, 02:30 PM   #15
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I NEVER tell anybody to max out a 401(k) unless they are in a higher tax bracket... it makes no sense to put money in there when all you are saving is 15% marginal...
Well, the explanation I received was that if you're in a 15% bracket right now, you're likely to be in that bracket (or lower) when retired (since most people don't head upwards in brackets). So you still would rather pay taxes later than now.
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