Investment – The Well Tempered Investor

Finding the Right Allocation Between Taxable Account & 401(k) for Early Retirement

Executive Summary

Allocating savings between taxable accounts and 401(k)s significantly impacts retirement flexibility and tax efficiency. While 401(k)s offer tax deferral and employer matches, all withdrawals are fully taxable, and withdrawals before age 59½ incur a 10% penalty. Analysis of four account allocation models across four different scenarios shows that a strategy of contributing to the 401(k) up to the employer match and investing the remainder in a taxable account, consistently maximizes net balances, preserves tax-deferred growth, and provides liquidity for large or unexpected expenses, making it the most effective approach for early retirement readiness and for handling various contingencies in life.

Introduction

Many individuals invest in employer-sponsored retirement accounts, such as a 401(k), but often it becomes their only significant financial asset. While 401(k)s and other employer-sponsored retirement accounts offer tax-deferred growth and employer matches, these benefits come with restrictions. Withdrawals made before age 59½ incur not only ordinary income taxes but also a 10% penalty.

The Roth Conversion Dilemma: Its Gains, Risks, and Strategy

Introduction

A Roth conversion is a process of transferring funds from a traditional retirement account like a Traditional IRA into a Roth IRA. The amount converted is subject to income tax in the year of the conversion, but once in the Roth IRA, future earnings and withdrawals are tax-free. The intent of the conversion is to reduce future tax payments by paying tax early at a lower rate, anticipating a higher future tax rate.

The conventional approach to Roth conversion assumes that it is beneficial only if the tax rate at withdrawal is expected to be higher than at conversion. However, this criterion has limitations, as it overlooks the fact that a Roth conversion can still make gains even if the withdrawal tax rate is slightly lower than the conversion rate, due to tax drag from reinvested required minimum distributions (RMDs).

Saving for Retirement – How to Practice Future Preference in a Culture Focused on the Present

In his book Tragedy and Hope, Carroll Quigley argues that for a civilization to prosper, two key conditions must be met: individuals delaying gratification and their having unlimited material desires. He refers to the former as “future preference,” which will be the focus of this article in relation to personal finance.

The Role of Future Preference in Early American Culture and its Decline

According to Quigley, early American settlers, many of whom adhered to the Puritan faith, exhibited a strong future preference, which contributed significantly to the development of the United States. The values they cultivated during the 17th century including hard work, self-discipline, and cooperation, continued to shape American culture well into the late 19th century.

However, since the 20th century, cultural shifts have eroded these values. Such changes are evident in literary works like The Sun Also Rises by Ernest Hemingway. The novel centers around a group of American expatriates in Paris who, disillusioned after World War I, spend their time drinking expensive wine day after day and living leisurely. Although the book was published in the 1920s, this culture of “living for the moment” persists today.

Cycles of Democratic-Republican Presidencies and Economic Performance – Why do Democrats Perform Better?

Presidents often like to take credit for stock market performance. During his term, President Trump, a Republican, frequently highlighted the rise in stock prices. The Trump administration achieved notable economic success, boasting annualized returns of 13.7%, placing him among the top performers compared to past presidents. However, one may be surprised to find that it is an anomaly for a Republican president to achieve high economic success, since Democratic presidencies have historically shown a pattern of significantly higher performance compared to Republican administrations.

This article discusses a 2020 research on stock returns and presidency conducted by the University of Chicago professors Lubos Pastor and Pietro Veronesi. It delves into the reasons behind the economy’s stronger performance under Democratic leadership, and discusses the research’s implications concerning the 2024 presidential election and beyond.

Devil’s Tactic – How Influencers Deceive Their Audience

As social media became widespread, some users have gained a large following, sometimes in the millions. As they often appear accessible, such as broadcasting from their homes and personally responding to their audience’s comments, people tend to trust them relatively easily. Consequently, companies have started to see these influencers as a valuable channel through which to promote their products.

I used to watch videos on men’s style regularly on Youtube when I was learning about classic clothing like suits. Unlike programs on television that appear over-produced, those on YouTube appeared more genuine and personable. Naively, I believed YouTube personalities were creating videos solely for the benefit of viewers. One such influencer recommended a belt with micro adjustments on its reverse side, promising the perfect fit at all times. After learning useful men’s style rules and tips from him, I didn’t hesitate to purchase this belt, thinking, “If this influencer is recommending it, it must be a great product.”