What am I missing?

[bnyurb]

Interested in investing in retirement accounts but have some general concerns. Haven't found much online searching about this, so feeling like I'm missing something big. Hoping to get your thoughts.

- Everything I read says something along the lines of 'take any 30y period of the stock market and it will always go up ~7%', so basically ignore market crashes and ride it out. Great! I'm on board with that, is it really fair to say the trends of the past 100 years apply to the next 30? Population growth from 100 million to 300 million. Cities were born and expanded - many to near max capacity. Women entered the workforce. Personal transportation. Internet and Globalism. Tons of expansion and growth. What's next - I don't know, but probably there is LESS room for growth than the past 100 years, no? Then again, maybe we'll ignore climate change, we will continue consumption at current rates and the population will boom to 500 million in 30 years as predicted and growth will continue?

- Also, I am wondering about potential future tax brackets. Right now I am at or near the top tax bracket. Historically I would have paid much more in taxes. Average for top tax bracket of past 100 years is >60%. https://www.google.com/url?sa=i&rct...aw3y-ThfA21nmdnbbeybKzU7&ust=1574700684992508

I realize anything can happen, so tax diversification is important with mix of retirement accounts, but historically I should be jumping on these low rates and doing backdoor Roth as much as possible right now, right? If I take out $200k/year from retirement accounts in the future, historically I would pay more in taxes on that 200k than I do currently at a much higher income, so I would imagine that it would be safest to pay those taxes now.

- After maxing out Roth, what about traditional retirement accounts vs just a HYSB. So right now say I have 'X' money and since I have it now, I can use it now for 'X' purchasing power. Put that in a high yield savings bank at 1.5-2% interest which offsets inflation and next year I have the same X purchasing power. This is money I can take out anytime I want, is insured, and can't decrease in value. CDs would be similar, except I can access it "almost" anytime.

say instead I put that money in a traditional retirement account pre-tax at 'presumed' 7% growth-2% inflation so I get 5%, compounded = 2.65X purchasing power in 20 years, take that out at historical average taxation on 200k/yr of 60% = 1.06X purchasing power. 6% purchasing power increase on my money... that I can't access any time I want, that can decrease in value, market can crash and delay my retirement, etc. That sounds like a terrible deal.

EDIT: I guess I'm reading that I should expect 7% return, and therefore putting my money in retirement accounts is a no brainer and that if I don't - I'm an idiot. I am no to sure, and wondering if my thoughts are off base - are my numbers off, am I missing some piece of information, should I be wrong to worry about the past 100 years not being applicable to the next 30? Nobody I know talks about this stuff so thought this group might have some opinions. Thanks for your time

 

[bnyurb]

@slaney4 I guess I'm reading that I should expect 7% return, and therefore putting my money in retirement accounts is a no brainer and that if I don't - I'm an idiot. I thought about it and seemed more like meh maybe it will work out, so there is some discrepancy there and wondering if my thoughts are off base - are my numbers off, am I missing some piece of information, should I be wrong to worry about the past 100 years not being applicable to the next 30? Nobody I know talks about this stuff so thought this group might have some opinions

 

[briantheguydude]

@bnyurb Historical return is closer to 10% not accounting for inflation so your numbers are off. So it’s 7% after inflation and yields 3.87x instead of 2.65x.

You’re also not accounting for dividends gain from your stocks over that duration, which will also amplify your investment,

 

[champion11]

@bnyurb There has been more discussion lately around here and other subs that 7% is probably not sustainable going forward, so it would be prudent to run your plan through with 3-4% returns.

https://engaging-data.com/visualizing-4-rule/

There are ways to mitigate risk of running out of money, one is the concept of “Consumption Smoothing” where you take more returns in good years, and put the money into savings, and less in down years, and using the money you put away during the good years. It increases your chances of money lasting throughout your life.

EDIT: BTW the 7% growth is including inflation. The S&P500 grows at 9% historically.

 

[slaney4]

@bnyurb The way I think about it is this. Companies exist to make money, and if they don’t, they fail. People that work on those companies, produce value. If they don’t, they get terminated. Thus, by owning companies (shares in the stock market), I am likely to make money in the long run. Can anyone guarantee that? Absolutely not. But, chances are that it will. Otherwise, there’d be a future with no jobs or business opportunities. Given human ambition and intelligence, I say chances are in my favor.

 

[han_solo]

@bnyurb You CANNOT assume that you will earn 7% from equities in a 30-year period. A better bet, however, is that equities will at least do no worse than any other major classes of investments over a 30 year periods. And, if you have a globally diversified portfolio of equities, I think it’s a great bet that equities will outperform fixed income.

I think it would be unwise to do Roth conversions when you’re already in a high tax bracket. If Congress gets close to jacking up rates, then you can think about it. We’re not there yet. For now, keep an even mix of Roth and traditional IRA assets, and since you’re already in a high tax bracket, you should favor traditional contributions.

The problem with the HYSA is that you’re paying taxes on your interest in a taxable account. Virtually all your fixed income portfolio should be in retirement accounts to shield the income from taxes. Taxable accounts should favor assets that have more capital gain appreciation.

I’m not sure where you’re getting 60% taxes on $200k of income. Maybe back in the 1950s there was an all in tax rate of 60% on $200k (back when $200k was a lot of money!). But today, the total marginal rate is nowhere near that, especially for a married household and especially since IRA distributions which don’t have social security taxes.

Net-net... a lot of your assumptions appear to be based on your assumption (paranoia?) that Congress will completely change the tax income system for upper-middle class households. All I can say is: stop making this fear almost the entire basis of your wealth management plan. It’s just not a good assumption, and you could make a lot of bad decisions if you make this fear the entire driver of your actions.