Since 1976 we have all been told that the 401K was the best retirement concept since sliced bread. After all, you get to put money away pre-tax, reducing your current taxes, your employer may even match a portion of it and you will be able to withdraw it when you need it, in retirement, at a lower tax rate than before.

Hogwash! Lets look at the numbers. For the sake of argument you put in the maximum amount allowed into your 401K. Today that is $17,500 if you are under fifty years of age and $23,000 if you are over 60 years of age. The amount you set aside is still subject to social security and medicare tax so we won’t even discuss that issue.

If you are 40 years old and you put $17,500 aside you are probably in the 25% tax bracket which means that contribution saves you $4,375 in income taxes in a year. Do that for the next ten years and you have saved $43,750, always assuming that tax rates stay the same for the next ten years and that the benefit is still available for the next ten years. President Obama has already made suggestions along the line of taxing or limiting your benefit if your account balance could finance an annuity paying $205,000 per year. Currently, for a 60 year old, that would be $3.2 million. You say great, I will never have that sort of money. You will if you saved the money judiciously during your entire working career, or if you are a [union] pension holder, which is another category that the President is talking about taking. [See MarketWatch, September 9, 2013]. For simplicity sake, we will ignore the change in tax rate issue and the loss of the benefit if you save too much. Read More