With traditional 401(k)s, by contrast, account holders get to deduct their contributions from their income, but taxes are due when those funds are withdrawn, usually during retirement and at a lower tax rate because the saver is no longer working. Beshears: What we found is that people didn’t save any differently, in the sense that they still had the same total contribution rate. But it makes a big difference if you’re doing it in the traditional 401(k) or the Roth. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. Beshears: Indeed, it’s just a difference of whether you’re paying your taxes now or later. With the Roth 401(k), you’re paying the taxes now. WSJ: Do you recommend the Roth 401(k) over the traditional pretax option? If people have a rule of thumb for the number of dollars they put into these savings vehicles, the exact same implications follow. Traditional 401(k): Study Finds a Clear Winner” first appeared in The Wall Street Journal.
Saving for retirement is often a matter of making sacrifices. After all, the money you lock away in savings could otherwise be used for discretionary purposes while you’re young. You might, for example, opt to use that money for travel, or buy yourself more flexibility in covering your living expenses during your working years. But if you’re willing to forego some instant gratification in favor of a more responsible approach to savings, you stand to benefit tremendously when retirement rolls around.
You’ll need more retirement income than you think
Giving up near-term luxuries to save for retirement is a hard sell for 20- and 30-somethings. And it makes sense. When you’re staring down a hefty housing payment, mounting expenses, and a pile of student debt, the idea of putting your discretionary income aside for the future might seem downright unrealistic. After all, how much should you really be expected to give up just to have a little extra cash on hand down the line?
Here’s the thing, though: Retirement probably won’t be the low-cost, easy breezy existence you’re expecting it to be. In fact, younger workers are often shocked to learn just how expensive retirement can be. Healthcare alone might set you back close to $9,500 a year over a 20-year retirement. And even if you manage to pay off your mortgage in time for retirement, there’s a good chance you’ll still be looking at close to $1,000 a month for housing when you factor in property taxes, insurance, and maintenance. In fact, you might face so many expenses in retirement that you wind up needing more money as a senior than you did during your working years.
Not convinced? Then consider this: According to the Employee Benefit Research Institute, 46% of households spend more money, not less, during the early years of retirement. For 33% of households, this trend lasts a solid six years. And roughly 25% of households wind up needing more than 120% of what they previously spent each year prior to retirement. When you think about giving up that weekly takeout order or annual vacation to buy yourself more financial freedom in the future, remember that doing so might end up being a matter…