You Do the Math: Goolsbee on Retirement Investing
By Bryan Caplan
After I do my taxes, I often start thinking about retirement planning. Here’s an old NYT column where Austen Goolsbee gives some sage advice:
You probably have not given much thought to political tax risk, however, or perhaps have even heard of it. Yet the purely political question of what will happen to tax rates over the next 30 years has become one of the most important factors in thinking about tax-deferred savings accounts…
Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all.
…Relative to a regular account… a 401(k) gives you a bonus. You get to put money into the account without paying income tax on it this year and you do not have to pay taxes as it builds up. You just pay income tax on the full amount at the very end when you finally pull out the money in retirement.
But the lurking catch is that the tax you will pay on your account will be at the rate in place when you retire, not the rate now. And that may be very different.
Currently, my wife and I max out our 401k-type options. My bet, as usual, is that things will work out pretty well. I don’t think the U.S. is going to raise tax rates by more than 15 percentage-points in my lifetime (though I won’t be surprised if the payroll tax cap goes away).
Still, if there were a convenient Java script somewhere that allowed me to simulate a variety of retirement plans under several different political scenarios, I’d leap at the opportunity to learn from it. Can anyone point me in the right direction?