401k, Traditional IRA And Roth IRA Savings Not The Same


Almost every week, I read an article telling me how big of a nest egg I need to retire comfortably, and almost every time, I think about my own retirement funds and try to compare it to the guidelines. Yet, every single time, I ask myself:

Is the retirement savings being referred to a post or pretax amount?

It seems like minor detail, which makes the point all the more important. Pretax retirement savings does not equal post tax funds. Make sure you take this into account when you do your retirement planning, or risk a true awakening when you can least afford it.

ira vs roth vs 401kWhat I’m saying sounds obvious now, but many people seem to forget that taxes will eat up a good portion of the 401k. Just because you have $30,000 in the plan doesn’t equate to the same amount in your online savings account.

How You Should Look at Your Retirement

When I do a quick tally of my retirement savings, I discount 40% of any account that will still be taxed. For example, any retirement accounts like the SEP IRA, Traditional IRA, and 401k is worth less than the number you see on your statement. Others, like the Roth IRA or your taxable investment account, is worth the full amount. This sounds trivial, but let’s use a hypothetical example to drive home this important point. Let’s say that Joe has the following saved up:

  1. Traditional IRA (rolled over from previous work)- $60,000
  2. 401k – $22,000
  3. Roth IRA – $8,000
  4. Savings – $8,000

Total = $98,000

Having close to $100,000 for retirement already saved up is a substantial amount, but is it really that much? If we discount the taxes that he will incur come retirement, the numbers become (I just take a simple 30% off as a quick, dirty and conservative way of doing this):

  1. Traditional IRA – $48,000
  2. 401k – $17,600
  3. Roth IRA – $8,000
  4. Savings – $8,000

Total = $81,600

$81,600 is not too shabby, but it’s not quite $100,000.

Okay, You Have My Attention, Now What

Even though the point I’m making is fairly obvious, many of us don’t think about the true value of our nest egg when we just glance at our 401k and IRA statements every quarter. If you are actively planning for your retirement, I strongly suggest doing a similar calculation and see if you are still on track. If anything, you will be more conservative and have more money to spend in retirement – hardly a bad situation.

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