This Illustration shows the misconception that Qualified plans (IRAs, 401Ks, 403b etc.) "Save" you taxes. The so called "Tax Savings" are not savings at all, but merely a deferral (Postponement) of tax payments. The taxes will be paid eventually and most likely at a higher rate. WHO'S PLAN IS THIS? Your's or Uncle Sam's?
NOTE: For ease of calculations the illustration uses a 33.3% "Marginal" tax rate. If your tax rate is lower or higher, the end results will be the same. Only the time frame will change.
If one were to earn 6% over this 30 year period, the accumulation would be $500,000. At 8.1% it would be $750,000 and at 9.6% it would be $1,000,000. Because we want the money to last our lifetime, we only withdraw the interest.
As you can see, at 8.1% withdrawing $60,000 a year, the "Tax Savings" of $60,000 that took 30 years to save, will be paid back in 3 years AND paid again every 3 years as long as the asset exists. If you earned 9.6% you would pay back everything you "Saved" in less than 2 years and every 2 years after that. If you earned 6% it would take 6 years to repay the taxes.
As you can see, at 8.1% withdrawing $60,000 a year, the "Tax Savings" of $60,000 that took 30 years to save, will be paid back in 3 years AND paid again every 3 years as long as the asset exists. If you earned 9.6% you would pay back everything you "Saved" in less than 2 years and every 2 years after that. If you earned 6% it would take 6 years to repay the taxes.
