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Hi ERN community! I built The Saving Menu and I was wondering if you could take a look and see if you could provide any feedback or let me know if it helped you in anyway? Investors often face the questions like "Traditional vs. Roth" or "Pay Mortgage vs. Invest" without much of a quantitative backing. This site tries to help with that and ranks these options along with nearly all other investment vehicles you can put your money in.
Nice tool. Visually very appealing. But I can't say that I'd endorse it because it has some serious flaws in the calculations (which is what really matters).
I entered some sample data ($120k income and married-filing-jointly, WA State resident) and your tool spits out an estimated 30% marginal rate today and 12% in the future. Completely false because it should be 22%/12% federal and 0% state. But even if you work with the 30%/12%, you now rank a Roth IRA and a "traditional 401k" (I presume that means 401k after the employer matching) equally with 3.5 stars. That can't be because of the big gap in marginal tax rates. You'd be MUCH better off deferring taxes in the 401k instead of paying taxes now at such a high rate.
The same error is apparent in your 401 with a match vs. Roth 401k with a match. The Roth 401k is vastly inferior to the regular 401k due to the tax arbitrage, yet, in your tool, both accounts get 5 stars. Doesn't make sense. Not sure what you calculated there, it's all a black-box.
So, in place of your tool, I'd much rather work with a tool that gets the math right, i.e. the tool I built:
https://earlyretirementnow.com/2016/06/22/retirement-account-comparison/
In my tool, all the calculations are completely transparent. No black box.
Of course, my tool is lacking the comparison of investment accounts vs. debt paydown. But you read off the IRR of all of the accounts in my tool and then decide if that IRR with the investment risk is better than getting rid of debt. Maybe subtract a 3-4% risk premium from the investment account and compare it to the debt IRR.
OK, maybe the 30% tax is from the income tax plus payroll tax. But keep in mind that your 401k contributions don't exempt you from income taxes, not FICA, so 22% vs. 12% should be used in the account comparison.
Awesome, thanks BigERN! You're the first person to provide me feedback on the calculation results, so I'm grateful you were able to take a look. To address your points:
(i) Yes, it was the FICA/payroll tax getting you to 30%. The HSA is pre-FICA so it makes that portion relevant but yes in nearly all cases the FICA is unavoidable so I'm going to make the messaging clearer.
(ii) Roth IRA v. Traditional 401k. I am going to add a more detailed rating system than rounding to 0.5. You would see that Trad 401k is actually rated higher in your results, but I do give Roth IRA a slight boost in my calcs because Roth IRA gives you short-term liquidity (being able to withdraw contributions). I know not everyone cares about this flexibility. The black box is an important point. I think there are a lot of people, not you or me, who prefer the black box as opposed to their own calculations. I have used your tool before and appreciate it!
(iii) Roth 401k w/match vs. Traditional 401k w/match...that is indeed a calculation error! Argh! I'll fix
(iv) Thank you!