Introduction
In a series of articles, The Skilled Investor compares different lifetime financial planning projections for Fran and Fred Frugal to illustrate the relative value of adopting different financial planning strategies. Fran and Fred, both age 30, are a married working couple with $100,000 in combined annual earned income. (See the “Fran and Fred’s Baseline Lifetime Planning Assumptions:” section at the bottom of this article for more information about Fran and Fred’s current personal finances and their other lifetime financial planning assumptions.)
Fran and Fred’s baseline lifetime financial plan is described in an article entitled: “Retirement Savings Needs of Renters — prior to any financial planning improvements.” Obviously, in this baseline scenario Fran and Fran have NOT adopted many of the lifetime financial planning practices that would make it easier to achieve financial success in life.
Improving on Fran and Fred’s lifetime financial plan by using traditional IRA contributions
In their baseline projections without certain financial planning optimizations, Fran and Fred would not utilize any tax-advantaged retirement investment accounts, such as IRA or 401k accounts. The following baseline scenario graphic for Fran and Fred projects their lifetime assets held in taxable accounts. All their assets are held in taxable accounts across their lives, and they do not use tax-deferred investment accounts of any kind.
While it might seem odd to you to develop a baseline lifetime financial plan without traditional IRA contributions, millions of Americans who could afford to make IRA contributions simply do not do so. They put their assets into taxable accounts, and worse, many of them hold excessive cash positions and pay current taxes on interest returns with a large inflationary component.
How much longer could Fran and Fred’s retirement assets last, if they used traditional tax-advantaged IRA retirement accounts?
To find out the answer to this question, Fran and Fred modeled their lifetime cash, bond, and stock fund assets in both taxable accounts and in tax-deferred IRA accounts. In this scenario, Fran and Fred are only evaluating the possible lifetime value of using “traditional IRA” accounts which are currently limited to annual contributions of $4,000 per year, plus an additional $1,000 for over age 50 contributions. Because the tax rules related to IRAs are almost bizarrely complex, we will not go into further detail. The lifetime financial planning tool that Fran and Fred use fully automates these complex rules, so that they can focus [...]