All Forum Posts by: Alexander Monnin

@Bryan Wilson Here is the formula I derived for calculating an equivalent rate of return for ONE years contribution over a given time period.

y = ((((Pv*(1 + R)^n) / C)^(1 / n)) - 1) *100

R is the assumed rate of return.

C is your after tax dollars of your contribution (since investing in real estate with after tax dollars).  

Pv is your contribution plus the employer match

n is years

@Bryan Wilson I left that out for a reason.  We are looking at how one years contribution grows over time.  At the beginning of your career it makes less sense to use 401k than at the end of your career.  This is why I have the graph.  A better hybrid solution would be to invest in real estate for the first 15  or so years then switch to investing in 401k.  Also, what rate of return do you think is feasible for mutual funds/stocks/etf's?

If you contribute 1000 and get a company match of 1000 you obviously start with 2000.  Assuming 5% return, after 25 years, your initial 1000 is now 6772.71.  If you were to invest that 1000 somewhere else ie real estate at 8% per year you would have 6848.48.  The graph below is an example i did in another thread.  It shows what the real compounded interest rate is for a 401k contribution.  Y axis is average yearly % return and x axis is years.  Notice how the longer you hold the investment, the smaller your average yearly return is.

@Malcolm Douglas Good point. Risk vs Reward is always something to consider. I am  also not advocating either side, i'm just doing the math. 

Why Your 401k Match Is Not What You Think

I am going to do a mathematical example to show you the real return of your 401k contribution.

Let's assume I make $60,000 per year (a modest starting salary for my major). My company matches dollar for dollar my 401k contributions up to 4% of my salary.

4% of 60,000 is 2,400

So if I contribute 2,400 my company adds in another 2,400 to put me at 4,800.

When I graduate from college and get this job, I will be approximately 22.5 years old. If I withdraw this investment when I am 59.5 years old, I will have waited 37 years.

Fv = Pv * (1 + R)^n

Fv = 4800 * (1 + 0.05)^37 (assuming you can make 5% return through stocks/mutual funds)

Fv = 29,190.75

This is the total value of your contribution after 37 years.

We are going to use this value to find the value of each individual dollar after 37 years and call this value “A”.

A = Fv / C

“C” is your after tax dollars. Since most people will want to compare pre tax 401k returns to after tax real estate returns, it make since to find the equivalent after tax value.

According to https://smartasset.com/taxes/income-taxes#xar90xIn5V my total effective income tax is 26.3%. (Make sure you understand the difference between marginal and effective income tax.)

So, $2,400 in 401k would be equal to $1,768.8 in after tax dollars which could be invested in real estate.

C = 2400 - 2400*0.263

C = 1,768.80

Now:

A = 29,190.75 / 1,768.80

A = 16.50

This means that every dollar invested is worth 16.50 dollars after 37 years.

To find the average compounded interest rate (y) for the 37 years we use:

(1 + y)^n = A

Solve for y:

y = A^(1/n) - 1

y = .0787 or 7.87%

This means that from your initial contribution of $2,400 you made a 7.87% return per year for 37 years. Remember, we assumed that you could make 5% return through stocks/mutual funds, so the 401k increased your yearly return by 2.87%.

Or you could view this as the 2,400 contribution provides the exact same return as a 1,768.80 after tax real estate investment that had a 7.87% Internal Rate of Return.

The condensed formula is:

y = ((((Pv*(1 + R)^n) / C)^(1 / n)) - 1) *100

Here's what happens when you plug this function into a graphing calculator with the variables we used.

The Y-axis is the yearly return and the X-axis is the number of years. Notice that the longer you have to wait to withdraw your 401k, the lower your yearly return is. Try it with your own personal variables and sorry this was so long. Also, your yearly return will be less if your company only matches 50 cents on every dollar of yours.

In the last 50 years, the yield curve inverted before every recession.  This happened 7 out of 7 times.  

The yield curve inverts approximately 12 months before the start of a recession (could be more, could be less).  It inverts when short term interest rates are higher than long term interest rates.  

Currently, the yield curve is upward sloped, not inverted.  These are just observations I've made.  In my opinion we are not in a recession yet.

@Justin S. I vote for staying in Brooklyn.  You've already had success there.  Also, could you point me to Adam's profile, If he is anything like Llew, I would love to learn from him.

@Christopher Phillips so if I'm understanding this correctly, the $62 is tax free income correct?  Also, is the $758 deductible from your W-2 income?

@William C. For the referral fee, would the new showing agent completely take over all the work and I receive the 25% of their commission?

@Christopher Phillips @Ivy Wang Thanks for the replies.  This makes more sense now.