Growth Rates of My 401(k) vs Taxable Accounts

While working on my update on reducing 401k contributions to raise more cash I came up with an additional chart that I think is very telling. This chart is mapping my 401k balance against my Net Cash + Value of Taxable Stock Accounts.

Part of the problem of benchmarking my 401k balance vs my net cash is that alot of my cash gets tucked into stock investments. If we add the the 2 buckets together we can see if the growth rate of my net "fairly liquid" savings (cash + stocks) is matching my 401k growth.

Short answer is no. Ofcourse there are logical explanations -- I bought a house and an engagement ring last year. However I have some catching up to do. This just reinforces that I need to put less in my 401(k) at least till I can restore the growth rate to match that of my 401(k).

Related in 401(k):

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Comments (9)


Does your cash amount include cash you are holding onto in Savings Accounts due to your 0% Balance Transfer Strategy?

Good question -- shoudl have clarified -- its net cash so I took my total cash + savings and backed out my 0% credit card liabilities.

I did a similar analysis which led to me boosting my 403b contributions to the max.

Hi, does your 401(k) graph account for the fact that the Income Tax on the 401(k) balance will be due when you cash it out?

Don't underestimate the tax savings of maxing out your 401k. I have a somewhat active strategy in my tax deferred accounts (401k and IRA) that has my performance above my taxable accounts by close to 3%. If I followed same strategy in taxable accounts it'd be way worse because of high marginal tax rates, so perversely (I suppose) I am much more active in my "long term investment accounts" than my taxable one's. The tax burden is so onerous it makes you want to trade as little as possible.

I'm still a bit confused. What is your overall objective here? Is it to raise your net worth, or raise extra cash for short-term needs (wedding, new house, etc.)? Based on the post I'm getting the assumption that you're trying to match growth rates and balances, but it's not clear.

Bingo. If anything the growth rate of the net cash & teaxable "liquid" investments should be higher than that of my 401k since all my short term and long term expenses (wedding, house, cars, kids tuition) will all be coming from that bucket. I am looking for a roughly 50/50 split of tax deferred and taxable money as part of my net worth. This clearly isn't the case and i need to make some adjustments.

I think you have your logic backwards here. If you want to increase net worth, you should put more money into the "strategy" that is out-performing, not less.

My guess is that the 401k is outpacing because it is almost completely in stocks, it doesn't have to pay taxes each year, and your contributions have been consistent, and you haven't made withdrawals. Your "cash + investments" have had to deal with all of these things.

I don't understand why you'd assume that your taxable accounts would ever be able to match your non-taxable accounts without much higher contributions to the taxable accounts.

I'm not sure why you are comparing the two. Do you have some need for money in the taxable accounts?

A follow-up question to your discussion from last year.

I have maxed out my pre-tax contributions for my employer's 401k program this year. My employer's 401k program also allows employees to contribute nearly $30,000 in after-tax contributions. For the after-tax contributions, they can be withdrawn at any time and there are no penalties.
Would you recommend either (1) making the after-tax contributions to my employers 401k program, or (2) investing in low-cost mutual funds with small fees?

The benefits of the after-tax contributions to the 401k are: (1) I don't have to pay any of the fees associated with mutual funds because the after-tax contributions are withdrawn directly from my paycheck and (2) I've been happy with the returns on my 401k the past 3 or 4 years. The downside of the after-tax contributions is that they are, I believe, taxed as ordinary income when they are withdrawn.

The benefit of the mutual funds is that they are taxed at the lower capital gains rate when they are withdrawn. However, these mutual funds have larger fees associated with them.

What would you recommend for someone in my situation--i.e. someone who is in their late 20s and has disposable income available for investing. I'm not sure which approach makes the most sense from a long-term investment growth standpoint.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
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