Optimizing Retirement Savings

Abstract

In this article, the authors compare five retirement saving choices, namely, the employer match plan (like the SIMPLE or 401-k), the traditional IRA, the Roth IRA, a tax-deferred annuity, and a simple savings plan with no tax benefits. They show that employer match plans are usually but not always the most beneficial alternative for maximizing post-retirement income. They argue that, for certain combinations of pre- and post-retirement tax rates, the Roth IRA can be shown to be superior to all other choices, including the employer match plans. While circumstances under which the Roth is shown to be superior to an employer match plan are uncommon, the fact that this can occur at all is contrary to conventional wisdom.