These caps force people to put money in either the 401(k)/403(b), or into a Traditional IRA. One hopes that the introduction of the Roth 401(k)/403(b) will actually take off (http://www.roth401k.com/). Another problem with the Roth IRA is the very low maximum contribution limit per year. I don’t think it is unreasonable to assume that a person starting out will need to set aside 25% of their gross income each year for retirement, meaning one hits the contribution limits for IRAs.

Finally, even though we will probably get the short end w/re to taxes, keep in mind that the tax-deferred growth of your savings might be much higher than would be possible in direct, non tax-sheltered, investments. That shelter can make a big difference, especially with the expectation that stock returns will be lower in the next few decades than they have been in the previous few.

and to your third point, there have been many millionaires and billionaires made without involving equities. Donald Trump (Real Estate), George Soros (Currencies), Bill Gates (Entrepreneur). Millions are there if you are creative enough.

First, I would say the definition of retirement has changed. For many it means the financial independence to do whatever is desired at any time. There are many who will continue to work because they enjoy what they do. There will be many who will change careers because they want to try something new. Retired or not, smart investors will continue to invest in the stock market with allocations dependent on each individual’s goals NOT their age.

Second, you stated “that most US companies now make more money from their overseas operations than their local US operations”. If that is the case wouldn’t it stand true that there would be continued growth in US equities because of the continued expansion into these additional markets?

And finally, you will have a very hard time building enough money to comfortably retire on if you’re sticking the majority of your money in non-equities. Inflation will be a major drag on your savings over time.

It’s an extreme but it’s possible…

“Also, even if marginal rates go up, your income during retirement may be less than your income now, so it still may be taxed at a lower rate.”

Even if tax rates go up, your income level will be less.

My personal view is that this will NOT be the case over the next 30 – 40 years and here’s why:

1. 60 to 80 million baby boomers will begin to retire. What are they going to retire on? Social Security and their 401k savings. Beginning in 2008, these retirees will begin to pull money out and spend it to live – they will likely spend most of it on healthcare related expenses.
We have NEVER had a situation in our country where 1/3 of the population is not working and not putting money into 401ks and the stock market. This will impact productivity tremendously.

2. Because 60 to 80 million will be retiring, this will deplete the number or workers in the system. This means either those people pay higher taxes and social security contributions and have LESS money for retirement 401k contributions. Granted, these people may ultimately end up earning more because of the scarcity of labor but I don’t think it will be offset enough. A potential negative effect is really high inflation.

3. Immigration. In order to sustain the system, the country will need millions of new immigrants to help pay for the social services “promised” to those baby boomers as well as more people contributing to 401k. There is a two fold problem here:
1. Businesses have thrived and wanted cheap labor so the vast majority of immigrants into this country have been typically uneducated manual labor people. This is of no real benefit since most don’t pay social security tax (illegal) or if they do (legal) have hardly enough money to be making 401k contributions into the Equity markets.
2. Global competition for “high end” labor is taking place. Counties all over the world are cherry picking the best minds out there and competing to get them to immigrate to thier counties. There will be even more pressure to immigrate elsewhere, thus depleting further the labor pool in the US. Keep in mind that most US companies now make more money from their overseas operations than their local US operations.

So what I’m trying to say is that I have great doubts about the US Equity market long term. Most 401k plans offer limited options as to where your money is invested: A few mutual funds, a few bond funds and some type of cash account. I have conciously made a decision to lower my 401k contributions (from their max) to the minimum matching max and am investing the extra cash in non-equity investments.

I also think it’s a pretty bad bet to assume that marginal tax rates won’t skyrocket in coming years. But that doesn’t necessarily make maxing out a deferred-taxation plan a bad move.

1) Matching. That’s free money that if you don’t take disappears.

2) It’s forced savings. If I forgo the 401(k) and put it in the bank or a brokerage, there is always the temptation to spend it. In the 401(k), it’s there till retirement, unless I take a substantial penalty, which I’m not willing to do.

Also, even if marginal rates go up, your income during retirement may be less than your income now, so it still may be taxed at a lower rate.

Excellent post; keep up the great work!