Stocks in Roth and Bonds in 401k To Minimize Taxes

Most people have a mix of stocks and bonds in their retirement accounts.      Stocks are expected to grow faster than bonds in the long run.    If you put your stock investments in a tax free account and your bonds in a pre-tax account you'll come out a bit ahead in retirement. 

Lets illustrate this with an example.   Pretend you've got $100,000 split evenly between Roth and 401k accounts with $50,000 in each.   Now say you've got a 50 stock / 50 bonds allocation.    That would give you $25,000 in stocks and bonds in each account.   Now say your stocks grow 10% over 20 years and the bonds grow 5%.    Assume you've got a 33% tax rate on your 401k withdrawals.

	Roth 70/30	410k 70/30
stock	$25,000	$25,000
bond	$25,000	$25,000
10% for 20yr	$168,187	$168,187
5% for 20y	$66,332	$66,332
total	$234,520	$234,520
tax	$0	$77,392
after tax	$234,520	$157,128
TOTAL	$391,648

Now instead put all the stocks in the Roth and all the bonds in the 401k and you get :

	Roth 70/30	410k 70/30
stock	$50,000	$0
bond	$0	$50,000
10% for 20yr	$336,375	$0
5% for 20y	$0	$132,665
total	$336,375	$132,665
tax	$0	$43,779
after tax	$336,375	$88,885
TOTAL	$425,260

In the end you've got about 8.5% more money simply due to allocating your investments per the tax advantages.

Note:   I'm not saying that you should *only* have stocks in the Roth and bonds in the 401k.    In the above example its set up that way just to illustrate.  If you had a 70/30 split allocation then you'd still need some bonds in your Roth.    Further, reallocating periodically to keep a specific % asset allocation isn't possible if all your stocks are in one and all the bonds are in the other.

Admittedly this is pretty contrived example, but I did that to illustrate the point.    Its more likely you'd have money invested periodically annually over a long period rather than starting with a lump sum and its also likely your effective tax will be lower. 

I didn't come up with this idea, but I can't recall where I saw it.

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It Should Not Surprise Us that 1 in 6 Millennials Have Saved $100k

Recent headlines are telling us that Millennials: 1 in 6 now have $100,000 socked away    And when reading that I wonder 'why is this news'?        Will it be followed by reports that 1 in 50 Millennials are millionaires or that 1 in 2 millenials have over $50k in their 401k?   Cause I suppose both those are true too.

I don't think its any surprise at all that 1 in 6 millennials have over 100k saved.   Theres a few reasons why it should be expected.

Net worth and savings balances increase with age and millennials are aging.   

As millenials get older it is really just a given that their savings will grow on average.  This isn't any kind of generational phenomenon its just a simple reflection of peoples savings growing over time.

In the survey of consumer finances the mean holdings of financial assets by age in 2013 was :

Age of head (years)	Mean  $k
Less than 35	38.3
35–44	148.8
45–54	253.1
55–64	411.2
65–74	566.1
75 or more	314.6

Note this is just among households who have financial assets but >90% do for every age group.
This kind of distribution has held over time too so you could see similar growth of assets by age in previous years.    As you can see there the jump from the under 35 to the 35 -44 age groups crosses the $100k mean.   


If you make a decent amount its not so hard to pile up $100k over a few years. 

I used one of DQYDJ.com's nifty calculators to find the income ranking for people age 18-35 and it shows that ~18% of households with heads in that age group make $100k or more.     If you are in your late 20's or early 30's and make 6 figures then its not too hard or unusual to have piled up $100k across your savings.   A 5% 401k investment and employer match would get you there.

People also inherit money.   

I found this interesting BLS paper with a lot of data on inheritances :
Inheritances and the Distribution of Wealth Or Whatever Happened to the Great Inheritance Boom?
Its a bit old but the figures give us a reference on how common inheritances are and how much people receive.   From 1989 to 2007 about 12% of people under age 35 inherit or receive gifts that average ~$146k.  The average skews high and the median value was $28k.     But still thats a sizable chunk of people who receive large gifts or inheritances.    If the median is $28k received by 12% then 6% of people got over $28k.   I'd assume that 1-2% of people inherit over $100k but that is more an educated guess.

I think that instead of proclaiming a sense of surprise that the younger generation has saved money they should have honestly stated 'hey we shouldn't generalize entire generations'.

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Net Worth by Age Over Time 1989 - 2016

The Survey Of Consumer Finances has net worth broken down by age groups.   They have data going back to 1989 and the report is every three years.    Taking that data and then adjusting for inflation to 2016 I get the following charts showing how net worth has changed for different age groups over the time period :

I also figured the % change from 1989 to 2016 for each age group :

	Mean	Median
Less than 35	83%	72%
35–44	100%	54%
45–54	134%	64%
55–64	194%	98%
65–74	194%	149%
75 or more	225%	187%

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