Research Articles

Quantifying the Value of Retirement Accounts

The following is an abstract. Here is a link to the full article: Quantifying the Value of Retirement Accounts.

Many people talk about the tax benefits of retirement accounts. However, few attempt to quantify and estimate the actual benefits. Even when the topic is addressed, many of the discussions rely on flawed logic and do not properly measure the true benefit.

For example, I often hear investors (even investment and tax professionals) summarize these benefits as being due to ‘tax deferral’. In my view, however, deferring taxes is not the primary benefit of using retirement accounts. Moreover, deferral can actually work out to the detriment of investors since overall tax rates can increase and investors can move into higher tax brackets by the time they must pay those taxes.

This article highlights what I believe to be the real golden goose behind retirement accounts. In particular, there is immense value in not having to pay taxes on investment income and rebalancing (i.e., dividends, interest, and capital gains). I attempt to quantify this benefit for a variety of portfolio strategies and tax brackets via historical simulations.

Spoiler: While the results are dependent on market performance and each investor’s tax bracket, my calculations indicate the tax benefits of retirement accounts range between 0.7% and 2.7% per year.