Inflation rates to expect over the next 30 years, 401k planning

Question

I am a recent college grad and now a new hire looking to choose 401k options. I am wondering what the general strategy behind choosing a 401k investment rate is. I have been reading Recent graduate with new job: Choose Roth 401(k), or traditional 401(k)?, and it looks like the Roth is the way to go.

I found a calculator to help me understand this on the fidelity page (unfortunately can't link to it as it requires a login).

The calculator is coming up with about $2k now or $10k later. Is that $10k adjusted for inflation? Because if it's not, then going to pre-tax option looks to be the better deal as 30 years at 7% inflation is a factor of 7.6x. Hence that $10k is worth about $1.3k in time of investment dollars.

I don't know anything about this stuff, so please help a newbie out :P

Answer 1

401(k) doesn't have a "return rate", because 401(k) is not a type of investment -- it is a vehicle for investment, with certain tax treatments.

Just like your money that's not in a 401(k), you can invest it in either the bank, a CD, stocks, mutual funds, bonds, etc., you can similarly (depending on the options given to you by your 401(k) plan) invest the money in the 401(k) in a cash account, buy stocks, mutual funds, etc. Your return is dependent on how you invest your money, not whether it's in a 401(k) or not. Whether it's in a (Roth or Traditional) 401(k) simply affects when and how it gets taxed.

(It is true that most 401(k) plans offer little variety in types of investments you can choose; however, this is not a big deal, as chances are that in a few years, you will leave your company, at which point you are able to rollover the 401(k) into an IRA, at which point you will have many, many options for how to invest it.)

To make a valid comparison, you should be comparing the same type of investment in both cases. That means, you should assume the same return for both the money outside the 401(k), and the money inside the 401(k), and only consider the taxes and penalties (if you plan to withdraw early).