Is Your Financial Plan a Lie? The Dangers of False Precision with Sean Mullaney

[@FIRE_DrNinjaTurtle]

That is the best argument I have heard for a traditional 401k

[@erickarnell]

This is a great presentation, but I still have a hard time separating marginal tax rate and effective tax rate. I've watched so many people mix the two in past, it makes me nervous.

[@countdigi]

I have watched a number of Sean's videos. Technically, you should compare marginal dollars deferred with effective-marginal dollars coming out. I add the term effective because things like social security can create a higher tax rate than your "on-the-book" marginal rate. With that said, I think Sean has a great message which is: 1. Once you contribute or convert a Roth dollar, you have ended your planning 2. Any model you use is almost certainly not correct years later Therefore, you need to measure in broad strokes and effective tax rate gives you a "flavor" of how your taxes will likely look. I think he also presents this way to combat the fear of other financial personalities who encourage very high-tax bracket earners to contribute Roth or nothing. --- Now for the math on a static example, take a married couple that takes 48k ss and 20k from a trad-ira. For 2025, they will pay no taxes (even under 65). However if you add 30k of income they will pay 5700 of taxes. 5700 / 30000 = 19% effective-marginal rate even though they stay in the 12% bracket because it pushed their ss into taxable territory. Here is a little script I wrote to demonstrate this for educational value only: > fin/cash-ret.py --year=2025 --income=20000 --ss=48000 --add-inc=30000 > year:2025 status:mfj income : 20000.000 + ss_taxable : 6000.000 = income_taxable : 26000.000 fed_tax : 0.000 fed_tax_breakdown vs-effective-marginal (adding 30k of extra withdrawl from ira) income : 50000.000 + ss_taxable : 31500.000 = income_taxable : 81500.000 fed_tax : 5703.000 fed_tax_breakdown 3318.00 ( 27650.00 @ 0.1200) [ 45450.00 space-left] 2385.00 ( 23850.00 @ 0.1000) [ 0.00 space-left] fed_tax_eff : 0.058 (5703.0 / 98000) fed_tax_diff_mgn : 0.190

[@countdigi]

So with the above example although their effective-marginal is 19% w/ 30k extra withdrawal, their effective tax rate still is 5.8% so even if they deferred _all_ their dollars at 12%, while not optimum (using "false precision") - they are by no means "crushed by taxes."