Warnock's Win Changes Senate Math - Or Not

Since Sen. Raphael Warnock's reelection win in Georgia less than 2 days ago pundits are saying it totally changes the math of the US Senate. "Joe Manchin is the second biggest loser in this race [after defeated candidate Herschel Walker]," the gist goes.

Manchin, a Democrat US senator from West Virginia, rose to prominence over the past 2 years for his opposition to much of his party's legislative agenda. In an evenly divided 50-50 Senate every single vote counted. Manchin milked his for all it was worth. But is Machin made much less relevant with Dems now holding at 51-49 majority? Yes and no.

If all that had changed was Senate composition then, yes, Manchin would lose some leverage. Though only some, as Arizona Democrat Kirsten Sinema often joined him in thwarting Democrat priorities. The two of them together would still be enough to scuttle any or all Democrat legislation. But that's not the whole picture after the election; far from it. Republicans took control of the House. That makes intra-party opposition from Manchin in the Senate much less relevant. Sure, Dems can pass bills in the Senate without Manchin's support, but anything they do that's seen as even remotely partisan will die in the House.

Coming Out Ahead with a 401(k)

As I wrote about the contribution limits for 401(k)s rising in 2023 a few weeks ago I was reminded that a lot of people don't understand the benefit of 401(k)s. I mean, I think most American adults understand it at a high level: "Investing money in a 401(k) saves on taxes, so you have more money at the end." But understanding the details of how that works— and how much it benefits them— is squishy. I get it; the math¹ can seem intimidating. Even for many people well educated in math or engineering it's too much to figure out. That leads to a lot of people not participating in 401(k) programs when they should. For example, many of my colleagues. 😳

I'll walk you through the math with a simple illustration. This will show you how much you can gain by investing through a 401(k) instead of an ordinary account. I call it the Tax-Deferred Advantage.

Here are five basic assumptions for my example:

1. Let's suppose you invest your money in company XYZ, which enjoys stock price appreciation averaging 7% a year over the course of many years. To keep this example simple let's assume XYZ does not pay a dividend or distribution. This is a little unusual as most companies, over 80% of the names in the S&P 500 index, pay dividends; and virtually all mutual funds pay distributions. This assumption keeps the tax calculations simple.


2. Let's suppose your overall marginal tax bracket is 28%. This includes both federal and state/local taxes, so think of it as 22% federal plus 6% state/local, or 24% federal plus 4% state/local, etc.


3. You start with $10,000, pre-tax, to invest.


4. You "buy and hold" XYZ — no trading until you're ready to withdraw. (This also keeps the example simpler.)


5. We'll look at the totals after 20 years.

Case A: You invest via traditional investment account. You start by paying taxes on that $10k. Your investment in XYZ is thus $7,200 ($10k less 28% combined tax). Twenty years later your account value is $27,862. (This is $7.2k x 1.07^20.) When you withdraw the money you pay tax... but only on the gain of $20,662. Your net after taxes is $22,076.

Case B: You invest via a 401(k). You pay no taxes on the $10k up front because it's tax-deferred. All $10 goes into buying shares of XYZ company. Twenty years later it's worth $38,697. When you withdraw the money you pay taxes on the whole amount. After taxes you net $27,862.

So, how did we do? The 401(k) gave us 26% more money ($27,862 vs. $22,076) after 20 years. That's the Tax-Deferred Advantage!

And BTW, the advantage gets even bigger when you change some of the model's assumptions. For example, if your investment pays dividends or distributions, the advantage is even bigger. If your tax bracket is lower in retirement than your working years, the advantage is bigger, too. I'll show examples of these in a later blog as the math gets more complicated.

---

1: Insert curmudgeonly math joke: "That's not even math, it's arithmetic. If it were math it'd have letters!"

Why I Watched Chernobyl - Same as Why Mazin Created It!

A week ago Hawk and I binged the HBO miniseries Chernobyl from 2019. We watched 5 hour-long episodes in a single sitting. That was more than we expected... because the show was more engrossing than we expected. But why even watch it at all? For both of us a big part of the reason was that this enormous accident happened during our lifetimes— yet we didn't know much about it.

I was a teenager when the accident occurred in April 1986, finishing up my freshman year of high school. I was old enough (and precocious enough) that I was following national and international news and forming opinions about it. Hawk was a couple years younger than me and also paying attention to things. And yet.... And yet, all we remember about Chernobyl is the very broadest strokes: A bad accident happened. The Soviets lied about how serious it was, until they couldn't. Then they cleaned it up. They built a concrete "sarcophagus" built around the ruins of the reactor and created an exclusion zone 60km across.

As a scientifically educated person I knew a bit more about the accident— but I learned those things only years after it, only by choosing to read about it when 99.9% of the world had moved on from caring about it, and had to struggle through excessively technical and poorly written descriptions to reach an understanding. I looked to the miniseries as an opportunity to better understand something that shaped the world I grew up in— and nearly did way worse than "shape" it. 😨



After watching the 5 episodes of the miniseries I started watching some of the extras. Showrunner Craig Mazin did a series of podcasts, radio style interviews with NPR host Peter Sagal. In the podcast for episode 1 Mazin described how he started this project... and the reason he created it is the same reason I watched it!

In the podcast Mazin describes that the Chernobyl accident happened when he was about 15. He was aware of it at the time, but only in the broad strokes: a nuclear power plant accident occurred, Soviets lied about how bad it was until evidence made it undeniable, then they cleaned it up, then there was a sarcophagus and an exclusion zone. That's basically the same recollection I had, from a similar age!

Mazin also, like me, looked into details many years later. But Mazin looked at it with a filmmaker's eye rather than an engineer's eye. Meaning, he saw irony and drama. The irony was that technicians at the plant were running a safety test when the reactor core exploded. "It's like you're testing the brakes on your car," he explained (paraphrased), "But instead of slowing down your car zooms forward, catches fire, and crashes!" He knew there had to be a gripping story there.

And there is. Start with 1:23:45.

And keep reading after this: Chernobyl has serious horror movie energy.