This analysis models a full 40-year working career beginning in 1985 with a starting salary of $35,900 — the purchasing-power equivalent of $115,000 in today's dollars. Earnings grow at a compound annual rate of 2.95%, tracking the historical relationship between wage inflation and CPI.
Real wage growth over this period was just 19% in inflation-adjusted terms — roughly 0.44% annually. The nominal growth figure, however, compounds into a meaningfully larger ending salary. This reflects the well-documented stagnation of median wages across most of the income distribution over the past four decades.
Social Security remains the most durable income source in retirement — longevity-protected, inflation-adjusted, and largely tax-advantaged at the state level. The benefit is calculated using the SSA's progressive formula applied to 41 years of indexed earnings.
Each year of delay beyond FRA increases the benefit by 8%, permanently. Delaying from 67 to 70 adds $858/month. For someone in average health at 67, the actuarial case for delay is strong — breakeven is approximately 11–12 years.
| Claiming age | Adjustment | Monthly | Annual | vs. FRA |
|---|---|---|---|---|
| Age 62 (earliest) | −30% | $2,501 | $30,012 | −$1,072/mo |
| Age 65 | −13.3% | $3,096 | $37,152 | −$477/mo |
| Age 67 (FRA) ★ | — | $3,573 | $42,876 | baseline |
| Age 70 (maximum) | +24% | $4,431 | $53,172 | +$858/mo |
A common misconception is that contributing to a 401(k) rather than an IRA reduces your Social Security benefit because it lowers your reported wages. The reality is more nuanced — and for this income level, the SS outcome is identical under both strategies.
| Metric | 401(k) | Traditional IRA | Difference |
|---|---|---|---|
| Portfolio value (end 2025) | $1,379,330 | $1,379,330 | $0 |
| Total FICA paid (career) | $213,695 | $213,695 | $0 |
| SS taxable wages (lifetime) | Full gross | Full gross | $0 |
| AIME | $10,703/mo | $10,703/mo | $0 |
| PIA at age 67 (FRA) | $3,573/mo | $3,573/mo | Identical ✓ |
| Income tax deduction (career) | $43,352 | $43,352 | $0 |
NJ allows a 401(k) deferral to be excluded from gross income on the state return, reducing NJ taxable wages. NJ does not allow a deduction for Traditional IRA contributions. This means a 401(k) saves both federal (22%) and NJ state (5.525%) tax in one step, while a Traditional IRA only saves federal income tax via the Form 1040 above-the-line deduction — the NJ state tax on that income is still paid.
In dollar terms for this scenario: both vehicles save the same $43,352 in federal tax over the career. The 401(k) additionally saves $8,676 in NJ state tax (5.525% × $157,500). The IRA investor pays that NJ tax regardless. This is the only mechanical difference between the two vehicles for a NJ resident — and it favors the 401(k).
Maximum IRA contributions were made each year, invested at the actual S&P 500 total return. The IRS limit grew from $2,000 in 1985 to $7,000 in 2025, with meaningful increases in 2002, 2005, 2008, 2013, and 2019. The portfolio is identical under both Traditional and Roth structures — and identical to a 401(k) using the same dollar amounts.
The S&P 500's actual return path included severe drawdowns — 2002 (−22%), 2008 (−37%), and 2022 (−18%). Yet the full-career compounding effect is powerful: $157,500 in contributions became $1.38 million. The tax savings portfolio (Traditional deductions reinvested) added another $379,661 on top.
Both strategies invest the same IRS-limit dollars in the same portfolio — the terminal value is identical. The only difference is tax timing. The Traditional deduction is taken at the marginal rate during working years; retirement withdrawals are taxed at the lower effective rate.
| Component | Traditional + Savings | Roth IRA |
|---|---|---|
| IRA portfolio value | $1,379,330 | $1,379,330 |
| Less: retirement tax on IRA | ($144,829) at 10.5% | $0 |
| IRA after-tax value | $1,234,501 | $1,379,330 |
| Tax savings portfolio | $379,661 | — |
| Less: cap gains (15%) | ($56,949) | — |
| Savings portfolio after-tax | $322,712 | — |
| Combined after-tax value | $1,557,212 | $1,379,330 |
| IRA monthly income (4%) | $4,115 | $4,598 |
| Savings monthly income (4%) | $1,076 | — |
| Combined spendable monthly ★ | $5,191 | $4,598 |
When tax savings are reinvested, the Traditional IRA produces $593/month more in spendable income ($7,116/year). The 27.525% marginal deduction applied to $157,500 in contributions generates $379,661 in additional compounded wealth by retirement. Even after paying 10.5% effective tax on IRA withdrawals and 15% cap gains on the savings portfolio, the Traditional investor is materially ahead.
If the savings portfolio is managed within the 0% long-term capital gains bracket (income below ~$48,350 single), the advantage widens further to approximately $648/month.
Combining Social Security at FRA, IRA withdrawals under the 4% rule, and the tax savings portfolio produces the following gross annual income.
$35,900 in 1985 grew to $115,000 today — but in real terms that's only a 19% gain over 40 years. The S&P 500 turned $157,500 in contributions into $1.38 million. Investment return, not salary growth, is the primary driver of retirement wealth.
The critical variable is what happens to the annual tax refund. Invested in a taxable S&P 500 account, the Traditional strategy produces $593/month more spendable income than Roth. The 17-point spread between marginal working rate (27.5%) and effective retirement rate (10.5%) is the source of this advantage.
Neither vehicle reduces Social Security taxable wages. Both 401(k) deferrals and IRA contributions leave Box 3 (SS wages) on the W-2 unchanged — FICA is calculated on full gross wages either way. The AIME, PIA, and SS benefit are identical: $3,573/month at FRA. The portfolio outcome is also identical for the same dollar amounts contributed.
New Jersey excludes 401(k) deferrals from state gross income, saving 5.525% on each dollar deferred. NJ does not allow a Traditional IRA deduction. Over this career, that difference amounts to ~$8,676 in additional NJ tax savings that the 401(k) captures and the IRA does not — a meaningful but modest advantage.
NJ fully exempts Social Security, exempts up to $75,000 of pension and IRA income for single filers under $150,000, and produces an effective state retirement tax rate of approximately 0.5%. Relocating to a no-state-tax state saves only ~$67/month at this income level. The real NJ tax burden falls during working years.
Delaying from age 62 to 70 adds $1,930/month in permanent, inflation-adjusted, longevity-protected income. The 8%/year delayed credit is unmatched by any guaranteed financial instrument. For anyone in reasonable health at 67, maximizing the delay is likely optimal.
Combined gross income of $113,490/year produces net after-tax take-home of $8,303/month as a NJ resident — well above median retirement income. The effective tax rate on this income is just 12.2%, reflecting the favorable treatment of SS income and retirement account distributions.
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