Retirement Accounts and Short Timelines

In your 50% of worlds where we get AGI in the next 3y, do you have important uses for the money?

How does your remaining 50% smear across "soon but >3y" through "AI fizzle"?

I mean, does your Vanguard targeted lifecycle index fund likely invest in equities exposed to AGI growth (conditional on non-doom)?  

If you think money still has meaning after AGI and meaningful chance of no-doom, it might actually be optimal to invest in your retirement fund.

This is subtle and I may be missing something, but it seems to me that using a pretax 401k helps some but not that much, and the Roth scenario is only slightly worse than the regular investment account. Compare the three, chosen to be maximally favorable to your scenario:

1. You contribute to your pre-tax 401k, it grows (and inflates) 2x. You roll it over into a Roth IRA, paying taxes on the conversion. Over the next five years it grows 1.3x. You withdraw the contribution and leave the gains.

2. You contribute to your post-tax Roth 401k, it grows (and inflates) 2x, and then another 1.3x. You withdraw the same amount as in scenario #1.

3. You put it in a regular investment account.

Let's assume your marginal tax rates are 24% for regular income and 15% for capital gains.

In #1 if you start with $100k then it's $200k at the time you convert, and you pay $48k (24%) in taxes leaving you with $152k in your Roth 401k. It grows to $198k, you withdraw $152k and you have $46k of gains in your Roth 401k.

In #2 your $100k is taxed and $76k (less the 24%) starts in the Roth. When it's time to withdraw it's grown to $198k. Of that, your $76k of contributions are tax and penalty free, leaving you with $122k of gains. To end up with $152k in your bank account you withdraw $115k, paying $28k (24%) in taxes and $12k (10%) in penalties. You have $7k of gains still in your Roth.

In #3 your $100k is taxed to $76k when you earn it, and then grows to $198k. You sell $179k, paying 15% LTCG, and end up with $152k after taxes and $19k still invested (but subject to 15% tax when you eventually sell, so perhaps consider it as $16k).

So you're better off in #1 than #3 than #2, but the difference between #3 and #2 is relatively small, and this is a scenario relatively unfavorable to Roths.

My claim isn't "Roth 401(k)s are strictly better than putting the money in investment accounts" or "Roth 401(k)s are strictly better than pre-tax 401(k)s" but instead "when you consider the range of possible futures, for most people Roth 401(k)s are better than non-protected accounts and other protected accounts may be even better".

However, you should probably hedge your bets to a certain extent just in case you manage to live to retirement age.

Do you need to, though? People have been citing Feynman's anecdote about the RAND researchers deciding to stop bothering with retirement savings in the 1940s/50s because they thought the odds of nuclear war was so high. But no one has mentioned any of those RAND researchers dying on the streets or living off the proverbial dog chow in retirement. And why would they have?

First, anyone who was a RAND researcher is a smart cookie doing white-collar jobs who will be in high demand into retirement and beyond (and maybe higher than any time before in their career); it's not like they were construction workers whose backs are giving out in their 30s and will be unable to earn any money after that. Quite the opposite.

Second, no one said stopping was irrevocable. You can't go back in time, of course, but you can always just start saving again. This is relevant because when nuclear war didn't happen within a decade or two, presumably they noticed at some point, 'hey, I'm still alive'. There is very high option value/Value of Information. If, after a decade or two, nuclear war has not happened and you survive the Cuban Missile Crisis... you can start saving then.

The analogue here would be for AI risk, most of the short-term views are that we are going to learn a lot over the next 5-10 years. By 5 years, a decent number of AGI predictions will be expiring, and it will be much clearer how far DL scaling will go. DL will either be much scarier than it is now, or it will have slammed to a halt. And by 10 years, most excuses for any kind of pause will have expired and matters will be clearer. You are not committed to dissavings forever; you are not even committed for more than a few years, during which you will learn a lot.

Third, consider also the implication of 'no nuclear war' for those RAND researchers: that's good for the American economy. Very good. If you were a RAND researcher who stopped saving in the 1940s-1950s and decided to start again in the '60s, and you were 'behind', well, that meant that you started investing in time for what Warren Buffett likes to call one of the greatest economic long-term bull markets in the history of humanity.

Going back to AI, if you are wrong about AGI being a danger, and AGI is achieved on track but it's safe and beneficial, the general belief is that whatever else it does, it ought to lead to massive economic growth. So, if you are wrong, and you start saving again, you are investing at the start of what may be the greatest long-term bull market that could ever happen in the history of humanity. Seems like a pretty good starting point for your retirement savings to catch up, no?

(It has been pointed out before that if you are optimistic about AGI safety & economic growth and you are saving money, you are moving your resources from when you are very poor to when you will be very rich, and this seems like a questionable move. You should instead either be consuming now, or hedging against bad outcomes rather than doubling down on the good outcome.)

Whereas if you are wrong, the size of your retirement savings accounts will only bitterly recall to you your complacency and the time you wasted. The point of having savings, after all, is to spend them. (Memento mori.)

Remember, we still don't have flying cars.

I have a big peeve about that. When I try to model a flying car I see the tradeoffs of

(High fuel consumption, higher cost to build, higher skill to drive, noise, falling debris) vs (less time to reach work)

As long as the value per hour of a workers time is less than the cost per hour of the vtol + externalities, there isn't ROI for most workers.

Less market size means higher cost and thus we just have helicopters for billionaires and everyone else drives.

Did this come up in the 1970s or after the oil shocks were over in the 80s? Because they just jump out at me as a doomed idea that doesn't happen because it doesn't make money.

Even now: electric vtols fix the fuel cost, using commodity parts makes them cheaper, automation makes them easier to fly, but you still have the negative externalities.

AI makes immediate money, gpt-4 seems to be 100+ percent annual ROI...(60 mil to train, 2 billion annual revenue after a year, assuming 10 percent profit margin)

Note that it is entirely possible to invest in almost all "non-traditional" things within a retirement account; "checkbook IRA" is a common term for a structure that enables this (though the fees can be significant and most people should definitely stick with index funds). Somewhat infamously, Peter Thiel did much of his early angel investing inside his Roth IRA, winding up with billions of dollars in tax-free gains.

Saving, but avoiding protected "retirement" plans so you can invest in traditional taxed assets. This is very hard to justify, for the reasons you give. I'd classify as mostly dumb.

This is the only one I'm trying to argue against in the post, fwiw.

Not saving so you can donate more - I think it's confused, but I can't really judge what's important to you.

Why do you think it's confused? If some others can benefit >100x more from the money compared to 60-year-old Lorenzo, and their interests are just as important, wouldn't it be rational to reallocate money from him to them?

This is pretty right for pretax individual accounts (401ks may not let you do early withdrawal until you leave), for Roth accounts that have accumulated earnings early withdrawal means paying ordinary taxes on the earnings, so you missed out on LTCG rates in addition to the 10% penalty.

Often, but not always: your plan might not allow in-service withdrawals, so taking the money out right away might require leaving your company.