Perchance to dream of a well-funded retirement. Photographer: Marc Hill/Bloomberg
Perchance to dream of a well-funded retirement. Photographer: Marc Hill/Bloomberg

When I joined Bloomberg News, I found myself confronted with a new personal-finance conundrum. Bloomberg, you see, offers a Roth 401(k) option. I had read about these exotic creatures, but I had never come across one in person. And so I had never had to make the momentous decision that now confronted me: to Roth, or not to Roth.

The basic difference between a Roth and a traditional individual retirement account or 401(k) is that with an IRA, you put pre-tax money in and get taxable income out. With a Roth, you put after-tax money in, but your future withdrawals are tax-free.

In theory, the calculation is easy: Figure out whether your tax rate is likely to be higher now or in the future. If you're young, the answer is likely to be "future"; if you're in your peak earnings years, you're probably looking at a lower tax rate when you're retired.

But while the theory is simple, in practice, things are considerably more complicated. Personal finance is less about math than psychology . . . and tax policy, in this case. What will the tax rate on your income be when you retire -- higher or lower than your current tax rate?

Hard to say, isn't it? We're running some substantial deficits, and we've made some big promises to retirees. Those obligations will have to be paid for somehow, and by "somehow," I mean "With higher taxes on someone." What are the chances that you'll be that someone? Pretty high, if you save a lot for retirement.

That makes a Roth sound like a pretty good bet. But unfortunately, the same logic that suggests higher income taxes in the future also suggests that a hungry-eyed Congress might settle on all those fat tax-free retirement accounts as a way to balance the books. What Congress giveth, Congress can taketh away. Can you really count on that income being tax-free when it's finally time to collect it?

If, like me, you're more than 20 years from retirement, you're going to have to gamble on what a distant Congress will do -- a Congress that will probably be filled with kids who are currently looking forward to their freshman year of college. Either way you gamble, it's not a great bet.

So I fell back on a bit of math mixed with psychology.

Here's the most common error I see people make when they're thinking about retirement: They look at what savings does to their retirement income but not their current income.

The object of most people, when they're saving for retirement, is to make their disposable income in retirement match their current disposable income as closely as possible. Retirement savings helps you do that in two ways: It raises your future income, and it also lowers the amount that you are used to consuming right now.

This matters because once you've gotten used to a given level of consumption, it's quite hard to give it up. This is why I have assiduously avoided cultivating a taste for good wine, caviar or other things that might make me regret my decision to become a journalist rather than an investment banker.

Moreover, people tend to assume obligations that are commensurate with their income levels. Your activities, car, house are all geared toward a certain level of income, and even if they're paid up, they will have to be maintained in retirement. Yes, you can downsize, but while a lot of people talk about this, surprisingly few actually do it.

This is why I get nervous when people tell me they're only saving 5 percent of their income because they've got a great employer match. That may take care of the retirement income side, but it also means you'll be used to living on a larger disposable income . . . which means you need to save more.

The good thing about a Roth, then, is that it automatically disciplines you to spend less now. Psychologically speaking, that's the best way to save: Divert the money before you see it and can figure out things you'd like to spend it on. That's a benefit that the traditional can't match: Effectively, a Roth means that you are saving a larger percentage of your disposable income.

Of course, if you feel your budget is already tight, that may feel like a bug rather than a feature. But we'd already set a goal of saving more this year, so for us, the Roth turned out to be an easy choice.

To contact the writer of this article: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article: Brooke Sample at bsample1@bloomberg.net.