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This news prompted me to do some quick math earlier today. My question was: > What sort of retirement can you get from a 401k-only strategy? So I tried and pl
by AYBABTME 5y ago
This news prompted me to do some quick math earlier today. My question was:
> What sort of retirement can you get from a 401k-only strategy?
So I tried and played to see how much of a retirement, in term of yearly retirement income in today's dollars, one would get if they were able to consistently max out their 401K, every year, starting today from 20yo to 55yo in 35 years, with a 50% match from their employer.
Math may be wrong, but it seems like the total value of that person's 401k, at 55yo, would be about 6M$. If we turn this into how much of a yearly income this feels in today's purchase power, 6M$ would be ~3M$ in today's value. At a 4% withdrawal rate, that's a 120,000$/y retirement income (in today's value).
Assuming:
- a ~500$/y increase in 401k limit
- 7% YoY growth rate of investment
- 2% inflation rate
- 4% withdrawal rate.
- 50% employer match
- 88913527 5y agoAssuming you max 401(k) (no match), IRA, and HSA ($20,500 + $5,500 + $3,650), using same interest rate and investment window: $4.1M. If you have a spouse as fortunate as you: $8.2M. If we add in the employer match: $5.5M and $11M.
- turndown 5y agoWhy is your age range so weird? No one I've ever met had a 401k at 20, let alone maxing it out, and few actually retire at 55.
- kyawzazaw 5y ago23/24 is a more reasonable starting age
- AYBABTME 5y agoI was just going for the upper bound, assuming someone who lucks out right out of college and retires on a 401k-only strategy at exactly the 55. Knowing the upper bound is interesting to me because most people in the US don't max out their 401k and are probably not getting employer match, so their retirement story is probably not going to be anywhere near that. Meanwhile in tech (in the US), people's out of college starting salary and internships is often above this. That's a helpful comparison point - say if you want to check your privilege. Or if you're a tech worker making >120k/y and you've been saving for retirement using only your 401k, well, that'd tell you it's probably not going to be enough to finance your lifestyle expectations.
- dumbfounder 5y ago59.5 is the age you can pull out of your 401k without penalty. I like the exercise you did because if it doesn’t add up to something you can actually retire with then there is a big problem. But there are other big problems, most lower wage employers don’t offer 401ks because it is expensive for them to do so. So why is this a benefit only reserved for the relatively well off?
- maxerickson 5y agoIt is sort of limited to the relatively well off just by buying power anyway. It doesn't have matching, but for lower incomes, the Roth limit is probably high enough for the money that is available to invest.
- AYBABTME 5y agoOups! Was just a ballpark estimate.
- dlp211 5y agoThere are lots of ways to get money out of your 401k penalty free if you are actually retired. There is a 72t and also the rule of 55.
- RickJWagner 5y agoAnyone can contribute to an IRA, or probably a Roth IRA if they're not well off. There's a path to tax-advantaged wealth for almost everyone.
- marpstar 5y agoIt's not unprecedented. I worked at Best Buy when I was in high school and college (2005-2009). They offered 401K to part-time employees. When my mom found out they offered that (with matching) she basically told me I'd be a fool not to do it, so I did. When I left, I had only saved about $2,500. I rolled it into an IRA, where I've watched it grow significantly in the last 12 years.
- deleted 5y ago[deleted]
- missedthecue 5y agoI had a 401k at twenty, but it is worth noting that for some reason many but not all companies disallow 401k plans for employees under 21.
- eftychis 5y agoIsn't that age discrimination?
- deleted 5y ago[deleted]
- californical 5y agoAge discrimination laws only apply to those over 40 — totally legal to age discriminate anyone under 40. https://www.eeoc.gov/age-discrimination https://www.eeoc.gov/age-discrimination
- eftychis 5y agoGood point... Thank you.
- toomuchtodo 5y agoI am late 30s and have been maxing out a 401k since my early 20s, rolling it out to an IRA when separating from the sponsor firm (have worked in tech since ~18). An extended family member taught me the value of pre tax compounding and living below my means.
- xyzzyz 5y agoIt actually doesn’t matter whether you compound pre or post tax, only thing that matters is whether your tax rate changes between now and retirement.
- otterley 5y agoThis math doesn't seem right. Deferring taxes gives you significantly more money to invest early and take advantage of compounding. Additionally, the model is that you pay off your home mortgage before retirement, which means you need to withdraw a lot less during retirement years, which lowers your overall tax rate as well.
- davidgay 5y ago> This math doesn't seem right. Deferring taxes gives you significantly more money to invest early and take advantage of compounding. No, the grandparent is correct. The tax rates and compounding are both multiplicative, so associativity leads to the consultation that only the tax rate at saving-time and retirement-time matters
- swimfar 5y agoIt does sound suspicious, but it works out. Let's say you have $100k to invest, have a 30% tax rate, and your investment will give you a 2x return by the time you're ready to withdraw. Pre-tax investment: Invest $100k and it becomes $200k. You pay $60k in taxes and end up with $140k. Post-tax investment: You pay $30k in taxes and invest $70k. That $70k becomes $140k.
- deleted 5y ago[deleted]
- sam0x17 5y agoIt's funny, I've had the opposite experiences. All my offers to have a 401k were in my early 20s, and now in my 30s I barely ever see that anymore.
- colinmhayes 5y agoThis is a tech forum. Many here got 6 figure jobs out of college and have been maxing their 401k since they were 21. I'm only 25, but certainly hope I won't be working past 55.
- eppp 5y agoI hope I am working at something, just not the pointless stuff I have to do at work.
- danachow 5y agoWell 22 then. That’s the typical case.
- foogazi 5y agoIt’s true 'If you will live like no one else, later you can live like no one else.' - Dave Ramsey
- voidfunc 5y agoRandoCorp Employee matches are generally not nearly as generous as Big Tech employee matches. In BigTech I have seen 50-100% match but RandoCorp I have usually seen it limited in some way. Also very rare to have a 401k in your early 20s.
- eppp 5y agoI only get a 3% of pay maximum match. However I also have a pension paid entirely by the company in addition to that.
- ncallaway 5y ago> RandoCorp Employee I think this very much depends. We're a super small (7 person) software services company, but we offer a 10% 401k contribution (just contributed, with no requirement of the employee contributing)
- nemo44x 5y agoIn investing your best asset is time. 401k is the best wealth building tool we have especially if you have a match and even more so if you’re a high earner and consider the tax savings. Even more if you have an HSA and understand it’s a 401k on steroids. America is fabulous if you make a few deferred choices.
- ramphastidae 5y agoHSAs are wildly overrated. Yes, it’s triple tax advantaged and it rolls over, but with a yearly limit of less than $4K it’s not moving the needle for most people.
- nemo44x 5y agoYou’re forgetting the magic of compound interest. After 25 years of depositing 7k (that’s the current limit) you’d have $600k with a cost basis of $180k assuming the money was put into index funds. That $180k was all pre-tax meaning you probably only put in $120k of it or so assuming high marginal rates.
- ramphastidae 5y agoLimit is $3500 for individuals, $7000 for families.
- dlp211 5y agoWhy such a conservative rate of return? There is no 35 year period where the inflation adjusted return was below 7%. Why use a 5% real rate of return for this analysis?
- AYBABTME 5y agoIt's funny because I was asked by someone else why such an aggressive rate of return! * * * Just went off numbers in my head, I think there's lots of % people talk about, and 7% is what I've got stamped in my brain about expected return of an S&P 500 ETF over a long period. Might be wrong, but that's the number I use for napkin math.
- medvezhenok 5y agoCherry-picking dates, but the return from 1929 to 1974 (45 years, not 35) was 7.2% nominal, and only 4.76% inflation-adjusted. https://www.officialdata.org/us/stocks/s-p-500/1929?amount=100&endYear=1974 https://www.officialdata.org/us/stocks/s-p-500/1929?amount=1... Alternatively, 1972-2009 (37 years) gives an inflation-adjusted 5.17% https://www.officialdata.org/us/stocks/s-p-500/1972?amount=100&endYear=2009 https://www.officialdata.org/us/stocks/s-p-500/1972?amount=1... (To be fair, that's from lump-sum investing at the worst time, if you DCA the returns should be better than the numbers above)
- davidgay 5y agoSome missing aspects: - limit increases after 50, currently by 6.5k (more relevant with a different age range) - the traditional and Roth $ contribution limits are identical -> you can save more via Roth - employer matches are (I think always?) traditional
- colinmhayes 5y agoThis wolframalpha I drew up gives the basica formula with a target income option if anyone wants to mess around with the numbers. https://www.wolframalpha.com/input/?i=100+%3D+%2826.5+*+sum+1.06%5Ex+from+0+to+y%29*+.04 https://www.wolframalpha.com/input/?i=100+%3D+%2826.5+*+sum+... The .04 is withdrawal rate, 26.5k a year from 401k and ira, 6% interest after inflation. Gives 31.5 years to 100k inflation adjusted income after tax. Edit: fixed
- dlp211 5y agoYou don't pay cap gains tax on retirement withdrawal. They are subject to regular income tax (or tax free if they are Roth funds).
- AYBABTME 5y agoWhat's the 67.5 for?
- colinmhayes 5y agoah mb, was looking at max with employer match.
- throw0101a 5y ago> - 4% withdrawal rate. Note: the "Four Percent Rule" that many people go by is not "Take out 4% of your portfolio every year." It is "Take out 4% in the first year, and then adjust by inflation every subsequent year." * https://en.wikipedia.org/wiki/William_Bengen https://en.wikipedia.org/wiki/William_Bengen * https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study So: * Year 1: Take out 4% of portfolio. * Year 2: Year 1 amount + inflation of Year 1. * Year 3: Year 2 amount + inflation of Year 2. […] * Year N: Year (N-1) amount + inflation of Year (N-1). Though as you age the inflation adjustment tends to be less important as people tend to spend less.
- throwoutway 5y ago50% employee match? There is usually a $ or % cap for 99% of Americans. 50% up to X