I want to get everybody talking about their retirement portfolios because making the proper net worth allocation, deciding on how often to rebalance, and running different growth scenarios matters more over time. Contributing the maximum $17,500 a year to your 401(k) should be standard. If you’re making more than $60,000 a year and not maxing out your 401(k), then you should probably give yourself a timeout to contemplate why you’re slicing off your toes.
As you can tell from my 401(k) by age chart, contributions add up quickly over time. Assuming you receive no company match and suffer no losses, you’ll have at least $100,000 in your 401(k) in six years. In 10 years, you’ll probably sock away over $200,000 and in 30 years you’ll finally reach that magical $1 million dollar mark.
The S&P 500 is up roughly 10% year to date. That’s a healthy $100,000 gain in your million dollar portfolio in three months without having to do much of anything. I’m cautious investing new money now, but the point is once you’ve amassed a sizable nut there’s no longer a need to work in a bull market – unless you are restless like me.
401k CONTRIBUTIONS AS A PERCENTAGE OF YOUR PORTFOLIO
|Contribution||Portfolio Size||Contribution As % Of Portfolio||10% Change In Portfolio|
When your portfolio gets to $175,000, your returns will outstrip your maximum 401(k) contribution amount with a 10% change obviously. It’s my belief that once you reach somewhere around $250,000 in your 401(k), you’ll start caring less about your contributions and start really caring about your investments. Your returns start becoming meaningful and you start to believe $1 million is within reach if you don’t blow up.
Now imagine if you had a $2 million dollar portfolio and returned $200,000. $200,000 is 11.5X greater than a $17,500 contribution. At this point, I hope you’ve either become a very savvy investor by now, or have a private wealth manager looking after your money! Building your financial nut with the help of a financial advisor is somewhat of a chicken or the egg type of dilemma. You need enough under management to make the relationship worthwhile. Yet, without an advisor perhaps you will never reach “worthwhile” type of money as you get sidetracked or make bad investment choices.
BACK TO YOUR MONEY STRENGTH
Making money through work is easy compared to having your money work for you. In the article, “Your Money Strength: How Hard Is Your Money Working For You?” I gave stock stock investing a “B” grade because after you find your desired portfolio of stocks, you hope for the best, rebalance every so often, and collect some dividends.
Once your portfolio grows large enough, your money strength increases to an “A.” My 401(K) at the end of 2011 was around $310,000 and grew by 16% or roughly $48,000 in 2012. The effort required to make $48,000 through investments was easy compared to my time working at McDonald’s. $48,000 is also 2.8X greater than my $17,000 contribution. It’s just important NOT to confuse brains with a bull market now that the good times are back. We must constantly remind ourselves we cannot outsmart the markets over the long run.
2013 will be the first full year I do not contribute to my 401(k) given I’ve retired. As a result, I’ve found my investing style to be more cautious given I no longer have a contribution buffer in case things turn sour. My old self would probably have stayed 95% in equities until the markets started rolling over. My new self decided to take profits when the markets were up 9% (given that is what I predicted for the full year return) and wait for the storm that doesn’t seem to come. It’s a disconcerting feeling not maxing out my 401(k) for the first time in over a decade, so please cherish your 401(k) if you have the ability to contribute.
MAKE THE EFFORT TO STUDY, SAVE, AND INVEST
Your retirement portfolios are worth studying. Think about how much time you put into researching a car, a home, a school, or even an item of clothing. Now compare how much time you spend learning about investing and economics. Whether it’s through laziness or fear, I encourage you to get your priorities straight.
Once you build a sizable financial nut, making money becomes much easier. Follow my 1/10th rule for car buying. Put away your credit card if you can’t pay in full. Save and invest for goodness sake. You don’t want to wake up unemployed at 45 years old and complain why you don’t have enough money to survive for the next six months. 20 years of saving and investing should provide you years of reprieve.
Your retirement contributions matter less over time. What matters more is having the right asset allocation and the right holdings. I’m not going to tell you what to invest in or what your risk tolerance is. Only you can decide. Have an open dialogue with your above average spouse or a friend you trust about your finances. Your older self will thank you!
How To Build Your Financial Nut
Manage Your Money In One Place: The best way to build a financial nut is to get a handle on your finances by signing up with Personal Capital. They are a free online software which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 30 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. The best feature is the 401K Fee Analyzer which has saved me over $1,700 a year in portfolio fees I had no idea I was paying. Personal Capital takes less than one minute to sign up and is the most valuable tool I’ve found to help folks manage their money.
Be Your Own Mutual Fund Manager: Motif Investing allows you to build a basket of 30 stocks for only $9.95, instead of spending the normal $7.95 for each position ($230+ commissions). There’s no need to pay expensive and ongoing active management fees for mutual funds again. Once you build your own portfolio, or purchase one of the 150+ professionally created motifs, you can simple dollar cost average with one click of the button every time you have money to invest. You can even buy retirement Horizon motifs, that act like target date funds, except you don’t have to pay the 1% management fee either. Finally, you get up to $150 in free trading credit when you start trading with Motif Investing. Motif Investing is truly the low-cost, efficient, and innovate way to invest.
Mobilize Your Idle Cash Earning Nothing: Wealthfront is an excellent algorithmic advisory choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves once they’ve gone through the discovery process. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $10,000 and only 0.25% for any money over $10,000. Their minimum is only $500 to get started. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.