Build Your Financial Nut: 401(k) Retirement Contributions Matter Less Over Time

financial-nutI 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

What Does Early Retirement Feel Like? The Positives And Negatives Of Not Working For A Living

Retirement Travel In SantoriniFinancial independence and retirement are used interchangeably, but there are some subtle differences. Financial independence is usually applicable to people across their entire lifespan. Those who cashed out $5 million dollars worth of Facebook stock at the age of 30 are financially independent just like those who saved $5 million in their retirement funds by the age of 65.

Retirement, on the other hand, is a term often used to describe someone in the last quarter of their lives e.g. ages 65 and up. This is why some folks get so hot and bothered if you aren’t in the upper ages but say you are retired. They don’t think you deserve retirement because you’re not old enough! If you don’t want unwanted attention as an early retiree, just say you are unemployed, on sabbatical, or an entrepreneur.

The reality is all of us would rather be financially independent earlier, so we have more time to enjoy our wealth. When the director of admissions at Berkeley asked why I was applying so early (25), I told her it was because I knew what I wanted to do and felt it best to leverage an MBA degree sooner, for a longer period of time. Little did I know I’d be done 10 years later.

The older we get the more we are willing to trade money for time since we have less of it. Given I’ve already described what financial independence feels like, I’d like to now describe what life is like once you no longer have to report for duty. I’ll be as candid as possible so you can get a realistic understanding.

THE CHANGED LIFE OF A RETIRED MAN – THE POSITIVES

The Average Net Worth For The Above Average Married Couple

A cute couple of dogs.One of the most popular posts on Financial Samurai with over 250 comments is The Average Net Worth For The Above Average Person. The “above average person” is loosely defined as someone who graduated from college (35% of the American population), works hard, plays well with others, takes full advantage of their pre-tax retirement plans, saves additional disposable income, stays on top of their finances, expects nothing from their parents or the government and is not delusional. If you were a “C student” and expect to live an “A lifestyle,” you are definitely not the above average person!

Take a moment to study the above average person’s net worth chart again. Somewhere between the ages of 45-50, the above average person’s net worth reaches over one million dollars. We can all agree that thanks to inflation, easy monetary policy, a roaring bull market and a recovery in real estate, becoming a millionaire by the time we retire is fast becoming the rule, rather than the exception.

The Average Net Worth For The Above Average Person by Financial Samurai

It’s important to note the figures in my chart are for individuals and not for couples. For those of you who combined your household net worth to see where you stand, so sorry. That’s cheating. At the same time, not everybody can find someone they love hence why I initially created a per person chart. It would be presumptuous to assume we can all live in marital bliss. Not everybody is even allowed to get married thanks to the government telling us who we can and cannot be with. For simplicity’s sake, I will refer to “married couples” as anybody who is in a long term relationship.

This article will come up with reasonable “above average couple net worth” charts based on what I think, what the government thinks, what you think, and the realities of life. One can also define “above average” as one standard deviation beyond the midpoint of the normal distribution curve (top 16%). Not every couple can be above average. But every couple can certainly try.

THE AVERAGE NET WORTH OF THE ABOVE AVERAGE COUPLE

Cheap Health Insurance Options For The Unemployed, Self-Employed, Or Early Retiree

Restless In Warnemunde Germany

Whether you are unemployed by choice or due to unfortunate circumstance, having health insurance is a must. According to The American Journal Of Medicine, 62% of all bankruptcies in 2007 were health related and that’s before the economic meltdown. What’s more frightening is that back in 2001, health related bankruptcies were “only” 45% of total. The epidemic is growing!

Say what you will about Universal Healthcare, with a nation as rich as ours going bankrupt at the rate of 62% due to health expenses is an absolute travesty. Genetics and a drunk driver hitting you while crossing the street doesn’t discriminate between rich and poor. So why should one die while another lives when all it takes is money to save a life?

In 2009 roughly 2.3 million people were unemployed for longer than six months. By June 2012, the ranks of the long-term jobless soared more than 100 percent to 5.3 million. The employment market is thankfully recovering with a rise in corporate profits, but we are still at levels much higher than the natural rate of full employment.

You do not want to be unemployed AND uninsured. You’ve already lost your steady paycheck. The last thing you want is to have a medical disaster that wipes out your savings, emergency fund, and retirement funds. If you lose everything while unemployed, it will be brutally difficult to rebuild. You might very well enter a cycle of poverty and never get out.

AFFORDABLE HEALTH INSURANCE OPTIONS

Recommended Net Worth Allocation By Age And Work Experience

Squaw Valley USA, Lake Tahoe With the average savings rate below 5%, a median 401(k) of only $100,000, and an average 401(k) balance at retirement age 60 of around $230,000, most Americans are financially screwed in 2014. Just do the math yourself. Add the average Social Security payment per person of $18,000 a year to a 4% withdrawal rate on $230,000 and you get $27,200 a year to live happily until you die at 85.

Let’s think about this some more. You spend almost 40 years of your life working just to live off minimum wage in retirement. Hopefully you were able to live it up during your working years, otherwise, how else can we explain a national sub 5% savings rate? Blowing lots of money for fun is fine if you expect to live like a pauper when you’re old. The better way to do things is to smooth out your spending across your expected life expectancy to reduce stress and live a much steadier lifestyle.

We’ve talked in detail about the proper asset allocation of stocks and bonds by age. Just know that stocks should be a minority portion of your net worth by the time you are middle age. If you so happen to have 100% of your investment allocation in stocks before retirement and 2009 happens, well then you are poop out of luck. Calculate how much you lost, equate your loss to how many years it took you to save the value of the loss, and expect to work that many more years of your life. Now that’s depressing.

We also found out that the median net worth for 2010 plunged to $77,300 from a high of $126,400 in 2007. Surely the median net worth has recovered since 2010, but such data from the government only rolls around every three years. The main nugget of information is that from 2007 to 2010, the median home equity dropped from $110,000 to $75,000. In other words, the median American’s net worth almost ENTIRELY consists of home equity! What another bad idea.

Finally, despite a 120%+ rebound in stocks since the bottom of the crisis and savings interest rates of only 0.1% due to a dovish Fed, a lot of people missed out on the recovery as evidenced by a tremendous amount of cash still sitting on the sidelines due to fear. Billionaire hedge fund manager David Einhorn is suing Apple for hoarding their $134 billion in cash due to a “grandma depression mentality.” Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and 2006 housing correction probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before.

The question we must all ask ourselves is, “What is the right net worth allocation to allow for the most comfortable financial growth?” There is no easy answer to this question as everybody is of different age, intelligence, work ethic, and risk tolerance. I will attempt to address this question based based on what has worked for me, and what I believe will work for anybody who is serious about building enduring financial wealth for the long run. I’ve spent over 10 hours writing this post in hopes that every Financial Samurai reader can build a rock steady net worth portfolio to make money in good times and lose less in bad times.

THE MENTAL FRAMEWORK FOR NET WORTH ALLOCATION