Explaining Why The Median 401(k) Retirement Balance By Age Is Dangerously Low

Retirement Life On Lake TahoeYou likely won’t be able to live off your 401(k) alone in retirement, but you should be able to combine your 401(k) with alternative savings, investments, and Social Security to live a financially free life when the time comes to withdraw at the age of 59.5. Most Americans don’t have pensions.

The below chart shows what a typical 22 year old college graduate should have accumulated in their 401(k) if they followed my advice and started maxing out their 401(k) after two years of working. The high end shows what happens if there is roughly a 5% constant rate of return from investing. I’m not even including contributions or company match to keep things conservative.

The reality is that the median account balance in the U.S. is only around $101,650 at the end of 2013 according to a study by the Transamerica Center for Retirement Studies and Vanguard. At least the median has risen by over 100% from around $47,000 during the depths of the bear market in 2009. Furthermore, the current median account balance is now higher than pre-crash 2007 levels of $74,781 thanks to contributions.

Given the median age of Americans is 35.3 according to the US Census Bureau, the median 401(k) balance per person should be closer to $218,000-$350,000 according to my 401(k) retirement savings guide instead of $101,650. So what happened to the missing $117,000 to $239,000?

FINANCIAL SAMURAI PRE-TAX SAVINGS GUIDELINE (401(k) + IRA)

Recommend 401k Savings Chart

HOW MUCH DO PEOPLE REALLY SAVE FOR RETIREMENT?

How To Pay Little To No Taxes For The Rest Of Your Life

Save on taxes and go see Istanbul, TurkeyFor the past 10 years, I’ve been a buffoon. Ever since I was 25, I paid more than $100,000 a year in taxes. Even though I didn’t work for most of last year, I still paid over six figures in taxes. You don’t get a thank you card if you pay over $1 million dollars in taxes in case you’re wondering. Instead, you get the government hooked on your juice with¬†fishing letters from the IRS asking for more!

I didn’t mind paying my fair share of taxes when I was in my 20s because I was excited to progress in my career. I felt lucky to just have a job that allowed me to save like crazy and help others financially through charitable donations. As I grew older, my views on income taxes changed.

Since the turn of the century, we’ve witnessed a devastating war in Iraqistan that by some estimates have taken over 1 million lives. We’ve observed Congress do nothing to pass a balanced budget since 2008 while giving themselves pay raises every single year. During the 2009-2010 financial crisis, the government doled out massive bailouts to institutions such as AIG while allowing executives to pay themselves millions of dollars. AIG even had the audacity to contemplate suing the federal government this year for wrongful terms! What the hell.

I felt sick to my stomach supporting such atrocities by a government who also discriminates against certain citizens while displaying no fiscal discipline. Why can’t we all be treated equally? I don’t know. When it takes 18 months for the city to fix a noisy and dangerous manhole cover, perhaps paying tens of thousands of dollars in state taxes is not worth it anymore. How about $5 bucks instead?

John F. Kennedy once said, “Ask not what your country can do for you, ask what you can do for your country.” Unfortunately, those words were spoken on January 20, 1961. Most of us weren’t alive then since the median age in America is only 35. I’m afraid our society has permanently adopted a one-way take, take, take mentality.

I think I’ve paid my dues. Unless you’ve paid as much in taxes, please don’t criticize me for writing an article on how to help you legally pay less taxes. To build wealth, we must minimize our expenses. Taxes are one of the largest expenses we’ll ever incur.

THE BEST WAY TO PAY LITTLE TO NO TAXES

The Proper Asset Allocation Of Stocks And Bonds By Age

Endless Variety Of Gouda CheeseTo start, there is no “correct” asset allocation by age. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate, or risk loving? I’m personally risk loving or risk averse, and nothing in between. When I see “Neutral” ratings by research analysts, I want to slap them upside the head for having no conviction. Then the optimist in me thinks what a great world to have occupations that pay well for providing no opinion!

Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio. Meanwhile, you can have another portfolio in an after-tax brokerage account like E*Trade that is much smaller where you punt stocks. If you blow up your E*Trade account, you’ll survive. If you demolish your 401K, you might need to delay retirement for years.

I ran my current 401K through Personal Capital to see what they thought about my aggressive asset allocation. To no surprise, the below chart is what they came back with. I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” tab.

portfolio-analysis

I am going to provide you with five recommended asset allocation models to fit everyone’s investment risk profile: Conventional, New Life, Survival, Nothing To Lose, and Financial Samurai. We will talk through each model to see whether it fits your present financial situation. Your asset allocation will switch over time of course.

Before we look into each asset allocation model, we must first look at the historical returns for stocks and bonds. The goal of the charts is to give you basis for how to think about returns from both asset classes. Stocks have outperformed bonds in the long run as you will see. However, stocks are also much more volatile. Armed with historical knowledge, we can then make logical assumptions about the future.

CD Investment Alternatives: Why I’m No Longer Investing In CDs

Hawaiian SunsetCertificates of deposits, aka CDs have long been a stable part of my overall investment portfolio. Whether it was a bull market or a bear market, I would always invest roughly 30% of every dollar saved in the longest CD possible since college. Although I lost around 30% of my net worth during the worst of the crisis in 2009, I knew that even if everything went to hell I’d have at least 30% of my net worth intact. The feeling was very comforting, especially when yields were over 4%.

Unfortunately or fortunately, times have changed due to the Fed’s stance on keeping rates low until 2016 if not much longer. I strongly believe that low interest rates are here to stay for a while. We’ve still got a lot of economic slack in our economy to keep significant inflation at bay. Policy initiatives are also much quicker and more effective thanks to technology. As a result, everybody should:

1) Refinance their mortgages, call their credit card companies, and consolidate their student loans.

2) Be more amenable to taking on debt at the margin to build wealth e.g. buy real estate, invest in a business.

3) Look at all other investments besides CDs.

The best CD interest rate I can find is 2.2% for a 10 year CD as of 12/1/2014. The funny thing is, 2.2% is not bad given the 10-year yield is at around 1.85%. If you deal in LARGE numbers, a 0.3% spread will make you incredibly wealthy! Alas, most of us don’t have billions of dollars to invest and must rely on higher returns to surpass inflation and fund our retirement.

ALWAYS REMEMBER EVERYTHING IS RELATIVE IN INVESTING

How To Better Manage Your 401K For Retirement Success

Early Retirement Hawaiian SunsetEarly retirement is fantastic. There’s only one problem. Most early retirees no longer contribute to their 401Ks unless they start a business. Not only that, early retirees lose employer 401K match and profit sharing. I just took a look at my final year’s employer 401K profit sharing plus match and it came out to $27,000. There’s much more to your job than just your salary!

My 401K makes up a minority portion of my stock exposure as I’ve been aggressively investing through structured notes and after-tax accounts. Furthermore, I’ve been receiving more deferred company stock than desired. Although $400,000 is not a lot to retire on, it’s the best I could do after maxing out for 13 years after college. It should serve well for illustrative purposes to see how a portfolio can grow under different assumptions.

With the way the government loves to spend our money, I wouldn’t be surprised if the retirement age for distribution without penalty increases beyond 59.5 or the government imposes a “distribution tax” to take more of our money. That said, we can hope for the best by reducing our mutual fund expenses and creating different scenarios to better prepare for our future.

The best way to increasing our odds for retirement success is to run various investment scenarios. I will run three investment scenarios (Conservative, Realistic, Blue Sky) using the free 401K investment analyzer by Personal Capital. Regardless of whether you are retired or not, I encourage everybody to perform at least these three scenarios and write down some notes. Early retirees need to be extra diligent given we are more dependent on our investments to survive. If you have years to go before retirement, I suggest you pretend you are retired now so you can develop a fire to be all over your money!

CONSERVATIVE 401K PORTFOLIO SCENARIO