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

In order to achieve financial freedom, you must build your financial nut as large as possible. Once you have a larger enough financial nut, it will be able to generate enough passive income to cover your living expenses. This is the true definition of financial independence.

In some years, your financial nut will return an even greater amount of money than your day job or freelance income. However, in other years, your financial nut will lose you more money than you make from active income sources. Therefore, having a proper allocation of stocks and bonds is important.

I want to get everybody talking about their retirement portfolios because deciding on how often to rebalance and running different growth scenarios matters more over time.

Contributing the maximum $19,500 a year to your 401(k) (for 2021) 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 went up 16% in 2020. That's a healthy $160,000 gain in your million dollar portfolio. 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.

How Your Financial Nut Matters

To demonstrate the importance of building a large financial nut, let's use the 401k as an example.

ContributionPortfolio SizeContribution As % Of Portfolio10% Change In Portfolio

When your portfolio gets to $175,000, your returns will outstrip your 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.


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.

Personal Capital Retirement Planner Tool

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 2021 and beyond.

66 thoughts on “Build Your Financial Nut: 401(k) Retirement Contributions Matter Less Over Time”

  1. Sam is it bad if I’m still in school and will graduate at 24.I am 22 right now and put 2,000 in my Ira and being in school I don’t have a match when did you start saving??

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  4. How are you guys getting 10% on your 401K? I have an IRA (I’m self employed) where my max is only $5,000/yr and my return is 0%. Nothing. No fees either, but it’s not growing at all.

  5. Sam, What do you think about maxing beyond $17,500 in 401K? IRS says the absolute max for 401K is actually $50,000/yr. So my contribution is roughly:
    1. $13,000 tax-deferred, traditional 401K
    2. $4,500 company matching
    3. $32,500 after-tax 401K. All growth compounded tax-deferred. Contributions withdrawal, tax free. Earnings withdrawal, taxed at income rates.

    I plan to retire early, (at age 41) so I’ll convert all the after-tax 401K (contributions and earnings) to Roth IRA when I leave. Just pay some tax on earnings (I’ll convert after retiring overseas 1 year to get the $92,000 federal tax deduction).

    I save a lot more in my taxable account to hold me until 59.5.

    1. If you got the extra liquidity and like the funds, go for it. I contribute extra into my 401(k) for a year until I decided to buy my second property.

      However, best to just invest in an after-tax brokerage account so you have the flexibility. The brokerage account should have your same funds.

      Why not max out $17,500 tax deferred and then do the after tax stuff?

      1. Yes, after-tax 401K is less flexible. But it makes up for it by compounding tax free for 20-25 years.

        I looked back at my 401K plan. I did max my contributions to $17,000 (for 2012), and got a small portion from matching. The rest was after-tax.

          1. One advantage to adding after tax contributions to the 401k and maxing out to $50k+ is that it becomes an extension of the paycheck ‘autopilot’ mentality. It’s never in your checking account, and it’s beyond temptation.

            When you’ve got an extra $10k in your checking account, you may know on an intellectual level that you should buy a CD or mutual fund, but it can be too easy to buy a new motorcycle instead.

            And I’ll say again, 55 is the age of withdrawals from a 401k. If you’re 30 and planning your ER strategy, the difference between 55 and 59.5 may seem trivial. If you’re 53 like me….

  6. Sam would you recommend maxing out my 457 or paying down the mortgage? I figure I’ll need the mortgage paid off to retire early.

    I also am a state employee and will receive a pension equal to 2/3 my original salary for the rest of my life when I retire. I always find your website awesome but a bit lacking if you have a pension coming.

    At this point I can Max the 457 or pay off the mortgage in about 10 years. What’s the sage advice in my situation?

  7. I only do a little above the match b/c my 401k is TERRIBLE. All the fees on the funds are between 1 and 2%! My cash account is even at .98%!

  8. Well Heeled Blog

    My husband and I have around $150K in deferred retirement accounts. We are in our mid/late 20s. We’ll max out our Roth IRAs this year while I’m in school. I’m hoping 2014 will be the year when he can max our his 401K and I can contribute 1/2, and 2015 we can max out everything – Roth IRA & 401Ks, and then keep that going for as long as possible.

    1. Both spouses maxing out their 401ks is huge. $35,000 in contributions alone + performance and match can easily bring the total closer to $50,000 a year. 10 years of contribution and that’s $500K in 10 years by your mid 30s!

  9. Savvy Financial Latina

    I don’t max out my 401K yet. Right now I contribute 10% plus my employer matches 7%. I’m not contributing to a 401K because we are saving for a down payment aggressively. In 2014, I will start maxing it out, and try to max out the ROTH IRAs.

  10. Well one has to consider that a lot of the jobs that used to pay $60,000 have disappeared while a lot of the things that are replacing those tend to be low wage. Perhaps we need to start focusing on helping people to find ways to earn more so they can move onward to better things?

    1. I’ll definitely work on more posts that focus on making more money in the future. I sincerely hope that everyone can find progress in their incomes and careers over time. I know $55,000-60,000 is roughly the household median income. I know readers here can do much better than that!

  11. I’m definitely trying to build my empire, but I’m not exciting about IRAs etc because the government has so many controls on it, like when I can take it out, etc. I wouldn’t be surprised if they nationalize my contributions (IE steal it comparable to cyprus bank accounts). Another variable — what if I decide to move to Singapore / Australia, etc? Would my retirement accounts do me much good?

    1. Singapore and Australia are good choices! Singapore might be better since their tax rate for income is a 20% flat tax and heading lower + they have a budget surplus and great government safety net.

  12. I’d like to add one thing to your statement that retirement contributions matter less over time (which I agree with) and that is that they are critical in the first stages of your savings career. The earlier you start to invest in your 401k, the quicker you will reach the point where how much you invest isn’t as critical as managing what you have in there!

  13. @Marvin, fwiw, many corporations limit the 401(k) contributions to a percentage of salary, i.e. 10%, 20%. Ed Slott, a pioneer for the concept in the ’80s by interpreting the tax code, wrote a great book with lots of details called “The Retirement Savings Time Bomb.” Long story short, the highest earners often reap the greatest benefits by sheltering more money; there is a requirement for the lower earners to participate at a certain level, and for the aggregate amount to be distributed by a certain level. Many corporations are now making the 401(k) participation the ‘default’ option for new hires, not out of the goodness of their heart but so the top executives can continue to defer maximum amounts. Still a remarkably great deal for everyone.

  14. No doubt by 45 one should feel financially strong if one has averaged $60,000/year or so in income and has maxed out their savings. 20-23 years is a long time to save and invest!

  15. Excellent question Nick. It depends on when you plan to purchase your rental property I supposed. The property market is probably going to continue rebounding for the next 3-5 years a long with the stock market. If you end up buying real estate in 3-5 years, you will probably be buying at much higher levels. So, equities, on a relative basis is more attractive since you can buy now. Just beware of the inevitable pullback this summer.

    If you have an existing rental property now, I wouldn’t pay it off b/c you don’t want to be paying taxes on your income until you have negligible income.

  16. I like your mindset of making $5 million “bomb proof.” The last thing you want to do is lose 20% or $1 million of your financial nut!

    Folks who tell me I’m way too conservative and should be 100% in equities don’t get it. When you are retired, you protect your Nut like SPARTA. If you can earn 4% risk free on $5 mill, that’s $200,000. I’ll take it!

  17. I’m not sure if sorry mutual funds is the problem as every 401k plan I’ve seen has a pretty wide selection. The ironic key to wealth is actually locking up the money to compound for a very long time.

    Imagine how nice it would be to have your early retirement money AND your 401(k) compounded buffer money at age 60?

  18. Is it possible to do both max out your 401(k) and save the same percent of your after-tax income? One of the nice things about maxing out $17,500 is that it’s not $17,500 out of your paycheck, but more like $13,000-$14,000 depending on your tax rate. The “blow” doesn’t feel as bad, and one gets used to maxing out relatively quickly, and can then start saving aggressively for retirement.

    1. Dividend Growth Investor

      This is a great piece of advice on theory. Say you are making the median income in the US ($40-$50K), and you are single/married and you want to retire at 40 ( say in 15 – 17 years). You contribute the maximum amount for these years and say you reach $300 – $400K ( enough for you to retire). You decide to retire, follow the 4% rule. My question is – how do you take the money out? And how much is it going to cost you?

      My other question to Sam is – did you have all of your stocks in a 401 (K) plan? Based on reading your site it looks like your were making six figures every year, at which point you probably maxed out 401 K plans, and then had an amount equivalent to 2 – 3 times the 401K contribution left over to fund investments in a taxable brokerage account.

      1. Howdy mate, the straightforward answer to your first question is: You don’t take your money out before 59.5. This isn’t an early retirement post, but a standard retirement helping post. This is a pre-tax maximum recommendation post that goes to show once you’ve built a big enough financial nut, life becomes much easier (in a bull market) as your money really starts working for you until you can take it out.

        As to your second question, yes, I saved and invested 50-70% of my after-tax income after maxing out my 401k starting the 2nd full year of work. It was tough living in Manhattan, and sharing a studio with a friend for two years to save money, but it was worth it in the end.

        Treat your 401k like Social Security by writing it off mentally, but max it out while you can. If it’s there at 60, then great! IF not, you never expected it. That’s what after-tax savings and investing is for. Don’t use the 401k as a crutch.

    2. Dividend Growth Investor

      Hi Sam,

      Unfortunately, your readers seem to be of the ER type so this type of advise doesn’t resonate well with them ;-)

      However, if you do plan to contribute the maximums to 401 (K) for 3 – 4 decades ( which is usually how long people stay in the workforce), you will definitely do well.

      1. The ER crowd is actually a very small portion of my readers. You might think it’s more because of my recent posts on early retirement thoughts, but it’s just timing.

        That said, I’m sure many would like to get guidance on how to retire earlier.

    1. @CDP45, the “4% Rule” was published in 1994 and based on 75 years of equity returns. The S&P 500 is just now coming up on the nominal top reached 13 years ago in 2000. If you retired 13 years ago with half your money in equities, you would be in a huge world of financial hurt with a 4% withdrawal rate; compounding works both ways.

      People don’t have a 75 year window of investment. They make their money, and then expect it to work for them for 15 years minimum and up to 60 years in the case of some posters on FS. If you get whacked up front, and withdraw 4% from a nut that not only goes nowhere for 13 years but is actually 50% less at times, it is going to be a long and disappointing retirement. There is an assumption of a “7% stock market return” but I’m not seeing it going forward. A 7% return would put the S&P 500 at 2,180 in 5 years. Good luck with that.

      1. “A 7% return would put the S&P 500 at 2,180 in 5 years. Good luck with that.”

        Well, its 4 years later, not 5, and S&P = 2400. So yea, we had some luck here. So much for your pessimism. Lesson = don’t let your biases steer you wrong, just pick an allocation and stick with it (op may get the last laugh, as we can crash in the next year).

  19. Kim@Eyesonthedollar

    I would certainly max out my 401k if possible, but I don’t know that I would do it at the expense of passing up other investing opportunities. Buying my business ate up a huge chunk of money that could have been put toward retirement, but I get to sell it now for a nice profit rather than waiting until I’m 59.5 to enjoy it. I have maxed everything out the past couple of years and hope to continue to do so, but if a good rental property came up that caused me to divert from that, I would consider it.

    1. I would still max it out first and then look at other business investing opportunities. Way too many businesses fail, despite pitching a great game. At least your 401k will be yours forever.

  20. I like the idea that simply investing is probably more important at the beginning that worry so much about specific fund allocations. I know a lot of friends who will debate to the end of the earth a few half percents of interest on funds but neglect that actually investing more money would probably be the first step. Great post.

  21. I’m confused as to why you’re not contributing to your 401k still even though you are “retired”. You still have passive income and can probably use it to open and fund an se 401. If it was a good investment when you were working not sure why it isn’t now unless you’re not taking in enough money to fund it and live. But then you know why young people get to thinking that way sometimes rather than cutting back.

    1. B/c a 401(k) is an employer sponsored plan. I’ve got to either rollover my 401(k) to an IRA or do a solo-401(k) with my own company. The company needs to make money first in order to contribute. I can’t contribute via my passive income sources.

  22. The short answer is never! I will contribute until I retire in 2017. Why not, it is tax deferred and the return is pretty good. Hopefully, I will live 30 years in retirement when I stop contributing.

  23. This will be my first year fully maxing out my 401k as I no longer qualify for the Roth IRA unless it’s backdoor. I’m in my mid 20’s and am planning to max out my 401k for the rest of my professional career.

    I also plan on retiring early as do many of the other people on this blog. I plan to use my taxable assets for the early retirement period (40s-50s) and then draw down my 401k once I get to 59.5. I think people overlook the fact that if you are starting to worry about drawing down your taxable assets, you can use the 72-t rule to withdraw money from your 401k penalty free before you turn 59.5 (yes it does take some planning). That being said, if you’re having cash problems retiring early, you may want to re-think your retirement strategy. Thanks for all the great advice Sam!

    1. Good work Mark. I like your strategy of using your early retirement taxable assets for your 40s and 50s, and then use your 401k and IRA money post 60. That’s exactly my plan as well, although I’ve started in my mid 30s.

  24. @ JC @ Passive-Income-Pursuit Dude, trust me, the max 401k match is the easiest tax deduction a young guy will see. That and the mortgage deduction. I just get a little depressed to see us young people shrugging off the best ways to save money for the future… Shelter your income, then you can give back the moolah as you see fit… or when we get old

  25. I make $35,000 a year give or take a bit.
    My employee matches 4% of my gross income.
    I pay in enough to get the full match. I have no debt.
    What is the ideal amount for someone like me
    To contribute. I could theoretically max it, but I don’t
    Particularly like not having a dividend paying
    Option in my 401k plan options nor a no fee option.
    I also prefer to be able to save some of that money in a place where
    I will not have to take a penalty to withdraw.
    Please advise, thanks.

    1. At $35K, it is tough to max out the 401k. I don’t know your living expenses, so it’s hard to say.

      But, I will advise you to raise your 401k contribution by 1% a month until it HURTS. Keep the contribution at a painful level until it no longer hurts, and start adding another 1% a month. You’ll find out for yourself what you think you can tolerate.

      1. Assuming I could max it, would it make sense to put all my extra money here? Meaning, if I did max out at 17500 I would have no other free cash to invest/save.

        1. If all you could ever afford to save is $17,500, then probably not. I’d try increase in $1,000 increments until you get to $17,500. You can always reduce your contributions if they get too onerous. I’d like people to at least try and see how much savings they can “take” before they cry Uncle. I have a feeling most do not test this water, but many will be surprised at how they adjust.

  26. The First Million is the Hardest

    I’m definitely not to the point where my returns are overshadowing my contributions. I still feel like I’m trying to make up for some lost time early on in my career.

    I haven’t bothered to calculate how much of a nut I’ll need. Right now I’m in “save as much as possible” mode. Once I get to the point where my returns outweigh my contributions I’ll take a closer look at projecting what I’ll need. For now the goal is to just do everything possible to get to that point.

    1. That’s a great mode and mindset to have. It becomes a fun game where the accumulation of savings becomes your points. I love games, so maybe this is why I love to save.

  27. Jacob@CashCowCouple

    My wife and I don’t make much right now so we probably won’t hit $17.5k this year. By June, our income should see a sizable increase, allowing more contributions.

    Oh passive income – one day we will meet.

  28. I won’t be contributing to my 401k in 2013 either. I will try to get back to it in 2014 and beyond. I probably would be comfortable not contributing once 4% of the 401k can pay for my yearly cost of living plus a little cushion. Maybe 500k.

  29. Funny, it’s kind of the opposite of paying off your home… if we could just get the two to flip-flop retirement would be so much easier.

  30. When I first had the option to open a 401k I was lazy and didn’t want to bother. Fortunately I was talked into starting one and I’m so glad I did. Company matching is awesome “free” money and I agree with you that contributions really do add up nicely over time. I set a reminder to check my balance and allocations at least once a quarter.

  31. Just another point of view from the government employee perspective. As a former cop, I have a defined benefit pension that is COLA’d. In addition, my employer offered the government version of the deferred compensation known as the 457 plan. Some government entities call it the 403b. These are like the 401k only without the employer matching contribution. Although not as sweet a deal ad the 401k, your contributions are pre-tax and accumulate tax free like a 401k. You can get your money out after you retire without penalty at any age, so long as you are retired from your government job. Not so sweet on the front end. Sweeter on the back end.

    Young samurai’s listen to Sensei. Take advantage of your deferred compensation plan whether the government or private sector variety. I took the advice of my wise mamason and started out contributing what I could afford. Yearly COLA’s were contributed to the 457 until I maxed out. After age 50, the 457 plan allowed me to participate in what was called “catch up” which allowed me to contribute an additional $5000 to the $17,500 max.

    Something I also did that our Sensei, the wise Mr. Samurai might not agree with, was I used approximately $90,000 of my 457 stash to purchase 3 years toward my service credit in my government pension. I did this about 12 years ago. This allowed me to retire last year, three years early. To me it was worth it. Retirement is great. Life is good.

    1. Correct. Early withdrawal penalty does not apply. The requirement for withdrawals at 70.5 age still applies.

      1. Age 55 is the pain-free withdrawal age for a 401k. 59.5 for an IRA, a key difference between the two.

    2. Steve, you reached your end goal, which was to retire early so I’m totally for what you’ve done. There are so many ways to get there. It’s up to each of us to figure out the best way. If I was blessed with a pension, I’d probably stick it out for another 5 years. Alas, I was not so fortunate.

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