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

Updated: 01/31/2021 by Financial Samurai 66 Comments

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
$17,500$17,500100.00%$1,750
$17,500$30,00058.33%$3,000
$17,500$50,00035.00%$5,000
$17,500$75,00023.33%$7,500
$17,500$100,00017.50%$10,000
$17,500$150,00011.67%$15,000
$17,500$200,0008.75%$20,000
$17,500$300,0005.83%$30,000
$17,500$400,0004.38%$40,000
$17,500$500,0003.50%$50,000
$17,500$1,000,0001.75%$100,000
$17,500$1,500,0001.17%$150,000
$17,500$2,000,0000.88%$200,000
$17,500$3,000,0000.58%$300,000

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.

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.

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.

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Filed Under: Investments

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse (RIP). In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher rental yields in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free. With mortgage rates down dramatically post the regional bank runs, real estate is now much more attractive.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

Financial Samurai has a partnership with Fundrise and PolicyGenius and is also a client of both. Financial Samurai earns a commission for each sign up at no cost to you. 

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Comments

  1. Jay says

    January 21, 2016 at 8:11 am

    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??

    Reply
  2. Ken says

    June 3, 2013 at 7:09 pm

    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.

    Reply
    • Financial Samurai says

      June 3, 2013 at 7:18 pm

      S&P500 is up 15% in 2013 as of 6/3/2013. What are you invested in?

      Read this too https://www.financialsamurai.com/2013/06/03/are-you-a-real-investor-if-you-do-not-produce-alpha/

      Reply
  3. VC says

    April 23, 2013 at 12:51 am

    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.

    Reply
    • Financial Samurai says

      April 23, 2013 at 1:31 pm

      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?

      Reply
      • VC says

        April 24, 2013 at 7:32 am

        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.

        Reply
        • Financial Samurai says

          April 24, 2013 at 10:09 am

          Yep. For after tax, you can compound in 401k or in a brokerage account. Doesn’t really matter. What matters then are your investment selections.

          Reply
          • Wookie says

            February 18, 2014 at 6:41 am

            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….

            Reply
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  1. How Much Is Optionality Worth To You? | Financial Samurai says:
    February 9, 2015 at 2:30 pm

    […] we stop being so parsimonious with our money because our financial nut grows to the point where we can afford luxuries otherwise foreign to us in the past. The luxuries […]

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  2. Better Investing: Figuring Out How Much More To Dollar Cost Average | Financial Samurai says:
    February 8, 2015 at 8:00 pm

    […] you don’t have to think too much. All you have to do is not forget to invest, and eventually your financial nut will grow so large you’ll achieve make it rain status. Growing your wealth is all about […]

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