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.

Contribution	Portfolio Size	Contribution As % Of Portfolio	10% Change In Portfolio
$17,500	$17,500	100.00%	$1,750
$17,500	$30,000	58.33%	$3,000
$17,500	$50,000	35.00%	$5,000
$17,500	$75,000	23.33%	$7,500
$17,500	$100,000	17.50%	$10,000
$17,500	$150,000	11.67%	$15,000
$17,500	$200,000	8.75%	$20,000
$17,500	$300,000	5.83%	$30,000
$17,500	$400,000	4.38%	$40,000
$17,500	$500,000	3.50%	$50,000
$17,500	$1,000,000	1.75%	$100,000
$17,500	$1,500,000	1.17%	$150,000
$17,500	$2,000,000	0.88%	$200,000
$17,500	$3,000,000	0.58%	$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.

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.