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Top 401k Mistakes That Hurt Your Retirement

Published: 10/12/2020 | Updated: 11/08/2020 by Financial Samurai 60 Comments

Hopefully, everyone who has access to a 401k is contributing to a 401k. To not do so is a mistake you don’t want to realize when you’re old and unwilling or unable to work. This post will discuss all the top 401k mistakes that hurt your retirement.

Let us be clear. The government isn’t going to save you. With a large Social Security funding shortfall, the government is having a hard time saving itself.

Further, thanks to a global pandemic and massive stimulus, the government has a huge budget deficit. Therefore, the government will probably adversely affect your retirement life by either raising the eligibility age to receive Social Security and Medicare, raise taxes or both!

Having contributed to a 401k and a Solo 401k since 1999, I’ve made plenty of mistakes that have likely cost me over $200,000 in lost appreciation over the years. My goal for this post is to help you not make the same 401k mistakes I made.



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The Ideal Retirement Age To Minimize Regret And Maximize Happiness

Published: 10/11/2020 | Updated: 01/04/2021 by Financial Samurai 182 Comments

Contrary to popular belief, the ideal retirement age isn’t as soon as possible. Retire too soon and you may feel empty for never living up to your true work potential. Retire too late and you might always be left wondering what could have been if you had changed course sooner.

For example, a 35-year-old couple making $400,000 might love their jobs. With two young kids under three, both parents might both want to work for 20 more years. This way, they can maximize their capital and support their kids through college.

Then you might have a 30-year old couple making a combined $200,000. They don’t have kids and don’t want kids. Instead of needing a 4-bedroom, 3-bathroom home, they are happy living in a 1-bedroom condo for much less. All they want to do is travel and lead a simple life. In their mind, the ideal retirement age is 40.

To minimize regret and maximize happiness, I believe the ideal retirement age range is between 41-45. Let’s go through why.



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Surviving Off A $400K Income Biden Deems Rich Enough For Higher Taxes

Published: 10/07/2020 | Updated: 01/11/2021 by Financial Samurai 172 Comments

The average net worth for the above average person is large

Deca-millionaire Democratic Presidential-elect, Joe Biden, has stated he will raise taxes on people making over $400,000 a year if he is elected. Biden has called anybody who makes more than $400,000 “rich” and should, therefore, pay “their fair share” in taxes.

Further, Biden has stated once you make more than $400,000 a year, you will face a top marginal income tax bracket of 39.6%, up from 37% currently. In addition, you may likely have to pay FICA tax on income above $400,000 despite a cap on benefits.

Under billionaire Donald Trump’s tax plan, only after an individual makes over $518,401 does he or she pay the top marginal income tax rate of 37%. For married couples filing jointly, their income would have to breach $622,051 before facing a 37% marginal income tax rate.

$400K For Individuals Or Couples

It’s not clear whether Biden is making the $400,000 income threshold for the top marginal income tax rate for individuals or married couples.

If the $400,000 pertains to married couples only, then the income threshold for individuals facing the top marginal income tax rate will likely decline to somewhere around $250,000 – $300,000.

If the $400,000 pertains to individuals and married couples, then high-earning individuals best not get married! It would be much more tax-efficient to earn up to $400K per individual and just live happily ever after with another $400K-earning individual.

Now that the Democrats control both chambers of the house, federal income taxes are undoubtedly going up for the highest income earners.

2021 Federal Income Taxes


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Ranking The Best Passive Income Investments

Published: 09/29/2020 | Updated: 01/01/2021 by Financial Samurai 371 Comments

If you’re looking to achieve financial freedom before a traditional retirement age, you must build passive income. This post will highlight the best passive income investments to help you get there. Passive income is the holy grail of personal finance.

Why I Focused On Building Passive Income

After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at our company’s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.

There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. I started focusing on generating passive income in 1999.

However, it wasn’t until the 2008-2009 financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I’m sure many people during the global pandemic are feeling the same way about their occupations as well.

It wasn’t until 2012 when I generate enough passive income ($80,000) to break free from work. And it wasn’t until 2017 when I was able to generate enough passive income to take care of a family ($200,000).

We’ve discussed how to get started building passive income for financial freedom before. Now I’d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.

I’m updating my passive income rankings for 2021 given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.

The best passive income rankings are born from my own real life experiences attempting to generate multiple types of passive income sources over the past 20 years.



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Ruth Bader Ginsburg And The Importance Of A Strategic Retirement

Published: 09/25/2020 | Updated: 10/23/2020 by Financial Samurai 58 Comments

When Supreme Court Justice Ruth Bader Ginsburg died on September 18, 2020, at 87 years old, the first person I thought about was my 9-month-old daughter.

I thought about how RBG fought her entire career for women’s rights so that daughters, mothers, and sisters everywhere could lead better lives. Thank you RBG!

I’m not sure if you’re aware, but I’ve been writing about the importance of gender equality for a very long time on Financial Samurai. Here are some of my posts throughout the years:

Someone Has To Give Birth: Why Women Shouldn’t Be Penalized For Being A Mom (2009). A wakeup call for people who get snippy when women take maternity leave.

The Government Is Sexist And Nobody Seems To Care (2010). Discussed the absurdity of the marriage penalty tax and why it came to be.

The Gender Wage Gap And A Solution To Gender Inequality (2012). A no-brainer solution that should be adopted by all firms.

Over The Hill At 40: A Discussion On Age Discrimination In The Work Place (2014). Argued why people over 40 rock.

Sexual Harassment At Uber Reminds Me Why HR Is Not Your Friend (2017). Highlighted how the company did nothing after repeated complaints by one brave female employee.

The Marriage Penalty Tax Has Been Abolished, Hooray! (2018). Reviewed the new tax laws that are essentially a victory for higher-earning, career-focused women who wish to get married.

How To Negotiate A Severance As A High-Performing Employee (2018). Showed how my wife was able to negotiate a severance after getting passed over for a raise and a promotion gotten by two other guys.

Each post’s existence originated from the deep frustration I have about the lack of gender equality that has made its way into our systems. If our systems were governed by a more balanced group of people, our systems would treat all people more equally.

My goal is to bring about more awareness so that we can all speak up and take action to level the playing field.



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The Right Asset-To-Liability Ratio To Retire Comfortably

Published: 09/09/2020 | Updated: 01/15/2021 by Financial Samurai 96 Comments

The right asset-to-liability ratio is important if you want to retire comfortably. If your ratio is too low, you may stress too much about your finances. If your ratio is too high, you might not be taking enough advantage of cheap debt to get richer.

As interest rates decline and stay close to zero, the propensity to take on more debt increases. Low interest rates also encourages more investment. This can be good for economic activity, but it can also create asset bubbles that end up destroying a lot of wealth. Be careful.

On the corporate finance side, companies are taking on more debt to fund operations, investments, and acquisitions. The hope is that the return from various corporate activities will surpass the cost of debt in order to bring even more wealth to shareholders.

On the government side, the Treasury Department is issuing more Treasury bonds to pay for more government spending. It is logical to conclude that tax hikes are on the horizon. Luckily for us, the U.S. government can also print an unlimited amount of money to in essence pay back the debt.

On the personal finance side, consumers are taking on more debt to live a better life today. Below is a chart of my favorite type of debt, mortgage debt. Mortgage debt is the least bad type of debt because it generally improves the quality of your life and can often help build wealth through an appreciating asset.

As mortgage interest rates drop to record-lows, millions of Americans are smartly refinancing their existing mortgages to increase cash flow. Meanwhile, there’s a growing number of Americans buying new homes to live a better life.



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What Is Considered Passive Income? Analyzing Stock Sales And Windfalls

Published: 09/07/2020 | Updated: 12/07/2020 by Financial Samurai 35 Comments

Generating enough passive income to cover your desired living expenses is the holy grail of personal finance. The problem is, the goal post keeps moving thanks to inflation and life. This post explores what is considered passive income so we can remain disciplined on our journey to financial independence.

What Is considered passive income?
Art by CKongsavage.com

I’ve been trying to build passive income since 1999 when I first graduated college. I knew when my boss told me to get in by 5:30 am that I wouldn’t be able to last for decades in finance.

It wasn’t until around 2017 that I felt I truly had accumulated enough passive income to take care of my wife and son. However, after my daughter was born in late 2019 I once again felt more pressure to provide. My family planning forecast only assigned a small chance we’d have another child due to our advanced ages. It’s funny how life turns out sometimes.

Then, when the government started unleashing trillions of stimulus in 2020, the feeling of having accumulated enough began to fade. With volatility back and interest rates getting compressed, the desire for more capital as a safety buffer increased. In addition, the income-generating potential of various assets are under pressure.

We’ve already seen a slow decline in P2P lending returns, bond interest rates, CD rates, and savings rates. Stock dividend yields and real estate rental yields might not be too far behind.

When it comes to personal finance, you never want to get too complacent. It’s important to always try and anticipate the future.



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No Need To Win A Financial Argument, Just Win By Getting Rich Instead

Published: 08/30/2020 | Updated: 10/23/2020 by Financial Samurai 60 Comments

After my post, The Proper Withdrawal Rate: 4 Percent Rule Is Outdated, caused a ruckus, I began to wonder why people argue so much on the internet. Arguing is exhausting and pointless. There’s no need to win a financial argument. Just get rich instead.

The last time I got into a financial argument must have been when I was in my early 30s. I thought I knew so much after only 10 years of working in finance. I was willing to battle with people who saw the world differently. How naive.

But as I’ve gotten older, I now just shrug my mental shoulders when there’s a financial disagreement. I do try my best to understand the person’s point of view. Goodness knows I have many blind spots. However, if I still disagree, then I move on. No big deal.

In the professional investment world, we are taught to always entertain the possibilities. As soon as you ossify your way of thinking, you expose yourself to tremendous potential loss. To get rich, you must try and see opportunity before others.

In personal finance land, the main thing you must focus on is whether your views and actions are making you richer or poorer. If you disagree with someone’s financial point of view, yet are getting poorer or are not keeping up with everybody else, then you should consider changing your ways.

Be flexible in thought. Otherwise, you’re just going to get angry as the world passes you by.



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401k Savings By Age: How Much Should You Save For Retirement

Published: 08/20/2020 | Updated: 01/01/2021 by Financial Samurai 1,013 Comments

The 401k is one of the most woefully light retirement instruments ever invented. The maximum amount you can contribute is $19,500 for 2021 (no change from 2020). Let’s go through how much 401k savings by age you should have to live a comfortable retirement.

Although the 401k pales in comparison to a nicely funded pension, even more disappointing than the 401k is the IRA. With the IRA retirement plan, you can only contribute $6,000 in pre-tax dollars. Further, you can only contribute if you make under $76,000 a year as an individual and $125,000 as a married couple. What about the rest of us?

Meanwhile, you have to make less than $140,000 a year as a single person or $208,000 as a married couple for the privilege of contributing the maximum $6,000 in after- tax dollars to a Roth IRA. I do not recommend doing this before maxing out your 401k.

Give me a pension that pays 70% of my last year’s salary for the rest of my life over a 401k or IRA any time! At least with the 401k, anybody can contribute.

Average Retirement Balances

Based on Fidelity’s 2Q2020 study, here are the average retirement balances for the IRA, 401(k), and 403(b).

  • The average IRA balance was $111,500, a 13% increase from last quarter and slightly higher than the average balance of $110,400 a year ago.
  • The average 401(k) balance increased to $104,400 in Q2, a 14% increase from Q1 but down 2% from a year ago.
  • Average 403(b) account balance increased to $91,100, an increase of 17% from last quarter and up 3% from a year ago.
Average Retirement Balances Q22020 - 401k savings by age

After the S&P 500 returned 16% in 2020, excluding dividends, the average 401k savings by age should be slightly higher today.



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How To Feel Rich Even If You Can’t Get Rich

Published: 08/18/2020 | Updated: 09/20/2020 by Financial Samurai 78 Comments

If you’re still apoplectic that I challenged the sacred “4% Rule” from the 1990s and introduced the new Financial Samurai Safe Withdrawal Rule, do not fret! Just because you can’t save 200X your annual expenses or don’t want to only withdraw 0.5 percent a year in retirement doesn’t mean you’ll never be rich. Let me share with you how to feel rich instead.

To feel rich consistently is even better than actually being rich. In fact, learning how to feel rich might be the biggest wealth hack of them all.

I define rich as earning a top one percent income of $1+ million or having a top one percent net worth of over $11 million. You may disagree, but if you make more or have more than 99% of the population, you are rich.

However, you can be rich and still be miserable because your spouse left you. You can be rich and still feel terrible because your children hate you for neglecting them growing up. Making $3 million a year is great, but due to tremendous job stress you hate your life. You may have a $20 million net worth and never feel rich because you sacrificed your health to amass your fortune.

Obviously, if you can consistently feel rich and actually be rich, then you’ve got the best of both worlds. But sometimes, we can’t have everything we want.

This article will share my ideas on how to feel rich even if you can’t get rich.



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