Every month I contribute $1,500 to my 401K so that by the end of the year, the 401K is maxed out at $18,000 (the max increases to $18,500 for 2018). Unfortunately, $18,000 a year is a ridiculously low amount of money to save for retirement if you really do the math. After 10 years, you might have $250,000, and after 30 years you might have $800,000 to $1.2 million depending on the markets and your employer’s match. Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay taxes upon distribution.
The government needs to get it together and raise the amount of 401K contribution for those in the later part of their lives. How is it that a 40 year old executive who makes $250,000 can only contribute the same amount in his 401K as a 23 year old kid out of school making $40,000? It just doesn’t make sense. Instead, the government should allow pre-tax contributions to increase by $5,000 every 5 years so that by the time one has served 20 years in the work force for example, s/he can contribute $35,000+ a year to their 401Ks until retirement.
Let’s talk about the pencil geek IRA retirement plan for example. If you’re one of the fortunate who are allowed to contribute, you can only fund $5,000 a year! Whoopdeedoo! $5,000 X 30 years later, assuming you don’t lose it in the market yields $150,000-$300,000 maybe! Great, just enough to buy me a Honda Accord sedan when I’m grey. Get it together government and raise that $5,000 contribution amount higher with better tax incentives. Furthermore, let hard working Americans who make over $120,000 the opportunity to contribute regularly, and not just through odd year loop holes. Empower people to want to save for their future!
SAVE FOR THE FUTURE
I’ve thought about the 401k’s lack of retirement efficacy since the 90’s and I never thought there would be people out there who depend a large majority of their retirement on their 401Ks. Whenever I hear about people saving 20% of their income, I think that is money in addition to their 401K and IRA contributions. Apparently, I am in a minority who thinks this way. Something has got to change.
It really hit home after reading several of CNN Money’s most delightful extreme saver profiles on everyday people and their finances. CNN Money and other advisers showcased super savers who to my surprise include 401K and IRA contributions as part of their percentage savings calculations. In other words, if you make $100,000 a year, save $4,000 a year in cash, and contribute $16,000 in your 401K, you are considered by financial advisers as saving 20% of your gross income. Your $20,000 in “savings” is woefully light because in reality, you are only saving $4,000 a year.
With the stock market implosion of 2008, your 401K has proven itself to be totally unreliable. Like Social Security, contribute to it like any good citizen should, but in no way depend on Social Security or your 401K to retire a comfortable life. If we do nothing to fix Social Security, those under 40 should still get ~70% of regular benefits. But, if you go through life expecting 0% benefits from SS, how wonderful will it be to just get 10%? Write off the value to zero and don’t believe in the traditional way of calculating your net worth.
Depending on Social Security is depending on the government doing the right thing. There’s no way that’s going to happen. Depending on your 401K is depending on people choosing the right stocks consistently over the long run, which isn’t going to happen either.
The only person you can depend on is yourself to save. This is why you must save that minimum 20% of your gross income every year on top of contributing to your 401K and IRA if you can. An easy goal is to just save one of your two bi-weekly paychecks. Stock market implosions are good because they serve to remind us how delusional we are in counting on government created retirement programs to keep us afloat in our later years. Get with the program and save more, much more!
RECOMMENDATIONS TO BUILD WEALTH
Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform 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 25+ difference 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 and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
About the Author: Sam began investing his own money ever since he opened an online 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 $175,000 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 2018 and beyond.