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.
Related: The Average Net Worth For The Above Average Person
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!
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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.
[…] half of what’s owed, but certainly not 100%. As a result, many have smartly decided to write-off Social Security from their retirement plans in order to focus on accumulating enough assets on their own. […]
I’m a little unclear….the implication I get from the article is that there is something more reliable then either the Wall Street or government programs.
What makes, say, a CD, a safer choice? Banks are tied to Wall Street- the crash brought plenty of them down- and what is FDIC insurance but a government program?
Nothing wrong with the practice of the philosophy, though. Undersaving for retirement is almost certainly the standard, and this is one good counter.
Financial Samurai says
The FDIC insurance is for $250,000 in a bank per individual.
Investments are obviously not insured and can lose value.
Nothing is ever a guarantee, but the cash in the bank up to 250k is the best guarantee for now. Better than under the mattress as you could get robbed with no record.
The fact that you can’t depend on the government for Social Security and the stock market to give you a good return is a good reason to diversify your investment strategies. Paper investments are only one part of my plan. The other part is to build passive income in real estate. Capital appreciation in paper assets, passive income in real estate (as well as some capital appreciation over time).