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
CONCLUSION
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.
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).
There’s some archaic law too that “highly compensated” employees can’t even contribute to a 401(k) if some portion of the rest of the company doesn’t contribute as well. That’s the real reason for the company match and why companies often opt-in new employees instead of allowing them to start contribute voluntarily – the executives don’t want to miss their 401K(k) match!
I agree with indexing to inflation. it’s funny how the government ONLY indexes things to inflation that screw you but they don’t index beneficial things. For instance, the FICA cap generally goes up every year (even though it didn’t the past two), while the AMT isn’t indexed. Not indexing IRA max contributions is dumb. They should be encouraging, not discouraging Americans to save. They’ll be less dependent upon the government in retirement!
Money Reasons— the original intent of the 401k was to offer corp execs a way to defer income tax free; over the years it has been unscrupulously used by corps to unburden themselves with defined benefit plans and then marketed hog wild to the masses by wall st firms that realized it was a tsunami of potential assets for them to manage. The 401k was a saving vehicle offered in addition to a pension. You still see some remnants of both being defined benefit and defined contribution used in the public sector but those are also going the way of the dodo bird particularly during this current economic crisis.
Also per u other comments when u make over 200k u are looking for every scrap of legal tax deferral vehicles that u can put ur money into.
Pickapen – Yeah, pensions were great investment devices and they will be missed. Actually what Darwin’s Money says below is also spot on, mostly.
Not to be too simplistic, but couldn’t those that are fortunate enough to make a high enough income to save $50,000 a year, just buy quality stocks in a regular brokerage account as their retirement vehicle (in addition to their 401k contribution too)?
Yeah, they would lose the benefit of the deferral of the taxes, but they money invested would still (hopefully) grow and appreciate over time tax free until they cash it in. But if they cash it in during retirement when they are in a lower tax bracket (again hopefully…, who know what the tax rates will be then), wouldn’t that still be good?
My take on 401k plans is that they were created to encourage the masses (and lower income folks) to invest money for their retirement. But those incentives aren’t really necessary for those making over $200,000 are they? I don’t walk in the same shoes as someone who make $200k, so perhaps I’m wrong…
I think if I made over $250k, I’d setup a regular brokerage account and treat it as my retirement account, buying quality stocks in that account. Of course, I’d also take advantage of any 401k that my employer would provide too.
Setting the retirement account aside, I’d still have a regular brokerage account for investing in too…
Yes, investing/saving the extra money in a non-tax beneficial account is another option. However, the point is that there is no incentive to do so, and therefore many don’t. If the government suddenly increases the 401K limit to a still reasonable $50,000 in pre-tax income, that would cause a HUGE influx of savings and investing imo. I know I would get in there an take full advantage even if the stock markets looked scary.
Most people who can afford to invest do indeed have a separate stock investing account on top of their 401K/IRA, savings.
Sorry mate I don’t need your silly attempt at some sort of pseudo psychoanalysis. How about you stick to the points and critiques and criticisms I made concerning the topic!
Why do u have yours head wrapped around what % a person should save rather than generating income for retirement?
Your analysis is bereft of solid financial sense. You totally miscalculate the power of compound interest, DCA, tax deferment and low transaction fees with regards to 401k’s and IRA’s.
I mean it’s nice to say ‘one should save x amount of their income’ for retirement and the gov is is evil but you speak like a corp wage earner sitting in a cubicle who takes pleasure in acquiring things to show he world he thinks he is a success, such as german cars, rolex watches, a home in a toney neighborhood, a built in wine cellar,etc.
You sound like a ladder climbing YUPPY that takes any opportunity to name drops his alma mater in a conversation
Listen all of that aside, I get what you are saying but you post like a mildly intelligent smug whigney ranter.
Love your feedback mate. Keep it coming. I know it’s hard to get ahead sometimes and it makes people feel better to attack, so no worries. Part of the reason why i have this site is to allow people to feel better about themselves. It really is OK if you didn’t go to a good school and arent able to climb the ladder yourself.
Feel free to read other posts about making money and comment on all of them. Would be great if you can offer the reader solutions too. Thx!
Ok u want good advice that can help to maximize your returns in ur tax deferred accounts?
Instead of contributing $1300 every month to ur 401k do like I do and contribute 5k per month the 1st qtr of the year, this way ur act is fully funded and have the choice to take advantage of any mkt dips during the rest of the yr and on Jan 1 contribute 5k to your IRA for the the current yr. Doing both of these will allow u to put your tax deferred money to better us over a longer period of time and compound more tax deferred gains.
I mean u do make enough to accelerate your contributions in the 1st qtr correct?
3 + 2 = 5 and 2 +3 = 5. My point is whether I contribute $16,500 the first month, or spread it out over 12 months, it makes little difference over the long run, especially since there is no discernible pattern that stocks go up more in the first quarter of the year than in the end. Furthermore, $16,500 is but a small fraction of my 401K now, so the alpha doesn’t make a difference.
I haven’t been able to contribute to an IRA in over a decade thanks to the income limitation.
Thanks for your thoughts.
Sorry, but you’re stupid. Clearly you know very little about investments if you think it’s better to max out your 401K in the beginning of the year, then in the end. It doesn’t matter one bit in the short run, medium run, or long run. Every year is different, and as long as you are maxing out your 401k, that’s all that matters.
Damn, you are a moron. No wonder why you don’t want to tell anybody your background. You’re an idiot too!
I know this topic is old but just in case someone who comes and reads it a year later like i did lol.
Some employers are different. My employer matches each pay period. For example.Your employer matches up to 5% of your salary 100% each pay period. If you maxed out your 401k in June. You are missing out on 6 months worth of matching
Hmm, interesting! Then the lesson for all is to know their employer guidelines!
Thx
What a bunch of nonsense! You guys are spouting off that people should save x amount of y income to retire? What is this a site driven by a financial advisor for Morgan Stanley with his generic marketing material that gives you the road map to wealth with pics of grey haired people, wearing sweaters tied around their necks, getting out of their expensive foreign car, walking into the local country club or about to board their yacht the S.S I’m Rich and Retired?
How about focusing on increasing your income today so u can save more money!
I guess none of you have ever heard about something called the unpredictability of life, you know medical emergencies, deaths in the family, caring for aging relatives, job loss that can wipe out savings and savings plans? As the owner of rental property let me give u an analogy, one bad unforseen property repair or horrible tenant, lawsuit, etc can wipe out YEARS of rental profits, no matter how much you predict and forecast. Investments just like life can be very unpredictable.
Also let’s be realistic for a minute, less than 10% of the US population makes $100k yr , so using that convenient income level in you espousing is a bit unrealistic given the median household income is about $50k.
I agree that the govt should increase thresholds on deferred tax accts but then if the did they would delay their ability to collect tax revenue today.
Love your anger! Keep it up! Would like to hear more about your story and background and what made you so amped. Thx!
LOL! Clearly you can’t tell the difference between anger and disdain! People talking out of their arse will always earn my complete and utter disdain.
Awesome! Share us your background so we have an idea where all your disdain is coming from. Thanks mate.
Are you stupid? Or are you just bitter that society wronged you and that you are stuck in a dead end job and you have nobody cares for you?
If you’re unsure of equities in 401k you can always put it in cash or money/market equivalent… can also set up a SEP IRA if you have your own business (easy enough to start) and I think the limits are around $50k per year.
My wife and I save as follows (all percentages are based upon gross income):
401k’s – 11.7% of combined gross income
IRA’s – 8.5% of combined gross income
Normal cash savings – 20.3% of combined gross income
Total savings = 40.5% of combined gross income
Sounds good to me! You are well on your way to having a huge capital account! Just don’t bet anybody big bucks on the golf course, unless you are playing to a 20 handi.
Just wish I had more time to get on the golf course! But right now I’m a 4 handicap. Not much of a gambler – it’s all about preserving the capital!
Who cares about percentages!
When the Starbucks asks me to pay for that Frappucino, I have to pay $4.50. It doesn’t matter if I make $50k or $500k. If you want the retirement lifestyle that you are dreaming of, figure out how much you need to save in dollar terms, not in percentage terms.
Thinking about percentages are limiting because you spend too much time trying to increase your percentages when you should really be thinking about increasing your income. 10% of $1 million is a bigger number than 90% of $100,000.
True. Income generation is of fundamental importance. As I believe more people make much more money that people think, I feel comfortable in believing most readers are doing quite well.
Saving in dollar terms is the flip side of saving in percentage terms. One can be figure out by solving for the other variable.
I think the people who are doing well are very concentrated in specific areas. Lots of people are doing well for sure (and many more than most people think), but I don’t think the majority is making 6 figures and just not reporting their income.
I mean, not even counting people who have wealth but not much income, if 1% makes $250k to $500k, then that’s like 3 million households, and more like 6-10 million people that you and I know because when one person in the family does well, pretty much the whole immediate family will have a pretty decent lifestyle.
Now consider that most of these people concentrate in areas where you and I live and that alone probably can give the illusion that everybody is wealthy.
Additionally, most of the world is still working for an employer and counting on that as primary income. When you work at a 9-5, tax invasion opportunities are just very minimal, so I think the statistics that we see may not be picture perfect but it’s generally accurate.
Savings should be money put aside for the future. Savings can include retirement accounts. Things become fuzzy regarding gross and net, because most people treat it differently. I have annual savings of 26-30%.
The Social Security program was meant to be a safety net. In many ways, the 401K, IRA and Roth IRA are safety nets. If you invest early (right out of school) the maximum amount you will probably do pretty well. Most people do not, particularly when there is a company match. They only contribute up to the match. In some companies, you can not contribute the max because the 401K plan is top heavy. That means that the highly compensated are limited when contributing because there is not enough participation by the lower paid employees.
Will the government raise the limits? Eventually, but they are not motivated to, because it will take more revenue from the government coffers. As individuals, we can do something about this, by starting businesses, investing in income property and establishing brokerage accounts. Don’t expect the government to take care of you or you will be disappointed!
I had to question your 600k if you max your 401k for 30 years so I did the math..
Assuming a 11% rate of return (avg since 1950) and 3.8% inflation (avg) and a 25% tax rate, you get a real rate of return of 7.2%. Maxing out your 401k for 30 years will get you 750k in todays money (2.3 million in 30 years from now dollars). So I must apologize, I don’t think I could live too comfortably off 750k in todays money. 750k * 0.04 = $30k/year
That being said I save above and beyond my 401k about 25% of my income and also I have 40 years till I hit 65 so hopefully that will help me in the battle.
Thanks for bringing me down to earth (seeing the 2.3 million could inflate my sense of retirement savings, but when considering that that’s only 750k in todays money it doesn’t seem all that great).
I have one more thought since my last comment on this.
I guess I would include it in what I save, just because I don’t spend it. I think of money in terms of either spending or saving in a sense. Since it is money I don’t spend, it is money I consider saved.
Great Stuff! I just saw that you posted on the Thomas Stanley Blog recently.
Fwiw .. I think anyone could retire on $1m … just depends on what one needs to enjoy their retirement. Does one really need the Cadillac AND the Corvette? Or would a Or would a convertible 18989 Pontiac Sunbird (great condition) do the trick? Is it the all inclusive “geriatric heaven” that is needed? Or just live the easy life in someplace that is not complicated, not mainstream … or even overseas. Aka: Mexico, South America, etc.
Retiring with at least $1,000,000 is the new common standard! Everybody should be able to do it if they work long enough and invest.
:) Most do not want to work that long. But end up doing just that. Working for money, instead of money working for them.
“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!”
Couldn’t agree more, but this seems strange coming out of your mouth after you were ragging on my $12 million retirement figure on my blog. ;)
Oh, I wasn’t ragging on the $12 million figure per se.. I was saying of course anybody should be able to retire on $12 million liquid, even living in NYC!
I keep track of my 401k and consider 1/2 of it ready for retirement (because I assume that’s how it will be taxed by then (I’m 31)). I don’t think completely ignoring it as retirement money is appropriate, but it certainly isn’t going to fund world travel for a couple of decades. I do ignore Social Security (because I assume it will be “different” (at best) by then.
But my 401k is just one part of retirement savings for me. I always save for “old me.” Pretty much everything I do financially is either for college savings for my children or early retirement (I realize I wouldn’t be able to withdraw early w/o penalty, but the plan is to not “need” the money until 60 or 70 at the earliest. I’m just aggressively trying to get to my number!
I agree with everything Doug Warshauer said.
We have 76K/year that we can contribute as a couple in tax advantaged savings for retirement. That’s not even including 529s. We have access to a mandatory plan, a 403(b), a 457, and IRAs. 457 plans are generally only popular with government employees, but private companies can offer them– from what I understand, the problem is that the employee has to trust the company not to go out of business or otherwise steal the money.
I can also put money in an SEP because I do small amounts of contract work from time to time. Anybody who is (productive enough to be) maxing out their work accounts already (assuming they have work accounts… if they don’t then they are probably only making enough to contribute to a Roth since benefits tend to be correlated with income) probably gets those kinds of opportunities from time to time as well. Not 50K, but if I maxed out that 76K from work (more than DH’s take home pay already), anything left could fit in that.
How much do we need to be subsidizing the retirement income of the high income? 32K/year or 42K/year is probably more than enough tax advantaged savings for most folks. People who need more savings than that for retirement can save in non-tax advantaged accounts or hire an accountant to use the many tax loopholes set aside for the rich.
That only addresses the first gist. Thanks to Money Smarts for the outline– very helpful!
We don’t “save”. We “pay” ourselves for various goals. That pay is before tax for some things (401k, charity & health insurance) and after tax for others (rent, grocery, gas…). We do calculate everything as a % of our gross (in case of the pretax categories) and net(for others). There are home account in which we save for down payment, baby fund for when we plan a family, emergency account, vacation account, entertainment account, even auto insurance account and a fun investment account. Most of these accounts will be spent eventually so I guess we are not saving anything? I am confused now :)
I ran a spreadsheet of all of our expenses and my wife and I save a combined 53% of our salaries. It’s kind of jumbled up because that’s money after taxes, although it does include IRA, 401k and 457b contributions… for me, it’s nice to be able to look forward to a pension at the end of my career.
Then again, with all the negative taxpayer sentiment going on with government salaries/pensions (see city of Bell, CA) I’m almost thinking that pensions might not even be around 20 years from now when I retire. A lot of my coworkers are banking on their 20-30 years of service to take care of them into their old age, but I’m not that confident… I guess we’ll see.
So my question is let’s say you make $100,000… did you save $53,000? Or, did you save 53% of your income after tax i.e. 30% tax rate $70,000 net X 0.53 = $36,000? This is what I’m trying to get at. What is the standard when people are saying they save 20%, 30%, 50%?
Made roughly $150k and saved just under $80k in IRA’s, 401k’s 457b’s, 415m’s and cash accounts. Hope that answers your question.
Bummer about the lower tax deferred contribution vehicle limitations. But here’s a consolation to those who max out their tax deferred accounts:
If you buy a portfolio of diversified index funds (with low portfolio turnover) you’ll have a fairly tax efficient vehicle, even if the money is outside of an IRA or 401K, correct? Of course, it won’t be as efficent, but the low turnover (of indexes) ensures that you don’t really pay short term capital gains tax, and it’s not until you sell that you pay taxes at the longer term rate, correct? I read recently that 65% of American mutual fund money was in non tax deferred accounts. As much as it would be nice to have greater tax deferral potential, I think money should be indexed (or used to buy a diversified basket of blue chip dividend paying stocks)
Thoughts?
I contribute as much as I can to 401k. It keeps me disciplined because that money never hits my checking account so I can’t spend it and employee matching really helps the numbers grow quickly. The only thing that annoys me now is the crappy stock market. I’m so tired of seeing red performance so I think I will allocate more to fixed income.
I like your thoughts about the government increasing the amount we can contribute. They definitely should increase it since social security is going down the toilet.
That’s good you are contributing as much as you can. Hopefully as much as you can is $16,500 a year. Trust me, it does add up quick with employer matching, profit sharing, and performance. You won’t regret it in 10 years when your account is over $200,000.
yeah employee matching is awesome. And you’re right – it does add up quickly even with the dips in the market. Dow 13000 let’s go!
While I agree that you SHOULD save 20% of your gross income, I am doubtful that most people do. I think if you are able to save $20,000 (pretending you make 100k), that is darn great!!!
I think people are woefully unaware of retirement needs, and think if they save a few dollars each paycheck they are doing great. Unfortunately, in the long run, they may find themselves in hot water at 60.
I know our retirement plan is painfully under where it should be. Right now we are focused on a few other things, and when we hit a certain point (probably in about 18-24 months) we will be able to reevaluate.
$20K/yr on a 100K/yr income is darn great indeed, and hopefully that’s on top of contributing $16,500 to your 401K.
BTW, tried to comment on your site numerous times, but it doesn’t go through for some reason. Maybe it’s a Blogger platform thing? Donno.
I think that most people definitely look at 20% as 20%, period. Whether it be
401k or whatnot. If it’s a choice they make to deduct it from their pay, then it’s part
of their savings.
That being said, I don’t think anyone (in the U.S.) w/consider gov’t programs, SS,
etc., as part of their savings. Those contributions are not a “choice” we make.
I personally look at that amount as a tax that I will never see again.
I will go a step further and say that I don’t even like to count on my husband’s military
retirement pay. Even though if that goes away we will be in really deep water!
We simply aren’t saving enough to compensate otherwise. Not to excuse it, but
perhaps to explain it: raising children really puts a dent in your retirement contributions.
:)
I think that when most people say 20%, they are including their 401ks. For me, every month just over $1,200 goes into various savings accounts, but only half of that is to my 401k – $200 is the employer match. What can I say, I want to retire early too!
I count my Roth IRA as part of the 20% annual saving for retirement. But that is just me.