Your_401k_Matters_For_Retirement
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about the 401k
00:00:05.200 | One leg of the three-legged stool for retirement in the past those three legs consisted of pension
00:00:12.360 | Social security and personal savings now
00:00:16.560 | I believe there is a new three-legged retirement stool the three legs are one personal pre-tax savings
00:00:23.580 | That's you
00:00:25.040 | To personal after-tax savings that's up to you and then three personal hustle and that's also up to you
00:00:32.660 | Social security it'll probably be there right just not in its current form and pensions just forget about it
00:00:39.700 | You've really got to depend on yourself to have that retirement that you've always dreamed of
00:00:45.400 | So with regards to the personal savings part the pre-tax savings part and the 401k good news
00:00:51.840 | It just got a little bit easier for everyone under 40 to become a 401k millionaire by the time you turn 60
00:00:58.520 | I strongly believe and I encourage all financial samurai listeners and readers to become 401k millionaires
00:01:06.300 | I know it'll happen if you continue to max out your 401k
00:01:10.260 | Every single year the maximum 401k contribution limit for 2020 goes up to nineteen thousand five hundred from nineteen thousand in
00:01:18.080 | 2019
00:01:19.920 | According to the IRS. Meanwhile, the combined employer and employee contribution limit rises by a thousand to fifty seven thousand folks
00:01:28.160 | Fifty seven thousand that's a lot of money. In other words your employer in 2020 can contribute up to
00:01:34.000 | Thirty-seven thousand five hundred to your 401k in terms of a match or a profit share
00:01:39.840 | So when you hear you know an employer say they offer a three percent match or up to three thousand dollars
00:01:45.240 | It's actually not so good
00:01:48.580 | They can do more but it's just they don't want to because look they're trying to make money as well
00:01:53.800 | Or maybe they're just not that profitable
00:01:55.800 | So for those of you who like to job hop every six months to a year
00:02:00.300 | I think that's pretty common among young folks nowadays who like to roll the dice with a startup
00:02:04.900 | Realize that you're potentially missing out on a lot of employer profit sharing or matching
00:02:11.080 | You know when I left my firm in 2012, I forsook twenty thousand plus a year in annual employer contributions
00:02:17.520 | So it's been over seven years now. Wow. I gave up a hundred forty thousand dollars, man
00:02:23.560 | I need to go back to work. So just kidding
00:02:26.280 | Well, actually maybe not and for participants ages 50 and over the additional catch-up contribution limit will rise to sixty five hundred
00:02:33.560 | That's up by another five hundred dollars
00:02:36.020 | Curiously the limit on annual contributions to an IRA for 2020 remains unchanged at six thousand dollars. What's up with that?
00:02:44.240 | Government the additional catch-up contribution limit to an IRA for individuals age 50 and over remains
00:02:50.000 | $1,000 so according to Fidelity investments one of the largest administers of 401k plans in America
00:02:57.440 | Employees average 401k contribution rate is now 8.8 percent of their pay
00:03:02.280 | That's nearly a full percentage point higher than ten years ago. Wow
00:03:06.720 | one full percentage point higher in
00:03:10.780 | Contribution. All right, if we use the median household income of roughly sixty three thousand dollars in America that equates to about fifty five hundred
00:03:18.500 | Dollars an annual 401k contribution per household add on an average three percent salary match and we're talking another
00:03:25.080 | 1900 employer 401k contribution for a total of about
00:03:29.580 | $7,400 so contributing between five thousand to eight thousand a year in household for one case not bad
00:03:36.500 | however, I
00:03:38.460 | Strongly encourage folks to force yourself to contribute the maximum amount allowed to your 401k each month
00:03:44.100 | You will learn to live on less or figure out new ways to make more money if necessary
00:03:51.220 | Always pay yourself first by at least
00:03:54.620 | Maxing out your 401k it should be a default automatic assumption
00:03:59.980 | So you can then aggressively build your critical after-tax retirement portfolio for passive income
00:04:06.020 | Ideally you want to accumulate an after-tax retirement portfolio
00:04:10.000 | That is at least three times your pre-tax retirement portfolio more and that retirement portfolio that pre-tax retirement portfolio
00:04:16.860 | Should be pretty good by the time you're 50
00:04:19.360 | I'm talking a base case of about a million dollars in your 401k plus IRA or
00:04:24.460 | 750,000 by age 45 and as a result if you're gonna have three times the after-tax accounts
00:04:31.220 | Well, that's gonna be about 1.9 million at age 45 and 3 million at age 50. It does sound aggressive. I
00:04:38.660 | Understand that but if you can ultimately build a net worth
00:04:41.940 | Investable net worth of between 1.5 million to 4 million by the time you hit 50
00:04:47.180 | You should be good to go for the rest of your life
00:04:49.620 | The net worth spread accounts for varying costs of living and lifestyles, of course
00:04:54.020 | And of course, we've been through a 10 plus year bull market
00:04:57.900 | Who's to say we won't decline by 20% over the next two three years
00:05:01.860 | But chances are good over the next 20 years
00:05:04.700 | The markets are gonna be higher and if you're not regularly investing and saving you're gonna miss out
00:05:10.540 | Alright, let's say you're just
00:05:13.060 | Flabbergasted you're like there's no way I'm gonna be able to save that much money
00:05:17.100 | Well, if you compare yourself to the median and average person in America
00:05:21.540 | It's probably a legitimate concern by age 50. The median 401k balance is
00:05:26.820 | $63,000 and the average 401k balance is about a hundred eighty thousand dollars according to Fidelity by age 60
00:05:34.340 | The median 401k balance only increases by $300 to sixty three thousand and the average 401k balance increases
00:05:41.540 | by nineteen thousand five hundred to about two hundred thousand dollars as
00:05:46.740 | Of the second quarter of 2019 the overall average 401k balance is a hundred six thousand
00:05:52.700 | That's up 2% from a year ago
00:05:55.100 | Now why the median and average 401k balance hardly grows between the ages of 50 and 60. It's hard to say
00:06:01.980 | But I postulate that it's probably due to increased medical expenses and skyrocketing educational expenses
00:06:08.660 | Particularly college because when you're 50 to 60
00:06:12.220 | Okay, your your kids are college age and it's probably gonna put a dent in your retirement savings plans
00:06:17.860 | But there is some good news and it's good to know that
00:06:20.900 | Participants who have been in their 401k plan for 10 years straight the average balance reached
00:06:27.620 | 305,900 dollars that's more than five times the average balance of fifty nine thousand nine hundred for this group ten years ago
00:06:34.820 | So what's the key?
00:06:37.460 | Longevity and consistency ten years of maxing out your 401k
00:06:41.900 | You are gonna be shocked and pleasantly surprised how much you will accumulate
00:06:46.460 | I promise you folks because it's not just the returns and you're maxing out if you have a decent company
00:06:52.180 | You're gonna get these matches too. And if you're at the company for ten years your profit sharing percentage is probably gonna go up as well
00:06:58.100 | But if we go back to the median and average balances
00:07:01.180 | Not so good. You don't want to be the median or average American
00:07:06.140 | Not only does the typical American have an underfunded retirement account, but the typical American is also quite unhealthy
00:07:12.100 | You can be broke and healthy. That's alright. A lot of young folks are broke and healthy. That's good
00:07:18.180 | Or you can be rich and unhealthy
00:07:20.700 | It's kind of stupid because if you're rich and you won the lottery you want to live as long as possible
00:07:24.940 | But you definitely don't want to be broke and unhealthy
00:07:28.460 | That's a bad combination that you've got to get out of you got to fix one or the other
00:07:32.940 | And I'm confident if you listen to financial samurai or read the post
00:07:36.660 | You should be able to fix at least your finances or make it better and with food and eating
00:07:42.340 | Well, we know it's just eating less and more exercise
00:07:45.820 | Finally, I just want to leave some historical perspective on what the historical 401k contribution limits were
00:07:53.540 | Because nineteen thousand five hundred is pretty darn good for 2020
00:07:59.020 | Back when I first started contributing to my 401k it was in 1999 and that limit was ten thousand
00:08:04.900 | So it's steadily increased by about five hundred dollar increments every one to two years
00:08:09.500 | sometimes a thousand dollar increments
00:08:12.140 | but it's generally been five hundred dollars and I
00:08:15.180 | expect this increase should continue as the government wants us all to keep up with inflation and
00:08:21.140 | Inflation is a dirty and a good word
00:08:24.180 | inflation helps those of us with assets get wealthier because our assets inflate with inflation and hopefully quicker and
00:08:31.220 | Those who don't have assets like real estate and stocks are going to get poorer because inflation is going to eat into your purchasing power
00:08:38.300 | So if you want to retire comfortably, please at least max out your 401k each year
00:08:44.700 | After ten years, you're gonna be pumped after 30 years
00:08:47.980 | I think you're gonna reach a million dollar status if you continue to max it out
00:08:52.740 | And that's fine work until 60 have your 401k have some of your social security
00:08:58.980 | Maybe you might have a pension you're gonna be okay
00:09:01.700 | You're gonna do great if you can max out your 401k and you know, it's not gonna be a lavish retirement lifestyle
00:09:07.180 | But it's gonna be a comfortable retirement lifestyle, especially if you pay off all your debt
00:09:11.460 | Now if you want to retire early like in your 40s or 50s
00:09:15.340 | You must really focus on building that after-tax
00:09:19.740 | Investment portfolio it can be in stocks bonds real estate private equity venture debt or whatever
00:09:26.940 | You just really need to focus on building this after-tax portfolio because it is this portfolio
00:09:32.180 | That's gonna spit out a livable passive income stream
00:09:35.720 | So hopefully after this podcast
00:09:38.100 | Everybody is motivated to max out their 401k and do some investigating on what other company benefits you have whether it's tuition
00:09:45.980 | Reimbursement benefits understand your health benefits because health care is very expensive if you don't have any benefits
00:09:51.860 | And I think you'll learn to appreciate your company more
00:09:54.060 | Look what type of profit sharing arrangement there could be if you stay at your firm for another three to five to ten years
00:09:59.540 | Who knows it could be really good
00:10:01.860 | Thanks so much everyone and happy savings. If you enjoyed this podcast, please share and subscribe
00:10:07.660 | Subscribe.