Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about the 401k One leg of the three-legged stool for retirement in the past those three legs consisted of pension Social security and personal savings now I believe there is a new three-legged retirement stool the three legs are one personal pre-tax savings That's you To personal after-tax savings that's up to you and then three personal hustle and that's also up to you Social security it'll probably be there right just not in its current form and pensions just forget about it You've really got to depend on yourself to have that retirement that you've always dreamed of So with regards to the personal savings part the pre-tax savings part and the 401k good news It just got a little bit easier for everyone under 40 to become a 401k millionaire by the time you turn 60 I strongly believe and I encourage all financial samurai listeners and readers to become 401k millionaires I know it'll happen if you continue to max out your 401k Every single year the maximum 401k contribution limit for 2020 goes up to nineteen thousand five hundred from nineteen thousand in 2019 According to the IRS.

Meanwhile, the combined employer and employee contribution limit rises by a thousand to fifty seven thousand folks Fifty seven thousand that's a lot of money. In other words your employer in 2020 can contribute up to Thirty-seven thousand five hundred to your 401k in terms of a match or a profit share So when you hear you know an employer say they offer a three percent match or up to three thousand dollars It's actually not so good They can do more but it's just they don't want to because look they're trying to make money as well Or maybe they're just not that profitable So for those of you who like to job hop every six months to a year I think that's pretty common among young folks nowadays who like to roll the dice with a startup Realize that you're potentially missing out on a lot of employer profit sharing or matching You know when I left my firm in 2012, I forsook twenty thousand plus a year in annual employer contributions So it's been over seven years now.

Wow. I gave up a hundred forty thousand dollars, man I need to go back to work. So just kidding Well, actually maybe not and for participants ages 50 and over the additional catch-up contribution limit will rise to sixty five hundred That's up by another five hundred dollars Curiously the limit on annual contributions to an IRA for 2020 remains unchanged at six thousand dollars.

What's up with that? Government the additional catch-up contribution limit to an IRA for individuals age 50 and over remains $1,000 so according to Fidelity investments one of the largest administers of 401k plans in America Employees average 401k contribution rate is now 8.8 percent of their pay That's nearly a full percentage point higher than ten years ago.

Wow one full percentage point higher in 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 Dollars an annual 401k contribution per household add on an average three percent salary match and we're talking another 1900 employer 401k contribution for a total of about $7,400 so contributing between five thousand to eight thousand a year in household for one case not bad however, I Strongly encourage folks to force yourself to contribute the maximum amount allowed to your 401k each month You will learn to live on less or figure out new ways to make more money if necessary Always pay yourself first by at least Maxing out your 401k it should be a default automatic assumption So you can then aggressively build your critical after-tax retirement portfolio for passive income Ideally you want to accumulate an after-tax retirement portfolio That is at least three times your pre-tax retirement portfolio more and that retirement portfolio that pre-tax retirement portfolio Should be pretty good by the time you're 50 I'm talking a base case of about a million dollars in your 401k plus IRA or 750,000 by age 45 and as a result if you're gonna have three times the after-tax accounts Well, that's gonna be about 1.9 million at age 45 and 3 million at age 50.

It does sound aggressive. I Understand that but if you can ultimately build a net worth Investable net worth of between 1.5 million to 4 million by the time you hit 50 You should be good to go for the rest of your life The net worth spread accounts for varying costs of living and lifestyles, of course And of course, we've been through a 10 plus year bull market Who's to say we won't decline by 20% over the next two three years But chances are good over the next 20 years The markets are gonna be higher and if you're not regularly investing and saving you're gonna miss out Alright, let's say you're just Flabbergasted you're like there's no way I'm gonna be able to save that much money Well, if you compare yourself to the median and average person in America It's probably a legitimate concern by age 50.

The median 401k balance is $63,000 and the average 401k balance is about a hundred eighty thousand dollars according to Fidelity by age 60 The median 401k balance only increases by $300 to sixty three thousand and the average 401k balance increases by nineteen thousand five hundred to about two hundred thousand dollars as Of the second quarter of 2019 the overall average 401k balance is a hundred six thousand That's up 2% from a year ago Now why the median and average 401k balance hardly grows between the ages of 50 and 60.

It's hard to say But I postulate that it's probably due to increased medical expenses and skyrocketing educational expenses Particularly college because when you're 50 to 60 Okay, your your kids are college age and it's probably gonna put a dent in your retirement savings plans But there is some good news and it's good to know that Participants who have been in their 401k plan for 10 years straight the average balance reached 305,900 dollars that's more than five times the average balance of fifty nine thousand nine hundred for this group ten years ago So what's the key?

Longevity and consistency ten years of maxing out your 401k You are gonna be shocked and pleasantly surprised how much you will accumulate I promise you folks because it's not just the returns and you're maxing out if you have a decent company 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 But if we go back to the median and average balances Not so good.

You don't want to be the median or average American Not only does the typical American have an underfunded retirement account, but the typical American is also quite unhealthy You can be broke and healthy. That's alright. A lot of young folks are broke and healthy. That's good Or you can be rich and unhealthy It's kind of stupid because if you're rich and you won the lottery you want to live as long as possible But you definitely don't want to be broke and unhealthy That's a bad combination that you've got to get out of you got to fix one or the other And I'm confident if you listen to financial samurai or read the post You should be able to fix at least your finances or make it better and with food and eating Well, we know it's just eating less and more exercise Finally, I just want to leave some historical perspective on what the historical 401k contribution limits were Because nineteen thousand five hundred is pretty darn good for 2020 Back when I first started contributing to my 401k it was in 1999 and that limit was ten thousand So it's steadily increased by about five hundred dollar increments every one to two years sometimes a thousand dollar increments but it's generally been five hundred dollars and I expect this increase should continue as the government wants us all to keep up with inflation and Inflation is a dirty and a good word inflation helps those of us with assets get wealthier because our assets inflate with inflation and hopefully quicker and 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 So if you want to retire comfortably, please at least max out your 401k each year After ten years, you're gonna be pumped after 30 years I think you're gonna reach a million dollar status if you continue to max it out And that's fine work until 60 have your 401k have some of your social security Maybe you might have a pension you're gonna be okay You're gonna do great if you can max out your 401k and you know, it's not gonna be a lavish retirement lifestyle But it's gonna be a comfortable retirement lifestyle, especially if you pay off all your debt Now if you want to retire early like in your 40s or 50s You must really focus on building that after-tax Investment portfolio it can be in stocks bonds real estate private equity venture debt or whatever You just really need to focus on building this after-tax portfolio because it is this portfolio That's gonna spit out a livable passive income stream So hopefully after this podcast Everybody is motivated to max out their 401k and do some investigating on what other company benefits you have whether it's tuition Reimbursement benefits understand your health benefits because health care is very expensive if you don't have any benefits And I think you'll learn to appreciate your company more Look what type of profit sharing arrangement there could be if you stay at your firm for another three to five to ten years Who knows it could be really good Thanks so much everyone and happy savings.

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