Save for Retirement. Right the Heck Now.
If you work in the US, your employer likely offers a 401(k) retirement plan. These are amongst the biggest farces every perpetrated on the American public.
401(k) plans were created as an alternative to private pension plans which, at the time, were failing in stupendous numbers and being discontinued left and right by employers. So the 401(k) is kind of a “do it yourself” replacement.
The sales pitch was compelling enough: Instead of your employer funding your retirement plan (possibly in part by using funds deducted from your paycheck, possibly not), you’d actively kick in some money and your employer could “match” you. In 2023, a 401(k) can receive up to $66,000 in contributions, all tax-free. Do that for a 40-year career and you’d end with almost $125MM, assuming a fairly conservative 6% annual return, and ignoring the fact that the contribution limit goes up every year to help cover inflation.
Anyone can retire on $125MM.
Hell, after 30 years you’d have $64MM. Plenty. If you started at age 30 and retired at 60, you’d reasonably be able to spend $2MM a year! We’ll all be kings!
Except that YOU can only put in $22,500 in your 401(k). Your employer is supposed to “match” the rest, except roughly zero employers match 3x. Most employers match 50% of your contribution, up to 6% of your salary. So if you’re making an even $100k and maxing out your $22,500 contribution, you’re getting a whopping $6k more. Woo-hoo.
That incredible, fantastic, beautiful sum of $28,500, if done every year for 40 years (start at the tender young age of 20 and end at 60), will still get you $54MM though. Do it for 30 years, you get $27MM—honestly, plenty to retire on, at about $900k/year, right? Do it for 20 years and you wind up with $12MM. Still not chump change—if you contributed from ages 30 to 50, and expected to live to 80, you’d have $400k/year to work with. So I mean, you can retire on a 401(k), but it’s nowhere near the nirvana that’s pitched, given that the majority of the contribution comes from YOU.
And man, does time count. Let’s say you plan to retire at 65 and live to age 85—that’s 20 years in retirement. Let’s also assume you plan to max out your 401(k) at 2023 numbers of $28,500. We’ll ignore inflation; although the 401(k) limit does go up, and you’d have to keep contributing at the then-current max, that rise generally lags inflation a bit, so the numbers kind of even out. We’ll also ignore the fact that, at age 50, you can contribute quite a bit more per year ($30k in 2023). I’m also going to drop the return rate to 5%, which is a pretty rock-bottom long-term return.
Here’s where you’ll end, depending on where you start:
- Age 20: $55.8MM
- Age 25: $42.2MM
- Age 30: $31.5MM
- Age 35: $23.2MM
- Age 40: $16.6MM
- Age 45: $11.5MM
- Age 50: $9.5MM
From here on, I’m assuming you’re kicking in the max amount at age 50+, plus an employer match of $6k. - Age 55: $5.5MM
- Age 60: $2.4MM
The numbers drop a LOT, guys. If you only contribute for 5 years, you’ll have to make it through the next 20 years on just $120k/year, which ain’t terrible, but that’s also when medical and stuff gets expensive.
But look: if you can contribute the max—or frankly even half—starting at age 30, you will be fine. Better than fine. You could probably retire pretty early. A 30 year-old who maxes their 401(k) until age 60 will have $23.3MM in the bank, plenty to live on for ~15 more years.
The math works best if you start soonest. Skimp on other stuff—trips, lattes, whatever—until you can afford it. Put your retirement FIRST, and other discretionary spending AFTER.
To max our your $22.5k contribution, you’re looking at almost $2k/month, which is a LOT, especially when you’re starting out. It’s $865/paycheck, basically, if you’re paid biweekly, and for a lot of people that’s more than their rent. But the more you can do, and the sooner you do it, the better of you’ll be.
Factor this into the decision to have kids. Can you still fund your retirement and then afford kids? This should help dictate the kind of car you buy. The kind of apartment you rent, or home you buy. Spend on yourself first. Even if you can’t fully fund your 401(k), fund as much as you can—enough to capture the maximum employer match amount, for example.
But do it soon.
