Why max out 401k?
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Anonymous
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I am in my mid-40 and currently save 10% of my salary towards 401k. My salary is 120k and have ~500k so far. I know these are small numbers compared to what most people post on this board but not bad realistically!
When I run a retirement calculator, it seems like I am on track for retirement and, including SS, I will have around 9k in monthly income. That sounds good to me. I don’t know how accurate the calculator I used is but, supposed it is, if I am on track, why would I want to max out my retirement savings? to have more money when I am old? I have 2 children, but somehow the thought of a bigger inheritance to them doesn’t feel like a great motivation. I would rather enjoy my time with them now than passing them on money after I am dead! My husband also has his own fund with approximately the same balance and contribution. |
Anonymous
Curious the numbers you used to get to 9k income. If you retire at 62, you'll get maybe 2500 in SS pretax. To get to 9k monthly, (and this is still pretax), you would need to have 2.6m in your 401k to get the remainder (6500) from four 401k. You aren't getting to 2.6 in 20 years if you are currently at 500k. |
Anonymous
If you plan to work for 20 years with spouse, no need to max every year. The calculator is assuming 8% or so constant annual gain based on your balance, which will compound. The actual performance will not be 8% a year. This year the market is down 20%. Previous years were up 20 to 40%. |
Anonymous
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I don't know what calculator you used, but I don't think there is any way a 10 percent savings rate will get you almost 100 percent of your income replaced at retirement.
I would be cautious about these retirement calculators based on historical returns. Unfortunately future returns are likely to be much lower than in the past - listen to a podcast or interview with Antti Ilmanen to hear why, but this is something that most investors believe. I think 3 percent real is a much safer assumption going forward... |
Anonymous
| Your math sounds odd. |
Anonymous
| Because MD has high taxes. Many states with high salaries also have very high taxes. Max out 401k to shield them from high state and local taxes. Then move to low tax areas in retirement. You've effectively shielded your income from 30+ years of high state taxes. |
Anonymous
| Because you can’t afford to run out of money in retirement OP. Many unexpected things happen in life some costing more than you planned for. Without consistent income source, you need to over-save for uncertainties. |
Anonymous
To add to this, you likely are saving on federal taxes as well, as long as the withdrawal amounts in retirement are less than Taxable Income now. |
Anonymous
| I don't know why you are maxing out. I'd do up to the match and enjoy the rest. I can also live nicely on $4k a month. Not sure why you need twice that. |
Anonymous
| Your retirement calculations have you making about the same as you earn now? Darn, I want that calculator. |
Anonymous
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I assume these numbers mean you intend to drawn down your principle.
Most people (at least on DCUM) intend to live off (mostly) the interest of a 401k, at least til minimum distributions kick in. Your approach is risky and does not account for unforeseen circumstances and volatility in your life and the market |
Anonymous
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OP here. After writing my post I went and tried the Vanguard calculator and my estimate became less than half 😒, probably without SS. I was using the calculator that comes with the investment company from work, Voya, which didn’t have me input any number, so not sure what wild assumptions they made 😝
I get I may need to reconsider my financial picture after using other calculator and thinking about current and future priorities. The reason I think I am in good shape for now is that we are south European expat and will probably retire back there, where even a 2k monthly pension is considered not bad. We would have that already from SS.. Am I missing something? Things may get more complicated and expensive if children stay here and we have to travel back and forth.. |
Anonymous
4k a month? Assuming your house is paid off, that's still cutting it pretty close IMO. 1k food, 1k in property taxes and insurance, 1k healthcare. |
Anonymous
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What other income vehicles do you have in your retirement portfolio? Are you investing in long term care insurance, for example? What if the day after you retire something happens and you live 20 more years but need significant medical care? Or for whatever reason your children need financial assistance and turn to you.
We aren't wealthy by DCUM standards but try to save as much as possible via our 401Ks, separate IRAs, and a few other things. I don't want to be 85yrs old and living in a crappy Medicaid nursing home because we've run through our retirement savings. |
Anonymous
The tricky part is figuring that out in future dollars. I'm not OP, but we live on 6k including day care bill and mortgage. 4k would be more than enough without those. But we don't know how much food will cost in 25 years, for example. |