Why max out 401k?

[Anonymous]

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Anonymous wrote: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.

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.

Compound interest would get her almost exactly to 2.6M in 20 years.

Exactly. don't know why people were questioning this.

Math is hard. They probably aren't factoring in future contributions, matches and raises.

And you are not factoring in inflation and market corrections. Losers have been staggering in the last 2 years. Go ask a retiree.

That has zero to do with the question of how does $500k + 10% of income + company match + 20 years compounded interest get someone to
$2.6M. Also, most people use 6% as the average rate over time and that takes into account market corrections.

You are correct that what people cannot do is treat $2.6M in future dollars as equal to $2.6M in today’s dollars due to inflation (I was the poster that previously pointed that out). But that had nothing to do with the actual math involved in determining what $500K will equal in the future based on a certain set of assumptions.

DP. The point is that a lot of economists are questioning whether the 6% return rate over time is a good number. I saw a paper the other day that extended the data window that was covered by the economists that made that calculation back just a few years and the average rate of return dropped significantly. Plus, even if the 6% return # is good over say, a 100 years, there could be 30 year windows in which the return is much lower. It’s why financial advisors will give you a range of probabilities.

Agree. The point is don't base your decisions on this $2.6M number alone. That's one of many possibilities, and many things affect what the ultimate total will be.

Also we have no idea how OP is invested. Some people are in stable value fund and don't even know it. Lots of people are in target date funds which will glide away from stocks over time. Even setting aside what OP should be invested in based on her age and risk tolerance, you can't assume an average stock market return when she might not even be in/stay in stocks for the next 20 years.

She should go to Bogleheads if she wants more help.

[Anonymous]

Anonymous wrote:

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Anonymous wrote:

Anonymous wrote: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.

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.

Compound interest would get her almost exactly to 2.6M in 20 years.

Exactly. don't know why people were questioning this.

Math is hard. They probably aren't factoring in future contributions, matches and raises.

And you are not factoring in inflation and market corrections. Losers have been staggering in the last 2 years. Go ask a retiree.

That has zero to do with the question of how does $500k + 10% of income + company match + 20 years compounded interest get someone to
$2.6M. Also, most people use 6% as the average rate over time and that takes into account market corrections.

You are correct that what people cannot do is treat $2.6M in future dollars as equal to $2.6M in today’s dollars due to inflation (I was the poster that previously pointed that out). But that had nothing to do with the actual math involved in determining what $500K will equal in the future based on a certain set of assumptions.

6% is VERY generous.

Sheesh, there are some crazy people on this forum. 6% is not very generous. You have no idea what you are talking about. You can get a 2yr treasury paying nearly 4% right now. Do you really think the risk premium in stocks will be less than 2% of risk free assets?

+1

SP500 long-term annualized return is 11.88% from 1957 through end of 2021. 6% is fine for an assumption in your retirement calculator.

Sure. If you ignore the Great Depression and the recession that preceded the “Roaring 20’s” (which really started in 1925 and the 6% number does). If you start the calculation in the late teens/1920 6% is too high.

The S&P500 didn't exist before 1957. If you are referring to the DOW, the average, including those periods, is 7.75%

You’re still cherry picking your window. That number is 1921 to present. The Dow dropped 32% in 1920.

Markets are much deeper/liquid today relative to 1921. We have a central bank that is willing to take unconventional actions to maintain financial stability. 1921 didn't have circuit breakers.

My point? 6% assumption of annualized returns is a pretty good benchmark over the lifetime of a portfolio. It's not "conservative" but it's also not wildly optimistic. It's just a solid assumption. I certainly did not predict 25% annualized return in 2020-2021 time period.

Did you predict the 20% drop in the S&P 500 this year? The circuit breakers don't eliminate the downturns, they just spread the drop out over a longer period time. The point stands -- a "solid assumption" over a 100 year period is not something you can assume will apply in any 30 year window.

In any case, this conversation started in response to the pp who called someone who referred to 6% as a "generous" estimate "crazy."

[Anonymous]

Anonymous wrote: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.

Keep in mind the researchers and planners who come up with these formulas are mostly educated by people who are, ultimately paid one way or another, directly or indirectly, by companies like Fidelity and T. Rowe Price. They want to maximize retirement plan assets.

The real problem with saving too much for retirement is that a lot of things could happen between now and 2042.

You could die before than. Maybe there’s a 5 percent chance of that happening.

A terrible depression could leave the world sort of intact but wipe out most financial assets. Maybe there’s a 0.5 percent chance of that happening.

You might live, but global warming could eliminate the economy as we know it and kill any plan you’ve made.

You might leave, and financial assets could survive, but the performance of financial assets could be so disappointing you’ll wish you hadn’t bothered trying to save. Maybe there’s a 10 percent chance of that happening.

So, one way to look at this is that planners and calculators are leaving out the 15 percent possibility that you’d be better off having fun now, or investing in bomb shelters and freeze-dried food, than saving anything for retirement.

Maybe the way to handle that risk is to take your income, set aside 15 percent (or whatever your instincts say the percentage should be) for fun and disaster prepping now, and then use 85 percent of your income as the basis for computing retirement savings contributions. Or, take some other approach.

But I think a super important point is that you should not live a terrible life today to build retirement savings, because you have no idea what the future will hold. Balance the interests of the future with the interests of the future.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

Keep in mind the researchers and planners who come up with these formulas are mostly educated by people who are, ultimately paid one way or another, directly or indirectly, by companies like Fidelity and T. Rowe Price. They want to maximize retirement plan assets.

The real problem with saving too much for retirement is that a lot of things could happen between now and 2042.

You could die before than. Maybe there’s a 5 percent chance of that happening.

A terrible depression could leave the world sort of intact but wipe out most financial assets. Maybe there’s a 0.5 percent chance of that happening.

You might live, but global warming could eliminate the economy as we know it and kill any plan you’ve made.

You might leave, and financial assets could survive, but the performance of financial assets could be so disappointing you’ll wish you hadn’t bothered trying to save. Maybe there’s a 10 percent chance of that happening.

So, one way to look at this is that planners and calculators are leaving out the 15 percent possibility that you’d be better off having fun now, or investing in bomb shelters and freeze-dried food, than saving anything for retirement.

Maybe the way to handle that risk is to take your income, set aside 15 percent (or whatever your instincts say the percentage should be) for fun and disaster prepping now, and then use 85 percent of your income as the basis for computing retirement savings contributions. Or, take some other approach.

But I think a super important point is that you should not live a terrible life today to build retirement savings, because you have no idea what the future will hold. Balance the interests of the future with the interests of the future.

Correction: Balance the interests of the future with the interests of the present. And “live,” not “leave,” and probably some more.