IRS announces 401(k) limit increases to $20,500
irs.gov
irs.gov
> What sort of retirement can you get from a 401k-only strategy?
So I tried and played to see how much of a retirement, in term of yearly retirement income in today's dollars, one would get if they were able to consistently max out their 401K, every year, starting today from 20yo to 55yo in 35 years, with a 50% match from their employer.
Math may be wrong, but it seems like the total value of that person's 401k, at 55yo, would be about 6M$. If we turn this into how much of a yearly income this feels in today's purchase power, 6M$ would be ~3M$ in today's value. At a 4% withdrawal rate, that's a 120,000$/y retirement income (in today's value).
Assuming:
- a ~500$/y increase in 401k limit
- 7% YoY growth rate of investment
- 2% inflation rate
- 4% withdrawal rate.
- 50% employer matchAlso very rare to have a 401k in your early 20s.
I think this very much depends. We're a super small (7 person) software services company, but we offer a 10% 401k contribution (just contributed, with no requirement of the employee contributing)
Knowing the upper bound is interesting to me because most people in the US don't max out their 401k and are probably not getting employer match, so their retirement story is probably not going to be anywhere near that.
Meanwhile in tech (in the US), people's out of college starting salary and internships is often above this. That's a helpful comparison point - say if you want to check your privilege. Or if you're a tech worker making >120k/y and you've been saving for retirement using only your 401k, well, that'd tell you it's probably not going to be enough to finance your lifestyle expectations.
There's a path to tax-advantaged wealth for almost everyone.
When I left, I had only saved about $2,500. I rolled it into an IRA, where I've watched it grow significantly in the last 12 years.
If you expect to be in a lower tax bracket when you take the money out, then invest pre-tax money. If you expect it to be in a higher tax bracket, invest money after you pay taxes on it. Obviously this is a very simple way of looking at it. But I think it's a good way to get a general understanding of the different options. Post-tax investments can be good if you need to pull out a big lump of money while retired.
On top of that, since you are only feeling a 11k reduction in your paycheck per year, but investing 15k, you end up with that much higher growth overall starting with a higher base.
The only time expected retirement withdraw rate (treated as income at that time) matters is when choosing between Roth and traditional 401k / IRAs. In that case, with Roth you are contributing a lower amount initially (11k reduction in pay = 11k invested, instead of 15k invested), however the interest grows tax free. So if you are investing enough that the interest gives you a huge amount of money during retirement such that your annual retirement income (using 4% rule) gives you much higher pay, you would be better with Roth. But in no case are you better without any tax advantaged account.
i.e. I'd argue that most people will be paying lower taxes in retirement (even without moving to a low/no tax state) even if their post retirement income is greater than their pre retirement income and tax brackets haven't changed.
Pre-tax investment: Invest $100k and it becomes $200k. You pay $60k in taxes and end up with $140k. Post-tax investment: You pay $30k in taxes and invest $70k. That $70k becomes $140k.
Yes, technically with the latter you will have more money left to invest in a separate taxable account, but not being able to defer taxes will drag on the investment return.
No, the grandparent is correct. The tax rates and compounding are both multiplicative, so associativity leads to the consultation that only the tax rate at saving-time and retirement-time matters
'If you will live like no one else, later you can live like no one else.'
- Dave Ramsey
America is fabulous if you make a few deferred choices.
That $180k was all pre-tax meaning you probably only put in $120k of it or so assuming high marginal rates.
Note: the "Four Percent Rule" that many people go by is not "Take out 4% of your portfolio every year." It is "Take out 4% in the first year, and then adjust by inflation every subsequent year."
* https://en.wikipedia.org/wiki/William_Bengen
* https://en.wikipedia.org/wiki/Trinity_study
So:
* Year 1: Take out 4% of portfolio.
* Year 2: Year 1 amount + inflation of Year 1.
* Year 3: Year 2 amount + inflation of Year 2.
[…]
* Year N: Year (N-1) amount + inflation of Year (N-1).
Though as you age the inflation adjustment tends to be less important as people tend to spend less.
The .04 is withdrawal rate, 26.5k a year from 401k and ira, 6% interest after inflation. Gives 31.5 years to 100k inflation adjusted income after tax.
Edit: fixed
- limit increases after 50, currently by 6.5k (more relevant with a different age range)
- the traditional and Roth $ contribution limits are identical -> you can save more via Roth
- employer matches are (I think always?) traditional
https://www.officialdata.org/us/stocks/s-p-500/1929?amount=1...
Alternatively, 1972-2009 (37 years) gives an inflation-adjusted 5.17%
https://www.officialdata.org/us/stocks/s-p-500/1972?amount=1...
(To be fair, that's from lump-sum investing at the worst time, if you DCA the returns should be better than the numbers above)
* * *
Just went off numbers in my head, I think there's lots of % people talk about, and 7% is what I've got stamped in my brain about expected return of an S&P 500 ETF over a long period. Might be wrong, but that's the number I use for napkin math.
At my income, hitting the Roth IRA maximum is much more attainable than the 401(k) maximum.
Keep in mind that the limits can only increase by $500 increments. $6500 / $6000 ~= 1.083, which is still a larger fraction than $20500 / $19500 ~= 1.051.
> I.R.C. § 219(b)(5)(C)(ii) Rounding Rules — If any amount after adjustment under clause (i) is not a multiple of $500, such amount shall be rounded to the next lower multiple of $500.
https://irc.bloombergtax.com/public/uscode/doc/irc/section_2...
A married couple with both working at companies offering 401k gets to save $40k+ pre tax, but a married couple with one spouse working at a local small shop not offering 401k gets to save half as much.
Doesn't the owner want to save for retirement?
And admin costs are going down; I think something like $50 +$8/per/mo on Guideline. Not nothing obviously, but can be recouped pretty quickly if you're maxing out even just employee contribution.
Essentially you do a non-deductible traditional IRA contribution and then immediately convert it to a Roth IRA. There are rules regarding this so important to follow them but it's actually fairly easy to do.
$140k in any number of US cities is solidly middle class. That's also the point where you can't contribute at all.
The contribution scales to zero linearly with AGI from 125k to 140k. And we're talking about a $6,000 contribution here, which is nothing compared to the $19,500 you can put into an employer plan.
And that's per wage earner, so double if you are dual income. (A huge implied tax on active parenthood)
But anyway, if you have that much to save, after 401k and 529, you above almost all the middle class, whose total household income is below your savings.
https://www.law.cornell.edu/uscode/text/26/402
Everything, including the rounding to a multiple of $500, is specified in the law.
[1] https://www.aei.org/wp-content/uploads/2020/01/cpi2020-875x1...
For a balanced take: https://www.investopedia.com/articles/07/consumerpriceindex....
Used to be 58k in 2021.
At one company, my salary was stated as X, but it was really .97X plus .03X 401k contribution.
https://www.levels.fyi/benefits/401k/
It's actually more complicated than it looks, because the base salaries and total compensation may also differ substantially between the companies, so you can't really compare 401k alone.
Usually the way to hit the 58k limit is through the Megabackdoor:
In other words, it’s hard to reach the true 401k cap even with huge contribution amounts from everywhere.
401k match is > than stock options in most cases long term. Of course options can be a lottery you win sometimes.
But as an annual reminder.. max out your 401k! Also if you can find a way to be even partially self-employed--max out the (much larger) employer contribution as well.
Always max out the 401k. Especially if you get an employer match.
Follow the simple steps outlined by Dave Ramsey / John Bogle / Tony Robbins / etc ad naseum. Accumulating wealth is easy and fairly certain if a few simple rules are followed.
In 2000 the Social Security tax limit was $76,200 so that is a 93% increase. Inflation increased only 59% in that time.
Especially on the coasts people making 150k plus is not too unusual.
In theory, that decreases the Social Security we have to pay out, but in reality, that would mean letting those people die when they get old, so we'll pay for it one way or another.
Plus, you know, people not having kids. Social Security isn't pre-funded, so it kind of depends on the labor force growing indefinitely. That was a terrible idea, but I can't see any way to fix it now.