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401k how much is enough

Old 07-09-2015, 02:46 PM
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Default 401k how much is enough

Started max contribution of $17,500 at age 26. Let's say I plan to retire at age 60 and to keep it simple my employer offers no match incentive. Even at a conservative return of 5%, the calculators show a total sum of ~$2.5 million by age 60. If I plan for 25 years of retirement with no social security (which probably isn't unlikely...) that leaves me with ~$8300/month of gross income minus I'm guessing 30% tax rate leaving $5800/month net income. What am I missing?

I'm trying to get an idea/decide if 401k savings alone is enough for retirement considering I started very early in my career with max contributions. Thoughts?
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Old 07-09-2015, 02:49 PM
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Well one thing I hadn't considered was inflation rate what's a good estimate there? 3%
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Old 07-09-2015, 02:55 PM
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The max contribution rate will continue to increase as well. You need to keep increasing your contributions to keep pace with inflation.
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Old 07-09-2015, 02:56 PM
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Originally Posted by gf View Post
The max contribution rate will continue to increase as well. You need to keep increasing your contributions to keep pace with inflation.
I will continue to do so I think it's $18k for 2016
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Old 07-09-2015, 03:05 PM
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2 questions that I'm sure you've already heard ad nauseum that any retirement planner will ask you;

<but I'll state the obvious and ask them again>

1. What quality of life do you want? (Or what percentage of your current pay do you want per month)

2. How long do you expect to live?
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Old 07-09-2015, 03:06 PM
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Somewhat dependent on WHEN you turn 60. Next year?, no problem, grab ss payment, add your $8300/mo and rock on.
If turning 60 20yrs from now, the $2.5mil will not look so impressive, even @ 2%/yr inflation.

In either case, you are doing GREAT! Keep up the savings and don"t worry. I retired young, and while I would like more dough, I would make the same decision today. Congratulations on planning your retirement. Kids are the biggest delaying (read money soak) factor when planning your retirement.
Again, good for you.
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Old 07-09-2015, 03:06 PM
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3 - 3.2% is not a bad inflation rate to calculate. But my personal feeling on your conservative 5% is that you should be basing your expected conservative return to be 3%, not many have gotten an average of 5% return in their 401k's over the last 5-6 yrs. It's better to base your assumptions off the 3% and end up with more money than anticipated than using the 5% and ending up without enough money.
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Old 07-09-2015, 03:08 PM
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May want to look at a after tax investment to prevent penalties on early withdrawal, the withdrawal age very well can increase....
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Old 07-09-2015, 03:16 PM
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10x your yearly income in the bank will make for a comfortable retirement. This is assuming you are not carrying much debt at that time as well.
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Old 07-09-2015, 03:21 PM
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Originally Posted by runabout View Post
3 - 3.2% is not a bad inflation rate to calculate. But my personal feeling on your conservative 5% is that you should be basing your expected conservative return to be 3%, not many have gotten an average of 5% return in their 401k's over the last 5-6 yrs. It's better to base your assumptions off the 3% and end up with more money than anticipated than using the 5% and ending up without enough money.
Except with 3% inflation and 3% return you are only treading water.

If you can't achieve 5-6% AAR over a 10-35 year time period, you or the plan would have to do some seriously idiotic investing.

Remember the money continues to grow in retirement, if you manage your finances correctly.

Last edited by aubv; 07-09-2015 at 05:53 PM.
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Old 07-09-2015, 03:22 PM
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Originally Posted by cfarmd View Post
Started max contribution of $17,500 at age 26. Let's say I plan to retire at age 60 and to keep it simple my employer offers no match incentive. Even at a conservative return of 5%, the calculators show a total sum of ~$2.5 million by age 60. If I plan for 25 years of retirement with no social security (which probably isn't unlikely...) that leaves me with ~$8300/month of gross income minus I'm guessing 30% tax rate leaving $5800/month net income. What am I missing?

I'm trying to get an idea/decide if 401k savings alone is enough for retirement considering I started very early in my career with max contributions. Thoughts?
Obamacare will cost at least $5800/mo when you reach age 60. Better not get sick or have any health problems associated with aging after age 60.

You are going to have to work until you are 66 or 70.

Expect European type tax rates. That gross $8300 will only net you around $4150 if you are lucky and taxes "only" rise to 50%.

Somewhere along the way, expect a 10% confiscation of retirement accounts ala Cypress/Greece.

My advice? Keep working and saving. Maybe get a second job.
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Old 07-09-2015, 03:33 PM
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How much is enough ?.... Certainly an interesting question.... Its never enough IMHO

Kidding aside, in retirement you will need to generate the same amount of income as you are accustom to living on .. Hard to say when you are young - but assume you make +/- 200k in your highest earning years ..

Then you will need 5M and withdraw 4% a year... or less and draw a bit more ..

The advice I give my kids,,, start saving now and dont touch it ...

Retirement age comes hard and fast and I plan on spending every penny so don't count on me...

Last edited by triplenet; 07-09-2015 at 06:00 PM.
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Old 07-09-2015, 03:35 PM
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Originally Posted by dssmith View Post
Keep working and saving. Maybe get a second job.
Now days you're just about better off putting your money in a jar and going on the system ....let the Gubbement take care of ya....I can assure you many are
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Old 07-09-2015, 03:37 PM
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At 3% inflation by the time you turn 75(assuming you are 26 now) that $8300/month income will have the buying power of $2100 in todays dollars.

While a 401K is an excellent investment vehicle, I would also look outside to other investment ideas for inflation hedging assets. I like the "throw it on the wall and see what sticks" method when it comes to long term planning. You can never assume one asset will provide 100% of what you need that far into the future.
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Old 07-09-2015, 03:57 PM
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Something else to consider is having all mortgages paid off - debt free. Its a wonderful thing.

Health insurance and care costs are already a major expense, and this will only get worse. A good portion of savings/retirement will likely go to this.
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Old 07-09-2015, 04:09 PM
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There are many ways to look at it. Once is to say 20-25 times your current expense level. Another - it is enough when the return (income + growth) on your investments exceeds your current expense level.

Don't bother trying to figure out inflation for the next 40 years. Just worry about how many times your current annual expenses do you have?

YMMV but if you manage to save 20 times your annual expenses during a normal working career you are likely to keep those same spending habits and be fine for retirement.

Notice it's as much about reducing your expenses as it is about putting money away.
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Old 07-09-2015, 04:17 PM
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Make yourself a spreadsheet with years of age across the columns. Put in all your cost today as well as income, taxes, insurance, etc. track your cost for a few years or forever whis is what I do on a separate sheet.

Use formulas in the sheet so you can run multiple scenarios on growth and inflation percent. Then try to figure out multiple income sources. Take your withdrawals as a percent that is very conservative and maybe consider good dividend stocks.

You can answer your own question with analysis and conservative assumptions and have fun doing it. It helped me a lot.
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Old 07-09-2015, 04:18 PM
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20% of your gross income
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Old 07-09-2015, 05:42 PM
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Any decently diverse 401k, long term, should return 3-4% over the rate of inflation.
The 401k contribution cap is adjusted based upon inflation.
The better way to calculate it, is to use 3.5% as your real rate of return based upon today's dollars and see what that gets you over 30 years - that way you are using real growth, and can compare it to your current income and needs.
Your tax rate will likely be under 25%, assuming no state income taxes.
by my rough calculation, putting the maximum 401k contribution for 34 years (to age 60) at 3.5% will yield you a gross balance in today's dollars of $1,238,000, giving you a 25 year withdrawal rate of $5,300/month, which is about $4,200/mo after taxes.
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Old 07-09-2015, 05:45 PM
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As much as you can. I would consider a roth. Even though you are paying taxes now you won't pay taxes during a hopefully long retirement. Also I would say it is a safe bet that taxes won't be going down. There are some interesting articles by Michael Kitces and Wade Pfau on how best to position yourself for retirement. I think it is best (against current advice) to target a 3% rate. I agree with Triplenet that your level of spending is the same as when you are working or more as medical will likely rise. If you have kids you can count on having or wanting to help them out too.

You need to have another taxable account and allocate investments appropriately for what should be in the tax free one.

You don't say what your current age is but if your retire at 60 either you your wife or both will live into your 90's which means you will have a 35 year horizon.
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