As is my policy, the one Dad and the rest of my ‘Bully Mentors’ drilled into me, I don’t allow myself a bold statement if I can’t back it up with a specific, empirical, richly detailed explanation. In fact, I say that to callers all the time. “Don’t let me get away with that garbage! Make me back it up ’til you’re satisfied.” Tonight I’m gonna work it a different way.
Here’s the challenge.
Please, start askin’ around. Talk with friends, neighbors, family, folks at work, the innocent bystander behind you in line at Starbucks. Search everywhere ’til you find someone who has firsthand knowledge, no hearsay allowed, of a retiree, or retired couple who’re takin’ home at least $36,000 a year from their 401K. The next one I meet’ll be the first.
Look, I know they’re out there, but my point is that they’re the exceptions proving the rule. The rule? Yeah, the rule. Normal for folks who relied on their employer’s 401K isn’t anywhere near that sort of income. Imagine what it must feel like. You’re almost ready to retire. You call the guy who’s been guiding you for years. He says the ‘safe rate’, the yield at which he judges your principle to be relatively safe from market erosion, will take your half million bucks and give you back about $15-20,000 a year if you’re lucky.
That’s another question you might wanna ask. Find out how many folks have managed to hit the half a million dollar level in their 401Ks.
Given today’s rate for the 10 year Treasury — an eye-popping 1.9% — how you even get that much income becomes a pretty good question. I wonder if the advisor has a pretty good answer.
One of the most disturbing facts I’ve uncovered over the years, is that the average American man with a 401K, has less than $70,000 in it at age 58.
The second part of this challenge is to ask yourself a question.
Forget that financial advisors say to expect a conservative 4% yield on your principle at retirement. Forget that the highest, most conservative Treasury note is less than half that. Most of all, forget that the poor retirees who’re livin’ off that pitiful yield, are doin’ so — what for it — after they pay taxes on it. Oops. Talk about adding insult to injury. First you hit retirement after surviving the roller coaster of stocks ‘n bonds for 20-30 years. You’re proud of what your hard work and stick-to-it-iveness has produced — $500,000. At the current 1.9% 10 year Treasury yield, that’s not even $800 a month — and that piddlin’ amount is before taxes. Can you say, “Welcome to Wal-Mart’?
So, here’s the question.
Given the current balance in your own 401K, what’s a reasonable prediction of your end game retirement principle?
Bonus Question
Combined with your (muffled giggling in background) Social Security check, imagine what quality of retirement you’ll have — OR — IF you’ll be able to retire at all.
If the concept of 401Ks/IRAs had proven to have been a rockin’ success, heck, even a kinda sorta, maybe success, I couldn’t pose this challenge. But we all know it’s a losing proposition for the vast majority of Americans who keep havin’ those pesky birthdays every year. Yet, year in and year out, they contribute. Why?
Let me know about all those happy campers you find who’re livin’ the retirement of their dreams, thanks to their 401Ks.
You can also call me, to let me know your retirement isn’t lookin’ so hot about now. Together, we’ll check out the lay of the land and figure out a plan to vastly improve your end game. Call me at 619 889-7100. Or simply click on the Contact BawldGuy button up top, and start writin’. Have a good one.
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- Self-Directed IRAs and 401Ks – Don’t Trip Over the Crack
- Self-Directed IRAs and 401Ks – You Don’t Have Be All-In — Playin’ the House’s Rules
- Self-Directed 401Ks for Real Estate – Do I Qualify?!
- Self-Directed IRAs and 401Ks – Accounting For Contributions
About BawldGuy
Good stuff, as usual.
The question – for a 35 year old – is where do we ammass cash?
Always the key question, isn’t it? A surprisingly large segment of my clientele are 35 and younger. In fact, I’d say roughly 20%. They have a few common denominators.
1. Generally speaking, they make above average incomes. I’d say most find themselves over $70,000. They typically top out at $120,000ish.
2. They live significantly below their means. One guy is my hero. He makes around $100,000. He’s single, doesn’t own his own home, and has no known big time deductions. Yet he consistently saves $4,000 every month, month in and month out.
3. They’re not only disciplined, but have the ability to make decisions — to pull the trigger.
4. They’re all smarter than the average bear.
Seems like I’m describing a certain 30-something curmudgeon.
Hey Jeff,
I have 3 daughters – each one smart and good looking in their own way, marriage material.
I’d like to be the mother-in-law of your hero bachelor!
Aunty
Hi Jeff, if you add in inflation say 3.5% and withdrawing 4% from ones account minus taxes what’s left? Ones retirement living off of 401K/ IRAs plus Social Security is a very dim and meager outlook. After ten years can you afford the gas to go to Wal-Mart to greet people? Every year, the cost of living goes up while your savings goes down, way down. Just wanted to add my two cents, Thanks, Jim
Very true, Jim. The sad, sad thing is that the vast majority don’t realize this in anything but real time, as it’s happening.
The 401k has only really been around since 1980. If the the upper limit of the 3rd quintile household income (as of 2010 – $61,735) since 1980 religiously invested 5% of their income in a 401k (S&P 500 Index Fund) and had an average employer match (say 50% of that 5%), then their account would be somewhere around $370k (quick calc based on total annual return with dividend reinvestment). However, if this household was preparing to retire after a 40yr career and had the 401k available to them as far back as 1970, then their nestegg would be ~$750k. Hardly enough capital to enjoy what I’d consider blissful retirement. In order to take home $36k/yr, retiring in 2010 this typical household would have needed 401k available to them 10 yrs before it was actually created and would have had to allocate 15% of their income. Assumptions abound, such as never making emotional changes to investment allocations during market gyrations. Alas, $36k/yr isn’t really my vision of blissful retirement either…
My only objection to your challenge is that it’s not quite fair. Those currently in retirement were not able to contribute to a 401k until mid-career. Just sayin.
Hey Troy — All good points. However, if we can’t build a decent retirement in what is now 32 years, what’s the problem? This is why, by the way, that the post didn’t use more than a 30 year window. At least I think I didn’t.
I like your $750K number IF they’d begun in 1970, and IF there were qualified plans back then. I can find no plausible reason to think the average couple would’ve even sniffed at that figure. They’ve not done it after 30 years, why would they have done it back then? The simple answer is, they flat wouldn’t have. According to Dalbar, Inc., in their annual 20 year study of returns generated by 401Ks over that time period, it was 3.83% a year.
As far as the employee with the qualified plan opting to tie themselves to the S & P index, I haven’t seen it happen, have you? It’s why, imho, EIULs do so well over the long haul.
The other problem with the unleveraged accumulation of paper assets is the decumulation phase. The financial folks that helped you accumulate assets devise decumulation plans for your retirement income, not wealth management plans. You guess at your lifespan and the behavior of the markets, and you create a plan for spending most or all of your assets over your assumed remaining life.
In addition, the traditional IRA and 401k FORCE you to decumulate and pay taxes over a set time frame. Who benefits from this? Those same financial folks and the taxman.
Dunno about you, but I was raised by parents that were kids during the Great Depression. They believed you NEVER spend the principal you accumulate, only the income it produces.
Prudent accumulation of leveraged assets outside of tax deferred retirement plans creates the level of wealth required to live on the income your assets produce. Most people end up with a portfolio of paper assets from which they are scared to take more than the required minimum distribution for fear of running out of money. They suddenly discover markets are fickle and the planning assumptions used by the financial folks during the accumulation phase have changed dramatically. They spend their retirement in fear, nervously watching the financial markets and their account balances. Not a happy outcome.
We have kids (1 with a disability) and my wife is paranoid about what should happen if we die. So, we dump about $1,000/month into an Equity Indexed Universal Life insurance policy with a floor of 1% and a top cap of 12%.
We don’t think we lose more in the transaction costs they we would on other types of investments and we can borrow against this with no tax penalty if needed for college expenses or if the wife’s parents need special care. Plus it does have the death benefit.
Most people don’t consider what will happen when the “WITHDRAW” the money upon retirement. Many, if they save well, will be in even higher tax brackets when they retire with no deductions. They have no idea that they will have “mandatory distribution requirements” from their 401k which will then get taxed at, probably, a higher rate. (If a company matches 1 to 1 to your 401k, then that’s fine but any other scenario I’d analyze real carefully what will happen with you withdraw the money upon retirement.)
Here’s the picture. If you are a farmer would you rather pay a 30% tax on a bag of seed that costs $100 or a 30% tax on the crop that is worth $100,000. $30 vs $30,000? Investing money Pre-Tax in a 401k is like paying money on the seed.
We have a chart somewhere that shows how when we retire on this fund we pull out/borrow out about $140k per year in non-taxable income paid off by the death benefit with the rest going to kids. The same accumulation of funds in another investment vehicle would give us less per month because of the taxes we’d pay. Like $90k AND worse the amount accumulated would run out – in some cases too quickly – picture a downslope whereas our EIUL would keep paying until we die….
..or until the Singularity occurs and we can become robots and occasionally need a new box and hard-drive.
Hey Sam — Sorry for the tardy reply.
“Here’s the picture. If you are a farmer would you rather pay a 30% tax on a bag of seed that costs $100 or a 30% tax on the crop that is worth $100,000. $30 vs $30,000? Investing money Pre-Tax in a 401k is like paying money on the seed.”
That’s older than dirt, but absolutely on point. The perfect way to compare EIULs to 401s.
One of the best comments in quite some time, Sam. Thanks
That’s so well said, AI, I refuse to add to it. Great job.
Now that you and I are getting a little older and know more than a few people in this position, the problem is a lot more visible to us…..
I began tellin’ folks about the downside of qualified plans and Wall Street in general around 1997. Then, when the Nasdaq crashed a fews years later, they flocked into my office with the same stories.
401(k) is my backup plan to my backup plan. Primary plan is cash flow from real estate. Secondary plan is to work at a job I love so much that I never want to quit.
I’ve been contributing at least at the match rate for 14 years. I have 26 years until I can touch it. It seems like it is right on track to allow me to “subside” when I get there.
Hey Jeff, Welcome. To each their own. But ask yourself, Can you do better than your 401k has, even including employer matches? I bet you can, without breakin’ a sweat. I see folks doin’ it all the time. That said, I understand where you’re coming from completely.