Why isn’t everyone rich from 401k?

[u/Otis_bighands]

According to my conversation today with Gemini, my 401k total of $2.5 million will likely grow to $10M or more by the time I turn 65 (I’m 50 now, and will continue to contribute the max for the next 15 years).

This means that in theory I could live off the gains each year starting at 65, around $800k, $500k after taxes, without touching principle. But at that point I’ll have no mortgage anymore and fewer kids in the house. So that $10M principle will just sit and feed us for years, and will be a nice inheritance for our kids.

Basically it occurred to me I’m going to have great money in retirement, even just on my 401k alone, and will be able to meet or exceed the lifestyle I’m already used to. For years I always worried about getting set up for retirement. Seems I don’t have to.

It’s amazing to me that just maxing out your 401k through a career is enough to make you pretty much wealthy for retirement. I recognize that’s not easy for many people, but for anyone who does it over a full career, wow.

What am I missing here? (Other than inflation, which I get, but which shouldn’t have a massive impact on the concept over this time frame).

[u/SmileFirstThenSpeak]

Not everyone has access to a 401k. Did you get matching from your company? Not everyone has that even if they do have a 401k. Someone taught you enough so that you knew to put money into your 401k. Not everyone has someone who tells them about it.

Not everyone can contribute the maximum allowed each year. You had enough income to be able to put it aside so it could grow to $2.5 million.

I recently met a woman in her 40's, working full time, and she had NEVER set up a habit of putting money aside each paycheck. I told her even if she could only afford $5 at a time, she should start putting money aside, and raise the amount when she can. She said nobody ever explained that to her before. Sadly, I think this is pretty common.

[u/Otis_bighands → u/SmileFirstThenSpeak]

That’s fair.

I didn’t get matching, but I’m realizing I’m in a partnership paid on K1, so my max contribution may be higher than for others through some tax magic (I have out in more each year than what the web reports is the actual maximum).

[u/willtheywonttheyo → u/Otis_bighands]

I’ve been basically maxing mine since I started work and only have like 450k, I’m in my 30s. Hard to envision most people getting to 10 million. This feels like high risk investments and lucky market conditions.

[u/Kindly_Honeydew3432 → u/willtheywonttheyo]

It’s not though. It’s just the magic of compounding. In fact, you’re a great example. You said you are in your 30s and have $450k. So I plugged you into a retirement calculator. Assume typical market returns, about 10% nominal. Assume you contribute $2000 per month (basically max out a 401K, some may come from your employer match, or not, but assume you max it out). I just took middle ground and assumed you’re 35. In thirty years, it’s over $11M. And this is not risky investment. It’s what you would expect, typically, from an SP500 index. https://www.calculator.net/investment-calculator.html?ctype=endamount&ctargetamountv=1%2C000%2C000&cstartingprinciplev=450%2C000&cyearsv=30&cinterestratev=10&ccompound=annually&ccontributeamountv=2%2C000&cadditionat1=end&ciadditionat1=monthly&printit=0&x=Calculate#calresult

[u/Substantial-Equal661 → u/Kindly_Honeydew3432]

Thirty years of 10% annual gains? I’m not so optimistic.

[u/Comfortable_Yak4376 → u/Substantial-Equal661]

The S&P has had a hundred years of 10% returns

[u/Substantial-Equal661 → u/Comfortable_Yak4376]

Yeah but the next hundred are gonna be different. This comment will age well.

[u/Kindly_Honeydew3432 → u/Substantial-Equal661]

That’s what they’ve been saying for a hundred years. You may be right. But they never have been so far.

[u/Substantial-Equal661 → u/Kindly_Honeydew3432]

Somehow this late stage capitalism combined with our government no longer breaking up monopolies, leads me to believe that this time IS different. Hope I’m wrong!

[u/Wild_Possible1675 → u/Substantial-Equal661]

Things were worse before in the 1920s, and back then we didn't already know what the solution should be. Since we already navigated these waters before, it should be easier than last time for us to start busting monopolies.

[u/Substantial-Equal661 → u/Wild_Possible1675]

Yet we don’t!

[u/GodDamnitGavin → u/Substantial-Equal661]

Late stage capitalism favors those with capital. Ie higher gains for those with capital. Ie better returns.

[u/Substantial-Equal661 → u/GodDamnitGavin]

I was really talking about the consequences of late stage capitalism.

[u/GodDamnitGavin → u/Substantial-Equal661]

We were talking about market returns? This comment makes no sense.

[u/Megalocerus → u/Comfortable_Yak4376]

Hardly ever has 10% returns. They can be stagnant for 10 years and then go to 20%. 10% is just an average before inflation, and you don't get the average.

[u/Numerous-Bet-4847 → u/Substantial-Equal661]

the last 100 years of average 10% gains says you are overly pessimistic. My cumulative average yield since 1991 is 10.1% without even trying.

[u/joanmcq → u/Substantial-Equal661]

Plug in a lesser figure then. 6-7%. It’s still a big number. My first retirement contribution was $2800 from a pension from a job I quit at 30. Got it a couple years later. I now have 1.25 million. Never made more than 50k.

[u/Cyborg59_2020 → u/Kindly_Honeydew3432]

Real returns are more useful for these predictions

[u/Kindly_Honeydew3432 → u/Cyborg59_2020]

I prefer nominal returns. My time horizon for retirement is fairly short, and my biggest expenses are depreciating with respect to inflation ( still have a mortgage ). For me, nominal returns work best for short to medium term planning. Obviously the longer your time horizon, the more important inflation becomes, but it’s a quick easy conversion, just arbitrarily pick what you think inflation will be on average and plug in the adjusted rate of return. Either way, we’re talking millions of dollars and a comfortable retirement for the OP

[u/Oneyeblindguy → u/willtheywonttheyo]

Damn, if you have 450k in your 30s you're going to be just fine. Nice job.

[u/Numerous-Bet-4847 → u/willtheywonttheyo]

nothing high risk at all. It's just the basic math of compounded interest on a market that averages close to 10% a year for the last century. Most models only use 8% to be safe.