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Nothing more than a 401k

Could you retire on nothing more than your 401k? Let’s do the math to see if that’s a viable option for you.

Many medical professionals battle common financial dilemmas such as:

  • maxing out retirement accounts
  • paying down debt
  • saving enough for a house
  • having enough for estimated taxes
  • covering their monthly spending

What if you could simplify the retirement equation and do nothing more than maxing out your 401k every year.

No Keogh. No 457. No IRA. No cash balance plan. No pension. No SEP. No cash savings. No CD’s

It would be the laziest fucking approach to retirement, but would it work? Let’s find out. 


Retirement savings

There are plenty of physicians who don’t contribute a dime to their 401k’s. In fact, they don’t bother with IRA’s or other retirement accounts. Many do just fine as long as they have alternative means for retirement. 

Some rely on cash savings, the value of their home, inheritance, sale of a business, or pensions to secure a healthy retirement. 

Fortunately, most employers recognize that physicians get a late start in life and so there have a need for accelerating their retirement savings. So they usually offer physician employees the maximum IRS allowed retirement contributions – somewhere in the $55,000 range annually and going up with inflation. 

If you’re not employed, you can still max out your retirement savings through a solo 401k or a SEP-IRA and even a cash balance plan if you have enough room. 


Maxing out 401k

I started investing when 401k limits were $13,000 and now they are $18,500. This annual contribution limit usually goes up by 3% every couple of years. It’s not something we’ll take into account in our math because we are going to be calculating for today’s dollars. 

It’s not hard to figure out how much money you can set aside in your 401k retirement account if you were to max it out for the duration of your career. 

Even if you don’t remain employed, you can max out a solo 401k as a sole proprietor or independent contractor. 


How much do you need for retirement?

To figure out how much you’ll need for retirement, you’ll need to know what kind of lifestyle you want to live 30 years from now. For most of us this is damn near impossible to predict. 

But just because we can’t answer that question, doesn’t mean we should skip the planning. As a bare minimum, you’ll want money for food, housing, transportation, health, and entertainment. 

Some of you fancy-pants will want money for traveling, fashionable attire, exotic sports cars, plastic surgery, and money for offspring. 

Only one of my friends knows how much money she needs for retirement. One. A single person out of all… okay, I don’t have that many friends, but still, ya ought to know what you need so that you can plan to get it. 


Future 401k potential 

I googled [compound interest calculator] and entered $0 as my starting value. I added $18,000 a year as my ongoing contributions and set the compounding interest at 5%.

For an index fund portfolio, 5% of average annual returns is a pretty good estimate. For day-traders I hear this number can be as high as 10%. For real estate investors I hear it can be 15%. That’s awesome. 

For my years to maturity I put in 30 years. For some it might be 40, for others, 25. Here are some of my results:

  • 5% – $1.3M
  • 10% – $3.5M
  • 15% – $10.1M

I personally don’t believe consistent 10% annual returns are possible unless you make investing your job. But I believe that 4-6% of average annual returns using an investment vehicle such as broad index funds is achievable.

Catch me in 2040 and I’ll let you know if I was right. 

So I will use 5% for this example. Meaning, if you diligently max out your 401k for the next 30 years, you will have $1.3M in today’s dollars in that account. 

You would double these values if your household is dual income.


$1.3M in retirement

If you ask my buddy J., he’ll tell you that $1.3M is a joke and would last you only a few years. He’d want something closer to $50M to feel cozy in retirement. 

Ask a traditional financial advisor and they’ll tell you that you need to have 80% of your working income or around $8M in retirement. 

Ask my frugal lawyer friend V. and she’ll tell you that $500k would be more than enough for retirement. 

If I was 65, had $3k/month of SS income, some side money from selling my ass, and a passive income streak from this $1.3M 401k stash, then I would have an equivalent income of $8,000/month during my retirement years. 

I’m not creative enough to spend $8k/month in retirement. 

As for getting travel and exotics out of my system, I’m not sure I’ll need that since I’m living the retired lifestyle right now. 

If $1.3M matches your retirement number from above, then I don’t see why you’d ever want to worry about anything else but your 401k. 


$18,000 per year, every year

The premise here is that you would have to max out your 401k every year for the next 30 years. This isn’t really that hard to do.

Consider that you can open a solo 401k and no matter how much you earn every year, you can always max out that 401k. 

I’m 40 years old right now. Even if I went back to broke, I could build my nest egg back up by doing nothing more than maxing out a solo 401k for the next 30 years. 

In order to max out a solo 401k I would need earned income as a sole proprietor or independent contractor – any kind of business owner essentially. 


Retiring on $1M

It’s not easy retiring on $1M because most of us will have gotten used to much higher spending. It’s very possible but it requires some workflow adjustments. 

The point of this post isn’t to learn how to retire on $1M – rather, how much a 401k could grow to if it’s maxed out for 30 years. 

Let’s not forget about social security and side incomes. Even without those, a conservative $1M investment portfolio should net $30,000-40,000 per year of passive income. 

At $1.3M it would be $40,000-50,000/year. 

A $1.6M portfolio would net $50,000-60,000/year. 

Again, these numbers would be doubled if there are 2 working individuals in the household. 

Everyone tells me that it’s not possible to live on only $40,000/year during retirement. And then I meet people who are living happily on far less than $40k.

So, where is the disconnect in what I read and hear and what I observe? Dunno. Hoping to figure that out with this blog. 

2 replies on “Nothing more than a 401k”

$1.3 M in 2018 would be nice. But I fear we won’t be able to retire on $1.3 M in 2038 or later unless there is little to no inflation.

Also, I haven’t paid income taxes on my 401k/403b/457 so that will cut into my distributions.

I’ve been saving a lot of income and if I keep it up maybe I will feel comfortable with retirement at age 60. Hopefully I’m healthy enough to enjoy it.

The devil is in the details which is why this inflation factor can add unnecessary stress to people’s financial planning. Your contributions wouldn’t stay at $18,500 for the next 30 years. The limits would be increased according to inflation by the IRS (congress).
Your income, too, would increase at the rate of inflation.
Your investments, too, such as index funds, keep pace with inflation.

So the math which results in $1.3M would be in today’s dollars, or approximately $2.4M in 2048 dollars, assuming a 3% average annual inflation. And, assuming your personal rate of inflation will keep pace with the CPI.

A retiree should be a lot less affected by inflation than an active employee. You are spending almost nothing on commuting, licensing, drycleaning, debt, insurance, etc. These are the big inflation drivers and though they affect the CPI, your personal rate of inflation doesn’t have to be tied to it.

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