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Comment by AYBABTME | Hacker News Reader

This news prompted me to do some quick math earlier today. My question was:

> 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 match

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RandoCorp Employee matches are generally not nearly as generous as Big Tech employee matches. In BigTech I have seen 50-100% match but RandoCorp I have usually seen it limited in some way.

Also very rare to have a 401k in your early 20s.

I only get a 3% of pay maximum match. However I also have a pension paid entirely by the company in addition to that.

> RandoCorp Employee

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)

Why is your age range so weird? No one I've ever met had a 401k at 20, let alone maxing it out, and few actually retire at 55.

I was just going for the upper bound, assuming someone who lucks out right out of college and retires on a 401k-only strategy at exactly the 55.

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.

59.5 is the age you can pull out of your 401k without penalty. I like the exercise you did because if it doesn’t add up to something you can actually retire with then there is a big problem. But there are other big problems, most lower wage employers don’t offer 401ks because it is expensive for them to do so. So why is this a benefit only reserved for the relatively well off?

It is sort of limited to the relatively well off just by buying power anyway. It doesn't have matching, but for lower incomes, the Roth limit is probably high enough for the money that is available to invest.

Oups! Was just a ballpark estimate.

There are lots of ways to get money out of your 401k penalty free if you are actually retired. There is a 72t and also the rule of 55.

Anyone can contribute to an IRA, or probably a Roth IRA if they're not well off.

There's a path to tax-advantaged wealth for almost everyone.

It's not unprecedented. I worked at Best Buy when I was in high school and college (2005-2009). They offered 401K to part-time employees. When my mom found out they offered that (with matching) she basically told me I'd be a fool not to do it, so I did.

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.

I had a 401k at twenty, but it is worth noting that for some reason many but not all companies disallow 401k plans for employees under 21.

Isn't that age discrimination?

Age discrimination laws only apply to those over 40 — totally legal to age discriminate anyone under 40.

https://www.eeoc.gov/age-discrimination

Good point... Thank you.

I am late 30s and have been maxing out a 401k since my early 20s, rolling it out to an IRA when separating from the sponsor firm (have worked in tech since ~18). An extended family member taught me the value of pre tax compounding and living below my means.

It actually doesn’t matter whether you compound pre or post tax, only thing that matters is whether your tax rate changes between now and retirement.

This math doesn't seem right. Deferring taxes gives you significantly more money to invest early and take advantage of compounding. Additionally, the model is that you pay off your home mortgage before retirement, which means you need to withdraw a lot less during retirement years, which lowers your overall tax rate as well.

> This math doesn't seem right. Deferring taxes gives you significantly more money to invest early and take advantage of compounding.

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

It does sound suspicious, but it works out. Let's say you have $100k to invest, have a 30% tax rate, and your investment will give you a 2x return by the time you're ready to withdraw.

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.

That falls apart if you are maxing the contribution though. A maximum contribution to a Roth IRA is going to be more valuable than a maximum contribution to a Traditional IRA.

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.

Not sure why people don't like this comment. It's correct. Whether you pay taxes on your income and then invest it, or invest it and then pay taxes when you take it all out the result is the same (assuming your tax bracket doesn't change.)

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.

From my understanding, this is not correct. 401K contributions reduce your marginal tax rate. So if you make 100k and contribute 15k, you save about 24% in taxes. Then when you withdraw 100k a year during retirement, you pay only 18% in taxes.

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 think this is what they were saying--pre-tax refers to traditional, post-tax to roth. Only traditional ira/401k reduces the marginal tax rate. So the decision to go for traditional or roth depends on how you expect your tax bracket to change.

https://www.gocurrycracker.com/roth-sucks/

Whether it's pre-tax or post-tax, it's an ERISA account, which means it's mostly judgment proof. You could invest in a standard brokerage account with post-tax money and you wouldn't get the ERISA protection. Also, retirement accounts allow you to specify to specify a beneficiary, which usurps the (long) probate process or any wills (making for a quick asset transfer). Death and judgments are certainly corner cases, but nonetheless add some intangible benefits.

with a traditional IRA/401k you save today at the marginal rate (both state/federal) vs a Roth where you pay taxes at the marginal rate on them. In retirement, a traditional IRA/401k you only pay taxes at the amortized rate (for all your income) through all the brackets at the Federal level (and have more of an option to live in a tax free state than you did as a worker, to save even more).

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.

In the US, with a Roth, if you start withdrawing at 59 1/2 the earnings are not taxed. If you contribute $100,000 (after tax) the Roth and it grows to $300,000 you can withdraw the $200,000 earning tax free. (you can also withdraw your contributions tax free of course.) So that matters. [edit: the account has to have been open for 5 or more years.]

But a $100k Roth contribution would have been a larger pre-tax contribution (maybe $130k or so). That would have compounded to be larger than $300k all things being equal. If you do the math on it as long as your tax rate is the same in retirement there's no difference between traditional vs Roth.

23/24 is a more reasonable starting age

It's funny, I've had the opposite experiences. All my offers to have a 401k were in my early 20s, and now in my 30s I barely ever see that anymore.

This is a tech forum. Many here got 6 figure jobs out of college and have been maxing their 401k since they were 21. I'm only 25, but certainly hope I won't be working past 55.

I hope I am working at something, just not the pointless stuff I have to do at work.

Well 22 then. That’s the typical case.

It’s true

'If you will live like no one else, later you can live like no one else.'

- Dave Ramsey

In investing your best asset is time. 401k is the best wealth building tool we have especially if you have a match and even more so if you’re a high earner and consider the tax savings. Even more if you have an HSA and understand it’s a 401k on steroids.

America is fabulous if you make a few deferred choices.

HSAs are wildly overrated. Yes, it’s triple tax advantaged and it rolls over, but with a yearly limit of less than $4K it’s not moving the needle for most people.

You’re forgetting the magic of compound interest. After 25 years of depositing 7k (that’s the current limit) you’d have $600k with a cost basis of $180k assuming the money was put into index funds.

That $180k was all pre-tax meaning you probably only put in $120k of it or so assuming high marginal rates.

Limit is $3500 for individuals, $7000 for families.

> - 4% withdrawal rate.

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.

This wolframalpha I drew up gives the basica formula with a target income option if anyone wants to mess around with the numbers. https://www.wolframalpha.com/input/?i=100+%3D+%2826.5+*+sum+...

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

You don't pay cap gains tax on retirement withdrawal. They are subject to regular income tax (or tax free if they are Roth funds).

What's the 67.5 for?

ah mb, was looking at max with employer match.

Assuming you max 401(k) (no match), IRA, and HSA ($20,500 + $5,500 + $3,650), using same interest rate and investment window: $4.1M. If you have a spouse as fortunate as you: $8.2M. If we add in the employer match: $5.5M and $11M.

Some missing aspects:

- 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

Why such a conservative rate of return? There is no 35 year period where the inflation adjusted return was below 7%. Why use a 5% real rate of return for this analysis?

It's funny because I was asked by someone else why such an aggressive rate of return!

* * *

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.

Cherry-picking dates, but the return from 1929 to 1974 (45 years, not 35) was 7.2% nominal, and only 4.76% inflation-adjusted.

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)

50% employee match? There is usually a $ or % cap for 99% of Americans. 50% up to X

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