401k millionaires

[Koldo]

Even the poorest in America can improve their retirement saving plans. That is the truth. There are always options and choices. Those that choice to do nothing will reap the results of having nothing in retirement savings. It is that simple.

You wouldn't mind proving that even the poorest have some spare money, would you ?

 

[Shaul]

Think about why the tax brackets are different: because you’re planning to have less money in retirement.

You are overlooking the simple truth. If you don’t save the money it will be taxed at your personal highest rate, as high as 37%, whereas if you choose to save it it will be taxed at a rate of 10%. If you would think letting the government take almost four times as much of your money is fine, well...

 

[Shaul]

You wouldn't mind proving that even the poorest have some spare money, would you ?

As you must know there are too many variables for a one size fits all solution. Nonetheless I will give you one possible scenario. Assuming a person is in the lowest tax bracket he does this: he modifies his withholding (payroll deductions) by filing an updated W-4 while simultaneously directing the net income increase amount into his tax deferred qualified savings account (i.e. his 401k or an IRA). The results are that his gross income increases (but the increase goes into his retirement savings account) but his taxable income does not. Meanwhile he experiences no change whatsoever in his take home pay. There you have one general scenario which works. No need to find “spare” money. The “spare” money came from choosing to redirect money from needlessly going to the government to going into his personal retirement account instead. Yes, this does work.

 

[Shaul]

It is quite possible to have a $1,000,000 401k account at age 65 saving only $50 a week.
https://www.fool.com/retirement/2016/08/13/heres-how-much-money-you-could-retire-with-by-savi.aspx

 

[9-10ths_Penguin]

You are overlooking the simple truth. If you don’t save the money it will be taxed at your personal highest rate, as high as 37%, whereas if you choose to save it it will be taxed at a rate of 10%. If you would think letting the government take almost four times as much of your money is fine, well...

So you're assuming:

- this person is making at least $500,000 a year now (to be at 37%)
- the person will withdraw no more than $19,050 a year in retirement (to be at 10%)
- tax rates won't rise significantly between now and retirement.
- tax treatment of 401(k) plans definitely won't change in the future (e.g. there's zero chance that a future government won't start taxing them in some way).

Do I understand you correctly?

If so, do you see why I'm questioning these assumptions?

In reality, what often happens is something like this, ignoring inflation:

- a 30-year-old guy is making $50,000/y (so 22% marginal rate for 2018).
- he has grand plans to make $500,000/y before he retires.
- he follows the standard (but IMO questionable) advice of living on 70% of his pre-retirement income in retirement: $350,000/y (35% marginal rate)

... so any tax savings he gets from his 401(k) now will end up costing him more when he withdraws it. And that's even before asking if tax rates will go up before he retires. He would have been better off putting his money into something where he pays tax at the front end and doesn't pay tax on the increase (i.e. a Roth IRA in the US or a TFSA in Canada).

In any case: remember that our income - and therefore our marginal rate - tends to go up as we get older. It's very common for your annual withdrawal in retirement to be closer to your salary immediately before retirement than to your salary when you just started in the workforce.

 

[Jayhawker Soule]

It is quite possible to have a $1,000,000 401k account at age 65 saving only $50 a week.

And it is quite possible to live in the US and die from diarrhea.

 

[Thermos aquaticus]

For those that aren’t eligible for a 401 k there are alternate tax deferred retirement plans available.

Those alternate plans do not force the employer to contribute. My 401k wouldn't be anywhere close to what it is without employer contributions, and I certainly couldn't afford to save any money if I were just above the poverty line. I don't think you are taking these factors into account.

With sound retirement planning there is rarely any need to choose between housing and retirement saving. You may not agree, but nonetheless that is true.

I have been in that situation, and I couldn't save enough money to be a 401k millionaire and still have a place to live. I disagree because I know the facts.

 

[9-10ths_Penguin]

While it is true that not all employed people in the U.S. are eligible for a 401k plan, there are other retirement savings plans available for such people that also feature tax deferral for contributions and compounding of interest within the account. This would include plans such as IRAs, SEP, 403b, and others. Some don’t offer an employer contribution match that the 401k plans offer (although some do), nonetheless there are retirement plans available for almost every employee or self employed person. So the lack of access to a 401k plan is not really any excuse for not saving for retirement.

403(b) and SEP plans are also only offered by certain employers.

And I wasn't saying that these people can't save for retirement; I was pointing out that huge chunks of the workforce don't have access to employer matching, so they have only half the ability to save as someone who has access to employer matching.

So we have a system where you can effectively get free money, but typically not if you have precarious work and not if you're working for a less-than-ideal employer... and if you're lucky enough to get access to it, you can only take advantage of it if you can spare the cash right now. Do you understand how this disadvantages the working poor?

 

[Koldo]

As you must know there are too many variables for a one size fits all solution. Nonetheless I will give you one possible scenario. Assuming a person is in the lowest tax bracket he does this: he modifies his withholding (payroll deductions) by filing an updated W-4 while simultaneously directing the net income increase amount into his tax deferred qualified savings account (i.e. his 401k or an IRA). The results are that his gross income increases (but the increase goes into his retirement savings account) but his taxable income does not. Meanwhile he experiences no change whatsoever in his take home pay. There you have one general scenario which works. No need to find “spare” money. The “spare” money came from choosing to redirect money from needlessly going to the government to going into his personal retirement account instead. Yes, this does work.

Correct me if I am wrong, but as far as I understand it you can not deduct however much you put in your 401k from your taxes. You only get less taxes because of the reduced taxable income. So, if, for example, you earned 15.000$ in a year, you would be taxed 1.500$, and end up with 13.500$. But if you decided to put 1.000$ in your 401k you would get taxed on 14.000$ and end up with 12.600$ plus 1.000$ in your 401k. That's still 900$ less per year in your hands, which means you need 900$ to spare. Not to mention I don't see what's the point of putting 1.000$ in your 401k when you are already paying the lowest tax possible and you are going to pay at least that much sooner or later. So, what do you mean by ''he experiences no change whatsoever in his take home pay'' ?

 

[Jayhawker Soule]

Not to mention I don't see what's the point of putting 1.000$ in your 401k when you are already paying the lowest tax possible ...

Company match.

 

[Thermos aquaticus]

It is quite possible to have a $1,000,000 401k account at age 65 saving only $50 a week.
https://www.fool.com/retirement/2016/08/13/heres-how-much-money-you-could-retire-with-by-savi.aspx

Only $50 a week? That's $200 a month. That's a lot of money for people barely squeeking by on low wages.

 

[Akivah]

So we are to assume that these people did not benefit from anything state-funded in their lives and careers? That they did not benefit at all from the apparatus of social welfare and state-funded amenities and institutions?

Ah, along the lines of that idiotic Obama statement "you didn't build that"?

 

[Akivah]

All you need is a very good job which most don't have, no serious life emergencies which some don't have, great health insurance which the right wants to take away from more and more people for starters.

Actually, one can be wealthy with steady savings with even low pay. It requires living below your means and consistently investing the excess. Then even those emergencies can be handled without going into debt.

 

[Akivah]

Thant's not a punishment. That's the cost of using the American infrastucture, economy, and markets to make that money. Other Americans underwrote that with their taxes. The more one makes from it, the higher tax rate he should pay.

Any American that doesn't want to pay the price of admission is free to take his business to Guatemala or find a job in the Sudan, where I'm sure that taxes are much lower. Then, he'll find out what he was buying with those tax dollars he so begrudgingly pays.

Paying reasonable taxes are fine. It's when people complain that millionaires aren't paying their fair share that is silly. When pressed for what a "fair share" is, that I've heard people say most of it should be taken. People shouldn't be punished for managing their finances well.

 

[Akivah]

It seems people most successful with 401k already have fairly hefty incomes and manageable debt to start with.

Wrong! Try listening to Dave Ramsey for a while to learn differently.

 

[Akivah]

If it only was that easy and simple.....

It's not easy, it requires sacrifice, budgeting, and hard work. But it is do-able by almost anyone.

 

[Akivah]

It's a tax-deferred retirement savings plan. Typically, contributions are matched (up to some maximum) by the contributor's employer.

Income used to contribute to a 401(k) plan isn't taxed when it's first earned; instead, it's taxed as it's withdrawn from the account in retirement.

Edit: in Canada, a similar scheme is called an RRSP (registered retirement savings plan).

Edit 2: As a non-American myself, I don't understand Americans' weird fascination with using the section number of the law that enables a thing instead of giving the thing a meaningful name (e.g. 401(k), 501(c)3).

We give a mix of names and numbers to things. For example, we use IRA instead of (section) 408.

 

[Akivah]

Does it?

...or does it show that luck and your starting point plays a huge role in how you end up?

Actually, the surveys show 94% of US millionaires are first generation millionaires. Meaning they didn't inherit it, they earned it.
While there is some luck in your specific investment choices, it's far more sacrifice, planning, and dedication.

 

[Shaul]

So you're assuming:

- this person is making at least $500,000 a year now (to be at 37%)
- the person will withdraw no more than $19,050 a year in retirement (to be at 10%)
- tax rates won't rise significantly between now and retirement.
- tax treatment of 401(k) plans definitely won't change in the future (e.g. there's zero chance that a future government won't start taxing them in some way).

Do I understand you correctly?

If so, do you see why I'm questioning these assumptions?

In reality, what often happens is something like this, ignoring inflation:

- a 30-year-old guy is making $50,000/y (so 22% marginal rate for 2018).
- he has grand plans to make $500,000/y before he retires.
- he follows the standard (but IMO questionable) advice of living on 70% of his pre-retirement income in retirement: $350,000/y (35% marginal rate)

... so any tax savings he gets from his 401(k) now will end up costing him more when he withdraws it. And that's even before asking if tax rates will go up before he retires. He would have been better off putting his money into something where he pays tax at the front end and doesn't pay tax on the increase (i.e. a Roth IRA in the US or a TFSA in Canada).

In any case: remember that our income - and therefore our marginal rate - tends to go up as we get older. It's very common for your annual withdrawal in retirement to be closer to your salary immediately before retirement than to your salary when you just started in the workforce.

No, I didn’t make any of those assumptions and most of them are actually incorrect. I don’t assume the person is in the top tax bracket. Reread what I wrote. I said that was the maximum possible. No, I don’t assume someone will only withdraw no more than the threshold for the first tax bracket ($19,050). What I wrote was that until his taxable income when he begins withdrawals exceeds that then all his withdrawals would be tax at only 10%. That is not the same thing. In addition many (actually most) individuals could withdraw much more than $19,050 from their 401k and still keep their taxable rate to 10%. No, I don’t assume taxes won’t rise. What I wrote, which you don’t seem to understand, is that it doesn’t impact the tax deferred compounding within the account which makes any tax increases insignificant in comparison. Furthermore these supposed tax increases that you are touting would have to be increases on the lowest tax brackets. Historically the lowest tax bracket rate don’t go up. No, I don’t assume that there won’t be any changes to retirement plans by legislation, quite the contrary. But whatever changes are made can be adapted to. Nonetheless the current laws are the only ones we can make our plans with. And the current laws have established 401ks as an excellent vehicle for retirement.

So, no, you don’t understand me correctly. It also appears you make a lot of erroneous assumptions. Which explains why you fail to understand 401ks as you do.

 

[Shaul]

Only $50 a week? That's $200 a month. That's a lot of money for people barely squeeking by on low wages.

But the $50 a week doesn’t come out of take home pay. By adjusting withholding the $50 can be redirected from going to the government as tax credit and instead goes into the retirement account.

You are making an error. You assume the money that is to go into the retirement account must comes from the employee’s take home pay. It does not. The money comes from the money that would otherwise go to the government. You assume, incorrectly, that the total salary kept by the employee (as the total of his take home pay and retirement account contributions) is a zero sum. It isn’t. Try to understand.