29-year old trying to figure out some 401(k) things here, any help would be most welcome:
Suppose I have a million or more dollars in my 401(k) by the time I reach 65 years old (that’s roughly where it seems it could be, if my spreadsheet number-crunching is right.)
How much will the administrator pay out of my benefits per year? Do I have to guesstimate my time of death and say, “I anticipate that I’ll die about 25 years after I retire, so please give me my 401(k) money in 25 annual installments?”
The 401(k) keeps “growing” even after money is being taken out of it, right? So, for instance, suppose I had a million dollars, and the account administrator cuts me a check for $60,000, which drops it down to $940,000, but then the investments, etc. still grow on their own, so maybe it swells back up to $970,000 by the end of the year?
Is a 6-8% interest rate, over the course of a person’s lifetime, typical for the 401(k)? (Those are the figures yielded by that all-trustworthy source, Yahoo Answers.) Of course, with Trump as president, who knows what will happen to stocks, but over the course of a 40-year working career, the economic ups and downs would typically average out to about a 6-8% annual growth rate in the 401(k)?
There’s no restrictions by law as to how it’s disbursed, though the 401k administrator may have their own rules. You can take every penny out they day you turn 59 1/2 if you’re so inclined, though that will cause a huge tax liability too, since all that income will show up in a single tax year. By law, you must start taking a required minimum distribution when you turn 70 1/2.
Yes, though if it’s the money you plan on supporting you for the rest of your life, you’re probably not going to want to keep it invested in things that have substantial risk. But yeah, generally you’re still in control of how the funds are invested, and can continue to move between investment funds, etc.
That’s a question that a multi-billion dollar industry exists to answer and/or obfuscate.
As muldoonthief points out, you’ll have to take minimum required distributions from your 401K at some point - but there’s no law that says you have to spend that money. You can turn around and dump it into a bog-standard mutual fund if you want (though at age 70+, the smart investor will be more heavily invested in bonds). You’ll pay some taxes on the 401K distributions, and then of course you’ll pay taxes on the gains from the reinvested portion of those distributions. But to answer your basic question, the money still in your 401K is still invested, and it’s up to you how you want to invest it - stocks, bonds, REITS, etc.
I would guess that’s what has been typical, assuming an investor began his career heavily invested in equities, and smartly shifted toward being heavily in bonds (with their lower annual return) as they approach retirement. Stocks themselves have averaged quite a bit more than that since the early 1900s, but few people are that optimistic about stocks in the future, regardless of Trump. The optimist will say that we have 100 years of history showing that stocks average ~11% per year, but the pessimist (or perhaps the realist) will say that we have exactly ONE history of economic growth in this country/world, and we don’t know how it’s going to play out going forward. It’s fair to say that the global economy of today is not just an expanded version of the global economy from 100 years ago; we don’t have any compelling reason to expect economic growth to continue at the same rate we enjoyed in the 20th century.
Note also that the growth of the 20th century was very unevenly distributed. There were bulls, bears, and doldrums. If you were lucky, the market was bullish as you approached retirement and shifted to bonds; if you were unlucky, a bear attacked before you moved to the safety of bonds. And then of course there’s the crazy stuff that happens in life along the way - unemployment, natural disasters, etc. A good retirement saving plan will try to account for such variability by adding a nice fat safety margin to your target nest egg. This way, if you’re lucky then you’ll live well in retirement, and if you’re unlucky, you’ll still be able to get by (instead of being homeless). The best thing you can do (and so few do this, myself included) is to sock away as much money as you can as early as you can. a 401K has annual contribution limits, but you can invest as much after-tax money as you want in non-retirement mutual funds/stocks/bonds.
No one can answer the question you want an answer to, which is "will I make 6-8% over my lifetime, since it requires knowledge about the future we don’t have.
What people generally do is tell you what things did in the past, and we all sort of assume that the future is going to look kind of like the past (except with cooler phones). But there’s that little “past performance is not indicative of future events” disclaimer.
Also, a 401(k) is just a container. You can put any kind of investments (well, almost any) you want in it. So what you really want to ask is “is 6-8% growth over the course of a lifetime, typical for <insert investment type here>?” For a diversified stock fund, that’s about right historically.
I wish I had known what they teach at 29… instead I waited until I was 45 to start planning.
As an anecdote, my employer at age 29 put $2100 into a low cost half stock half bond investment. I ignored it for many years and now keep it untouched just to watch it grow. After 38 years, it is worth $74000 - CAGR of 9.8%. Instead of 50/50 it is now about 80/20.
Portfolio charts has some awesome data about different portfolio’s performance over time - **jasg’s ** 50/50 portfolio isn’t listed, but a 60/40 stock/bondone is. That shows an average real CAGR (ie inflaiton adjusted) of 5.1%.
I just retired with a 401K balance greater than one million dollars. My advice would be to put as much as you can afford into your 401K. If your employer offers a matching option, you’re a fool if you don’t contribute at least that amount. If your employer offers a Roth 401K I strongly encourage contributing to this instead of the traditional 401K. There are stealth taxes that arise from how Social Security benefits are taxed and the cost of Medicare that varies by income that are avoided by the Roth 401K (and Roth IRA). There are other advantages to Roth 401K or IRA that I won’t go into here. Traditionally, it is recommended that you have a mix of Bond and Stock funds. However, with the current low interest rates the shares will lose more money than the paltry return they give as interest rates rise in the next year. I highly recommend any mutual fund that tracks the S&P 500 index. Mainly because it will have the lowest expense ratio. If using other than an S&P 500 fund, find out and compare expense ratios. Generally, you can roll over your 401K into the 401K offered at your next employer (something I did) or into an IRA (I may do in the future). Don’t take my word for it, do the research to see if what I say is true.
I meant to say that the bond shares will lose value as the interest rates rise. A bond that pays 3% will be worth less when new bonds appear that pay 4%. So shares in a bond fund will lose value as interest rates rise.
There’s a minimum (RMD) you need to take out of your 401k (or IRAs) after age 70.5 but there’s no maximum.
My parents retired 15 years ago and had been taking RMDs for ten years, and their portfolio is (nominally) larger today than it was 15 years ago. They had the balls to be over 50% in stocks even after retirement figuring they had a 25-30 year life expectancy. If they were in 100% bonds like many of their contemporaries they would have drawn down a lot by now. But 2008-2009 was a white knuckle ride for them.
I’ve maxed out my 401k every year since 1990, my first year working full time. I’ve move from 100% stocks to about 72/28 over the last 20 years. My nominal rate of return over that time has been 8.1%.
Here’s the scary and sad thing, even with maxing out at either the maximum plan % (15%/18%/20%) or the statutory maximum (now $18k) I’m nowhere near on track for early retirement. My income has increased about 10X in nominal terms. So the big sacrifices I made to put away 15% of my meager early earnings didn’t really pay off even with 25 years of compounding.
I guess if I knew I would do as well in my career, I would have lived it up a little more in my 20s!
If you want to see what your RMD would be at 70 1/2 and happens to your portfolio value if you only take that out and the rest grows at certain rates (the default they use is 6%) Schwab has a calculator available here.
For a $1,000,000 portfolio at 6% annual return value continues to increase through 83 (peaking at $1,193,928) and then starts to decrease, with an initial RMD of $36,496 that increases each year.Of course who knows what annual returns will be …
Heh. That’s the trap. What the heck? I keep getting promoted and saving more dollars, but my retirement is like a carrot on a stick. I finally realized what was happening:
Those retirement calculators generally base your post-retirement income needs on your current income. So when I get a 15% raise, I think “Great! That much closer to retirement!” but they think “Not so fast. Now you need 15% more retirement income.”
The trick is, I think, to earn more early and less later. Hell, if I was currently making $8 an hour, I could retire now.
Well that’s the problem with retirement planning in general and with these calculators (which are generally great) in general. You can get most of your expenses over retirement to a large extent. Utilities, taxes, housing some medical. But at the end there’s a line for what I call “quality time.” Are you only taking staycations or are you going on three cruises a year? That’s hard to predict, and that can take your requirements from $25K a year to $1M a year - or from I can retire now to I’ll never be able to.
The half-trained statistician in me, however, wants to know if there’s any way to apply some statistical inference to these analyses. Sure, I can fiddle with the calculators to find portfolios with parameters that look good (best minimum and average long-term growth, in my case). But with so many parameters, a good deal of this effect will be due to simply searching for the best set of random historical flukes. I’d prefer to have some sort of confidence intervals for each parameter.
At this point, though, I’m past what I can do on my own. I can mumble stuff about statistics that seem to be relevant (… bootstrap? Hidden Markov models? Monte Carlo…?) Although All Models Are Wrong, I’m pretty sure the model I’d build would be Much Wronger Than Most.
You really need to pay for a session with a professional who can advise you on this. I did and boy am I glad. I don’t really know if my 401K is growing in retirement but I know that despite taking money out of our general retirement fund every month, the bottom line keeps on growing.
And good on you for starting to plan for this at the age you are. DH didn’t start till we were in our 40’s; we’re pretty comfortable now but think how “comfortable” we’d be if we’d started sooner.
A 401(k) is employer-sponsored, and you are limited to the investments the administrators have selected.
An IRA, on the other hand, could in theory contain any kind of investment; you can even set up self-directed IRAs that hold things like real estate, collectibles and such.
And of course when you leave an employer you can roll your 401(k) over to an IRA.
But the info about taking required minimum distributes is much the same (unless it’s Roth money including Roth 401(k) money) - for Roth, as I understand, there is no RMD.
FWIW, my 50/50 portfolio was a combination of two TIAA-CREF investments (I worked for a university) - CREF Stock and Traditional, not regular funds.
To me, the key takeaways from my anecdote are:
The power of compound interest. Over time, despite some large market fluctuations, the account grew very nicely from $2100 to $74000. My employer only contributed $420/year to that $2100 account. I now wish I had put some in - even $10/week would mean more than twice as much today.
The value of ‘staying the course’. Study after study has shown that picking a low fee portfolio and leaving it alone is better than constantly buying and selling based on market changes.
This chart is a good illustration of how bond and stocks perform over ten years from 2007-2017. The blue line is a Total Stock Market index fund - lost 50% in 2008 but still doubled in 10 years. The yellow line is a bond index fund which was much more stable but only grew half as much.
Thanks, maybe I should see a financial professional, yeah. Although what I’m doing right now is just having Fidelity manage it - I selected one of their plans, the year-2050 plan (the plan is to retire at 2050) and they apparently diversify my 401(k) among several hundred different investment things, going more aggressive since I’m still in my 20s (if I were older they’d be more risk-averse.) At least that’s how the understanding is…I think I might be able to just sit back for 33 years and let Fidelity manage it…?
Do you actually have a financial advisor by name assigned to you? If not, go with a brokerage house that does. Interview these people and talk about your retirement plans. Then select who you feel most comfortable that answers your questions without a condescending manner. Ask around to people you know and trust who are older that are happy with the financial advisor (aka Broker). Take your time meeting with them, and ask questions.
You don’t have to leave your money in a 401(k) when you are retired or no longer employed by that employer. You can roll it over to another plan with a brokerage house. Once you have a plan in place, and they can run retirement simulations for you so you got an idea of the probability of outcomes, you can review the account quarterly over the phone with them.
The only other advise I can offer is, stay away from annuities.
jasg mentioned it above, but it’s a bit buried. If anyone is really interested in investing, there is no better resource to learn than Bogleheads.org - Index page. There are wiki pages on all sorts of topics, as well as forums to discuss your plans, ideas and situation.
From the first post above, it appears that the OP has a pretty good handle on things from a basic standpoint. As for expected returns, 6-8% is pretty reasonable based on the past. For a long time, an annual 4% withdrawal has been viewed as a safe withdrawal amount (though some are now arguing it should be a bit lower, due to very low interest rates). Meaning if you have $1 million, you can withdraw $40k the first year, increase that amount by inflation, and never run out of money over a 30+ year retirement. On retirement forums, there are endless debates about whether the safe withdrawal rate should be 3.5%, 3.75%, 4.0% or 4.22358893%. Angels on the head of a pin, in other words.
