401k millionaires

[Koldo]

Company match.

Thanks!

 

[Akivah]

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

I agree with most of your article. But the article missed two major things. First most investments don't compound daily, so that assumption is too aggressive. Second, the effect of investment fees were ignored. Both of these would decrease the ending balance.

 

[Koldo]

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.

Depends on how sizable the low pay is. And sometimes living below your means entails not living at all.

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.

I feel this is at very the center of the political debate.
Not only how much is fair, but also in what way it should be done, how the money should be used and why it is fair in the first place.

 

[Koldo]

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.

I would like you to clarify this.
By what method would that happen ? What's your source ?

 

[Jayhawker Soule]

My wife and I retired on the same day after 32 and 30 years at the same company with each of us contributing to our 401K funds and maximizing our company match. FWIW, the OP is an ignorant joke.

 

[Koldo]

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

I agree with most of your article. But the article missed two major things. First most investments don't compound daily, so that assumption is too aggressive. Second, the effect of investment fees were ignored. Both of these would decrease the ending balance.

There is also another mistake here: not taking into consideration inflation.
It is irrelevant if everyone can achieve 1 million dollars in 50 years.
What is relevant for comparison is the purchasing power of 1 million dollars as of now.

 

[Shaul]

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'' ?

But you missed a key step. In addition to beginning the 401k deduction you also adjust the W-4 withholding (by claiming more deductions on it) so that it offsets the $900. So the net change to take home pay is zero (or close to it). But the government will receive less in taxes and you will have the monthly contribution to the 401k.

Yes, this should be done carefully. The changes in W-4 deductions should be enough to keep the take home pay the same but not enough to prevent withholding enough taxes (which could incur a penalty). But remember, I was discussing cases of the the lowest earners. They are highly unlikely to incur the penalty since they generally get all their withholdings returned. Higher wage earners they would need to be careful about the penalty.

 

[Shaul]

There is also another mistake here: not taking into consideration inflation.
It is irrelevant if everyone can achieve 1 million dollars in 50 years.
What is relevant for comparison is the purchasing power of 1 million dollars as of now.

The retort to that is that wages, and therefore contributions, will increase as well. The numbers are in constant dollars. Inflation would increase both the amount of money needed and the account balances similarly.

The bottom line is more retirement savings is better than less all things being equal.

 

[Shaul]

I agree with most of your article. But the article missed two major things. First most investments don't compound daily, so that assumption is too aggressive. Second, the effect of investment fees were ignored. Both of these would decrease the ending balance.

Fair enough. I don’t know what the compounding period is for most funds, but certainly many do compound daily. And why would anyone invest in funds that charge fees when no load index funds are an option?

 

[Koldo]

But you missed a key step. In addition to beginning the 401k deduction you also adjust the W-4 withholding (by claiming more deductions on it) so that it offsets the $900. So the net change to take home pay is zero (or close to it). But the government will receive less in taxes and you will have the monthly contribution to the 401k.

Yes, this should be done carefully. The changes in W-4 deductions should be enough to keep the take home pay the same but not enough to prevent withholding enough taxes (which could incur a penalty). But remember, I was discussing cases of the the lowest earners. They are highly unlikely to incur the penalty since they generally get all their withholdings returned. Higher wage earners they would need to be careful about the penalty.

I don't quite understand. Ideally, everyone will adjust their withholding according to how much they will have to spend in taxes in the first place. Assuming that's the case, there is no room to offset the $900. Where do you see it ?

 

[Shaul]

My wife and I retired on the same day after 32 and 30 years at the same company with each of us contributing to our 401K funds and maximizing our company match. FWIW, the OP is an ignorant joke.

Congratulations. I personally know individuals that have used 401ks to be able to create accounts over $1,000,000 and retire years before normal retirement age. It can be done. Yes, it is easier for some than others, life isn’t fair. But the goal is for each of us to do our personal best.

 

[Koldo]

The retort to that is that wages, and therefore contributions, will increase as well. The numbers are in constant dollars. Inflation would increase both the amount of money needed and the account balances similarly.

The bottom line is more retirement savings is better than less all things being equal.

Not necessarily in an equal balance ( between wages and inflation ), but yes, if you intend to keep up with the inflation by increasing the contribution in a proportional manner then you are good to go.

 

[Shaul]

I don't quite understand. Ideally, everyone will adjust their withholding according to how much they will have to spend in taxes in the first place. Assuming that's the case, there is no room to offset the $900. Where do you see it ?

Look at in reverse. Suppose before you began the 401k contribution you had set the W-4 deductions such that your tax withholdings exactly match what you would owe for the year. (You get no refund but get the most in your take home pay too) Then you begin your 401k contributions. Your take home pay goes down, but so does how much your total taxes for the year should be. So you now get a refund. The refund, for those in lower incomes, will be close to the total loss in tax home pay. But why let the government have that money up front interest free? Instead you change your W-4 to spread that refund throughout the year. That will replace (at least most of) the amount your take home was reduced by the 401k contributions. There are, obviously, details for the individual cases. But the strategy is actually not that complicated.

 

[9-10ths_Penguin]

Actually, the surveys show 94% of US millionaires are first generation millionaires. Meaning they didn't inherit it, they earned it.

That doesn’t follow.

- an inheritance just under $1 million plus a bit of passive ROI could easily give a net worth over $1 million

- inheriting assets that appreciate in value could create new millionaires: for instance, maybe with urban sprawl, the unfarmable land out in the country that grandpa bought in the 1940s for peanuts suddenly becomes a desirable suburban development site.

- there are lots of ways to build wealth that don’t involve earning the money.

While there is some luck in your specific investment choices, it's far more sacrifice, planning, and dedication.

... and even more than that, luck in your starting point.

 

[idav]

https://www.cbsnews.com/news/americans-with-1-million-saved-sees-a-big-jump/



The article shows that anyone can be a millionaire all on their own. Government assistance is not needed, indeed government assistance typically keeps people in poverty. These 401k millionaires have saved for over 30 years, making regular contributions. They also contribute enough to get their full company match, don't cash out accounts, and don't take out loans against their accounts. What I find disgusting are those people that want to punish these people for saving well by wanting to seize (aka tax) their money for the government.

You can do it .005% of the population!

 

[sun rise]

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.

You've lived a very sheltered life to have never known those who lost everything due to a crippling medical condition, for example, that is not sufficiently covered by our barbaric health care system in the past. Obamacare which the right is trying to destroy brought down that number significantly but it still occurs. And beyond that, many people's income is so low, minimum wage, that they barely can cover food, clothing and shelter without any surplus.

 

[sun rise]

- there are lots of ways to build wealth that don’t involve earning the money.

Watch, for example, Antiques Roadshow where significant numbers happen to find an object that has value in the tens of thousands of dollars, a great starting point or boost to net worth.

 

[Koldo]

Look at in reverse. Suppose before you began the 401k contribution you had set the W-4 deductions such that your tax withholdings exactly match what you would owe for the year. (You get no refund but get the most in your take home pay too) Then you begin your 401k contributions. Your take home pay goes down, but so does how much your total taxes for the year should be. So you now get a refund. The refund, for those in lower incomes, will be close to the total loss in tax home pay. But why let the government have that money up front interest free? Instead you change your W-4 to spread that refund throughout the year. That will replace (at least most of) the amount your take home was reduced by the 401k contributions. There are, obviously, details for the individual cases. But the strategy is actually not that complicated.

Can you exemplify ?
Because as I see it, adjusting your W-4 would only offset the loss of money in your hands if you could deduct 100% of the money you put in your 401k from your taxes. But I don't think this is the case. You can claim more deductions because you will pay less taxes, but you can't offset it entirely.
In the example I gave you, you still owe $1400 in taxes if your taxable income is $14000, so you only take home $12600. In the other hand, if you had $15000, you owe $1500 and end up taking home $13500. The $900 difference exists even if you fine tune your W-4 deductions.

 

[Kirran]

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

In common with many of my fellow non-Americans, I don't know much about what Obama did or did not say

 

[Koldo]

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.

That doesn’t follow.

- an inheritance just under $1 million plus a bit of passive ROI could easily give a net worth over $1 million

- inheriting assets that appreciate in value could create new millionaires: for instance, maybe with urban sprawl, the unfarmable land out in the country that grandpa bought in the 1940s for peanuts suddenly becomes a desirable suburban development site.

- there are lots of ways to build wealth that don’t involve earning the money.


... and even more than that, luck in your starting point.

There are two factors I would like to bring up.
The first one is: Have your parents paid your tuition fess all the way up to college ?
Being able to acquire a ( good ) college degree really early in your life will entail being able to earn bigger paychecks earlier in your life which results in having a much easier time becoming a millionaire. One might have earned a college degree and yet not have earned the tuition fees and this is huge.

The second one is: Where were you raised ?
People often hire others based on whether they know them, or their family. Being raised among millionaires means you will have an easier time being hired by them, and they can afford to pay more for your services. And it is, well, essentially impossible to earn this advantage.

I think an example is due: Around here whenever an architect recommends a furniture store to their client, they get ( from the furniture store ) 10% of however much their client spent on the store. So if your client spent half a million, you get $50000. Simple as that. Can you see how easy it is to eventually gain a million dollars if you know the right people ?