Finding Retirement Success with a Properly Managed 401K


Before you consider early retirement, think about your 401(k) and the impact retirement will have on it. Sure, you get to relax, sleep in later and have more freedom with your time, but there are a few down sides to leaving a job too early.

When a person retires, they often will not contribute to their 401(k) unless they start a business. In addition, if the employer was matching the 401(k) contributions and profit sharing, then a typical retiree could loose $27,000. There is so much more to think about when deciding to retire early.

Many financial investors are worried that the federal government will bump the retirement age for distribution without penalty to over the current age of 59.5. Even worse, they could impose a distribution tax that would take more of the money we have worked so hard to save, but don’t lose hope. By reducing mutual fund expenses and creating different scenarios, the future can be a positive place.

Let’s look at three different investment scenarios to help understand the risks and rewards involved in early retirement.

Conservative 401(k) Portfolio

Just a 401(k) is unfortunately not enough to give most retirees a comfortable life. It should be coupled with Social Security and other financial investments for monetary security. For those who have retired early, there will be no additional funds added and no employer match or profit sharing. A conservative growth estimate would be around 4% per year based on the average rate of return for the S&P500.

The good news is that even if nothing else is contributed to the 401(k), a conservative rate of growth still yields a retiree around $1.1 million by the age of 65. Depending on what part of the country you live in determines if this will be enough money to survive.

In addition, 30 years from now, inflation will have normally purchased items doubled. This means that the $1.1 million is now equal to $550,000 is today’s dollar. After that, take out 20% income tax, the spreading out of the distribution, and you are left with less than $450,000. This can be depressing to some who think that they will live the high life with their $1.1 million at retirement.

This leaves an investor with around 5 to 8 years of comfortable living before the money runs out—a shocking wake-up call for many. Therefore, maxing out a 401(k) and IRA is so vital to anyone thinking of retirement.

Realistic 401(k) Portfolio

Let’s max out that 401(k) and see what happens. Investing $10,000 a year into a 401(k), including employer match, over 30 years, with a 5% yearly return almost doubles the income when a person retires after 30 years.

By contributing a mere $10,000 a year, if only a 1% better performance is seen, the $1.1 million in the previous example now jumps to almost $2.5 million! In addition, the percentage lost from fees is decreased by 3% because the contributor decided to work for 30 years.

Beware, contributors! Watch closely the expense ratio on a mutual fund analyzer to find places that these funds can be optimized. Putting a little effort into watching a 401(k), or any investment, can help investors live comfortably well into their 70’s or 80’s.

But what if you plan on living into your 90’s or even becoming a centenarian? Your choices are to change the investment strategy or cut down on lifestyle choices.

Blue Sky 401(k) Portfolio

To get the most out of a 401(k), a contributor must max out the amount put in every single year. The max contribution for 2017 is $18,000. Based on a conservative rate of growth of 7%, along with a 100% employer match, that same 401(k) grows to almost $7 million! Additionally, Social Security will earn around $30,000 yearly. Again, a retiree cannot count all of his millions due to fees. Almost 3/4th of a million dollars will be eaten up by these fees. But, the retiree is still left with over $6 million to retire on for the next 30 or 40 or even 50 years.

Making Small Changes Can Make Huge Differences

In order to achieve financial security for retirement, remember to:

  • Don’t wait in analyzing your portfolio. Find out what types of investments you are buying, how much there are in fees, how much you currently have, and how these investments are doing. Not knowing these basics will make it hard to build wealth.
  • Run different “what if” scenarios. Change the savings amount, or find out how much an employer matches, and look at different rates of return on investments. Everyone is different in how much risk they are willing to take with their money and how much investing power they want to have over their 401(k).
  • Since inflation will cut down the power of your 401(k) in the future, consider investing in real assets that will inflate over time as well, like real estate.
  • Come up with several conclusions after analyzing your portfolio. Create different scenarios and how they would make your life better/worse/no change. The scenarios that are more conservative will have extra after tax savings or an alternative income stream to keep retirement funded. Keeping forecasts low helps to ensure you don’t end up short of money in retirement.
  • Set realistic goals on the rate of return for investments. As you check your portfolio on a regular basis, consider rebalancing if these goals are not met. Most importantly, have patience and discipline during extreme market swings.

Following these simple basic guidelines will help an investor feel more confident about their retirement and give them more control over their future.

3 thoughts on “Finding Retirement Success with a Properly Managed 401K

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