I agree with Financial Samurai’s basic sentiment, which is to effectively ‘write off’ your 401k and Social Security:
Every month I contribute $1,375 to my 401K so that by the end of the year, the 401K is maxed out at $16,500. Unfortunately, $16,500 a year is a ridiculously low amount of money to save for retirement if you really do the math. After 10 years, you might have $200,000, and after 30 years you might have $600,000 to $1 million depending on the markets and your employer’s match. Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay tax upon distribution.
CNN Money and other advisers showcased super savers who to my surprise include 401K and IRA contributions as part of their percentage savings calculations. In other words, if you make $100,000 a year, save $4,000 a year in cash, and contribute $16,000 in your 401K, you are considered by financial advisers as saving 20% of your gross income. Your $20,000 in “savings” is woefully light because in reality, you are only saving $4,000 a year. With the stock market implosion of 2008, your 401K has proven itself to be totally unreliable. Like Social Security, contribute to it like any good citizen should, but in no way depend on Social Security or your 401K to retire a comfortable life. I
Depending on Social Security is depending on the government doing the right thing. There’s no way that’s going to happen. Depending on your 401K is depending on people choosing the right stocks consistently over the long run, which isn’t going to happen either.
Because Social Security is a burden on governments and society, it’s always at risk of being watered down or eliminated … this is less of a risk the older your are (hence closer to receiving the payments).
But, not so your 401k: while governments can (and, probably will) water down – instead of increase – the contributions and benefits of your retirement program, the money that you contribute (and, your employer match) is still yours!
I don’t think you’ll ever lose what you contribute + whatever gains the flawed investment choices available may bring.
I look at my retirement plan (which I haven’t contributed to in years!) as insurance: if all else fails, when I reach whatever age the government of the time lets me access MY money, I’ll have something to keep me one step away from homeless … just.
So, I agree with Financial Samurai’s closing advice:
The only person you can depend on is yourself. This is why you must save that minimum 20% of your gross income every year on top of contributing to your 401K and IRA if you can.
You’ve heard of Paying Yourself Once? Well, I think you need to Pay Yourself Twice™ … once inside your 401k (there’s your ‘insurance policy premium’), and once outside of your 401k.
It’s the money that you can put aside OUTSIDE of your 401k that will drive your wealth, because you can put it to MUCH BETTER USE (e.g. investing in business, real-estate, value stocks, etc.) than that money locked away inside your 401k and in the hands of grossly under-performing, fee-driven mutual fund managers 🙂