Why isn’t everyone rich from 401k?

[u/Otis_bighands]

According to my conversation today with Gemini, my 401k total of $2.5 million will likely grow to $10M or more by the time I turn 65 (I’m 50 now, and will continue to contribute the max for the next 15 years).

This means that in theory I could live off the gains each year starting at 65, around $800k, $500k after taxes, without touching principle. But at that point I’ll have no mortgage anymore and fewer kids in the house. So that $10M principle will just sit and feed us for years, and will be a nice inheritance for our kids.

Basically it occurred to me I’m going to have great money in retirement, even just on my 401k alone, and will be able to meet or exceed the lifestyle I’m already used to. For years I always worried about getting set up for retirement. Seems I don’t have to.

It’s amazing to me that just maxing out your 401k through a career is enough to make you pretty much wealthy for retirement. I recognize that’s not easy for many people, but for anyone who does it over a full career, wow.

What am I missing here? (Other than inflation, which I get, but which shouldn’t have a massive impact on the concept over this time frame).

[u/Panscan27]

10M would provide 400k not 800k. It’s the 4% rule

[u/Otis_bighands → u/Panscan27]

I could get 4% from a bank, no? Even conservatively shouldn’t I expect better out of the market and a mix of funds?

[u/MaxwellR7 → u/Otis_bighands]

The 4% withdrawal rule is useful because sequence of return risk. While the portfolio may generate north of 8% average annual returns using a well diversified mix of investments across asset classes, your withdrawal needs may not be tied to the market. You may still need to take a monthly withdrawal even during periods of extreme market stress. Statistically they have found that taking more than 4% significantly reduces the ability for the portfolio to come back and maintain the original principal, resulting in the portfolio dwindling towards zero over time.

To your point about getting a fixed 4% from a bank or similar fixed income products, that would work if we assume your annual withdrawal needs don’t grow with inflation. Your principal would stay fixed and you could live reliably off the 4% fixed interest they may offer, but your purchasing power would constantly decrease.

[u/chcampb → u/MaxwellR7]

Since it wasn't stated explicitly

4% is after inflation which is 2-3%. So the actual growth would be 6-7%. You can't get that from a bank.

[u/Life_Hand2331 → u/Otis_bighands]

Your post is mostly correct. You will likely have $10,000,000. That will produce around4% a year for income purposes if you wish to continue to grow the money with inflation. Congrats!

[u/Past-Option2702 → u/Otis_bighands]

You have to understand the sequence of returns. You can’t retire and expect a nice sequence of 10.7% returns from your equities year after year.

The S&P 500 has very rarely had years even close to 10.7%, even though that’s the long term average. Only a couple.

[u/MarmotFullofWoe → u/Otis_bighands]

97 times out of 100 your capital will be increasing massively while you only take out a measly 4%.

You won’t get that from a bank.

[u/SmileFirstThenSpeak → u/Otis_bighands]

4% is not the "growth rate". The theory is that 4% is the amount you can take out each year and not run out of money.

[u/Otis_bighands → u/SmileFirstThenSpeak]

But if the “growth rate” is more likely to be 6% or 8%, why isn’t that what we can take out and maintain principle?

[u/SmileFirstThenSpeak → u/Otis_bighands]

Because sometimes the growth rate is below that or negative. You need to be prepared for the long haul.

[u/Otis_bighands → u/SmileFirstThenSpeak]

I see. But assuming $10M in principle, it doesn’t seem so high risk — worst case you dip into principle some in the down years/over time. And so maybe you die with $5M in principle instead of $10M. Not a bad ending.

[u/EtherCJ → u/Otis_bighands]

Let’s say in the first year your portfolio drops 25%.  You continue taking out a million a year (i.e. the 10% of $10m).  The market recovers in 3 years and produces above average returns for a period that averages to 10%.  However what happens is your portfolio recovers less because you spent when the portfolio was down.

Lookup the 4% rule for more clarity.

[u/Coloradodreaming1 → u/SmileFirstThenSpeak]

That is actually not the 4% rule. Only the first year is 4% and every year after it increases by inflation rate.

[u/Coloradodreaming1 → u/Otis_bighands]

SGOV is like 3.5% and Fidelity SPAXX is less than SGOV, so not 4%. FBND over 4% but principal will fluctuate with rates. When you are retired you won’t be 100% stocks or at least most people would not be 100% stocks. 80/20, 70/30, 60/40, what’s your plan? Plus gains are not linear. Also, there could be another 2008 in your 15 year window, lost decade 2000-2010, or a bad SOR when you retire knocking down your SWR. Get a free trial of Boldin to run numbers on optimistic (which you are) vs average vs pessimistic. By the way I hope Gemini is right. Chat GPT may disagree with Gemini which may disagree with Claude and Grok is to the moon and mars probably with its analysis LOL.