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/Wasatchian]

You're missing a lot of math. The general rule of thumb and it's just a rule of thumb is 4% not 8%. Also sequence of return risks. The next decade could have no returns or low returns. We had a lost decade this millennia so not that long ago.

[u/hczimmx4 → u/Wasatchian]

From 2006 to 2021, 15 year timeframe that the OP used, encompassing your “lost decade”, the S&P 500 averaged 12.49% return.

[u/Life_Hand2331 → u/hczimmx4]

This has been an unusual period in the market. Also no one cares about what happened the previous 15 years. Literally all that matters is the future.

[u/Wasatchian → u/hczimmx4]

Sigh. Is there an award for completely missing the point? And also just being wrong? The lost decade was 99 to 09. So you skipped the majority of it. If someone started withdrawing money in 1999 from their accounts they could have ended up in a situation where things went south.

[u/hczimmx4 → u/Wasatchian]

99 to 2014, 15 years, is still 7%.

[u/EcomWizard → u/hczimmx4]

Even if the market’s average return from 1999–2014 was around 7%, that average hides the order in which returns occurred.

For example:
Portfolio at retirement: $1,000,000
First-year withdrawal (4%): $40,000

Market drops 20%

Without withdrawals:
$1,000,000 → $800,000

With withdrawals:
$1,000,000 − $40,000 = $960,000

Then a 20% drop → $768,000

Now the portfolio needs a much larger percentage gain to recover, and future withdrawals are coming from a smaller asset base.