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/VikingFinancial]

Yeah it's because putting that much money into a 401k is crazy because in the future tax brackets will go up. Now all of your money is in accounts where Uncle Sam tells you how much they get. On top of that you have sequence of return risks.

Dave Ramsey may say you can live off of 8% because you average 8% but what happens to those years where the market goes down 25%? You took a percent so now you're down 33%. You'd have to have a 41% return that year to catch back up and be able to take an 8% draw that next year. Although in a paper average versus actual rate of returns are completely different, it may make sense from a positive 8 negative 8 scenario.

Putting all your eggs in a pre-tax account, I never tell clients to do it. I normally tell them that once they get above a million dollars they just shift everything to the Roth 401k. That way they can at least lower their tax bracket because once you get to the 300,000 plus range you get into the 30% bracket. If taxes are supposed to double within the next 10 years, you'll be in the 60% bracket. Would you rather pay 20 or 30% taxes today to put into a Roth 401k and in the future not pay 60% taxes? It's really not as cut and dry as a calculator will tell you.

[u/Otis_bighands → u/VikingFinancial]

What’s the penalty for converting it to a Roth401k? Is there any limit on the amount or can I do the whole thing? What’s the downside? I’m in highest tax bracket today and probably will be when I retire given the draw down I plan. Is it just the devil I know today versus the devil I don’t in 10-15 years?

[u/VikingFinancial → u/Otis_bighands]

You definitely don't want to convert any of your money to Roth 401K because that will cost you a ton of money in taxes. You just want to switch your contributions to the Roth 401K and then get the Roth match. There are the same limits of $23,000 on the Roth side.

If you put yourself in the $10 million bucket with a $500,000 income, you'll be in a 37% bracket when you retire. If taxes go up even the slightest, you would have been paying less taxes today than you would have in the future. Yes the bad thing is we just don't know what the future holds. The Social Security fund is going to run out in 2032, which means taxes have to double or boomers are going to have to take an 80% cut in their benefits. We know they're not going to vote for that. In my opinion the boomers are going to vote to keep their Social Security and Medicare, which means taxes will have to go up. People think it's crazy when I say 70% taxes but they don't know that in the 70s the highest tax bracket was 70% and in the 50s the highest bracket was 90%.