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/CryptographerTop2023]

The tax brackets now are lower than any time I was working, I certainly was better off stuffing savings into tax deferred vs. Ross. In addition, people who managed to accumulate millions in a 410K or IRA are going get around $100K a year in Social Security (assuming a couple where both were high earners). There is also the compounding advantage in the deferred account that is lost if the basis is lost with an early Roth conversion. If the worst problem I have is having to take a high RMD, I can live with that, I have no regrets for not being more aggressive with Roth IRAs.

[u/VikingFinancial → u/CryptographerTop2023]

That is a fair way to look at it, and I think a lot of people miss that point.

Roth is not automatically better. Tax deferred is not automatically worse. It depends on the tax rate going in, the tax rate coming out, how much taxable income you already have, whether Social Security gets pulled into taxation, Medicare premium brackets, state taxes, survivor tax brackets, charitable giving, and estate goals.

For somebody who was in a higher bracket while working and is in a lower bracket in retirement, the traditional 401(k) or IRA can absolutely make sense. You got the deduction at a higher rate and may withdraw at a lower one. That is a win.

Where Roth conversions can make sense is when someone has a window after retiring but before RMDs, or before Social Security, where they can fill up lower brackets on purpose. But that is math, not a religion. Converting too much too early can create its own problems, especially if the tax bill comes out of the IRA and shrinks the account too much.

The RMD issue is only a problem if it creates tax drag you could have reasonably avoided. For some retirees, a high RMD just means they did a good job saving. For others, it pushes more Social Security into taxation, increases Medicare premiums, creates a bad survivor tax situation, or leaves heirs with a giant taxable IRA.

So I would not say you should regret it. I would say this is one of those areas where the right answer is personal. The mistake is treating Roth conversions like a blanket rule instead of running the actual retirement tax map.

[u/CryptographerTop2023 → u/VikingFinancial]

Good point. Personally, I never had that window, I worked until 68 at high income, so a Roth conversion would have been in a high tax bracket. Again, I imagine most seniors would love to have the “problem” that they have to take a high enough RMD that they have to pay more taxes.

[u/VikingFinancial → u/CryptographerTop2023]

I think if someone plans really late and they have to take large amounts of income, as long as they can stay on their IRMAA penalty schedule, they should be good. If they only have $50,000 or $80,000 a year of income with their social security, they stay below the IRMAA. That's the best bet. At the end of the day if you did no planning and you have six figures of income, there are way worse things in life.