sport wrote: PhysicsTeacher wrote:
Crisium wrote:Some bogleheads cannot contribute that much. I can't.
Agreed! Although this forum skews to high income earners, it is entirely possible to follow Boglehead principles on a moderate income. I make $38k per year. My husband recently got a raise to $22 per hour. I have mandatory pension contributions, we max two Roth IRAs, and we're saving for a downpayment on a house. We utilize DH's 401(k) and my 403(b), but we aren't yet anywhere close to the maximum contribution. I don't think that makes us failures.
I never was able to make a maximum contribution to my 401k. I am now comfortably retired. The trick is to start saving when you are young and take advantage of compound growth.
Whoever and why ever the silly beat of the drum "you must max out your 401k" is banged so dang loudly on these forums seems way over the top to us.
How about talking about over-saving for retirement, and destroying one's cash flow by over-saving to the detriment of a household's monthly cash flow? The big three - home/transportation/food - need to be paid for as well. Balance is key, and not over-saving for retirement or over-spending on the big three will keep one's fiscal household in solid shape. An individual needs to have an annual income of $120,000 in order for the maximum contribution of $18K to equal 15% of one's income being saved for retirement (and that's before the employer match).
Just sticking with the financial planning community's general guideline of saving 10-15% of your income starting in your 20's for retirement, a lot of wealth can be accumulated over one's 35-40+ year working career even if an individual never makes it to a salary above $100K.
The Vanguard study of all of their 401K plans showed that the aggregate contribution (employee + employer match) was...
Taking into account both employee and employer contributions, the average total participant contribution rate in 2016 was 10.9% (estimated, see the Methodology section on page 106) and the median was 10.0% (Figure 40).
That meets the lower band of the financial planning community's general guideline of saving 10-15% for retirement.
We've never maxed our employer sponsor plans out, but focused on contributing about 15% of our salary into retirement funds since our 20's. We have never had the type of income required to max out a 401k plan, let alone two 401k/403b plans in our dual income household with two children, saving and paying for college, owning a home, paying for transportation, and the other biggie expense - food. Yet, here we are 30 years later and are absolutely on target for a secure retirement.
If one looks at a study on the salary arc, you will find that women hit their peak at age 39, and men at age 48. After that, it is usually only small bumps in salary increase. That also helps explain why getting going with saving 10-15% in your 20's to take advantage of the power of time and compounding is so important. Counting on huge salaries later in one's career to be able to "max out a 401k" is simply not going to happen for most.
When one talks about maxing out your 401K first (let's go with the under age 50 max of $18K), think about what that means as a percentage of annual income to an individual with a salary of....
$35,000 = 51%
$42,000 = 43%
$50,000 = 36%
$65,000 = 28%
$80,000 = 23%
$95,000 = 19%
$120,000 = 15%
The percentage of people making enough money to max out their 401K's without a detriment to the rest of their household cash flow during their working years is small indeed. It's far more realistic to tweak the percentage to what one can afford.
There are plenty of options - especially in a dual income household - to save and stay on target to reach one's goals without having to max out a 401K. We think the data clearly shows that in the Vanguard study in terms of the percentage of people in the plans Vanguard sponsors, it's a very small percentage that max out their plan.
We would assume that may be true here at BH's as well. It is clearly tied to salary level, household cash flow, and in our opinion is not a must goal to max out the 401K.