The one BIG problem with your 401k

Great guest post from William Cain

With the popularity of the 401k growing across America, more people than ever are jumping on the compounding interest, employer match bandwagon. And who wouldn’t! Your employer is giving you “free money.” If you’re not currently signed up then stop reading this and sign up now! It’s one of the best retirement vehicles on the market today.

Most employers draft it from your paycheck (pay yourself first!), and you can also select a Roth option if available. Most experts recommend contributing at least 15% of your income to ensure you’ll have a comfortable and adequate retirement. But who really wants comfort and adequate??? Not me, and definitely not my fiance’s shoe closet.

So let’s say you are up to it to 15% of your $85,000/year household income and your employer matches 5%. Nice, up to 20%! Bring on that McMansion.

We’ll also assume it returns a 7% interest rate per year on average. How are we looking at 35 years from now when we have to retire???



So we’re going to be totally “multi” millionaires and burn $100 bills to light our $200 cigars with our $300 bottle of Pappy Van Winkle.

Not so fast. Here are some things to think about.

First, the money you contributed was pre-tax, which means once you take it out the government will want to collect on it AND the profits. Stupid taxes. The amount depends on which tax bracket it puts you in when you decide to withdraw. While we don’t know the tax climate 35 years from now, let’s say 15%.

$2,450,000 x .15% = $2,085,500. Still ok right?

But wait, there’s more!

Here’s the secret retirement killer that hits everyone just the same regardless of how smart or dumb you are with your money.


It’s a scary word.

Using an excellent future inflation calculator
we can guestimate how much our remaining retirement monies will be worth in today’s dollars when we retire.

In this example, accounting for a 3%/year inflation rate, in today’s dollars, it leaves us with the same spending power as $741,000…


At age 65 this is the same monthly purchasing power as $5,638 and at 85 it’s $3,122.

Sure, hopefully, we’ve had our house paid off, rarely get new cars, and settle down to watch TV 8 hours a day. However, some people’s expenses increase once they retire. They now have the time to travel, play golf, or get a massage every week. What about medical bills? You know they’re coming, it just depends on how big they’re going to be. The average retired couple spends approximately $250,000 during retirement just on premiums! Are you helping your grandchildren through college? Helping your adult children through, well, adulting. There are so many factors and possibilities being supported on an ever-dwindling income.

So let’s reverse engineer it. Let’s figure out the kind of life we want in retirement, the things that are important to us, that we think may be important to us and create a buffer for the unexpected.

Next, let’s find out how much it is going to take to have the life we want in 2052 using our future inflation calculator.

Lastly, using a simple 401k calculator let’s see how much we really need to be contributing to hit our goals.

This isn’t meant to scare anyone or show unattainable goals and savings, but rather to shed light on how our retirement could truly shape up to be. The worst thing possible is to get to retirement only to realize it’s not the life you thought you had created, and it’s better to start working on a plan now to prepare than later.

This also highlights the need for additional passive sources of income among other well thought out investment strategies.

I’d love to hear your thoughts on this article and I’m always open to learning about topics that are of interest to you! Please send me an email, pigeon, or hit me up on the blog in the comments section.

As always, happy adulting out there!