Who maxed out their 401ks yearly and are retired early(55)?

[bambooi]

Originally Posted by ohio_peasant

The problem with defined-contribution pension plans (such as 401K) has been the poor cumulative rate of return during the past 13 years. Stocks are today basically where they were 13 years ago. Bonds have done better, but recent (since 2008) interest rates have been very low and have penalized savers. It's a bigger issue than just retirement savings... it concerns all retail investment in the past 13 years. The point is that even folks who did their homework, lived frugally, saved steadfastly, didn't panic-sell at inopportune moments and didn't chase yesterday's returns by buying at the top, well, even those folks would have little basis for being proud of their returns. And that has long-term consequences for preparing for retirement.

However, this has happened before... 1968 through 1982. Had the world ended in 1982, we'd all be bitter curmudgeons suspecting that the financial markets are rigged and that all retail participants are chumps. I wonder if the next two decades will essentially repeat the 1980s and 1990s. If they do, then our 401Ks will recover and the dream of early retirement can still be realized. If they don't, and if we're headed for Bear Market III (2000-2003, 2007-2009 and....), then we have all but assured that workers who are in their 40s and 50s will not see an early retirement.

Dollar cost averaging over 13 years would have helped.

[mysticaltyger]

Originally Posted by bambooi

Actually you should contribute to the max employer match, then max out the roth ira and then go back into the 401k. Also, since it is not April 15 yet, you can do a roth for 2012 and for 2013.

I hear people say this all the time...but at one point, I maxed out the 401k (no match) and maxed out a regular IRA. (My income was low enough to do so). The point is, everyone's situation is different.

[mysticaltyger]

Originally Posted by bambooi

Dollar cost averaging over 13 years would have helped.

Yes, definitely. Also, having some bonds in the mix smoothed out the ride. That's why I like balanced funds. The better balanced mutual funds typically do almost as well or even better than large company stocks with less volatility.

[mathjak107]

while the dow and s&p lagged as they are only a bunch of large cap you would be hard pressed to find funds which didn't have at least okay gains over that time frame. but why look at just that time frame?

if you buy a stock do you care what the high and lows were or only what it means to your purchase?

it is as silly as saying nasdaq was at 5000 so no one had gains since then.

it is silly logic, it all depends when you yourself bought , if you rebalanced and if you added money your results will be very different then some static share sitting there..

go back 15 years instead of 13 and how did you do?

[mysticaltyger]

Originally Posted by michgc

I was just reading Money Magazine's special retirement issue (March). In it, they said they evaluated all of the time periods - in good times and in back - back to the early 19th century, and regardless of when you lived and saved for retirement, saving 16.6% of your income for 30 years in a diversified portfolio of stocks and bonds was always adequate.

That sounds about right. That means if you started saving 16.6% at at 25, you could retire by 55, assuming no breaks in employment. Not bad. I know. Real life isn't always like that...but most people can save more than they do without major sacrifices. Besides the low savings rate, the other big problem is that people aren't consistent in investing. The good news is that people who pick balanced mutual funds typically get the same or better returns than pure stock funds because their lower volatility means people are more likely to stick with them over the long haul.

[mathjak107]

one of the issues we don't think about is that the returns we think we get and the money we should have by retirement is always looked at as pre-inflation. as well as pre lots of other factors .

you know the drill ,markets returned an average of 9-11% or so and you get the nice graph showing a huge amount 40 years later if you contribute the max to your ira..

well things like adjusting allocation as you get closer to retiring . real world volatility, dollar cost averaging and inflation all have the math wrong.

all alter those expectations big time but rarely are these factors considered.

it looks great when you look at these growth charts and see you will have over a million at retirement but if that is decades from now it is a different ball game as well as you will not have that balance.


throw in volatility and when markets are down 50% and need to double to get back to where they are the compounded average returns work differently then the arithmetic returns..

dr pfau ran some numbers looking at what we thought our compounding was vs what we really see.

dr pfau looked at a nice chart a financial author had in his book illustrating how if you saved 5k a year for 40 years at the average historical market returns you would have 1.3 million dollars.

in fact dr pfau found that the 1.3 million dollars on the graph in todays dollars and with real world mathamatical forces and real world investor actions as they age may be more like 300k .

i think i will cry now after reading this lol.

very interesting paper as usual from dr pfau.

for those not familiar with dr wade pfau ,he is one of the high level researchers today who's papers have been known to set the tone for the financial planning industry.

he is a featured writer for the journal of financial planning which is the equal to the ama's medical journal.

i can tell you when dr wade speaks an entire profession takes notice. they might not always agree but the words this man writes carry alot of weight .

Retirement Researcher Blog: Compound Interest and Wealth Accumulation: It's Not As Easy as You Think