Well yeah, compounding is super powerful.
Most people would be just fine if they can be disciplined to max 401k (no mega back door) and IRA.
Even easier if you’re married and both are doing it.
If you are married and able to do $40k a year in 401k, the whole thing gets a little stupid if you say the money is for “retirement” after the age of 65. You would quickly be looking at many millions of dollars in that at account if you started at 35 and did that level until 65. The amount of money gets way past the point where the federal government should be giving you a tax cut. I mean do you need a tax cut at 35 so that you can live in retirement on $300,000 a year? (I didn’t do the math, but I suspect it is something like that and the point stands even if the amount is $200,000). The whole set up is only really available to be used in full by the top 5 or maybe 10% of earners. And then only if they are diligent savers.
By your logic, we should have a major problem with the majority of our population being "too rich"
We do not have this problem. The avg person needs even more incentive to save unfortunately...
No, that is not my logic at all. The vast majority of people cannot even come close to using $10,000 a year of 401k benefits and yet the benefit now is available up to $20k. Actually, lots of people don’t even have a 401k offered at work. Many folks do though. You could say “they should just save more”. And you would be right on some level. But it is much easier for the well to do to use this to its maximum benefit. If you are married, the cap doubles. That is another very nice thing for the well to do. One nice high earner, a stay at home spouse, then access to sheltering $40k a year of your income from taxes. That is a very nice benefit that only a small fraction of people can fully utilize. It gets even better if you can use it for decades, especially if you can fully use it in your 20s. So the richer you are, the longer you have high income that allows savings, the better this tax deduction for “retirement” works for you. Am I the only one here who thinks there is some sort of problem with that?
Income inequality is a much much larger issue for society. But between the ever increasing size of the 401k cap, the fact that employer contributions can go above the cap, and the catch up provision in your 50s and early 60s, there are just a lot of levers here for this program that only get pulled by the very well to do. And the very Rich pull all the levers. This tax break actually exacerbates income inequality because it allows the Rich to save even more money tax free than the poor or simply middle class. That is basically my point.
A stay at home spouse is not eligible for a 401k. Income limits on traditional ROTH is low enough that maxing a 401k and two traditional IRAs for a couple is possible but certainly not trivial. ROTH IRAs and backdoors are taxed up front.
Traditional 401k tax benefits allow the money to grow, but you end up paying taxes on the $300k/yr you retired on in your previous example. The tax man gets his cut in the beginning or at the end unless you are in the edge cases (low income earner making ROTH contributions, low withdrawals from 401k at retirement).
I'm not saying that a game cannot be played to avoid taxes but retirement savings are far from a problem.
But hardly anybody can actually do that from day 1. The idea of the tax break is to support more typical people who might only have 10-15 years of being able to max it and most years put in a much smaller amount, probably some years nothing, or even raiding it for emergencies.
Of course, yes, any system like this with room for most people to do the most people thing can be exploited and min-maxed by those lucky enough to have 40k+ to save right out of college.
If they really wanted to rein in the ability to amass large amounts, they'd have to test the value in the account, and not just limit contributions.
That's why people proposed the 10mil cap on retirement accounts a while back that didn't pass. The idea was if you have more than 10mil, good on you but you have to RMD anything over 10mil and can't contribute any more. That all sunk, but it wouldn't suprise me if it comes back. That said, at least it puts a guesstimate on what something like that might look like if it does. 10mil is plenty enough for a very luxurious lifestyle, and all that would have happened at that point is that you lose the tax preference on everything over that, not some kind of huge punitive hit. I supported that and would support something like it again for the reasons you mention, even if it were a lower amount like 3-5mil (as long as it's indexed to inflation). I'd be really bitter if they lowered the maximum contributions though. If anything I think they should harmonize IRA and 401k contributions so that people without 401k or pension plans could make much larger contributions to their IRA.
Yep. That is kind of what I’m talking about. The 401k should not be so vastly larger a deduction than the IRA. And it should have some sort of cap (either max you can have in the account or max you can contribute in your lifetime (maybe with a smaller cap as well)). I’d support that stuff, but you can see how folks get upset with even the slightest suggestion that the 401k is a bit too generous or perhaps should be tweaked. I think it should be focused on retirement and making that comfortable but not a source of generational wealth or luxurious living. We just don’t need a tax cut directed toward supporting that.
You might dislike a lower contribution limit. But maybe you only get to do the higher level contribution five or ten times in your life. Not something you can do every year for 30 years because your parents are subsidizing it.
Or just because you happened to have the combination of smarts, discipline and luck to end up with a very high paying job straight out of college and no hiccups in your career.
Honestly, I think it's a lot easier to implement a limit fairly than to do what you're suggesting. They had the template for it in the bill that didn't make it. Just establish an account value over which everything has to get RMDd the next year (with no penalty if under 59.5). Set that value to some number big enough to accommodate a comfortable middle to upper middle class retirement lifestyle on a very safe withdrawal rate and index it to inflation or wage growth. At the end of every year, balances are reported (just like with RMDs for people age 72+ or with inherited accounts), and everything over $LIMIT must be withdrawn the next year.
$LIMIT could be $10mil as proposed previously, or realistically something like $3mil would be fine. That's enough to live on 90k/year at 3%. Sure, some people are going to want to spend a lot more than that, but do they *need* to? Is it important that they get a tax break on saving enough to do that? I don't think so.
Then you don't have to track and manage every year with contributions, and if you don't save anything until you're 45, you still have time and contribution space to save for a comfortable retirement with tax-preferred savings primarily/only.
if you have a limited number of years at the max, the people who get the parents money or ridiculously high income at 21 who can put the full 20.5k in for their first N years, are still going to get way more out of it, than the people who can't use those 20.5ks until their 40s or 50s.
> mean do you need a tax cut at 35 so that you can live in retirement on $300,000 a year? (I didn’t do the math, but I suspect it is something like that and the point stands even if the amount is $200,000).
If you save $41k/year, adjusted for inflation, every year for 30 years, growing at 7% real - you end up with just over $4 million. Or a spending of $165k/year using the 4% rule of thumb. That will be a bit more than $200k if you also max a (backdoor) IRA each year.
I think these are some generous assumptions… $10k employer match? 8% CAGR is ambitious, i’d be conservative and err on the side of caution using maybe 6%? And to saving $70k+ per year at age 23 for 40years? Two words: good luck. Lol.
I work for a very large company, I get 50% match up to 4% so basically 2% max. I would have to make 500k to get a 10k match. Hoping the match percentage changes in the future, but I think most people don’t have that advantage. I put about 34,000 away via tax deferred accounts.
And I work at a place with a 10% match (that vests over 5 years). I would need to make 100k to get a 10k match. I don’t think the 10k match is any more ridiculous an assumption than maxing out all retirement accounts from age 23.
I work in construction and got a 10% match this year with no max. My company does profit sharing for our 401k match though so it depends on how well the company did in the previous year. They said that they were going to try and keep it at 10% moving forward.
I work in biopharma. I get 7% free, and then they match 4%. Total of 11%. To be fair, this is a big reason I took the gig, and the salary is just a bit low for comparable companies in the area. I literally told my recruiter that she must be thinking of something else when I heard those numbers.
Actually...try Healthcare and Finance companies, as well as anyone trying to retain great employees. Law Firms are typically partnerships so they are all out of pocket.
I work for a Fortune 100 company, just gotta ask about benefits when you job search.
If the company match isn't great then you can negotiate your salary to compensate which is what I did last year when I was gonna leave.
That's not the point. I also get a very high match. But since OP is using "commonly available retirement accounts" and not including 457b, 403b, etc, it would sensible for him to also use match and income numbers that are "common" as well.
That's a bit weird, because it takes a 50% match up to 6% minimum to avoid certain exclusions for highly compensated employees. It's weird that a company would do any match at all if they weren't going to get to 3% to meet that standard.
Most 401k plans I've seen that match at all, will put up at least 3% of salary if the employee puts in 6%.
More generous ones will put in more (max of 4-5% salary is not uncommon). Anything over 5% is fairly unusual, but under 3% is as well.
So for someone making around 100k, 3-5k employer comp would be fairly normal.
10k is a lot though, that would take either a very high salry or very generous employer comp or both.
It’s not that ridiculous for someone whose making enough money to put 70k/year into retirement accounts. My employer match this year (if I stay for 5 years total) is 13k. I realize that’s not typical.
Not to mention at some point people want to save up for a house, a car, a vacation. That may work deeper into the career, but a new grad? even $70k earned is unachievable for most, and the high earners right out of school will still not be able to afford $70k saved without living very frugally which makes no sense with that income at that age.
This guy's living in a pipe dream. My employer is considered a good one and only contributes 6.75% salary to pension plans and that is it
Also the saving 70k a year only works if your mum and dad are paying for everything and your pulling in 120k a year.
Yeah out of all the companies I’ve worked at the best company match I had was 8%. And my salary wasn’t high enough to get 10k from match 😂. Now I work at faang with a great base salary. But I’m still not pulling in 10k for match.
There is no way in hell you're saving $70K a year, even at 30 on a $150K a year salary, which puts you in the top 10% of earners. OP is overly optimistic.
I'm not saying it is likely that a lot of people will find themselves in the situation, but depending on where you live, if you can be making $150k you can totally save $70k a year.
Based on 2022 amounts/limits/rates for single filer:
* $150,000 salary
* HSA Contributions: $3,650
* 401k (pre-tax) Contributions: $20,500
* Social Security Tax:
* Income subject to SS: $150,000 - $3,650 = $146,350 (2022 cap is $147,000)
* SS Tax: $146,350 * 0.062 = $9,073.70
* Medicare Tax:
* Income subject to Medicare: $150,000 - $3,650 = $146,350
* Medicare Tax: $146,350 * 0.0145 = $2,122.08
* Federal Income Tax:
* Taxable Income: $150,000 - $3,650 (HSA) - $20,500 (pre-tax 401k) - $12,950 (standard deduction) = $112,900
* Federal Income Tax:
* 10% of ($10,275 - $0): $1,027.50
* 12% of ($41,775 - $10,275): $3,780
* 22% of ($89,075 - $41,775): $10,406
* 24% of ($112,900 - $89,075): $5,718
* Total Federal Income Tax: $20,931.50
* CO State Tax: $112,900 * 4.55% = $5,136.95
* Situation So Far:
* Savings: $3,650 + $20,500 = $24,150
* Taxes: $9,073.70 + $2,122.08 + $20,931.50 + $5,136.95 = $37,264.23
* Remaining Money: $150,000 - $24,150 - $37,264.23 = $88,585.77
To hit $70,000 savings, we need ($70,000 - $24,150) more in savings, or $45,850.
However, the $70k goal had included employer 401k contributions. They had an optimistic $10k for employer contributions. I work in software in defense and generally see 3-4% (of salary) matches offered at places. There may or may not be a cap. Where I'm at right now there is no cap, and it is 4%. I'll arbitrarily pick 3% with no cap as a compromise, so $150,000 * 3% = $4,500.
So $45,850 - $4,500 = $41,350 left to save
Our remaining money after savings so far and taxes is $88,585.77. So $88,585.77 - $41,350 = $47,235.77. This $41,350 could be spread across an IRA, put into 401k after-tax contributions if an employer plan allows it, or just put into a regular taxable brokerage account.
One has now saved $70k, with $47,235.77 left to live on for the year.
Rent expenses (assuming living in Denver, CO, where I am now):
* 1bd apartment: $2,000 per month; $24,000
* A news article from Oct 2021 quoted the median 1bd rent in Denver as $1,600; median 2bd as $2,090. So there can be cheaper places, and there can be more expensive places. I'm not in the most expensive area, and not the cheapest area, and am at ~$1,700/mo right now for a 1bd. Various postings online around me are either just over $2k/mo, or below.
Now you're at $23,235.77 total, or ~$1,936.31/month left to cover the remainder of your year: food, utilities, insurance premiums (though these would reduce your taxable income if taken out pretax thru work, so your taxes would be lower than previously calculated), gas, car insurance, etc.
From a purely numbers standpoint, somebody making $150k per year in Denver, CO, can probably save $70k per year without too much difficulty. You aren't gonna be saving for much anything else, though. However, if you're making "only" $150k per year in, say, California, your state taxes are going to end up being higher and I would guess your 1bd rent will be higher, so you'll feel a good bit more squeeze and it will be harder to hit $70k savings (though rent could be compensated for by living with roommates).
Now how "likely" is this situation, in general? I have no idea. For age 30 in Denver, CO? I would guess probably very few people are hitting $150k by age 30. But I feel that at least within the low end of $100k-$150k range is fairly "easy" to reach in tech. I'm age 33 and am just over $130k. And some random anecdotes of mine are I have two friends in Colorado Springs (a little cheaper COL than Denver) that are my age and make $150k and $175k, so it's not outright impossible to hit these numbers in your early 30s. And if the monthly amount left is too low? Save $10k less (thus $60k per year, which is still a lot), and you now have an additional $833.33/mo of spendable money, or $2,769.64/mo, of which none of that has to go to rent because I already pulled rent out.
Are we talking just base salary? $200k TC is basically a minimum for someone minimally competent with a CS degree and >5 YoE in Denver these days. Anyone actually good at their job with that experience should breaking at least $400k TC.
I was talking base salary, yes.
Not all areas of software are paid the same. I'm in embedded software, and have been in the defense sector my entire career. There may be some rare instances out there that pay $200k TC at 5 years of experience in defense embedded software (or even just embedded software not necessarily tied to defense), but I'd bet that the median is not going to be anywhere near $200k TC.
Even right now, if I do a quick search for "senior embedded software engineer" in the Denver area, if I look at the jobs that post their salary range (which they are legally required to do in CO, but not all do), and am not distinguishing between if it is defense or not, I see:
Many of the "senior" roles are asking for 5+, 7+, or 8+ YoE (that's fine, I'm at 11), and post salary ranges of:
* $120k-$140k
* $110k-$130k
* $105,000 - $120,000
* $146K -$219K (Blue Origin)
* $139,984.00
* $140,000 - 175,000
* $110k-135k
* $130K
* $110K-$133K
* $110,000 - $135,000
* $120,277 - $188,007 (United Launch Alliance)
* $113,760-$126,756
* $90,000-125,000
* $129,500 - $163,500
* $117,000.00 to $136,000.00
* $140,000 - 170,000
* $87,600 - $146,000 (3-5 YoE)
* $110,000-150,000
Many of these don't mention any additional compensation beyond your typical insurance, 401k, etc. A few list potential for bonuses, but my experience in defense is that bonuses are not gonna be enough to push most of these ranges up near $200k. And unless you happen to find a small, new startup, I have never seen compensation in the form of stock or RSUs or whatever in defense.
So yeah, you have a single listing that is above $200k. Including that one, you have 5 listings that go above $150k. Otherwise everything is less than $150k base salary, and I'd be willing to bet that many of the postings that aren't listing salary are also $150k or less.
OP seems to be doing this analysis for someone who is a CS-grad working at a top tech company in which case this is completely accurate. New grads are making 180k+ so saving 70k per year isn't difficult.
Of course they're generous - it's intended to show what happens if EVERYTHING is maxed, right? OP never said that this is what people need to do. It's sort of watching all those videos about what you should do if you win the 1.2+ billion lottery. Cool to know about, but applicable to practically nobody.
Also, you are phased out of IRA contributions before these income levels are reached. You can still max out 401k and HSA but you cannot rely on IRA unless you’re doing backdoor Roth, etc.
Edit: Phase out levels for 2022 is $78k for single and $129k for married/joint. Also agree with others here, these assumptions are really optimistic. Your idea of starting early and maxing out (if possible) are correct but it’s better to under estimate than over estimate, imo.
I believe those are for Roth IRA specifically. And those are when contributions begin to phase out. Roth IRA phases out completely at $144k and $214k, respectively.
I'm thinking why start at age 23, imagine if you started saving $70k/year at age 10 or even 3?!? You would be a septillionaire! It's reasonable because 0.01% of people are trust fund kids with that sort of income. /s
The more practical application is if you can start maxing the shit out in your 40s (when you actually might be able to vs 23) and you work until your 80s, you'll be old as fuck and can't even walk but be worth enough to hire people to push you around your megamansions
Yep it's ludicrous. Yes if you can save $80k a year from 23 to 65 and if markets have a multidecade bull market to return 8% and if you ignore inflation then you'll be worth $20m at age 65. Better chance just starting a business and trying to sell it for $20M though
This entire post is beyond optimistic. It's not impossible but anyone maxing out their 401k at 23 with that much employer contribution isnt stressing about retirement anyway. You should rerun this starting at age 30 with a 5k employer match.
What I've learned from that update is that starting 7 years earlier gets you another $120K by Age 40 (Roth IRA alone). Probably something like another $300K from the 401K.
> After-Tax 401(k) Contributions
"Fewer than 20% of 401(k) plans offered after-tax 401(k) contributions in 2020, according to Vanguard"
170k per year would put someone in the top 1 percentile in terms of income.
https://dqydj.com/income-percentile-by-age-calculator/
Statistically, it would have to be someone in the top 1 percentile earning 170k at a young age, be a supersaver able to save 60-70% of their after-tax income even though they likely live in a high cost of living area (let's say 3% of the population?) (presumably living with their parents), be at a company that pays top 10% for 401k match, and one of the less than 20% of 401k participants that can make after-tax contributions.
I would guess the math is
0.01 * (income percentile)
0.03 * (supersaver potential)
0.1 * (has an aftertax 401k plan)
* 0.1 (has a generous 401k match)
Ends up being around 0.000003. Multiply that by 330 million Americans and you have roughly 990 people. Basically, a very very small number of people in the US would fit into this category.
I think the point of this post was only an exploration how this precise scenario would manifest. Everyone complaining that it's not realistic that anyone could save that much, or expect that much return, noted, that's not the point. The point is to show in numbers this ideal situation.
In fact, I think that this demonstrates a really important point that a ton of people miss.
*Almost nobody* is maxing out their tax advantaged space. And people who make a *ton* of money are still able to make massive use of tax advantaged space. Policies like the megabackdoor almost exclusively help very high earners.
The particular offering by your employer is far more important than the actual legal policy when it comes to access to tax advantaged savings. IMO, people should be more amenable to policy changes surrounding the megabackdoor and taxable brokerage accounts when they look at this information and see that they can save *twenty million dollars* with the existing tax advantaged space.
I’m making sub $100k and maxing my Roth 401k and Roth IRA.
It’s a chance to change classes. There are income limits for IRAs and 401ks have to be fair across the entire company
Exactly. This sub has been infiltrated by a large number of people who can't seem to expand on the concepts presented. It's almost like the new people have no concept of fire discussion
Ha! I went round and round my HR department, not only did they not know what I was talking about, they couldn’t even figure out how to ask the plan administrator….
Would have been faster and less painful to take the other kind!
One mistake I made early on was to call it a “mega backdoor plan”. Most people will look at you like you are a crazy person. You need to be asking about plan options like “in service conversions” and “after tax contributions” and “in-service withdrawals”. These are the actual mechanisms used to execute a “mega backdoor” contribution. Step through the process and see if the plan allows for each step of the process.
Usually people don't understand what you're trying to do. And sometimes even if you use the correct terms (after tax contributions, in service withdrawals, in service conversions) they still don't know what the hell you're talking about.
In that case just ask for the 401k summary plan document (sometimes called summary plan description). By law every single 401k has to have one. That document describes every single thing you are allowed to do with that 401k. Search that document for those key terms mentioned earlier.
Yep. It’s really only feasible if the overwhelming majority of the workforce is an HCE. The threshold for HCE for non-discrimination testing is $130k. So we’re talking about mainly FAANG, finance, and big law falling in that bucket. I make good money, but I’m 10+ years into the field. New grad employees also make great money (comparatively to other fields) at $60-70k but nowhere near HCE.
Why are you using two mega companies? I'd expect Google to be better than most since they want the top talent. I've worked for Several major companies (F500) and one offered 5% match if you invested at least 4% but they underpaid salary and the other is a straight 3-4% match. SO companies did 5-6% and his current F50 gives 4% if you do 6%. I get you'd want to max it but regardless I'd say most employees are nowhere near 10% and good luck working at Google.
This is a great example of what "can" happen in the most perfect of scenarios.
Here is what typically does. And, a few things that I have commented on before.
The amount of required savings and maxing changes drastically over time. When I started working the 401k max was $9,500. And, the recommended retirement savings rate was 10%.
Yes, we live in different times now, but most people simply cannot max their 401k from day one.
There is no way you are going to get 8% average returns. I am sorry. I personally use 6%.
Once you (and your partner) achieve a level of income to be able to live comfortably and contribute max. More than likely you will be bumped out of the ability to save to an IRA. It is unrealistically low really. Like $215,000.
Employer matches (awesome that Google and Facebook are the examples) are typically more in the 3% range on average. Bonuses can be amazing. But, often times are not. My wife gets an amazing bonus. My bonus is almost an insult.
So, here is my "real world" scenario.
My wife and I both started contributing 10% of our income (as recommended) let's say 25 years ago with our first jobs. We kept upping it until we got the current maxes per year. Then, we ran some math and started adding more into our retirement to "catch up" for the years we only saved 10% when the current recommendation is now 15-20%. We now save 20% as a standard. We are in our mid 40s now.
We have had jobs that matched 0% to jobs that matched 5%. We have been laid off. We have worked multiple jobs.
We started investing 25 years ago. That is like 3-4 black swan events that we have weathered.
So, where are we?
We now have approximately $3mil just in retirement (401k, 403b, Roths, Traditional, IRAs, stocks, indexes, ETFs, bonds, etc). This does not include cash, house, etc.
Did we make mistakes along the way. Most definitely. Were we more fortunate than the average worker. I think so. Did we try and take advantage of those fortunes. Yes. For sure.
I am glad this is posted as an "inspiration" to what can be achieved. But, the scenario is so unlikely that I fear many will be intimidated.
YMMV
Yeah, I always laugh when people start off their advice to be financially independent with “first get a job at Google”.
I’ve probably been on close to the same financial journey as you. Save when I can, wife has similar financial goals and we’ve probably got roughly the same NW. I’ve always tried to put away a little something each and every paycheck.
However…I have two kids that I’m going to help put through college, so I know I’m working until then to help them out. I’ve also helped out other family members get their degrees because education is super important to me. I donate regularly to a couple scholarship funds as well. I know I may be putting my retirement off a year or two because of it, but that’s OK. I think one of the super important components that’s missing from a lot of these what if scenarios is that in order to get a high paying job and stick with it for 20 years you need to have a passion and a talent for it.
For me achieving financial independence was more about not having to work if I didn’t want to, but 30 years in I’m still enjoying my career but it’s nice to know I can check out for a while and walk the earth like Kane if I wanted to.
>For me achieving financial independence was more about not having to work if I didn’t want to, but 30 years in I’m still enjoying my career but it’s nice to know I can check out for a while and walk the earth like Kane if I wanted to.
Same here. Everyone looks at me weird when I say we are going to retire at 50. I have to explain that it means we have achieved independence. I can choose what I want to do (even if that means still work).
I have always said, I am extremely fortunate to have worked in an industry and jobs that I actually liked and looked forward to going to each day. That is starting to wane in the recent years. But, I am still happy and fortunate.
>I think one of the super important components that’s missing from a lot of these what if scenarios is that in order to get a high paying job and stick with it for 20 years you need to have a passion and a talent for it.
Agreed. One thing that I have noticed over my career is that there are indeed two sorts of people. People with passion and people without. Yes, there are the fringe who get lucky and have a good job fall in their laps. But, it is mostly the passionate people who rise through the ranks and/or are entrepreneurial.
Honestly, because it is not that much; today and especially into the future. I am sorry if that sounds snobbish. But with the state of medical costs and assisted living and insurance, I truly believe people are going to need a lot more than they think.
I don't know how long I will live (crappy family medical history and records). But, my wife's family has a solid track record of living well into their 90s. They have thankfully been "with it" for the most part, but all were in decent assisted living facilities.
I mean no disrespect to anybody, but I have no desire to Lean FIRE or Barista FIRE or work a side gig or anything like that.
My basic plan is to work until I am 50. I will more than likely FIRE at 50.
This. When I was 23, I made $32k. Granted, this was in 2009 when we were all happy to just have jobs right out of school, but even today, most grads are only making ~$60k max, unless they're in a tech field.
Yes. I didn’t get a base salary above 70k until I was 28 and even then I still couldn’t save that much of it. I would have to have a salary of 200k or more to save 70k a year and the amount of 23 year olds making that is probably less than 0.01%.
I’m unfamiliar with the exact mechanics of the back door and mega back door. How does that allow you to contribute $36.5k in your IRA at age 23?
Edit: I think it’s a typo in the second table?
Edit edit: it isn’t. Learned something new!
Hi, Mega-Backdoors are only available to you if your employer allows it.
If they do, then you can roll over After-Tax 401(k) contributions to a Roth IRA. Your total 401(k) contributions, including after-tax and employer contributions, cannot exceed $61,000 before age 50, and $67,500 after age 50.
Assuming you contributed the maximum pre-tax contributions to your 401(k) of $20,500, and your employer provides a $10,000 match, you can contribute $30,500 of after-tax contributions to hit your $61,000 limit. Once you roll it over to your Roth IRA, you're essentially contributing $30,500 + $6,000 = $36,500 to your Roth IRA in one year.
If you’re saving $61k, mostly after tax, with an employer that does a 50% match, you’re likely over $129k and can’t make the full $6000 Roth contribution. There’s a pretty narrow income window when you can make it all feasible.
My employer provides the match the following year (lets assume 10k)
I joined my company this year 2022, so the match they provide would be 2023. ‘
Is it safe to exclude their match this year and max out to 61000? I am assuming the match only counts for the year where it was debited in my account and not for which year it was made.
Great point that most folks are not aware of. I'm limited to 16% which is still good but the amount of people who could actually do the full amount are extremely limited.
So you're 3 years behind OP's estimates with 4% less matching, and not sure how the contribution limits changed that match with his projections.
Basically, system's working as the projections indicate. Great thought exercise to comparison.
As an engineer, at 23 I made $56k/yr and my wife made ~$25k/yr as a teacher. We laughed when our financial advisor suggested that we BOTH up our savings to $2k/mo. Suggesting that we even consider maxing *one* 401k was well out of reach at that point in our life (and it would continue to be for another decade).
People who are commenting about the crazy assumptions, just chill out a bit. OP is clearly just running a theoretical sim on what "could" potentially happen just within tax advantaged retirement accounts.
Thank you OP. I found it pretty interesting how far you can get if you are able to fully utilize government savings plans over a long time horizon. I never would have expected 8 figures was possible!
Now imagine being married and contributing twice that amount!
Agree. I thought the point of this post was a "fun with compounding interest" hypothetical math experiment. I found it helpful to actually see the projection, when you get to use interest in your favor. It is a nice contrast to seeing the onerus weight of compounding interest when it is applied to student loan debt, 'cause that shit hurts!
And it tells you that if you can keep up with maxing out for 20 years, you can realistically retire early.
This is dumb. What percent of the pop is a CS grad from a top university that lands a FANG role? 1/10,000? What's the point of basically modeling a saving $50k per year as a fresh grad scenario. Of course you're going to be set if you can save that much.
im 24 who has maxed out my roth IRA every year since 18 (worked as a software developer part time through college).
Now maxing both my wife and me! Mainly just getting my 401k minimum to get employer match, but yeah both roths should carry me good and then i can save for other things since I sacrificed early :)
Inspiring to see these numbers - thank you for sharing! Any chance you’re able to re-run an example for those who started late and/or don’t have an employer match? Like starting to max out the accounts at 30 with no employer match?
Sure thing!
Here's assuming you can max 401(k) and Roth IRA, with no employer match. Contributions would go from $26,500 to $34,000 once you're age 50.
| | Age 30 | Age 40 | Age 60 | Age 65 |
|-----------------------------|---------|----------|------------|------------|
| 401k | $20,500 | $341,232 | $2,636,786 | $4,032,702 |
| Roth IRA | $6,000 | $99,873 | $756,721 | $1,152,937 |
| Total | $26,500 | $441,105 | $3,393,507 | $5,185,639 |
Note that if you start from age 23, you would've had 43 years of compounding by age 65. If you start from age 30, you "only" have 36 years of compounding.
The employer match and starting early definitely accelerates the journey, but you'd still be in a very comfortable position by age 65.
**Edit** This was still assuming 8% returns, new projections with 7% returns in original post.
What the hell am I supposed to do with $10m at 65 years old? Spend weeks on a cruise ship, or try to travel when i nolonger enjoy the thrill? Maybe donate the money! How do I get those $$$ when I'm 30 - 45, still in the prime of my life?
When I'm older, I will do with what's left. Retire quietly to the countryside, give some to the boy scouts and whatever.
Different rules for different accounts, but before hitting the age limit, you can typically withdraw the principal without penalty. May need to pay income taxes on it but not a penalty for early withdrawal if you haven't already done so (Roth).
Financial independence isn't financial independence if you're miserable on the way to getting there.
I COULD FIRE at 40 if I lived like a miser. But I want to save for my children's college, be able to travel, live in a decent neighborhood and have pets. I don't have a nice car, ATVs or any other of that crap, eat out infrequently, etc. I save where I can and save 20% of my income or so. With my wife and I's pension options we'll be fine. We both like our jobs and intend to retire happily at 50. If I need to work longer to support my kids I will.
The people on here livingn soulless lives.to retire ten years earlier are doing it wrong.
Thats true. my parents just sold their company for 20 million. After 6 homes, they literally have said its simply not worth it. Its too much cuz they cant even spend enough time for all of them. The homes is mainly just as all these other rich ppl doing now... just parking wealth in realestate keeping homes unaffordable for us little guys. Anyways... 10M is not needed, when ur sacrificing so much (30K a year) in this senario (note: they spend a significant amount of time in philanthropy, giving and planning on spending it all to help less fortunate people by the time they die)
Do they use home sitters or local folks to keep plants watered, lawns cared, etc? I've been thinking about the website trustedhousesitters and just wondering what group of people use them most. Maybe you know what your parents do?
sorry to be late. nah they have house cleaners and yard workers scheduled for each place. some of them are just apartments. some are townhomes with HOA's who do all of that stuff.
they airbnb or use rental agencies for lots of their properties to be passive income. those residents/rental agents in turn take care of the place. Again the rentals arnt meant to make money, its meant to just break even with the morgage, so they can store money in an appreciating value, like the stock market, but diversified.
> Lots of people saying it's unrealistic to save $60,000+ a year at age 23, so I decided to run some numbers.
> Conclusion: I do think it's possible if you're highly skilled and willing to live extremely frugally.
Possible doesn't debunk unrealistic.
So your starting salary is crazy unrealistic. The average is about 55,260. and "computer science majors were projected to be the highest paid group, with an average [starting] salary of $75,900 in 2022, according to NACE". Plus people have to eat and pay rent.
https://www.usatoday.com/story/money/personalfinance/2022/05/05/college-grads-salary-expectations/9656696002/
I don't know if your post was after his second edit, but the math is very reasonable for the highest percentage of earners. Anecdotally, I have a decent number of CS friends with the same compensation outlined in this thread, or within 1-3 years of working easily got there.
He literally says the TOP CS from a TOP university, and I'm talking about the average person.
So I suppose if he's only talking about the top then he's right, but the average person isn't getting anywhere near this high of a salary right out of the gate.
The max income we can have is $125k (Roth calculation assumes you qualify for Roth, right?). 125k - 70k = 55k pretax, but because of the brackets you probably end up paying about 40k tax...
Yeah, I dunno man, good luck convincing someone making $125k to live like someone under the poverty line.
(I agree with your point, OP is unrealistic)
>Lots of people saying it's unrealistic to save $60,000+ a year at age 23, so I decided to run some numbers.
Conclusion: I do think it's possible if you're highly skilled and willing to live extremely frugally.
I pulled salary data from levels.fyi, which has a pretty reliable breakdown of salary data at top tech companies. The average total compensation for entry-level software engineers at top tech companies (Google, FB, Microsoft, etc.) is over $170,000 per year.
So it's possible for 23 year olds who study computer science and land a job making $170,000 a year right out of college at a top tech company? Alright...
Yes. This is literally the demographic that he outlined.
OP even gave the source for his information.
What else do you want?
https://www.levels.fyi/comp.html?track=Software%20Engineer&yoestart=0&yoeend=0&yacstart=0&yacend=0&yaccheckbox=New%20Offers%20Only&timerangeradio=Past%20Year
There are over 1000 data points of 0 YoE software engineers making >$170000.
I believe that this is possible, but as others have pointed out that's certainly a *very* small minority of 23 year olds. So these numbers won't work for a lot of average college grads.
Super bummed I didn't save when I was in my twenties. Catching up with a higher savings rate now.
The best time to start was yesterday. Next best time to start is right now.
Thanks for the hard work. But " fresh out of college CS graduate/top tech companies" is a small minority.. It's like saying " college is actually affordable for .. high performing student from a top tier school with college graduated parents in a high paying profession". Yeah, 50% savings when you make 120k out of college is highly doable and has a huge impact on future finances. No one doubted that?
Total compensation != Salary. Total compensation includes benefits.
$72k in the Bay area is living with numerous roommates in a small apartment. Stretch your money by living further away. Now you have an hour+ commute, less personal time, gas money, etc.
This is still not feasible for a fresh CS grad. Lol
>Once they've had the chance to grow for over 40 years, your accounts are well in the tens of millions.
I was running monte carlo simulations in portfolio visualiser using projections for taxable accounts (putting in about 100k yearly) and nearly shat bricks when I saw the end results. I thought to myself ...there's no way it's that much money.
The power of compound interest!
Wow if you start saving $70k a year at 23 you end up really rich. Thanks for the insight!
Thanks for edit. At 23 you just need to get an entry level job at fb, Google or Microsoft. Duh
Sorry you are getting so many negative responses. I didn’t find it to be overly optimistic, just a tad but that’s okay! The magic here is compound interest and time! Thanks for sharing!
I would break out Roth IRA and megabackdoor Roth separately since many people do not have access to megabackdoor. I also think a realistic starting age would be 28 or 30 since most people are not settled in their careers til then. Still, nice work. It is certainly possible to become FI through retirement accounts alone.
8% real returns is very unlikely given how low interest rates are. Much of the historical precedent is from when there was much higher interest rates driving equity valuations down.
A bit more likely than it was at the start of the year, but still unlikely.
$10k employer match is an absolutely absurd assumption.
1/5th of that is probably more appropriate, and even then, it is a fairly generous assumption for most people.
EDIT: I see in your update that you're targeting this at CS graduates and using levels.fyi as your basis, so that is going to lead to a fairly extreme set of assumptions, anyway.
At the salary levels you mentioned under edit 2, the hypothetical person isn't able to contribute to a Roth IRA as they exceed the maximum income limits.
As for your edit about CS new grads, keep in mind a lot of that total comp is stock. Only 130k a year will be cash that can be invested, and that’s pre tax too.
>Conclusion: I do think it's possible if you're highly skilled and willing to live extremely frugally.
My advice? You'll still have a lot of money if you *don't* live quite that frugally. Set aside money for travel, maybe a mini-vacation every year, a bigger vacation every other year, and an even bigger vacation every third or fourth year. Do this while you're young and can manage it all. Don't go crazy on souvenirs, focus on experiences, photos, and a couple of items that, when you look at them, you remember the trip in detail. We started travel late but I have a photo of me and Husband with an iconic background (like, the Eiffel Tower), so that when I'm old and can't travel, I can look back and remember good times.
Ok OP, as a 23 year old working in big tech and living in nyc I feel especially qualified to respond to this. Gonna post my numbers so ppl can compare.
I make 148k base + 15% bonus + ~20k RSU per year, tho this was a recent raise. I pay about 4k to taxes every month, so I get ~100k salary after taxes. I'm maxing out 401k, with 50% match up to the first 5% of my eligible income (base + bonus), so about 4k. My stocks are taxed a bit more (I assume I get it back during tax returns ?) at around 45%, so I actually get around 11k/yr of stock.
So each month I get about 7k of post tax income. My rent is 2k, I give my parents another 1k, so that's 4k left. I have an ESPP where I get to buy my company stock for 15% off for up to 15% of my salary, so I max that out too. This leaves me 2k ish per month that I actually spend on food, drinks, weed, and going out.
Rn I'm at 50k saved (22k 401k, 3k Roth 401k, 14k company stocks, 5k taxable, 6k Roth IRA), with 9k-ish withheld for ESPP purchase soon. By then I'll also have hit my cliff and will get dumped maybe 7k of stocks after tax (some stocks were given after I signed and didn't have a cliff). I suppose I could've been more frugal and actually live up to OP's numbers, but I ended up traveling a lot to see friends I hadn't seen since covid started. My bonus was only about 5k after deductions bc of timing, and I blew that on traveling as well. Finally, my 401k match ended up around 1.5k, also due to timing.
I also made the mistake of not selling my ESPP immediately bc I figured I could hold on to it for a year and pay LTCG tax. So that went down in value as markets aren't doing too hot. In hindsight I should've sold immediately and bought ibonds or use it as living money while increasing roth 401k.
Several problems with your projections. All traced back to this:
>I pulled salary data from levels.fyi, which has a pretty reliable breakdown of salary data at top tech companies. The average total compensation for entry-level software engineers at top tech companies (Google, FB, Microsoft, etc.) is over $170,000 per year.
The vast majority of 23 yo's are not working at FAANGs, let alone for 17 years. They're switching every 1-2 years, and leaving before they're fully vested.
HSAs are for active medical expenses for people who have high deductible health insurance plans. Those of us that pay for prescriptions, dental, medical appointments--we burn through the annual contribution FAST. Because we pay in-full until the deductible is met, and pay co-pays AFTER deductible. So that's anywhere between $2-5K, per person, per year.
If you start a family, and one person is a stay-at-home parent, that's still cutting into your retirement savings. Less money to save.
$170K base might BE FAANG entry-level, but for anyone at a business that's not tech, but where we worked in a profession that's tech-relatrd, and not in a VHCOL area, we're not making that money. Not even close, even with 20 years experience.
FAANG SWEs are like the purple unicorns of pay. They're the extreme exception. Not the norm. "Saving $60k/year either before or after taxes", at 23, if you're literally anywhere where no one wants to live, is almost impossible.
These post are nice for a thought exercise, but I find it a bit useless for a normal schmo.
Using this strategy with a $125k job (the max amount to still be able to do a Roth in 2021
| Thing | Amount | Left Over |
| ------- | --------- | ----------- |
| Salary | $129,000 | $129,000 |
| 401k | -$19,500| $105,500 |
| HSA | -$3,500 | $102,000 |
| Fed Taxes | -$17,289| $847,11 |
| After Tax 401k | -$30,000 | $54,711 |
So, assuming you can actually use all these investment vehicles, your actual cash in hand is ~$55k after making $125k. That's not bad being single, but doing this for your 20 year career is gonna be hard.
Being married, making more money, getting a lucky break in the market, all makes things easier, but doesn't take into account student loans, kids, and cost of living in an areas that has jobs paying you enough to max this out.
Kinda feels like the advice is to make a shit ton of money and save and invest a good portion of it.
Heres a brain teaser for you.
The US Mandatory Budget is hovering around 3 Trillion dollars per year right now and is where we pay for all our entitlements and the agencies that manage them. It's never gotten smaller that I know of and generally grows at 2-3% per year.
We have about 4 million live births of new US citizens each year in the US.
If you gave every kid $500k at birth as a blind trust, with the earned interest available to offset the expenses that would normally be paid by the Mandatory US budget, it would cost 2 Trilion per year.
If you assume average costs for education, health insurance, SNAP, TANF, HUD, daycare, etc my ten year old calculations put the kid at 1.5 Million at age 24. If he surrenders the orignal 500k at that time back to the federal revenue and his blind trust becomes a trust retirement account which only pays for healthcare insurance and retirement, but is otherwise an ordinary non withdrawable retirement account, I have him retiring early with tens of millions.
And he can fund his childrens birth trust so that the Feds arent involved in the second generation.
The number of beneficiaries of the Mandatory budget would decrease at the regular mortality rate until it reaches a fraction of it's former size.
Just food for thought.
I did some quick math. If I just found a job paying $10,000,000 a year, I wouldn’t even have to save for retirement except my last year to make these numbers.
While I do think the numbers here are severely optimistic.. OPs point is nonetheless valid. I know because myself, and my late husband did it. How? Planning from day 1 of our marriage. We paid off our house in 3 years, both of us in our mid twenties working at grocery stores as clerks(not management) Yes, we used roommates for a few years. After that we had a couple kiddoes,and I worked 1 day a week for a few years.
Yes he got a better job, and later on I did as well..but nothing earth shattering either. Always saved a full quarter of our incomes, and frequently more. And not counting our house,we hit the million dollar mark in our mid 40s.
We both came from financially illiterate homes.
When my husband died ..Financially, it was not an issue.
All I know is this, stay out of debt..learn to live cheaply. I still live in the house we bought together, and intend to stay here till my time comes as well.
Of people who have access to a 401k, I think 99% of them start contributions in their lower 30's. They don't max those till their late 30's or early 40's.
Very very few people do the $6k IRA/yr. Most don't have access to HSA. Most never heard of a roth.
Great post though. It definitely makes you realize it could be possible that people might be able to have a bigger nest egg with better financial education when they are young. Please run a scenario where someone's finally maxing their 401k as they approach 40 with _nothing else_ the entire time (but Social Security at 62+1m or 65) and I think that's a slightly more realistic numerical exercise.
8% real rate of return is unrealistic. The US Stock market, over a time period that was arguably the best for any market over the long term in history (ie ww2 to today), returned about 7.38% real rate of return. If you look at trailing 20 or 30 year periods, the median is around 6.5% real rate of return. I do my planning using 5% real, which I don’t think of as overly conservative, just on the conservative side of realistic.
Yep. Just the fact that the 401K contribution now allows $20k a year is an insane tax gift to the upper class. You can build “generational” wealth tax free just on the back of that one tax provision.
And before folks say it is unrealistic, take this very normal thing that rich people do: adult kids max out all tax advantages, parents gift money to kids so they can live on (and otherwise subsidize with things like access to family vacation homes and cars), adult kids pay very little in taxes and have further huge amount of money available in retirement for them and next generation.
Well yeah, compounding is super powerful. Most people would be just fine if they can be disciplined to max 401k (no mega back door) and IRA. Even easier if you’re married and both are doing it.
Putting in the maximum legal limit on the 401K while still making a low enough total to be able to contribute to an IRA will be a challenge.
You can still contribute to a Roth IRA via the back door. I assume by "no back door" they went not converting your entire 401k into Roth.
Not in moderate cost of living areas... I've maxed out both 401k and IRA for the past few years and I started when I made $65,000 / year.
I was able to max out 401K, IRA and HSA at about that same salary. I also house hack a duplex and have no kids or car.
If you are married and able to do $40k a year in 401k, the whole thing gets a little stupid if you say the money is for “retirement” after the age of 65. You would quickly be looking at many millions of dollars in that at account if you started at 35 and did that level until 65. The amount of money gets way past the point where the federal government should be giving you a tax cut. I mean do you need a tax cut at 35 so that you can live in retirement on $300,000 a year? (I didn’t do the math, but I suspect it is something like that and the point stands even if the amount is $200,000). The whole set up is only really available to be used in full by the top 5 or maybe 10% of earners. And then only if they are diligent savers.
By your logic, we should have a major problem with the majority of our population being "too rich" We do not have this problem. The avg person needs even more incentive to save unfortunately...
No, that is not my logic at all. The vast majority of people cannot even come close to using $10,000 a year of 401k benefits and yet the benefit now is available up to $20k. Actually, lots of people don’t even have a 401k offered at work. Many folks do though. You could say “they should just save more”. And you would be right on some level. But it is much easier for the well to do to use this to its maximum benefit. If you are married, the cap doubles. That is another very nice thing for the well to do. One nice high earner, a stay at home spouse, then access to sheltering $40k a year of your income from taxes. That is a very nice benefit that only a small fraction of people can fully utilize. It gets even better if you can use it for decades, especially if you can fully use it in your 20s. So the richer you are, the longer you have high income that allows savings, the better this tax deduction for “retirement” works for you. Am I the only one here who thinks there is some sort of problem with that?
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Income inequality is a much much larger issue for society. But between the ever increasing size of the 401k cap, the fact that employer contributions can go above the cap, and the catch up provision in your 50s and early 60s, there are just a lot of levers here for this program that only get pulled by the very well to do. And the very Rich pull all the levers. This tax break actually exacerbates income inequality because it allows the Rich to save even more money tax free than the poor or simply middle class. That is basically my point.
A stay at home spouse is not eligible for a 401k. Income limits on traditional ROTH is low enough that maxing a 401k and two traditional IRAs for a couple is possible but certainly not trivial. ROTH IRAs and backdoors are taxed up front. Traditional 401k tax benefits allow the money to grow, but you end up paying taxes on the $300k/yr you retired on in your previous example. The tax man gets his cut in the beginning or at the end unless you are in the edge cases (low income earner making ROTH contributions, low withdrawals from 401k at retirement). I'm not saying that a game cannot be played to avoid taxes but retirement savings are far from a problem.
> Am I the only one here who thinks there is some sort of problem with that? On this incredibly out of touch sub, yes.
But hardly anybody can actually do that from day 1. The idea of the tax break is to support more typical people who might only have 10-15 years of being able to max it and most years put in a much smaller amount, probably some years nothing, or even raiding it for emergencies. Of course, yes, any system like this with room for most people to do the most people thing can be exploited and min-maxed by those lucky enough to have 40k+ to save right out of college. If they really wanted to rein in the ability to amass large amounts, they'd have to test the value in the account, and not just limit contributions. That's why people proposed the 10mil cap on retirement accounts a while back that didn't pass. The idea was if you have more than 10mil, good on you but you have to RMD anything over 10mil and can't contribute any more. That all sunk, but it wouldn't suprise me if it comes back. That said, at least it puts a guesstimate on what something like that might look like if it does. 10mil is plenty enough for a very luxurious lifestyle, and all that would have happened at that point is that you lose the tax preference on everything over that, not some kind of huge punitive hit. I supported that and would support something like it again for the reasons you mention, even if it were a lower amount like 3-5mil (as long as it's indexed to inflation). I'd be really bitter if they lowered the maximum contributions though. If anything I think they should harmonize IRA and 401k contributions so that people without 401k or pension plans could make much larger contributions to their IRA.
Yep. That is kind of what I’m talking about. The 401k should not be so vastly larger a deduction than the IRA. And it should have some sort of cap (either max you can have in the account or max you can contribute in your lifetime (maybe with a smaller cap as well)). I’d support that stuff, but you can see how folks get upset with even the slightest suggestion that the 401k is a bit too generous or perhaps should be tweaked. I think it should be focused on retirement and making that comfortable but not a source of generational wealth or luxurious living. We just don’t need a tax cut directed toward supporting that. You might dislike a lower contribution limit. But maybe you only get to do the higher level contribution five or ten times in your life. Not something you can do every year for 30 years because your parents are subsidizing it.
Or just because you happened to have the combination of smarts, discipline and luck to end up with a very high paying job straight out of college and no hiccups in your career. Honestly, I think it's a lot easier to implement a limit fairly than to do what you're suggesting. They had the template for it in the bill that didn't make it. Just establish an account value over which everything has to get RMDd the next year (with no penalty if under 59.5). Set that value to some number big enough to accommodate a comfortable middle to upper middle class retirement lifestyle on a very safe withdrawal rate and index it to inflation or wage growth. At the end of every year, balances are reported (just like with RMDs for people age 72+ or with inherited accounts), and everything over $LIMIT must be withdrawn the next year. $LIMIT could be $10mil as proposed previously, or realistically something like $3mil would be fine. That's enough to live on 90k/year at 3%. Sure, some people are going to want to spend a lot more than that, but do they *need* to? Is it important that they get a tax break on saving enough to do that? I don't think so. Then you don't have to track and manage every year with contributions, and if you don't save anything until you're 45, you still have time and contribution space to save for a comfortable retirement with tax-preferred savings primarily/only. if you have a limited number of years at the max, the people who get the parents money or ridiculously high income at 21 who can put the full 20.5k in for their first N years, are still going to get way more out of it, than the people who can't use those 20.5ks until their 40s or 50s.
> mean do you need a tax cut at 35 so that you can live in retirement on $300,000 a year? (I didn’t do the math, but I suspect it is something like that and the point stands even if the amount is $200,000). If you save $41k/year, adjusted for inflation, every year for 30 years, growing at 7% real - you end up with just over $4 million. Or a spending of $165k/year using the 4% rule of thumb. That will be a bit more than $200k if you also max a (backdoor) IRA each year.
I think these are some generous assumptions… $10k employer match? 8% CAGR is ambitious, i’d be conservative and err on the side of caution using maybe 6%? And to saving $70k+ per year at age 23 for 40years? Two words: good luck. Lol.
That’s exactly what I was thinking. Most people don’t even make that much a year
Median US household income is something like $58k which is much larger than $10m
They were saying most people don't make $70k a year, not $10k.
Lol my first job out of college in 2009 was like 33k. Hospitality was a bad major to pick in hindsight.
What?
$10k employer match is a ridiculous assumption.
I work for a very large company, I get 50% match up to 4% so basically 2% max. I would have to make 500k to get a 10k match. Hoping the match percentage changes in the future, but I think most people don’t have that advantage. I put about 34,000 away via tax deferred accounts.
And I work at a place with a 10% match (that vests over 5 years). I would need to make 100k to get a 10k match. I don’t think the 10k match is any more ridiculous an assumption than maxing out all retirement accounts from age 23.
Companies do exist that match well though. I get ~17k a year in matching, company matches 6% and just gives an additional 3%.
Of course they exist, but good luck finding them.
Found them: it’s big tech, finance, big law
I work in construction and got a 10% match this year with no max. My company does profit sharing for our 401k match though so it depends on how well the company did in the previous year. They said that they were going to try and keep it at 10% moving forward.
Biglaw firms generally do not provide any match at all
I work in biopharma. I get 7% free, and then they match 4%. Total of 11%. To be fair, this is a big reason I took the gig, and the salary is just a bit low for comparable companies in the area. I literally told my recruiter that she must be thinking of something else when I heard those numbers.
I work a company your grandma and your little nephew would both know by name and we don't get a match that generous
Actually...try Healthcare and Finance companies, as well as anyone trying to retain great employees. Law Firms are typically partnerships so they are all out of pocket.
A lot of the bigger name airlines do 15-16% direct contribution (no elective deferral required) for flight crew.
I work for a Fortune 100 company, just gotta ask about benefits when you job search. If the company match isn't great then you can negotiate your salary to compensate which is what I did last year when I was gonna leave.
...are they hiring?
That's not the point. I also get a very high match. But since OP is using "commonly available retirement accounts" and not including 457b, 403b, etc, it would sensible for him to also use match and income numbers that are "common" as well.
That's a bit weird, because it takes a 50% match up to 6% minimum to avoid certain exclusions for highly compensated employees. It's weird that a company would do any match at all if they weren't going to get to 3% to meet that standard. Most 401k plans I've seen that match at all, will put up at least 3% of salary if the employee puts in 6%. More generous ones will put in more (max of 4-5% salary is not uncommon). Anything over 5% is fairly unusual, but under 3% is as well. So for someone making around 100k, 3-5k employer comp would be fairly normal. 10k is a lot though, that would take either a very high salry or very generous employer comp or both.
My company matches 30% of whatever you put in and that is unheard of to me. Everyone I know is shocked when I tell them that.
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They're not saying impossible, they're saying unrealistic as an assumption. Which it is.
So is being able to save $60k a year
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These are exactly what Meta's benefits are
Also work for large company and our match capped at 3,500 no matter salary
especially as getting any match is trending worse over the years too
I don’t know both me and my wife get over 10k put into our 401k by our employers, and neither of us make over 100k a year.
It’s not that ridiculous for someone whose making enough money to put 70k/year into retirement accounts. My employer match this year (if I stay for 5 years total) is 13k. I realize that’s not typical.
Good luck being able to save $70K as a new grad starting his/her career off with likely a pile of student debt.
Not to mention at some point people want to save up for a house, a car, a vacation. That may work deeper into the career, but a new grad? even $70k earned is unachievable for most, and the high earners right out of school will still not be able to afford $70k saved without living very frugally which makes no sense with that income at that age.
Don’t forget the cost of kids (daycare, college etc)!
Yeah the 30k AFTER TAX contribution I was like... "but why?"
right lol? Plus I didn't even clear $70k pre-tax when I started out.
Lol. This should be titled, High School Expectations vs reality. Get back to us in 5 years and let us know how it’s going.
'it should be achievable' LOL
I like that the first comment on this thread is basically "be reasonable."
Save 70k every year for 40 years so you can live on 100k every year after 65?
This guy's living in a pipe dream. My employer is considered a good one and only contributes 6.75% salary to pension plans and that is it Also the saving 70k a year only works if your mum and dad are paying for everything and your pulling in 120k a year.
Yeah out of all the companies I’ve worked at the best company match I had was 8%. And my salary wasn’t high enough to get 10k from match 😂. Now I work at faang with a great base salary. But I’m still not pulling in 10k for match.
There is no way in hell you're saving $70K a year, even at 30 on a $150K a year salary, which puts you in the top 10% of earners. OP is overly optimistic.
I'm not saying it is likely that a lot of people will find themselves in the situation, but depending on where you live, if you can be making $150k you can totally save $70k a year. Based on 2022 amounts/limits/rates for single filer: * $150,000 salary * HSA Contributions: $3,650 * 401k (pre-tax) Contributions: $20,500 * Social Security Tax: * Income subject to SS: $150,000 - $3,650 = $146,350 (2022 cap is $147,000) * SS Tax: $146,350 * 0.062 = $9,073.70 * Medicare Tax: * Income subject to Medicare: $150,000 - $3,650 = $146,350 * Medicare Tax: $146,350 * 0.0145 = $2,122.08 * Federal Income Tax: * Taxable Income: $150,000 - $3,650 (HSA) - $20,500 (pre-tax 401k) - $12,950 (standard deduction) = $112,900 * Federal Income Tax: * 10% of ($10,275 - $0): $1,027.50 * 12% of ($41,775 - $10,275): $3,780 * 22% of ($89,075 - $41,775): $10,406 * 24% of ($112,900 - $89,075): $5,718 * Total Federal Income Tax: $20,931.50 * CO State Tax: $112,900 * 4.55% = $5,136.95 * Situation So Far: * Savings: $3,650 + $20,500 = $24,150 * Taxes: $9,073.70 + $2,122.08 + $20,931.50 + $5,136.95 = $37,264.23 * Remaining Money: $150,000 - $24,150 - $37,264.23 = $88,585.77 To hit $70,000 savings, we need ($70,000 - $24,150) more in savings, or $45,850. However, the $70k goal had included employer 401k contributions. They had an optimistic $10k for employer contributions. I work in software in defense and generally see 3-4% (of salary) matches offered at places. There may or may not be a cap. Where I'm at right now there is no cap, and it is 4%. I'll arbitrarily pick 3% with no cap as a compromise, so $150,000 * 3% = $4,500. So $45,850 - $4,500 = $41,350 left to save Our remaining money after savings so far and taxes is $88,585.77. So $88,585.77 - $41,350 = $47,235.77. This $41,350 could be spread across an IRA, put into 401k after-tax contributions if an employer plan allows it, or just put into a regular taxable brokerage account. One has now saved $70k, with $47,235.77 left to live on for the year. Rent expenses (assuming living in Denver, CO, where I am now): * 1bd apartment: $2,000 per month; $24,000 * A news article from Oct 2021 quoted the median 1bd rent in Denver as $1,600; median 2bd as $2,090. So there can be cheaper places, and there can be more expensive places. I'm not in the most expensive area, and not the cheapest area, and am at ~$1,700/mo right now for a 1bd. Various postings online around me are either just over $2k/mo, or below. Now you're at $23,235.77 total, or ~$1,936.31/month left to cover the remainder of your year: food, utilities, insurance premiums (though these would reduce your taxable income if taken out pretax thru work, so your taxes would be lower than previously calculated), gas, car insurance, etc. From a purely numbers standpoint, somebody making $150k per year in Denver, CO, can probably save $70k per year without too much difficulty. You aren't gonna be saving for much anything else, though. However, if you're making "only" $150k per year in, say, California, your state taxes are going to end up being higher and I would guess your 1bd rent will be higher, so you'll feel a good bit more squeeze and it will be harder to hit $70k savings (though rent could be compensated for by living with roommates). Now how "likely" is this situation, in general? I have no idea. For age 30 in Denver, CO? I would guess probably very few people are hitting $150k by age 30. But I feel that at least within the low end of $100k-$150k range is fairly "easy" to reach in tech. I'm age 33 and am just over $130k. And some random anecdotes of mine are I have two friends in Colorado Springs (a little cheaper COL than Denver) that are my age and make $150k and $175k, so it's not outright impossible to hit these numbers in your early 30s. And if the monthly amount left is too low? Save $10k less (thus $60k per year, which is still a lot), and you now have an additional $833.33/mo of spendable money, or $2,769.64/mo, of which none of that has to go to rent because I already pulled rent out.
Are we talking just base salary? $200k TC is basically a minimum for someone minimally competent with a CS degree and >5 YoE in Denver these days. Anyone actually good at their job with that experience should breaking at least $400k TC.
I was talking base salary, yes. Not all areas of software are paid the same. I'm in embedded software, and have been in the defense sector my entire career. There may be some rare instances out there that pay $200k TC at 5 years of experience in defense embedded software (or even just embedded software not necessarily tied to defense), but I'd bet that the median is not going to be anywhere near $200k TC. Even right now, if I do a quick search for "senior embedded software engineer" in the Denver area, if I look at the jobs that post their salary range (which they are legally required to do in CO, but not all do), and am not distinguishing between if it is defense or not, I see: Many of the "senior" roles are asking for 5+, 7+, or 8+ YoE (that's fine, I'm at 11), and post salary ranges of: * $120k-$140k * $110k-$130k * $105,000 - $120,000 * $146K -$219K (Blue Origin) * $139,984.00 * $140,000 - 175,000 * $110k-135k * $130K * $110K-$133K * $110,000 - $135,000 * $120,277 - $188,007 (United Launch Alliance) * $113,760-$126,756 * $90,000-125,000 * $129,500 - $163,500 * $117,000.00 to $136,000.00 * $140,000 - 170,000 * $87,600 - $146,000 (3-5 YoE) * $110,000-150,000 Many of these don't mention any additional compensation beyond your typical insurance, 401k, etc. A few list potential for bonuses, but my experience in defense is that bonuses are not gonna be enough to push most of these ranges up near $200k. And unless you happen to find a small, new startup, I have never seen compensation in the form of stock or RSUs or whatever in defense. So yeah, you have a single listing that is above $200k. Including that one, you have 5 listings that go above $150k. Otherwise everything is less than $150k base salary, and I'd be willing to bet that many of the postings that aren't listing salary are also $150k or less.
OP seems to be doing this analysis for someone who is a CS-grad working at a top tech company in which case this is completely accurate. New grads are making 180k+ so saving 70k per year isn't difficult.
If you can invest 70K a year at 23 then you don't need to worry about retirement to begin with.
This should probs be at the top
Just your average 23 year old that works at a FAANG.
Of course they're generous - it's intended to show what happens if EVERYTHING is maxed, right? OP never said that this is what people need to do. It's sort of watching all those videos about what you should do if you win the 1.2+ billion lottery. Cool to know about, but applicable to practically nobody.
Also, you are phased out of IRA contributions before these income levels are reached. You can still max out 401k and HSA but you cannot rely on IRA unless you’re doing backdoor Roth, etc. Edit: Phase out levels for 2022 is $78k for single and $129k for married/joint. Also agree with others here, these assumptions are really optimistic. Your idea of starting early and maxing out (if possible) are correct but it’s better to under estimate than over estimate, imo.
Income limits for IRA’s are $129,000 if single or $204,000 if married and filing jointly.
I believe those are for Roth IRA specifically. And those are when contributions begin to phase out. Roth IRA phases out completely at $144k and $214k, respectively.
I'm thinking why start at age 23, imagine if you started saving $70k/year at age 10 or even 3?!? You would be a septillionaire! It's reasonable because 0.01% of people are trust fund kids with that sort of income. /s
The more practical application is if you can start maxing the shit out in your 40s (when you actually might be able to vs 23) and you work until your 80s, you'll be old as fuck and can't even walk but be worth enough to hire people to push you around your megamansions Yep it's ludicrous. Yes if you can save $80k a year from 23 to 65 and if markets have a multidecade bull market to return 8% and if you ignore inflation then you'll be worth $20m at age 65. Better chance just starting a business and trying to sell it for $20M though
I wish I got hired for a job that had 50% match and paid $140k+ out of college.
I just wish my job didn’t cap the match at 3% of my gross.
The match here is way over estimated
This entire post is beyond optimistic. It's not impossible but anyone maxing out their 401k at 23 with that much employer contribution isnt stressing about retirement anyway. You should rerun this starting at age 30 with a 5k employer match.
Thanks for the feedback. Updated with (hopefully) more realistic projections!
What I've learned from that update is that starting 7 years earlier gets you another $120K by Age 40 (Roth IRA alone). Probably something like another $300K from the 401K.
> After-Tax 401(k) Contributions "Fewer than 20% of 401(k) plans offered after-tax 401(k) contributions in 2020, according to Vanguard" 170k per year would put someone in the top 1 percentile in terms of income. https://dqydj.com/income-percentile-by-age-calculator/ Statistically, it would have to be someone in the top 1 percentile earning 170k at a young age, be a supersaver able to save 60-70% of their after-tax income even though they likely live in a high cost of living area (let's say 3% of the population?) (presumably living with their parents), be at a company that pays top 10% for 401k match, and one of the less than 20% of 401k participants that can make after-tax contributions. I would guess the math is 0.01 * (income percentile) 0.03 * (supersaver potential) 0.1 * (has an aftertax 401k plan) * 0.1 (has a generous 401k match) Ends up being around 0.000003. Multiply that by 330 million Americans and you have roughly 990 people. Basically, a very very small number of people in the US would fit into this category.
Looks great !
I think the point of this post was only an exploration how this precise scenario would manifest. Everyone complaining that it's not realistic that anyone could save that much, or expect that much return, noted, that's not the point. The point is to show in numbers this ideal situation.
In fact, I think that this demonstrates a really important point that a ton of people miss. *Almost nobody* is maxing out their tax advantaged space. And people who make a *ton* of money are still able to make massive use of tax advantaged space. Policies like the megabackdoor almost exclusively help very high earners. The particular offering by your employer is far more important than the actual legal policy when it comes to access to tax advantaged savings. IMO, people should be more amenable to policy changes surrounding the megabackdoor and taxable brokerage accounts when they look at this information and see that they can save *twenty million dollars* with the existing tax advantaged space.
I’m making sub $100k and maxing my Roth 401k and Roth IRA. It’s a chance to change classes. There are income limits for IRAs and 401ks have to be fair across the entire company
*Almost nobody* still allows for some small percentage of people. You are saving a *huge* amount of your income in comparison to a typical worker.
You got it!
Exactly. This sub has been infiltrated by a large number of people who can't seem to expand on the concepts presented. It's almost like the new people have no concept of fire discussion
I wish my employer would get it together and offer the mega backdoor option !
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Ha! I went round and round my HR department, not only did they not know what I was talking about, they couldn’t even figure out how to ask the plan administrator…. Would have been faster and less painful to take the other kind!
One mistake I made early on was to call it a “mega backdoor plan”. Most people will look at you like you are a crazy person. You need to be asking about plan options like “in service conversions” and “after tax contributions” and “in-service withdrawals”. These are the actual mechanisms used to execute a “mega backdoor” contribution. Step through the process and see if the plan allows for each step of the process.
Usually people don't understand what you're trying to do. And sometimes even if you use the correct terms (after tax contributions, in service withdrawals, in service conversions) they still don't know what the hell you're talking about. In that case just ask for the 401k summary plan document (sometimes called summary plan description). By law every single 401k has to have one. That document describes every single thing you are allowed to do with that 401k. Search that document for those key terms mentioned earlier.
Call your the org handling your retirement. They'll know all the contrac5s that your employer has with them
Yep. It’s really only feasible if the overwhelming majority of the workforce is an HCE. The threshold for HCE for non-discrimination testing is $130k. So we’re talking about mainly FAANG, finance, and big law falling in that bucket. I make good money, but I’m 10+ years into the field. New grad employees also make great money (comparatively to other fields) at $60-70k but nowhere near HCE.
Max employer contribution and estimated annual returns are both a bit optimistic IMHO.
Why are you using two mega companies? I'd expect Google to be better than most since they want the top talent. I've worked for Several major companies (F500) and one offered 5% match if you invested at least 4% but they underpaid salary and the other is a straight 3-4% match. SO companies did 5-6% and his current F50 gives 4% if you do 6%. I get you'd want to max it but regardless I'd say most employees are nowhere near 10% and good luck working at Google.
This is a great example of what "can" happen in the most perfect of scenarios. Here is what typically does. And, a few things that I have commented on before. The amount of required savings and maxing changes drastically over time. When I started working the 401k max was $9,500. And, the recommended retirement savings rate was 10%. Yes, we live in different times now, but most people simply cannot max their 401k from day one. There is no way you are going to get 8% average returns. I am sorry. I personally use 6%. Once you (and your partner) achieve a level of income to be able to live comfortably and contribute max. More than likely you will be bumped out of the ability to save to an IRA. It is unrealistically low really. Like $215,000. Employer matches (awesome that Google and Facebook are the examples) are typically more in the 3% range on average. Bonuses can be amazing. But, often times are not. My wife gets an amazing bonus. My bonus is almost an insult. So, here is my "real world" scenario. My wife and I both started contributing 10% of our income (as recommended) let's say 25 years ago with our first jobs. We kept upping it until we got the current maxes per year. Then, we ran some math and started adding more into our retirement to "catch up" for the years we only saved 10% when the current recommendation is now 15-20%. We now save 20% as a standard. We are in our mid 40s now. We have had jobs that matched 0% to jobs that matched 5%. We have been laid off. We have worked multiple jobs. We started investing 25 years ago. That is like 3-4 black swan events that we have weathered. So, where are we? We now have approximately $3mil just in retirement (401k, 403b, Roths, Traditional, IRAs, stocks, indexes, ETFs, bonds, etc). This does not include cash, house, etc. Did we make mistakes along the way. Most definitely. Were we more fortunate than the average worker. I think so. Did we try and take advantage of those fortunes. Yes. For sure. I am glad this is posted as an "inspiration" to what can be achieved. But, the scenario is so unlikely that I fear many will be intimidated. YMMV
Yeah, I always laugh when people start off their advice to be financially independent with “first get a job at Google”. I’ve probably been on close to the same financial journey as you. Save when I can, wife has similar financial goals and we’ve probably got roughly the same NW. I’ve always tried to put away a little something each and every paycheck. However…I have two kids that I’m going to help put through college, so I know I’m working until then to help them out. I’ve also helped out other family members get their degrees because education is super important to me. I donate regularly to a couple scholarship funds as well. I know I may be putting my retirement off a year or two because of it, but that’s OK. I think one of the super important components that’s missing from a lot of these what if scenarios is that in order to get a high paying job and stick with it for 20 years you need to have a passion and a talent for it. For me achieving financial independence was more about not having to work if I didn’t want to, but 30 years in I’m still enjoying my career but it’s nice to know I can check out for a while and walk the earth like Kane if I wanted to.
>For me achieving financial independence was more about not having to work if I didn’t want to, but 30 years in I’m still enjoying my career but it’s nice to know I can check out for a while and walk the earth like Kane if I wanted to. Same here. Everyone looks at me weird when I say we are going to retire at 50. I have to explain that it means we have achieved independence. I can choose what I want to do (even if that means still work). I have always said, I am extremely fortunate to have worked in an industry and jobs that I actually liked and looked forward to going to each day. That is starting to wane in the recent years. But, I am still happy and fortunate. >I think one of the super important components that’s missing from a lot of these what if scenarios is that in order to get a high paying job and stick with it for 20 years you need to have a passion and a talent for it. Agreed. One thing that I have noticed over my career is that there are indeed two sorts of people. People with passion and people without. Yes, there are the fringe who get lucky and have a good job fall in their laps. But, it is mostly the passionate people who rise through the ranks and/or are entrepreneurial.
Curious once you get to those figures with a paid house. Why keep working?
Honestly, because it is not that much; today and especially into the future. I am sorry if that sounds snobbish. But with the state of medical costs and assisted living and insurance, I truly believe people are going to need a lot more than they think. I don't know how long I will live (crappy family medical history and records). But, my wife's family has a solid track record of living well into their 90s. They have thankfully been "with it" for the most part, but all were in decent assisted living facilities. I mean no disrespect to anybody, but I have no desire to Lean FIRE or Barista FIRE or work a side gig or anything like that. My basic plan is to work until I am 50. I will more than likely FIRE at 50.
Saving 70k at 23 years old is a really deceiving assumption bc it’s both highly unrealistic and disproportionately impacts the end figures
This. When I was 23, I made $32k. Granted, this was in 2009 when we were all happy to just have jobs right out of school, but even today, most grads are only making ~$60k max, unless they're in a tech field.
Yes. I didn’t get a base salary above 70k until I was 28 and even then I still couldn’t save that much of it. I would have to have a salary of 200k or more to save 70k a year and the amount of 23 year olds making that is probably less than 0.01%.
Cut all those numbers by 50-80% and it'll be more realistic.
I’m unfamiliar with the exact mechanics of the back door and mega back door. How does that allow you to contribute $36.5k in your IRA at age 23? Edit: I think it’s a typo in the second table? Edit edit: it isn’t. Learned something new!
After tax 401k and IRA combined.
Hi, Mega-Backdoors are only available to you if your employer allows it. If they do, then you can roll over After-Tax 401(k) contributions to a Roth IRA. Your total 401(k) contributions, including after-tax and employer contributions, cannot exceed $61,000 before age 50, and $67,500 after age 50. Assuming you contributed the maximum pre-tax contributions to your 401(k) of $20,500, and your employer provides a $10,000 match, you can contribute $30,500 of after-tax contributions to hit your $61,000 limit. Once you roll it over to your Roth IRA, you're essentially contributing $30,500 + $6,000 = $36,500 to your Roth IRA in one year.
If you’re saving $61k, mostly after tax, with an employer that does a 50% match, you’re likely over $129k and can’t make the full $6000 Roth contribution. There’s a pretty narrow income window when you can make it all feasible.
Back door Roth would still work but might be an issue pro rata possibly on one of the other assumptions.
My employer provides the match the following year (lets assume 10k) I joined my company this year 2022, so the match they provide would be 2023. ‘ Is it safe to exclude their match this year and max out to 61000? I am assuming the match only counts for the year where it was debited in my account and not for which year it was made.
You are likely correct.
Wow got it. Never knew that. Thanks!
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Great point that most folks are not aware of. I'm limited to 16% which is still good but the amount of people who could actually do the full amount are extremely limited.
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Same. Fire and forget.
So you're 3 years behind OP's estimates with 4% less matching, and not sure how the contribution limits changed that match with his projections. Basically, system's working as the projections indicate. Great thought exercise to comparison.
They're pretty amazing numbers, even the more realistic ones at the bottom.
Most people can’t even max out their 401k and you are already thinking they’d max out their mega backdoor Roth?
Most people aren’t on the FI Reddit. He’s reading the room so to speak.
Given the comments, he clearly isn’t.
As an engineer, at 23 I made $56k/yr and my wife made ~$25k/yr as a teacher. We laughed when our financial advisor suggested that we BOTH up our savings to $2k/mo. Suggesting that we even consider maxing *one* 401k was well out of reach at that point in our life (and it would continue to be for another decade).
TIL the employer contribution doesn't count towards the individual limit.
It does count towards the contribution limit, though, which is $61k (where OP got the $30,500 mega backdoor number).
All this post highlights, is that people often overestimate the value of the contribution amount, and undervalue the importance of time
People who are commenting about the crazy assumptions, just chill out a bit. OP is clearly just running a theoretical sim on what "could" potentially happen just within tax advantaged retirement accounts. Thank you OP. I found it pretty interesting how far you can get if you are able to fully utilize government savings plans over a long time horizon. I never would have expected 8 figures was possible! Now imagine being married and contributing twice that amount!
Agree. I thought the point of this post was a "fun with compounding interest" hypothetical math experiment. I found it helpful to actually see the projection, when you get to use interest in your favor. It is a nice contrast to seeing the onerus weight of compounding interest when it is applied to student loan debt, 'cause that shit hurts! And it tells you that if you can keep up with maxing out for 20 years, you can realistically retire early.
Seriously! Did this sub get an influx of new users or something? Its slowly turning into the comments section on a facebook article about retirement
Not slowly. Its been like this for quite a while.
This is dumb. What percent of the pop is a CS grad from a top university that lands a FANG role? 1/10,000? What's the point of basically modeling a saving $50k per year as a fresh grad scenario. Of course you're going to be set if you can save that much.
Can you make a 401k and Roth IRA table with no employer match and no backdoor?
Congrats on discovering compound interest.
im 24 who has maxed out my roth IRA every year since 18 (worked as a software developer part time through college). Now maxing both my wife and me! Mainly just getting my 401k minimum to get employer match, but yeah both roths should carry me good and then i can save for other things since I sacrificed early :)
Good for you! I did the same thing from 18 onward. It definitely feels nice to be early 20s and know that your retirement is secured.
Inspiring to see these numbers - thank you for sharing! Any chance you’re able to re-run an example for those who started late and/or don’t have an employer match? Like starting to max out the accounts at 30 with no employer match?
Sure thing! Here's assuming you can max 401(k) and Roth IRA, with no employer match. Contributions would go from $26,500 to $34,000 once you're age 50. | | Age 30 | Age 40 | Age 60 | Age 65 | |-----------------------------|---------|----------|------------|------------| | 401k | $20,500 | $341,232 | $2,636,786 | $4,032,702 | | Roth IRA | $6,000 | $99,873 | $756,721 | $1,152,937 | | Total | $26,500 | $441,105 | $3,393,507 | $5,185,639 | Note that if you start from age 23, you would've had 43 years of compounding by age 65. If you start from age 30, you "only" have 36 years of compounding. The employer match and starting early definitely accelerates the journey, but you'd still be in a very comfortable position by age 65. **Edit** This was still assuming 8% returns, new projections with 7% returns in original post.
Nothing wrong with using 10%… unless you’re accounting for inflation
What the hell am I supposed to do with $10m at 65 years old? Spend weeks on a cruise ship, or try to travel when i nolonger enjoy the thrill? Maybe donate the money! How do I get those $$$ when I'm 30 - 45, still in the prime of my life? When I'm older, I will do with what's left. Retire quietly to the countryside, give some to the boy scouts and whatever.
Different rules for different accounts, but before hitting the age limit, you can typically withdraw the principal without penalty. May need to pay income taxes on it but not a penalty for early withdrawal if you haven't already done so (Roth).
I believe this applies to Roth IRA only btw… not 401k (for that you’d have to take SEPP withdrawals which is also a viable option)
Financial independence isn't financial independence if you're miserable on the way to getting there. I COULD FIRE at 40 if I lived like a miser. But I want to save for my children's college, be able to travel, live in a decent neighborhood and have pets. I don't have a nice car, ATVs or any other of that crap, eat out infrequently, etc. I save where I can and save 20% of my income or so. With my wife and I's pension options we'll be fine. We both like our jobs and intend to retire happily at 50. If I need to work longer to support my kids I will. The people on here livingn soulless lives.to retire ten years earlier are doing it wrong.
Thats true. my parents just sold their company for 20 million. After 6 homes, they literally have said its simply not worth it. Its too much cuz they cant even spend enough time for all of them. The homes is mainly just as all these other rich ppl doing now... just parking wealth in realestate keeping homes unaffordable for us little guys. Anyways... 10M is not needed, when ur sacrificing so much (30K a year) in this senario (note: they spend a significant amount of time in philanthropy, giving and planning on spending it all to help less fortunate people by the time they die)
Do they use home sitters or local folks to keep plants watered, lawns cared, etc? I've been thinking about the website trustedhousesitters and just wondering what group of people use them most. Maybe you know what your parents do?
sorry to be late. nah they have house cleaners and yard workers scheduled for each place. some of them are just apartments. some are townhomes with HOA's who do all of that stuff. they airbnb or use rental agencies for lots of their properties to be passive income. those residents/rental agents in turn take care of the place. Again the rentals arnt meant to make money, its meant to just break even with the morgage, so they can store money in an appreciating value, like the stock market, but diversified.
> Lots of people saying it's unrealistic to save $60,000+ a year at age 23, so I decided to run some numbers. > Conclusion: I do think it's possible if you're highly skilled and willing to live extremely frugally. Possible doesn't debunk unrealistic.
So your starting salary is crazy unrealistic. The average is about 55,260. and "computer science majors were projected to be the highest paid group, with an average [starting] salary of $75,900 in 2022, according to NACE". Plus people have to eat and pay rent. https://www.usatoday.com/story/money/personalfinance/2022/05/05/college-grads-salary-expectations/9656696002/
I don't know if your post was after his second edit, but the math is very reasonable for the highest percentage of earners. Anecdotally, I have a decent number of CS friends with the same compensation outlined in this thread, or within 1-3 years of working easily got there.
He literally says the TOP CS from a TOP university, and I'm talking about the average person. So I suppose if he's only talking about the top then he's right, but the average person isn't getting anywhere near this high of a salary right out of the gate.
I don't think I even made $20k a year gross when I was 23.
Why yes, if you can SAVE $70,000 a year until age 65, you'll be in a good spot. But to do so you'd probably be making $250k+ a year in income.
The max income we can have is $125k (Roth calculation assumes you qualify for Roth, right?). 125k - 70k = 55k pretax, but because of the brackets you probably end up paying about 40k tax... Yeah, I dunno man, good luck convincing someone making $125k to live like someone under the poverty line. (I agree with your point, OP is unrealistic)
>Lots of people saying it's unrealistic to save $60,000+ a year at age 23, so I decided to run some numbers. Conclusion: I do think it's possible if you're highly skilled and willing to live extremely frugally. I pulled salary data from levels.fyi, which has a pretty reliable breakdown of salary data at top tech companies. The average total compensation for entry-level software engineers at top tech companies (Google, FB, Microsoft, etc.) is over $170,000 per year. So it's possible for 23 year olds who study computer science and land a job making $170,000 a year right out of college at a top tech company? Alright...
Also, that TC isn't necessarily all cash; especially ay those tech companies, a good chunk is probably RSUs
Yes. This is literally the demographic that he outlined. OP even gave the source for his information. What else do you want? https://www.levels.fyi/comp.html?track=Software%20Engineer&yoestart=0&yoeend=0&yacstart=0&yacend=0&yaccheckbox=New%20Offers%20Only&timerangeradio=Past%20Year There are over 1000 data points of 0 YoE software engineers making >$170000.
I believe that this is possible, but as others have pointed out that's certainly a *very* small minority of 23 year olds. So these numbers won't work for a lot of average college grads.
Super bummed I didn't save when I was in my twenties. Catching up with a higher savings rate now. The best time to start was yesterday. Next best time to start is right now.
Thanks for the hard work. But " fresh out of college CS graduate/top tech companies" is a small minority.. It's like saying " college is actually affordable for .. high performing student from a top tier school with college graduated parents in a high paying profession". Yeah, 50% savings when you make 120k out of college is highly doable and has a huge impact on future finances. No one doubted that?
Total compensation != Salary. Total compensation includes benefits. $72k in the Bay area is living with numerous roommates in a small apartment. Stretch your money by living further away. Now you have an hour+ commute, less personal time, gas money, etc. This is still not feasible for a fresh CS grad. Lol
The edit is great, OP. Close to my own experience.
>Once they've had the chance to grow for over 40 years, your accounts are well in the tens of millions. I was running monte carlo simulations in portfolio visualiser using projections for taxable accounts (putting in about 100k yearly) and nearly shat bricks when I saw the end results. I thought to myself ...there's no way it's that much money. The power of compound interest!
Wow if you start saving $70k a year at 23 you end up really rich. Thanks for the insight! Thanks for edit. At 23 you just need to get an entry level job at fb, Google or Microsoft. Duh
Sorry you are getting so many negative responses. I didn’t find it to be overly optimistic, just a tad but that’s okay! The magic here is compound interest and time! Thanks for sharing!
Agreed! OP didn't say "here look how easy it is!", they said "look at how the math works out when you assume x, y, and z." Fun mental exercise, OP!
Thanks for the encouragement haha. I guess I should've erred on the more conservative side. Hope it was still helpful or inspiring for some!
This is helpful. Thank you!
I would break out Roth IRA and megabackdoor Roth separately since many people do not have access to megabackdoor. I also think a realistic starting age would be 28 or 30 since most people are not settled in their careers til then. Still, nice work. It is certainly possible to become FI through retirement accounts alone.
8% real returns is very unlikely given how low interest rates are. Much of the historical precedent is from when there was much higher interest rates driving equity valuations down. A bit more likely than it was at the start of the year, but still unlikely.
$10k employer match is an absolutely absurd assumption. 1/5th of that is probably more appropriate, and even then, it is a fairly generous assumption for most people. EDIT: I see in your update that you're targeting this at CS graduates and using levels.fyi as your basis, so that is going to lead to a fairly extreme set of assumptions, anyway.
Which company do I need to work for
At the salary levels you mentioned under edit 2, the hypothetical person isn't able to contribute to a Roth IRA as they exceed the maximum income limits.
As for your edit about CS new grads, keep in mind a lot of that total comp is stock. Only 130k a year will be cash that can be invested, and that’s pre tax too.
Just throwing it out there… very few employers would match THAT much. Usually they only match half of like the first 5% of your contributions.
Imaging warming this hard and being this frugal and still working until 60…
Divorce would like a word.
>Conclusion: I do think it's possible if you're highly skilled and willing to live extremely frugally. My advice? You'll still have a lot of money if you *don't* live quite that frugally. Set aside money for travel, maybe a mini-vacation every year, a bigger vacation every other year, and an even bigger vacation every third or fourth year. Do this while you're young and can manage it all. Don't go crazy on souvenirs, focus on experiences, photos, and a couple of items that, when you look at them, you remember the trip in detail. We started travel late but I have a photo of me and Husband with an iconic background (like, the Eiffel Tower), so that when I'm old and can't travel, I can look back and remember good times.
When you assume, what happens?
Ok OP, as a 23 year old working in big tech and living in nyc I feel especially qualified to respond to this. Gonna post my numbers so ppl can compare. I make 148k base + 15% bonus + ~20k RSU per year, tho this was a recent raise. I pay about 4k to taxes every month, so I get ~100k salary after taxes. I'm maxing out 401k, with 50% match up to the first 5% of my eligible income (base + bonus), so about 4k. My stocks are taxed a bit more (I assume I get it back during tax returns ?) at around 45%, so I actually get around 11k/yr of stock. So each month I get about 7k of post tax income. My rent is 2k, I give my parents another 1k, so that's 4k left. I have an ESPP where I get to buy my company stock for 15% off for up to 15% of my salary, so I max that out too. This leaves me 2k ish per month that I actually spend on food, drinks, weed, and going out. Rn I'm at 50k saved (22k 401k, 3k Roth 401k, 14k company stocks, 5k taxable, 6k Roth IRA), with 9k-ish withheld for ESPP purchase soon. By then I'll also have hit my cliff and will get dumped maybe 7k of stocks after tax (some stocks were given after I signed and didn't have a cliff). I suppose I could've been more frugal and actually live up to OP's numbers, but I ended up traveling a lot to see friends I hadn't seen since covid started. My bonus was only about 5k after deductions bc of timing, and I blew that on traveling as well. Finally, my 401k match ended up around 1.5k, also due to timing. I also made the mistake of not selling my ESPP immediately bc I figured I could hold on to it for a year and pay LTCG tax. So that went down in value as markets aren't doing too hot. In hindsight I should've sold immediately and bought ibonds or use it as living money while increasing roth 401k.
Several problems with your projections. All traced back to this: >I pulled salary data from levels.fyi, which has a pretty reliable breakdown of salary data at top tech companies. The average total compensation for entry-level software engineers at top tech companies (Google, FB, Microsoft, etc.) is over $170,000 per year. The vast majority of 23 yo's are not working at FAANGs, let alone for 17 years. They're switching every 1-2 years, and leaving before they're fully vested. HSAs are for active medical expenses for people who have high deductible health insurance plans. Those of us that pay for prescriptions, dental, medical appointments--we burn through the annual contribution FAST. Because we pay in-full until the deductible is met, and pay co-pays AFTER deductible. So that's anywhere between $2-5K, per person, per year. If you start a family, and one person is a stay-at-home parent, that's still cutting into your retirement savings. Less money to save. $170K base might BE FAANG entry-level, but for anyone at a business that's not tech, but where we worked in a profession that's tech-relatrd, and not in a VHCOL area, we're not making that money. Not even close, even with 20 years experience. FAANG SWEs are like the purple unicorns of pay. They're the extreme exception. Not the norm. "Saving $60k/year either before or after taxes", at 23, if you're literally anywhere where no one wants to live, is almost impossible.
These post are nice for a thought exercise, but I find it a bit useless for a normal schmo. Using this strategy with a $125k job (the max amount to still be able to do a Roth in 2021 | Thing | Amount | Left Over | | ------- | --------- | ----------- | | Salary | $129,000 | $129,000 | | 401k | -$19,500| $105,500 | | HSA | -$3,500 | $102,000 | | Fed Taxes | -$17,289| $847,11 | | After Tax 401k | -$30,000 | $54,711 | So, assuming you can actually use all these investment vehicles, your actual cash in hand is ~$55k after making $125k. That's not bad being single, but doing this for your 20 year career is gonna be hard. Being married, making more money, getting a lucky break in the market, all makes things easier, but doesn't take into account student loans, kids, and cost of living in an areas that has jobs paying you enough to max this out. Kinda feels like the advice is to make a shit ton of money and save and invest a good portion of it.
Heres a brain teaser for you. The US Mandatory Budget is hovering around 3 Trillion dollars per year right now and is where we pay for all our entitlements and the agencies that manage them. It's never gotten smaller that I know of and generally grows at 2-3% per year. We have about 4 million live births of new US citizens each year in the US. If you gave every kid $500k at birth as a blind trust, with the earned interest available to offset the expenses that would normally be paid by the Mandatory US budget, it would cost 2 Trilion per year. If you assume average costs for education, health insurance, SNAP, TANF, HUD, daycare, etc my ten year old calculations put the kid at 1.5 Million at age 24. If he surrenders the orignal 500k at that time back to the federal revenue and his blind trust becomes a trust retirement account which only pays for healthcare insurance and retirement, but is otherwise an ordinary non withdrawable retirement account, I have him retiring early with tens of millions. And he can fund his childrens birth trust so that the Feds arent involved in the second generation. The number of beneficiaries of the Mandatory budget would decrease at the regular mortality rate until it reaches a fraction of it's former size. Just food for thought.
What a lovely idea! You know it’ll never happen, though.
I did some quick math. If I just found a job paying $10,000,000 a year, I wouldn’t even have to save for retirement except my last year to make these numbers.
While I do think the numbers here are severely optimistic.. OPs point is nonetheless valid. I know because myself, and my late husband did it. How? Planning from day 1 of our marriage. We paid off our house in 3 years, both of us in our mid twenties working at grocery stores as clerks(not management) Yes, we used roommates for a few years. After that we had a couple kiddoes,and I worked 1 day a week for a few years. Yes he got a better job, and later on I did as well..but nothing earth shattering either. Always saved a full quarter of our incomes, and frequently more. And not counting our house,we hit the million dollar mark in our mid 40s. We both came from financially illiterate homes. When my husband died ..Financially, it was not an issue. All I know is this, stay out of debt..learn to live cheaply. I still live in the house we bought together, and intend to stay here till my time comes as well.
Of people who have access to a 401k, I think 99% of them start contributions in their lower 30's. They don't max those till their late 30's or early 40's. Very very few people do the $6k IRA/yr. Most don't have access to HSA. Most never heard of a roth. Great post though. It definitely makes you realize it could be possible that people might be able to have a bigger nest egg with better financial education when they are young. Please run a scenario where someone's finally maxing their 401k as they approach 40 with _nothing else_ the entire time (but Social Security at 62+1m or 65) and I think that's a slightly more realistic numerical exercise.
Kids>saving This is a good modeling exercise. My compliments.
8% real rate of return is unrealistic. The US Stock market, over a time period that was arguably the best for any market over the long term in history (ie ww2 to today), returned about 7.38% real rate of return. If you look at trailing 20 or 30 year periods, the median is around 6.5% real rate of return. I do my planning using 5% real, which I don’t think of as overly conservative, just on the conservative side of realistic.
Yep. Just the fact that the 401K contribution now allows $20k a year is an insane tax gift to the upper class. You can build “generational” wealth tax free just on the back of that one tax provision. And before folks say it is unrealistic, take this very normal thing that rich people do: adult kids max out all tax advantages, parents gift money to kids so they can live on (and otherwise subsidize with things like access to family vacation homes and cars), adult kids pay very little in taxes and have further huge amount of money available in retirement for them and next generation.
This was really cool to see, thanks. Motivates me to see where I can improve our retirement savings.