Is $1 Million Enough In A 401(K) Fund?

 

You have a 401K fund and you’ve noticed that your balance has decreased dramatically, well you’re not alone according to Money Watch. The number of 401K millionaires have plunged by over a third, in fact, in some areas it’s more than 50%. Meaning the vast wealth creation and accumulation of a 401K fund has been part of a personal financial assessment has gone way down. Now at the same time many people’s real estate holdings. Most people that have a 401K, or homeowners in your equity in your home may have gone up. If your 401K is going down, and it’s an even wash, that might have a negative effect on what’s called “The wealth effect”. It’s where people feel like they have so much wealth, and they’re spending money. That could be a pretty significant factor in a recession.

 

What has happened to your 401k balance?  Has it gone down dramatically?

 

This is affected by the stock market by mutual funds, by bond holdings. Over the last year, when interest rates went up, a lot of stock funds went down. Does this give you confidence in your 401K? Confidence in your retirement? Even if you have a million dollars in your 401K, how far is that going to go in retirement?

 

Let’s say that you are an employee that makes let’s say $100K a year, which isn’t filthy rich. It’s above average, it’s a solid healthy upper middle class. Let’s say you make $100K per year and you have a million dollars in your 401K; how far is that going to go? Well if you take that same $100K, out in retirement; it’s going to last you 10 years. Suppose you want to retire at age 60 or 65, that means you’re 70 or 75 and you’re going to run out of money. Now that also assumes that you only need to take out a hundred thousand dollars every year. You might think you’ll spend less in retirement, I don’t have to pay for dry cleaning or eating out or things like that. 

 

This might overlook a couple factors:

 

First of all, in retirement, having more time means you have more time to spend money. Might want to take vacations more often, eat out more often, or go to the movies. Part of the reason that daily expenditures and your day-to-day discretionary spending is kept artificially low is because you work. If you work, you don’t have time to spend money on things. Sometimes in retirement, you have a tendency to spend more money. Don’t forget about inflation. If inflation goes up five percent a year, which we’ve seen go up more than that. At five percent a year, prices of things double in roughly seven years. Five percent times seven years is only 35 percent. By the time you compound the inflation, you get to seven or ten years; prices of things are close to double. You might have to spend more than a hundred thousand just to have the same level of income. In fact some of your expenses, like health care, might go up even more than five percent a year. Keep in mind that a million dollars seems like a lot of money, and a million is a number that comes to mind of wealth. May not go as far as you think, and in fact if the number of millionaires has gone down by a third. There’s a third less people that even have that million dollars to spend.

Let us know in the comments below what you think about your 401K as a retirement vehicle. If it’s something you’re going to continue putting money into, and if you have had to take money out for any kind of emergencies.

 

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