Could Have Been a 401K Millionaire by 40 Had I Kept My Job
Now that I’m thinking about retirement again, I’ve been doing a lot of planning for what’s next. One key thing is making sure I have the right asset allocation. As I reviewed my portfolios, I realized I could have been a 401k millionaire by 40 if I had stayed at my job!
Based on my recommended plan, I firmly believe everyone can become a 401k millionaire by 60 if they max out their 401k. With many employers offering company matching or profit sharing, reaching this milestone should be inevitable for most people.
Let me share how I could have been a 401k millionaire and what happened to my 401k after I left my job in 2012. This case study will be interesting for those considering retirement, joining a startup, or becoming an independent contractor.
We’ll also look at how much money you should have in taxable investment accounts by age if you want to retire early. It’s best not to touch your 401k before 59.5.
Could Have Been a 401k Millionaire by 40
The most obvious reason not to retire early is losing a steady salary. In 2012, I gave up a $250,000 base salary plus any discretionary bonus. Looking back, it seems irresponsible for a 34-year-old, but I was no longer happy. Instead of complaining about life being unfair, I quickly made a change.
Losing annual profit sharing was also a huge loss. For several years, I received over $20,000 a year in profit sharing deposited into my 401k. In 2022, the maximum an employer can contribute to your 401k is $40,500 if you contribute the employee maximum of $20,500.
When I left work in 2012, I rolled over my 401k. Once it was rolled over, I couldn’t contribute new pre-tax money to my IRA due to income limitations. Even if I could have, the maximum contribution was $5,000 in 2012 and only $6,000 today.
All I could do was make investment changes to boost returns. I didn’t remember my specific investments until writing this post. Not having to pay active fund fees is one benefit of an IRA; you can buy individual securities, index funds, or ETFs.
Current Value of Rollover IRA (Old 401k)
Here’s a snapshot of my rollover IRA. It looks like my 401k was worth about $440,000 in 2012 when I rolled it over. The rollover IRA has since appreciated by 115.39% without any contributions. The composition is 51.47% equities, 41.58% fixed income, and 6.98% cash.
A 115.39% return over 8.5 years means a 10% compound annual growth rate. This is in line with the market average. I also just sold about $65,000 in S&P 500 index funds for reasons I’ll share below.
If I had stayed employed, I would have continued maxing out my 401k and receiving corporate profit sharing. I would have had at least $35,000 in annual contributions for eight more years. That $280,000 would likely have grown to over $350,000.
Leaving my job cost me $2,000,000 in lost salary and bonuses, and over $350,000 in lost retirement funds! My 401k would have been worth about $1,000,000 at age 40 and over $1,250,000 today! Why did I leave my job to pursue my dreams? I should have just stuck it out until at least 40, like I originally planned.
Composition of My 401k / Rollover IRA
My rollover IRA’s asset class split is misleading. What is considered Fixed Income is not bonds but equity structured notes. These are derivative instruments that often provide a hedge.
When I left work in 2012, I was understandably uncertain about my future. At 34, I had just torpedoed my salary and could only rely on savings and modest online income. We had also gone through the worst downturn several years prior.
Instead of investing purely in equities, I bought $150,000 of an S&P 500 structured note with downside protection. In exchange for protection, I gave up some annual dividends. Without the downside protection, I wouldn’t have had the confidence to invest $150,000.
When it comes to investing, there has to be some trigger to push you to invest. The fear of losing money causes many people to hoard cash. Below is a snapshot of my main equity structured note, now worth $346,425. I must have invested around the second half of 2013 when the S&P 500 was around 1,800.
100% Equities
Upon review, my entire Fixed Income allocation is comprised of three equity structured notes. So before I sold some S&P 500 index funds, 100% of my rollover IRA was in equities. Today, 93% is in equities, and 7% is in cash.
I didn’t fully realize this because I’ve been focused on managing other investments that generate dividend and municipal bond income. I have three taxable brokerage accounts to manage. I moved assets to a new bank for better pricing when I refinanced a mortgage in 2019.
If I had paid closer attention to my rollover IRA, I might have sold some equities back in 2019 to achieve a more balanced asset allocation. With this account, I plan to gradually sell more equities as the S&P 500 rises until I reach an 80/20 equities/fixed income split. Once I hit age 50, I’ll aim for a 70/30 split.
Main Equities Winner in My Rollover IRA
Apple is my main winner, up 448% since I purchased $38,269 worth years ago. If you can’t get a job at a company you admire, buying their stock is a good alternative. You benefit from their success and feel good knowing their employees work for you.
Reflecting on my rollover IRA’s performance, I wonder why it isn’t up even more given Apple’s performance and my main structured note. The answer must be poor trades I made years ago that lost money.
One danger of having a rollover IRA is the temptation to trade frequently without tax consequences or fees. Excessive trading often hurts performance.
Buying a long-term structured note forced me to stop trading. I couldn’t redeem it without a discount, so I held on. A few years ago, I decided to ignore the rest of my portfolio. These structured notes are less volatile than the market. For example, during the market crash in March 2020, my notes declined by less than half as much. When their terms end, the true value will be revealed, likely adding some upside to about 41% of my IRA.
Lessons Learned from Almost Becoming a 401k Millionaire
If you want to become a 401k millionaire, here are some key points:
Trust the process! Max out your 401k for 20+ years, and you’ll likely become a 401k millionaire.
Before retiring, calculate the lost healthcare and retirement benefits. These add up over time. My family pays about $2,250/month in unsubsidized healthcare premiums. Early retirement is not cheap, so find ways to earn supplemental income.
If you like your 401k, keep it. If not, roll it over to an IRA and manage your investments, but avoid excessive trading. Focus on long-term investing.
Hoarding cash can lead to underperformance over time. If you’re afraid of investing, find an investment with downside protection in exchange for some upside.
The opportunity cost of not investing because you bought unnecessary items can grow huge. For example, the average price of a new car is about $38,500, which is what I invested in Apple stock, now worth over $200,000. Think twice before spending beyond your needs.
Once you set your 401k contributions on autopilot, focus on building your taxable investment portfolio. Only through taxable investments can you retire early.
Here’s a base case guide for how much money you should try to accumulate by age in your pre-tax and taxable accounts. Ideally, you want 2-3 times more in your after-tax accounts than in your pre-tax accounts. This way, you can retire early and still have “bonus funds” from your 401k when you turn 59.5.
Final Lesson About Growing Your 401k After Leaving Your Job
When you retire early, many thoughts will swirl in your head. One of the last things you might think about is saving more for retirement because you’ve presumably saved enough.
I felt confident I had enough for retirement when I left, so I didn’t bother finding alternative ways to contribute to a 401k for a year and a half. I thought that leaving my $440,000 401k portfolio alone would suffice by the time I turned 60.
This thought process has worked out so far, but I didn’t consider contributing to a tax-advantaged retirement account. I didn’t open a Solo 401(k) until 2014. If I had been more proactive, I would have opened one in early 2013 and contributed the maximum $17,000 plus 20% of operating profits.
From 2013-2017, I did part-time consulting for companies like Personal Capital, Motif Investing, and Sliced Investing. It was a good experience to avoid wondering what startup life was like in San Francisco. Now, I have a whole compendium of posts for my kids or grandkids to review.
The Real Average 401k Balance Is Higher Than Reported
Am I a 401k millionaire given my Solo 401k is worth about $245,000? No! According to tracking methods, my 401k balance
at 43 is only $245,000. The ~$940,000 rollover IRA doesn’t count. So, I may need to delay retirement and keep hustling!
Based on average 401k balances by age, data likely underreports true balances. The median and average 401k balances always seem low. For example, you might have three different 401k plans each with $400,000 balances due to job changes over 25 years. Your total 401k balance is $1,200,000, but the data only shows three $400,000 balances.
Despite this, don’t make excuses. According to the Fed, the median American net worth has risen to around $121,000 as of 2022. Real estate, stocks, and business equity have been the biggest drivers of wealth for Americans since 2019.
Got To Keep Saving and Investing
After writing about personal finance for so long, I believe there is a lot more potential to be better. You can follow reported median or average retirement balances as a guide, but they are disappointingly low. Aim to be far above average with your finances.
If you keep maxing out your 401k for 20 years, you’ll likely become a 401k millionaire. When you do, let me know how it feels!
Finally Made 401k Millionaire Status
My rollover IRA, which was my 401k, hit the $1 million mark on July 13, 2021. So, I can say I’ve finally reached 401k millionaire status.
My Solo 401k is about $255,000, and my SEP IRA is $370,000. Combined, my tax-advantaged retirement accounts are over $1.5 million.
Since I can’t contribute to my rollover IRA anymore, my goal is to keep contributing as much as possible to my Solo 401k and SEP IRA. At the same time, I will invest to boost cash flow in this low-interest rate environment. I’m optimistic about the future and believe it has years to run.
Diversifying Into Real Estate
Although I’m finally a 401k millionaire at 44, I’m actively building my real estate portfolio to diversify, dampen volatility, and take advantage of rising rents.
In 2016, I started diversifying into heartland real estate to benefit from lower valuations and higher cap rates by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. The pandemic has also made working from home more common, so my plan is to become a real estate crowdfunding millionaire over the next couple of years.
Invest In Private Growth Companies
Millionaires love to build businesses and invest in private companies. Consider diversifying into private growth companies through an open venture capital fund. Companies are staying private longer, and more gains are accruing to private investors. Finding the next Google or Apple before they go public can be life-changing.
To Succeed, Keep Saving and Investing
After writing about personal finance for so long, I believe there is much more potential. Aim to be far above average with your finances. If you keep maxing out your 401k for 20 years, you’ll likely become a 401k millionaire. Let me know how it feels when you do!
