Why Saving 10% in my 401K Worked for Me

Routinely in my posts I state how I have consistently saved 10% in my 401K and I would like to take a moment to walk through how this was successful for me but may or may not work for you.

  1. My Retirement Plan Has Never Changed (Retire at Age 60) – Back in 1987 when I first started saving there was no concept of FI/RE.  At that time, a well-planned early retirement was considered to be age 60 and for extremely successful people it was 55.  I focused on age 60 and never deviated.
  2. I was Always Invested Heavily in Stocks – In the early years, 401K plans did not offer a wide array of investments.   My plan had a whopping 6 choices.  I chose to invest 90% into a large cap growth Fund and 10% into a bond fund.  Once a year I would rebalance to keep the 90/10 ratio.  As the years progressed my 401K expanded their investment options, and I was told more than once I should diversify into more investments.  I really did not care for spreading out my funds and liked the simplicity of the two-fund portfolio.
  3. I Never Withdrew Money – This one is self-explanatory.  Regardless of how financially in trouble we were at times I never once withdrew a dollar. I also forced myself to fix my financial problems through other means like cutting expenses, working over-time, or taking on part-time jobs.  To me my 401K money was for one thing and one thing only, it was not a personal piggy bank.
  4. I Had Time on My Side – The most powerful reason why saving 10% was successful can be boiled down to time in the market.

Here is a graphic from a July 2020 Fidelity article that shows the recommend savings rate at different ages.  The graphic depicts the earliest age of 25 with a 15% savings rate and that is where my advantage comes into play.  I started saving 10% at age 19, I had a 6-year advantage!

I wish I had saved all my annual 401K statements but alas I did not.  However, I was able to recreate my portfolio performance thanks to Portfolio Visualizer which had the two mutual funds I invested in starting from 1987 and was able to chart from the end of 1987 to the end of 2015 (I took my 401K rollover in Jan 2016). 

When I first started my career, I was making a $15,000/year plus whatever over-time they would throw my way.  Putting this in context, it would be closer to $34,000/year in today’s dollars.  But heck I did not care back then, I was 19 with money in my pocket to burn.  So even starting out with a small salary I was still able to build a sizeable balance (~$400K) by the time I rolled it over and the average annual return was 9.76%.    At this growth rate, I was on a path towards $1.3M by age 60 without adding any additional funds.

However, saving 10% was not the best for me or my family either.  As a young adult I greatly underappreciated the cost of life and in particular family life. 

When I first started saving, I thought all I needed was a 401K, a little bit of emergency cash, and a down payment for a house.  The rest I spent on fun. The reality of my lack of planning for life events set-in when my wife left the workforce to raise our children full-time.  I was unprepared financially to support 3 children and a wife on just one salary and it started a slow spiral into debt which we did not climb out of until my wife returned to the workforce in 2017.

Looking back, I wasted a lot of money on having fun during my single and early marriage years.  If I had to do it again, I would have kept the 10% 401K contribution and I should have been also saving another 20% in a brokerage account for life’s little needs for a total savings rate of 30% and dialed it down to 10-15% after the kids were born.  I obviously cannot go back in time so all I can do is chalk it up to experience.

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