How to Maximize Your 401k Contributions. My 10-year Gains Exceeded $150,000, on Track to Reach Over $1 Million
That’s a lot of money; time to figure out what to do with my 401k after retirement.
If you told me back in 2014 that I would be able to reach even $1 million in investments, I would have likely dismissed it. Retirement accounts like the 401k, 403b, or 457b are often touted as bad investments, on social media.
On the contrary, I can say from experience that it’s been a phenomenal investment. This led me to revisit an article that I posted back in 2020, “How My 401k Contributions Grew to over $150,000 and What You Should Do.”
To give you a taste of the investment allocation. Based on my risk profile (specifically time horizon), this investment tends to be on the aggressive side. Currently, my TSP (govt. 401k) allocations are 88.28% stocks, 8.65% cash, 2.8% alternative and 0.27% bonds. This changes over time, however, the portfolio performance from January 2020 through December 2023 has been 50.44% (an annualized average of 12.61%).
This narrowly beats the S&P’s performance for the same period by +0.7% but was short of a pure C Fund portfolio by 2.45%. Why? I didn’t understand the S Fund and should have bailed sooner. Lesson learned. Highly recommend TSPfolio.com for quick performance numbers and an explanation of the TSP funds.
Without further delay, here’s the 5-year update.
Table of Contents
How Much I’ve Accumulated over the last 10 years?
Along with the employer match of up to 5%, I was able to contribute dollars while decreasing my taxable income. As a bonus, these dollars were able to grow annually. Just to keep the numbers tangible, I contributed $160,280 from 2014 through 2023 (avg. $16,028 per year).
For that same period, my employer matched $48,687 (avg. $4,869 per year) while the total gains equaled $114,618 (avg. $11,462 per year). In summary, after 10 years, my 401k total gains and matching contributions exceeded my contributions. Refer to Graphic #1
It’s incredible. This doesn’t even include the tax deferment savings of about $32,000 (at 20%). Never miss the Tax Mitigation play. That’s how you get richer quicker.
Misinformation is running rampant on social media. Mind the details or it will be extremely costly. Even if you disagree with 401k accounts, if you have it available at your job, make sure you take the match since it’s FREE.
A matching contribution (of $3,000 annually) is worth at least $750,000 over 40 years invested at the historical average of 8%. Combining that with the yearly max contribution, reaching $2M is easier than advertised. For example, imagine contributing $18,000 annually plus a $3,000 match. When you calculate this monthly at 9% over 25 years, you already hit your mark. Refer to Graphic #2
Wealth comes down to Contributions x Rate of Return x Time. Luck can exist in this formula however since it’s outside your locus of control, you should depend on a miraculous lump sum or a magic investment opportunity. Given two scenarios:
- If you earn enough to contribute to your 401k, it will take you no time to reach your goal if you are invested in a market-weighted portfolio (mutual fund).
- Or, if you don’t have a lot of money to spare, you can still invest. Instead, the tradeoff is a bit more time and consistency.
Either way, the wealth formula is immutable. You ended up paying something. As they say, you have to have skin in the game.
My Retirement Goals so Far
As a Federal employee, I have three baseline sources of retirement income:
- Federal Employees Retirement System (FERS) basic benefit – which is about 33% of the average of my highest three years;
- Social Security retirement (or the FERS supplement) – which you can find your estimated payout using SSA.gov; and,
- The Thrift Savings Plan (TSP – govt. 401k system) distributions
The first two provide streams of income meant to last a lifetime along with survivor benefit options, while the third provides more flexibility. Think of the FERS as the government employee pension plan that’s based on your unique salary and the age that you retire. Though the math can get funky, I try to keep it simple with Salary multiplied by 33% to get the annual range. For me, that’s $150,000 (future high average) multiplied by 33% which equals $49,500 annually. Give or take, I can anticipate receiving $3,250 to $4,000 per month in retirement. For the social security that I will access at the age of 62 (earlier than the standard 67), I will likely draw $3,000 a month.
Based on the current trajectory of my 401k, I anticipate reaching +$1.7 million by 2038. God willing, I plan to keep contributing to the match into the TSP. In total, the contributions post-2024 will be $351,000 while the interest will grow to over $1 million. Using the 4% rule, even after tax, I’ll be able to withdraw $60,000 annually (or $5,000 monthly). Refer to Graphic #3 and the Graph
| Starting Balance | Annual Contributions w/ Matching Contribution | Interest Earned | Ending Balance | |
| Yr End 2023 | $238,947 | +$28,753 | +$55,885 | $323,584 |
| 5-YR (2028) | $599,530 | ~$30,000 | +48,143 | $684,706 |
| 10-Yr (2033) | $1,109,284 | ~$30,000 | +101,054 | $1,240,338 |
| 15-Yr (2038) | $1,893,603 | ~$30,000 | +$171,643 | $2,095,245 |
In total, based on the three buckets (retirement strategy), I’ll be able to withdraw $11,000 per month. That’s over $100,000 annually. The rest of the money will likely go to charitable contributions. Money is money but excess wealth would be wasted on me.
My wife and I will barely need $80,000 annually.
Wait How Do I Get Money Out of the TSP?
There are a few ways to withdraw your earnings with degrees of complexity or tax implications.
Firstly, take a lump sum payment from your pre-tax TSP balance. This will have the highest tax consequences. Depending on the amount you have, this is like paying yourself a massive salary. Think about like having to pay 30% on $1 million (i.e., $300,000). You may also have to pay state income taxes if you live in one of the 21 states that tax such withdrawals.
The second is for you to set up a monthly installment payment. These monthly payments are subject to ordinary income tax so it will be less taxing than the lump sum.
Your third option includes an annuity (once elected, cannot be changed, or stopped). Think of these as managed monthly payments. The monthly payments of a TSP annuity are computed using your age at the time of purchase (the older you are, the bigger the payment). The interest rate index, fixed for the life of your annuity, also impacts the value of your monthly payments. You no longer manage the money you use to purchase a life annuity. You give up control of the money used to purchase the annuity in exchange for guaranteed lifetime monthly payments.
The final option includes doing a direct rollover into an Individual Retirement Account (IRA) or another 401k. While you won’t be taxed on the money until you withdraw it from the traditional IRA or the eligible employer plan, you will be taxed if you roll over to a Roth IRA for that year. If that sounds confusing, it’s ok. You might need a Certified Financial Planner with a solid tax background or even a Certified Public Accountant, specializing in Taxes.
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Sharing Financial Information
My neighborhood was simple. The median household income is still less than $50,000 in 2022. Check the stats for North Miami from the US census, if you want to verify. People worked hourly at low wages to just get by. K-12 in the area are sub-terrible, pushing out kids with 32% reading and 23% math proficiency. And yet the graduation rate is over 90%. And, again check Niche.com to verify the stats.
For some reason, I had a feeling that other people in society were living differently. It felt grossly inefficient. This isn’t a rant about fancy houses or nice cars. On a more grounded level, I realized that some people were benefiting from financial knowledge. That knowledge led me to make asset-building a priority.
The more assets you have the faster it grows and the more money you ultimately have. In the end, money is worth your time and the lifelong opportunities.
Having financial security changes how you process the world.
Lose $10,000 as an investor that’s just a daily market fluctuation. Try losing $1,000 while being cash-strapped, it’s demoralizing. Poverty has an overbearing aura, similar to high humidity during +90-degree weather. It’s draining.
My life, post-high school and after Financial Freedom has improved dramatically. My wife and I travel the world when we can. We meal-prep weekly and we invest as much as possible. Why? Because tomorrow is never promised. It’s better to make adjustments today, while you are healthy and earning.
I’m sharing these details as proof that the current financial system (though flawed) can still work if you dive into it. I didn’t have any prior examples. I’m a second-generation American. My mom didn’t have a working concept of what a 401k is or how to invest. This is still brand new. In the end, I had to step out on faith. However, you have examples. You read it for yourself. And it’s now up to you to apply yourself.
You will need every dollar you can get in retirement
Share this information. Sure, I want people to see it, however, the added benefit is that once you share it, you line it up as a priority in your mind. Computers aren’t the only things with algorithms. Your mind is a powerful tool if you apply it and give it parameters of priorities, and it will work wonders for you.
Lebron is a great basketball player because early on, he focused on being a great basketball player. That’s how successful people continue to win. They control the boundaries of their mind to establish a probable future.
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