Three Secrets to a Fat 401k

By Harry Sit

My wife knows where my blog is. She seldom reads it because her interests are elsewhere. After I wrote 401k vs Pension: How To Make Your 401k Pay As Much As a Pension, I was pretty excited.

"Honey, I wrote a great article today."

"Really? What’s it about?"

"It’s about how to make your 401k pay as much as a pension."

"Silly. I tell you how to do it."

"Okay … "

"You put more money in it. You grow it faster. You give it more time. Then you will have a big 401k."

There, she just intuitively described the future value formula: FV = PV * (1 + i)n. It goes to show that most people understand what it takes to have a large 401k because it’s just common sense. We don’t need a class in high school for this.

Of the three factors, the investment return is up to the market conditions, somewhat out of our control. The other two factors are completely under our own control. Contribute more and contribute early, you will have a large enough 401k to cover your retirement. Not rocket science.

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Posted on May 21, 2012 under Investing. Keywords: .

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7 Comments on Three Secrets to a Fat 401k

  1. Leigh on May 21, 2012
     

    Your wife sounds awesome and she is so totally right. It is common sense, yet many people still don’t have very large 401(k) accounts. If you max it out every year, you could have a six figure balance in under 6 years.

  2. Matthew Amster-Burton on May 21, 2012
     

    I can’t tell you how many people I encounter who are genuinely surprised to learn that one of the keys to being a great investor is saving a large portion of your income. Must be frustrating to hear, if your prior impression was that investing means making a few clever moves and then living off “passive income” or something.

  3. M on May 22, 2012
     

    That is pretty much the executive summary version! Start early, sacve a lot, and earn good returns.

    Unfortunately, this is another one of those “common sense” things that apparently isn’t so common.

    Or else, it is common, but many people don’t do it because they would rather believe they can count on magic or good fortune instead of deferred gratification and saving.

    Still, your original point was about matching a pension, which requires understanding the amount that must be set aside.

  4. Jake on May 22, 2012
     

    The law of compound interest…a thing of beauty! That’s why its critical that younger people learn about this and take advantage of it while they can!

  5. Financial Advice for Young Professionals on May 25, 2012
     

    I don’t think this is common sense at all. How many people actually do this? haha

  6. babar on May 25, 2012
     

    I wish I had realized the magic of compounding when I was younger. It’s still not too late for me. But another 5 years’ headstart would’ve made a big difference.

  7. Dan on May 26, 2012
     

    Great post, although I’d quibble with one sentence: “Of the three factors, the investment return is up to the market conditions, somewhat out of our control.”

    While market conditions may be out of our control, investment returns are not, insofar as we can keep our investment costs low by choosing low-cost passively managed funds and allocating our investments in the most tax-efficient ways possible. These are the reasons why I’m such a big fan of the Bogleheads Investment Philosophy.

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