The salary grows by 3% per year
He contributes the maximum allowed to his 401k, $18,500 for 2018. This is a lot to Junior, but he’s only out of pocket less than $14,000 because of the pre-tax nature of the contributions
Mrs. DD and I have an agreement with Junior. He can live at our home rent free and be on our health care plan in exchange for his agreement to maximize his 401k contribution.
There is just one house rule. Junior must not touch his father’s beer; it is strictly for his Dad’s medicinal purposes.
Junior’s company contributes 3% of his base salary to his 401k account each year.
The government increases the maximum allowable contribution by 1% each year, and junior increases his contributions by that amount.
Let’s be conservative and assume Junior earns investment returns of just 7% annually and the answer is:
I plugged these assumptions into a spread sheet and determined junior could be a 401K millionaire at about age 42. That’s our gold standard my friends. Our speed to a million, if you will.
One more interesting point. At the age of 42, junior is only out of pocket a little over $320,000 to build his $1 million. Why? The company contribution, the tax break from Uncle Sam and the investment returns make up most of the $1 million. It is clear now that junior’s employer, the US government and the financial markets are doing most of the work. That is the beauty of the 401k!
So, what do you think?
Do you have children and could you get them to agree to this arrangement?
Are you in your 20’s? If so, what do you think of this plan?
Am I crazy to believe anyone would think about doing something like this?
What regrets do you have?
Leave a comment, join the conversation and let us all know.
This article was republished with permission from Dividends Diversify.