If you and your partner had maxed out your 401k and IRA accounts every year for the last 10 years, you would have over $1.2 million in your 401K/IRA accounts right now!
See the chart below. To the left shows the maximum amount you are allowed to invest into a 401k/IRA account for that year. To the right shows how much that amount would be worth on 1/1/2022.
Your account would have $607,691.
As a couple you would have $1,215,382!*
* This assumes you and your partner invest everything into a S and P 500 index fund into your 401K and IRA.
You can use portfolio visualizer to backtest this. www.portfoliovisualizer.com
If you have a company match, your total amount in your 401K/IRA would be even higher!
Imagine how much money you will have in another 10-20 years!
Currently I have a net worth of over $4 million. How did I do it? I didn’t win the lottery, I didn’t sell a startup, I don’t have a trust fund, and I didn’t marry into wealth. I simply did two things.
I saved a high percentage of my income every year.
I invested that savings every year and let compound interest run like magic!
“The harsh truth is that the most important driver in the growth of your assets is how much you save, and saving requires discipline.”
Burton Malkiel from “A Random Walk Down Wall Street”
If you want to retire by 65, financials advisors recommend you save 10-15% of your income each year and invest it into a 401K.
I thought to myself, “I’m not going to wait until I’m 65! I want financial independence as soon as possible!”
If you want to reach financial independence within 10 years, you need to save about 70%-85% of your income each year and invest it. That’s exactly what I did.
From 2013- 2019, I was making about $300,000 a year on average. I only spent about $30,000 each year for my living expenses.
This allowed me to invest about $200,000 each year! (I wish I could have invested even more money but I had to pay about $70,000 in taxes each year.)
You might be thinking, “How can you live on just $30,000 a year?”
I’ll show you how I only spent $30,000 each year and still had a great life living in an expensive city like Boston. The details are right here.
People often say, “How can you live in Boston and save money? It’s so expensive!” I believe you can have a great life in Boston by only spending $30,000 a year.
Even after I got married, I still only spent $30,000 a year. (We spent $60,000 as a couple)
The breakdown of our 2020 expenses as a couple is right here.
Below is the breakdown of my expenses when before I got married.
Rent- $1500 a month
I used to live a nice 2 bed apartment in the Symphony area for $3000 a month with utilities.
I had a roommate, so I paid $1500 a month. Rent will be your biggest expense so it’s important to get a roommate to cut down this expense!
I lived right in the center of Boston. I could walk to the bus/train station in 2 minutes, and I could walk to work in 2 minutes.
Restaurants- $300 a month.
Boston has many great restaurants that cost $30 for a meal or less.
If I ate meals that cost $10, I could eat out 30 times a month. If I ate meals that cost $30, I could eat out 10 times a month. I tried to mix it up.
Here were some of my favorite restaurants:
Giacomos- Great Italian- $20-$30
Petit Robert- Nice French Bistro- $30
Symphony Sushi- $10 for their lunch specials
Cafe Mami, Sapporo Ramen, Dig Inn, Greco, Tasty Burger, Bon me, and Blaze- $10 or less.
Numerous Chinese restaurants in Chinatown- $10-$30
Numerous Korean restaurants in Allston- $10-$30.
Now I didn’t always eat at cheap restaurants. With a $300 budget I could splurge on $100 restaurants once in a while!
Groceries- $200 a month
The best place to get high quality but cheap groceries is Costco or Wegmans. Buy and bulk and freeze items! Since I didn’t have a car, I had Instacart deliver groceries from Wegmans.
Here is a sample of the groceries I often bought:
Wegman’s Chicken Thigh- $1 a pound, or $0.33 cents a serving
Wegman’s Ground Beef- $3.99 a pound or $1.33 a serving
Veggies- $2 a pound, or $0.50 a serving.
Rice-$30 for 15 pounds, or $0.10 a serving.
Oatmeal- $11.39 for 4 pounds or $0.14 a serving.
My meals usually consisted of rice, some kind of meat, and veggies.
Here is a sample of my meals:
Breakfast- Oatmeal and a banana- $0.50
Lunch- Teriyaki chicken thighs with rice and broccoli- $1.25
Dinner- Thai spicy ground beef or pulled pork with rice and string beans- $2.25
Eating like this only cost $4 a day, or about $120 a month!
Now you could say, how boring! What if you want to eat steak, fish, and snacks! Keep in mind I still had another $80-$120 to spend each month to buy steaks, fish, and snacks on occasion.
If you think I’m cheap, check out Savingsherpa.com (another early retirement financial blogger who lives in Boston). He only spends $80 a month on groceries!
Transportation- $100 a month.
Boston is really small so you don’t need a car. Since I lived in central Boston I could walk or take a bus/train to almost anywhere in Boston. It only cost $2 to take a bus or train. I often took Uber Pool which was really cheap.
Personal Items- $50 a month.
$50 a month covered personal items such as toiletries, soap, paper towels, etc.
Misc.- $3600-$5100
I was free to spend $3600+ a year on whatever I wanted! I spent it on vacations, entertainment, clothes, and special night outs.
The great thing about Boston is there are so many things you can do for free or that costs very little.
Some of my favorite things to do: Explore different charming neighborhoods, walk through parks, visit museums, hotels, all kinds of festivals, free concerts at music schools, bike rides and more!
You get to spend another $500-$1500 a year by simply signing up for a credit card! You can get details from thepointsguy.com
If you make about $65,000 and your partner also makes about $65,000, you can reach a net worth of $1 million in just 10 years!
Before you say that’s impossible, let me break down the simple math and strategy.
Part 1- The simple math and strategy.
Max out your 401k and IRA each year. Ask your partner to do the same.
You contribute up to $19,500 to your 401k as an Employee for 2021. You are allowed to contribute up to $6000 to your IRA for 2021. This means you can contribute a total of $25,500 each year into your Retirement accounts.
Which investment should you buy in your 401K/IRA?
Simply buy an S and P 500 Index Fund. Don’t buy anything else. Buy Vanguard’s S and P 500 Fund if it’s available since they have the lowest fees.
Wait 10-12 years, and you/partner will be a millionaire! It’s that simple!
How did I reach this estimate? Let’s run the numbers.
Historically the S and P 500 has returned 10% a year on average over the long run.
No one can say for certain what an S and P 500 index fund will give you in the future. Experts say it’s reasonable that an S and P 500 index fund will give you 6%-10% return a year on average over a long time period.
Let’s say your 401k/IRA only gives you a 6% yearly return over 12 years. You will reach $1 million in 12 years! (You can use an online compound calculator to calculate the return. Input $51,000 each year, and input 6% annual return.)
Let’s assume your 401K and IRA gets a 10% compounded yearly return over 10 years. You will reach reach $1 million in 10 years!
You might say, “If I invest so much money into my 401k and IRA, I won’t have any money left for living and having fun!”
Well as a couple, after paying Fed Taxes and MA Taxes, you will still have about $60,000 to spend on living expenses. (You can use Turbotax calculator to figure this out). My wife and I only spent about $60,000 a year for many years and still had a lot of fun and vacations.
Here I show how I lived a great life only spending $30,000 a year.
Here I show how we had a great life spending $60,000 in 2019!
Here I show how we had a great life spending $60,000 in 2020!
