JEFF BEZOS ONCE asked Warren Buffett why everyone doesn’t just copy his example when investing. Buffett famously replied, “Because nobody wants to get rich slowly.”
The magic of saving diligently, coupled with decades of compounding inside tax-advantaged accounts, can ensure financial freedom. In fact, young married couples today have an outside chance of accumulating $10 million by the time they reach the new required minimum distribution age of 75.
To reach the $10 million jackpot, a couple would both have to save the maximum allowed in their 401(k) or 403(b) from age 22 to 62, plus earn a 4.5% average annual return on that money from age 22 to 75. Hard to fathom? Here’s the math behind their fortune.
In 2023, workers can contribute a maximum of $22,500 per year to tax-deferred plans, which would translate to $900,000 of total contributions over a 40-year career. Assuming a 4.5% annual return, the contributions would grow to be worth $2.5 million at age 62.
Many workers also receive a company match on their contributions. Let’s assume a 3% match on $60,000 of annual earnings. This adds another $1,800 a year, or $72,000 over 40 years. With a 4.5% annual return, the company contributions would grow to be worth $201,000 at age 62.
Starting at age 50, workers can add $7,500 in catch-up contributions to their tax-deferred plans. Twelve years of catch-up contributions add another $90,000 to the savings pot. With a 4.5% annual return, that would grow to be worth $121,000 by 62.
If you’re keeping score at home, this means a determined worker can build up a nest egg of nearly $3 million in their tax-deferred accounts by age 62. But wait, there’s more.
Let’s presume retirees can live on other savings and Social Security until they begin taking required minimum distributions at age 75. That means their retirement savings can compound tax-deferred for a further 13 years, from age 62 until 75. At our constant 4.5% growth rate, their $3 million balance would grow to $5 million.
If each member of a couple followed such a diligent savings strategy, their combined retirement pot would be worth $10 million at age 75. Now comes the reward. Each one would need to take required minimum distributions of $205,000 beginning at age 75, or $410,000 annually as a couple.
With income that high, their federal tax rate would be solidly within the 32% bracket, and perhaps 35% if Social Security payments and other income were added in.
In effect, their $10 million balance is $6.6 million of after-tax wealth, and even less in states that tax retirement account distributions. In addition, their required distributions would push the couple into the second-highest Medicare income-related monthly adjustment amount (IRMAA) bracket, which would increase their Medicare Part B and Part D premiums over the base level by about $10,400 per year, based on 2023’s surcharges.
How realistic is this scenario? Well, the savings rate used in this analysis is quite high, particularly for young adults just starting out. Few couples will be able—or want—to put aside $45,000 per year in savings, especially if they’re early in their careers, with each earning just $60,000 a year. On the other hand, many of the other assumptions are relatively conservative.
The 4.5% annual return, for example, is moderate. The stock market has delivered 10% annual returns over the past 40 years, and today short-term bonds pay nearly 4.5%.
Neither the contribution limits nor the couple’s incomes are adjusted for inflation, as would happen in real life. Further, I also used simple annual compounding rather than continuous returns. Finally, the taxes on their distributions will increase substantially if the 2017 tax law is allowed to sunset as scheduled in 2026.
I wouldn’t predict a large number of young couples will get to $10 million. Yet it’s useful to know that diligent super-savers with successful career paths can save a small fortune if they choose. And, as night follows day, they would also face some surprisingly high tax rates, with IRMAA layered on top.
This high-tax scenario could also apply to anyone receiving a significant inheritance or substantial outside income. My recommended remedy for anyone on one of these three fortunate paths is to “Roth early, Roth often.” That should help keep the taxman at bay.
John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.
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