The Expert Podcast

So, you have a 401k fund, and you've noticed that your balance has decreased dramatically. Well, you're not alone. According to Money Watch, the number of 401k millionaires has plunged by over a third. In fact, in some areas, it's more than 50 percent. What that means is that the vast wealth creation and accumulation that a 401k fund has been part of in a personal financial assessment has gone way down.

At the same time, many people's real estate holdings—most people that have a 401k are homeowners—may have gone up. But if your 401k is going down and it’s an even wash, that might have a negative effect on what's called the wealth effect, where people feel like they have so much wealth and they’re spending money. That could be a pretty significant factor in a recession.

Drop your comment below: what has happened to your 401k balance? Has it gone down dramatically? This is affected by the stock market, mutual funds, bond holdings, and, over the last year, by interest rate hikes. When interest rates went up, a lot of stock funds went down.

Does this give you confidence in your 401k? Does it give you confidence in your retirement? Even if you have a million dollars in your 401k, how far is that going to go in retirement? Let’s say you are an employee making $100,000 a year. That’s not filthy rich, but it’s solid, healthy middle class or upper-middle class. If you have a million dollars in your 401k, how far is that going to go?

Well, if you take that same $100,000 out in retirement, it’s going to last you 10 years. Now suppose you want to retire at age 60 or 65—that means you’re going to be at age 70 or 75 and run out of money. That also assumes you only need to take out $100,000 every year. You might say, “Well, maybe I’ll spend less in retirement—I don’t have to pay for dry cleaning, eating out, or things like that.” But that overlooks a couple of factors.

First of all, in retirement, having more time means you have more time to spend money. You might want to take vacations more often, eat out more often, or go to the movies more often. Part of the reason that your daily expenditures and day-to-day discretionary spending are kept artificially low is because you work. If you work, you don’t have time to spend money on things. In retirement, you might have a tendency to spend more money.

Also, you're forgetting about inflation. Even if inflation goes up five percent a year—which, obviously, we’ve seen inflation go up more than that—at five percent a year, prices of things double in roughly seven years. You might say, “Well, five percent times seven years is only 35 percent.” By the time you compound the inflation, by the time you get to seven or ten years, prices of things are close to double.

You might have to spend more than $100,000 just to maintain the same level of income. In fact, some of the things you spend money on in retirement, like health care, might go up even more than five percent a year. So, keep in mind, that million dollars seems like a lot of money, and a million is a number that comes to mind when thinking of wealth, but it may not go as far as you think.

In fact, if the number of millionaires has gone down by a third, there are a third fewer people who even have that million dollars to spend. Let us know in the comments below what you think about your 401k as a retirement vehicle. Is it something you’re going to continue putting money into? Have you had to take money out for any kind of emergencies?