Now that I’m focused on retirement once again, I’ve been doing a lot of planning for what’s next. One of the key items on my pre-retirement checklist is ensuring I have the right asset allocation. As I was reviewing my various portfolios, I realized that I could have been a 401k millionaire by 40 had I stayed at my job!

Based on my recommended 401K By Age post, I firmly believe all of us will be 401k millionaires by 60 if we max out our 401k. With many employers offering company matching or profit sharing, becoming a 401k millionaire should be an inevitability for most people.

Let me share with you how I could have been a 401k millionaire and what happened to my 401k once I left my job in 2012. This will be an interesting case study for those of you who are thinking about retiring, joining a startup, or becoming an independent contractor.

We’ll also review how much money you should have by age in taxable investment accounts if you want to retire early. Because at the end of the day, it’s best not to touch your 401k before 59.5.

Could Have Been A 401k Millionaire By 40

Losing a steady salary is the most obvious reason to not retire early. In 2012, I gave up a $250,000 base salary plus any discretionary bonus. Looking back, that seems like an irresponsible thing to do for 34-year-old. But, I was no longer happy. Therefore, instead of complain why life wasn’t fair, I decided to quickly make a change.

Losing annual profit sharing was also a huge loss. For the last several years, I was receiving over $20,000 a year in profit sharing that was deposited into my 401k. In 2021, the maximum amount an employer can contribute to your 401k is $38,500 if the employee contributes the maximum $19,500.

When I left work in 2012, I rolled over my 401k into an IRA. Once it was rolled over, I couldn’t contribute new pre-tax money to my IRA anymore due to income limitations. Even if I could have contributed, the maximum was $5,000 in 2012 and only $6,000 today.

Therefore, all I could do was make some investment changes to try and boost returns. I didn’t remember what investments I had made until this post. But, I did know that I didn’t want to pay active fund management fees anymore. Not having to pay active fund fees is one of the benefits of an IRA. You can buy individual securities, index funds or ETFs.

Current Value Of Rollover IRA (Old 401k)

Below is a snapshot of my rollover IRA. Based on the details, it looks like my 401k was worth about $440,000 in 2012 when I rolled it over. The rollover IRA has since appreciated by 115.39% without any contributions. Further, the composition is 51.47% equities, 41.58% fixed income and 6.98% cash.

A 115.39% return over 8.5 years means a 10% compound annual growth rate. 10% is inline with the historical return average of the S&P 500. Therefore, the performance is OK and nothing special. I also just sold about $65,000 in S&P 500 index funds for reasons I’ll share below.

If I had stayed employed until now, I would have continued to max out my 401k and receive corporate profit sharing. Therefore, I would have had at least $35,000 in annual contributions for eight more years. $35,000 X 8 = $280,000. The $280,000 would likely have grown to $350,000+ as well.

Therefore, leaving my job not only cost me $2,000,000 in lost salary + bonus, it also cost me $350,000+ in lost retirement funds! My 401k would have been worth about $1,000,000 at age 40 and over $1,250,000 today! Damn!

Why did I ever leave my job to pursue my dreams with my one and only life? I should have just gutted it out until at least 40, like I had originally planned. Then, I could walk around with my chest puffed out thanks to being a 401k millionaire.

Composition Of My 401k / Rollover IRA

What’s interesting about my rollover IRA is that the Asset Class split is misleading. What is considered Fixed Income is not bonds. What I really hold are equity structured notes. Structured notes are derivative instruments that often provide a hedge.

When I left work in 2012, I was understandably uncertain about my future. At 34, I had just torpedoed my salary and could only rely on my passive income and unimpressive online income to keep me afloat. We had also gone through the worst downturn several years prior.

Therefore, instead of investing naked long equities, I bought $150,000 of a S&P 500 structured note at some point with downside protection. In exchange for the protection, I gave up some annual dividends. But, that’s fine because if there was no downside protection, I wouldn’t have had the confidence to invest $150,000 in the first place.

When it comes to investing, there has to be some trigger that pushes you over the edge to invest. The fear of losing money is why so many people end up hoarding cash. Below is a snapshot of my main equity structured note that is now worth $346,425. I must have invested in 2H2013 when the S&P 500 was around 1,800.

100% Equities

Upon review, my entire Fixed Income asset allocation is comprised of three equity structured notes. Therefore, before I sold some S&P 500 index funds, 100% of my rollover IRA was in equities! Today, 93% of my rollover IRA is in equities and 7% is in cash.

Frankly, I did not fully realize this was the case because I’ve been focused on managing my taxable brokerage accounts that spit out dividend and municipal bond income. In total, I have three taxable brokerage accounts to manage. I had moved assets over to a new bank to get relationship pricing when I refinanced a mortgage in 2019.

If I had paid closer attention to my rollover IRA, I may have sold some equities back in 2019 to get closer to a 80% equities / 20% fixed income asset allocation. The asset allocation would have still done well since bonds boomed in 2020.

With this account, my plan is to gradually sell more equities the higher the S&P 500 goes until I have a 80/20 equities/fixed income split. Once I hit age 50, I’ll drop the split down to 70/30. I’m following the Financial Samurai asset allocation model from here on out.

Main Equities Winner In My Rollover IRA

Apple is my main winner, up 448% since purchasing $38,269 years ago. If you can’t land a job at a firm you want to join, then you might as well buy some of their stock. It’s one of the best money-making solution after being rejected by a company. This way, you benefit from their success and feel good knowing their employees are working for you.

Now that I think about it, I’m wondering why my rollover IRA isn’t up even more given the performance of Apple and my main structured note? The answer must be that I executed some poor trades years ago that lost me lots of money.

One of the dangers of having a rollover IRA is that you can trade as much as you want without any tax consequences or fees today. Given most active traders underperform, excessive trading almost always hurts performance.

Buying a long-term structured note forced me to stop trading. I couldn’t redeem my structured note without receiving a discount. Therefore, I just sat tight with that portion of my funds. Then several years ago, I decided I would just ignore the rest of my portfolio.

One interesting thing to note is that these structures notes are less volatile than the market. For example, when the market crashed by 32% in March 2020, my structured notes declined by less than half as much. When their terms end, the true value of the structured notes will be revealed. Therefore, there should be some upside to roughly 41% of my IRA upon maturity of these notes.

Lessons Learned From Almost Becoming A 401k Millionaire

If you want to become a 401k millionaire, let’s review some key points:

Below is a base case guide for how much money you should try to accumulate by age in you pre-tax and taxable accounts. Ideally, you want to eventually have 2-3X more in your after-tax accounts than in your pre-tax accounts. This way, you can retire early and feel good knowing that you’ve got “bonus funds” from your 401k once you turn 59.5.

Final Lesson About Growing Your 401k After Leaving Your Job

When you retire early, a lot of things will swirl in your head. Perhaps one of the last things you will think about is trying to save more for retirement because you have presumably saved enough.

I was relatively confident I had enough saved for retirement when I left. Therefore, I didn’t bother finding alternative ways to contribute to a 401k for a year and a half. My thought process was that if I left my then $440,000 401k portfolio alone, I should have plenty by the time I turn 60.

The thought process has turned out correct so far. But, since I didn’t think about contributing to a tax-advantageous retirement account, I didn’t open up a Solo 401(k) until 2014.

If I was on the ball, I would have opened up a Solo 401k at the start of 2013 and contributed the maximum $17,000 + 20% of operating profits. From 2013-2017, I did some part-time consulting as a freelancer for Personal Capital (sold to Empower), Motif Investing (sold to Charles Schwab), and Sliced Investing (morphed into Indio and then sold to Applied Systems).

It was a good time to experience the startup life so I would never be left wondering. I had this fear of having no answer when my kids or grandkids would ask me how startup life was in San Francisco back in the day. Now, I’ve got a whole compendium of posts they can review.

The Real Average 401k Balance Is Higher Than Reported

So this begs the question, am I a 401k millionaire given my Solo 401k is worth about $245,000? The answer is no!

According to the way things are tracked by 401k providers and the government, my 401k balance at age 43 is only $245,000. The ~$940,000 rollover IRA does not count. Therefore, I may have to delay retirement and keep hustling!

Based on the average 401k balances by age data available, there’s a good chance the data is underreporting true average 401k balances. The median and average 401k balances in the chart below have always seemed a little light. Wouldn’t you agree?

For example, you might have three different 401k plans each with $400,000 balances due to three job changes over 25 years. Your true total 401k balance is $1,200,000. However, the data will only see and report three $400,000 401k balances.

Got To Keep Saving And Investing

After writing about personal finance for so long, I strongly believe there is much more wealth out there than we realize. You can choose to follow the reported median or average retirement balances as your guide. But the median and averages are disappointingly low. Always shoot to be far above average with your finances.

After all, you’re reading Financial Samurai! If I can’t get you to achieve financial freedom faster the average person over the years, then I have been wasting my time.

If you keep maxing out your 401k for 20 years, I strongly believe you will become a 401k millionaire. And when you do become one, please let me know how it feels!

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This content was originally published here.

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