Retirement Investing: A Married Couple Working for Wal-Mart Could Retire and Live Very Comfortably
From time to time, to gauge opportunities for the workforce in the marketplace, I look at retirement investing benefits and other benefits. This evening, I was thinking about Wal-Mart Stores, Inc. Here is how I approach these things at my desk.
Wal-Mart matches employee stock purchases by 15% on the first $1,800 worth of shares bought each year. If you work at the company and write a check to buy $1,800 worth of the stock, the company is going to give you another $270 to buy shares completely free. That results in an automatic 15% return before you’ve collected your first dividend. On top of that, the company matches 100% on the first 6% of salary contributed to a 401(k) plan.
To put it into perspective: Imagine that you have a perfectly average American couple, John and Jane, who have 2.5 kids, drive a minivan, and live in the Midwest. They are both assistant managers at local Walmart stores, earning the average salary of $58,000 for their job, or $116,000 combined.
Every year, they both buy $1,800 worth of Wal-Mart Stores, Inc. common stock, having the money taken directly out of their paycheck. With the 15% match on the $3,600 they are saving between the two of them, they are able to buy $4,140 worth of shares in Walmart every year. They tell the company to reinvest the dividends on their stock.
In addition, both max out their 401(k) up to the point of the match (6% of salary). At $58,000 each, both John and Jane kick in $3,480 per year and receive a matching $3,480 from the company. That means that between the two of them, they are saving $6,960 per year but receiving a free $6,960 in matching funds, which is a 100% return on their money instantly, for a total of $13,920 annually. In the 25% bracket, they are going to receive $1,740 in tax credits for their part of the retirement contribution, putting extra cash in their pocket each year.
Between those two items alone, the couple is giving up $8,820 in cash out of pocket each year ($10,560 in out of pocket contributions less the $1,740 tax refund they will get back form the IRS as a result of their retirement savings) but putting $18,060 in money away for their future. The value of their investments would have to fall by more than 51.1% before they lost a single penny of their own net contribution money!
If that is all they did, never saving any other money elsewhere, and opting, instead, to spend their paychecks on nicer homes, newer cars, better furniture, longer and more upscale vacations, sending their kids to school, etc., they would not only get to enjoy their lives, but they’d retire with nearly $4.9 million in their investment account at average long-term rates of return. If inflation runs the same rate it did during the past century, that would be around $1.7 million in today’s dollars, which would generate $5,700 per month pre-tax without every touching the principal. Clearly, this is a simplification because you wouldn’t want to hold all of your net worth in Walmart stock if you also relied on the company as an employer, but the basic math is sound.
It’s not hard to do well in the United States. You just have to know a few things about economics, compounding, and tax rules.
Update: This post was restored on 05/15/2019 as part of my decision to re-open selected articles and essays from the private archives, particularly if I felt they had some sort of academic, educational, or entertainment value. The point, of course, was not Walmart and none of this was intended to be investment or career advice. Rather, the theme of the piece was that there are often all sorts of income and net worth enhancers available, sitting in plain site, that might seem small but that over time can drastically improve the quality of your life.
There was also an undercurrent that I felt was important. In those days, it wasn’t unusual for me to hear people complain about how families such as the Waltons were somehow magically endowed with wealth; a nonsensical notion. It struck me as strange when the source of this wealth – ownership of the retail stores – was plainly evident and, just as importantly, freely and democratically available to anyone who decided to buy the shares, which were available for purchase every trading day on the New York Stock Exchange. The shares didn’t care about your age, race, education, sexual orientation, political beliefs, religion, height, weight, eye color. The shares didn’t care if you were kind or cruel, beautiful or ugly, intelligent or intellectually handicapped. Once your name was engraved on the stock certificates, you enjoyed the same proportional earnings and dividends as the Walton family. You held the same type of common stock they did through their family holding company, Walton Enterprises LLC. Not only that, if you worked for Wal-Mart, the company would give you a discount when you wanted to collect more ownership!
Of course, Wal-Mart Stores could have failed just like any business can fail under the right circumstances. That is the reason, like the Waltons, you should diversify. Your 401(k) should have held ownership of many other enterprises, perhaps through a collection of index funds if that were the best option available to you and you couldn’t select the specific companies you wanted to own. There was nothing stopping you from saying, “You know, I think I want to own a little McDonald’s, too, so I get checks in the mail for my cut of the distributed profits.” You could have just as easily said, “I feel like buying a stake in Starbucks today. I see their stores keep doing better and better, revenue, sales, and dividends keep marching skyward. I want a cut of each cup of coffee they sell.” Think like a business owner. You are surrounded by productive assets that give people goods and services they want. Find those that do this at a profit while maintaining a decent “moat” to protect the operation from competitors then go through life collecting ownership! Yes, some of those business may go bust from time to time – who would have ever thought Sears would fade into oblivion when it had such a commanding lead over Amazon in the early days – but if you structure your life, career, and portfolio correctly, that doesn’t matter. It’s a cost of doing business and an inevitable part of the process of success.
Finally, let’s take a look at our hypothetical couple in this post. In the eight years since it was first published, the world has changed quite a bit but the spouses in our example should have done very well for themselves. Their profit sharing plans and 401(k) balances should have grown enormously, adding six-figures in additional net worth to their household and keeping them on track for the original goals laid out at the time of publication. Meanwhile, one would hope that nearly a decade would be sufficient time to get a promotion from assistant manager to manager. The typical Walmart manager now earns an average of $175,000 per annum; a fairly material upgrade from the $58,000 assistant manager salary in 2011. They may have even changed careers or moved to a competitor, such as Costco. You can’t control the future but you can tilt probabilities. Go through life collecting advantages and let those advantages reinforce each other. Time, and compounding, can do a lot of the heavy lifting once you kick start the cycle.