The Personal Finance Podcast - How to Become a 401(k) Millionaire

Episode Date: August 12, 2020

In this episode we cover:  What is a 401(k)  How much money you need to save each paycheck to be a 401(k) millionaire  How to increase your contributions Why your employer wants to give you free money Tips on how to become a 401(k) millionaire Resources in this episode: What is a 401(k) Article Average 401(k) Balance by Age Charts M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App CIT BANK (Best Savings Account) Learn more about your ad choices. Visit megaphone.fm/adchoices

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Call 16-531-2600 or visitconnectsont.ca. On this episode of the Personal Finance Podcast, we're going to talk about how you can become a 401k millionaire. What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of Dollar After Dollar.com. And today on the podcast, we're going to be talking about how you can become a 401k millionaire. Now, you may be realizing that you've got to start saving for retirement. And if you're young, you've got a ton of options out there because you have a long, time horizon and the 401k is a wonderful way to save for retirement and in the past few years the number of

401k millionaires has reached an all-time high and a lot of that has to do with surging markets and the market is flying up right now but a lot of it has to do with people learning how to save more as well but the key to understanding why there's so many more 401k millionaires appearing now is that it's something that you can do too in fact a lot of surveys are coming out now about everyday millionaires or millionaires next door and the majority of them reached millionaire status through their 401k. That's why this is so important to understand because it's one of the easier ways to get to millionaire status. That's the cool thing. Most 401k millionaires don't have anything special. They're usually the millionaires next door. Sometimes it could be your neighbor. Sometimes it

can be the guy down the street and sometimes they don't even look like they're millionaires. Their outward appearance would never show it and you would never know how wealthy they are unless you took a peek at their balance, at their income statement, at their net worth statement. So we're going to go through exactly how you can go about becoming a 401k millionaire. But first, let's dig into exactly what a 401k is. So a 401k is actually a retirement vehicle.

A lot of times it's through your sponsored employment plan. So a lot of times you can talk to your HR department and see if they have a 401k plan if you're not sure. And the huge benefit to a 401k is you don't have to pay taxes on the money as you contribute it to your 401k. Then you pay taxes as you pull your money out when you retire. Your 401K allows you to put money in without paying taxes, which allows you to put more money into your 401k so that it can grow more.

And that's the cool thing about the 401K. Then you pay taxes as it comes out. Now, if you remember earlier in this podcast, we talked about how to become a Roth IRA millionaire. And the Roth IRA is the opposite. You pay taxes on money going into the Roth IRA, but as you pull your money out with all its growth, then you don't have to pay taxes on that money. Now that you have that quick understanding of how a 401k actually works, let's get into how you can become a 401k millionaire. So as the number

of 401k millionaires grows, there's a few tips I want to give you on how you can become a 401k millionaire as well. And we're going to get into some of the math on how much you need to save each paycheck so that you can be on track to become a 401k millionaire, depending on how much time horizon you have coming up. The reason why it's so difficult, especially if you're later on in your investing career, is because you have a limited amount that you can put into your 401k each and every year. But the good thing is, as you turn 50, you have catch-up contributions, which is where you can add $6,000 in addition to your max-out contribution of $19,000, $500 per year. So 19-5 is what you can put into the 401k every single year,

but you have to have somewhat of a time horizon to reach millionaire status. It's not going to just happen extremely quickly, as we'll see coming up here. And you can never get lost time back. So contributing as much as you can each year is extremely important. It's the same thing with the Roth IRA. You can't go backwards and contribute more money. You have to contribute the amount that you're allowed within that year. So here is some tips to get the most out of your 401K.

Number one, start investing early into your 401k. So if you're young and you have a long time horizon, you know how much compound interest is going to make a huge difference in your investment. invest it. And if you start contributing to your 401k at age 25, you're going to have to contribute much less than someone who's starting at age 35 because compound interest is starting to work for you in your younger years. And as you hit 35, you're just going to have to try to catch up and you're going to have to plow way more money into your 401k than someone who started way earlier. And investing early matters. It's one of the biggest things. If you're young, you're in your investing

golden years. Because if you start contributing as much money as possible, it's going to compound. It's going to grow, it's going to snowball, and you're contributing to your financial future and your family's financial future. And that's why retirement accounts are so important for people who are young, because longevity is the name of the game. You're limited in the amount that you can put in. That's for good reason because there's so much tax benefits inside of these tax accounts in a 401k, a Roth IRA, and an HSA, which we're going to talk about in a future episode, which might be the best of all the retirement accounts, but these are ways that you can actually contribute and save money on your taxes. But like we talked about in the first episode, getting to your first 100k and really

getting the ball rolling is the toughest part. So you have to understand, you're just going to start off slow. So start investing early into your 401k. Number two, invest in low cost investments like index funds or target date funds. So we've talked about index funds widely on this show, but VTSAX or any other type of index fund that's out there, that's a total stock market or an S&P 500 fund or any of those low cost investment funds are fantastic for your 401K because they have a long time, Horizon A, and B, they really have almost no expense ratio, and a lot of them now have 0% expense ratios, or if you look at some of the Vanguard ones, they're 0.05 expense ratios, because having high fees will cost you six figures in the long run if you're investing for

the long term. So you always want to look at the expense ratios on the funds in your 401k, because if you have a bad 401k, then you could see expense ratios above 0.50% or above 1% even, which is really going to kill you in the long run. And VTSAX is what I'm I have in my 401k. So that's what I recommend to most people when they have a 401k when you're just buying the total stock market because it's got an average return of 7 to 8% and you know it's going to be studying. And that's not guaranteed, obviously, forever.

But historically, that's what it's gotten. The third tip is always get your employer's match. Guess why? Because your employer's match is free money. Let me explain. If you don't know what an employer's match is, it's when your employer offers to match your contribution into your 401K up to a percentage. So they could say, hey, I'll give you 3% match if you put 3% into your 401k.

So you're literally doubling your money at 3% if you put it into your 401k. So at the minimum, always get your employers match because it's free money. And that's just going to accelerate your growth to your million dollar 401k because you're just increasing the amount that you can put in. And as your income goes up, guess what? That contribution goes up because it's 3% of your income. Number four, try to max out your 401k when you can. can. So currently, when I'm recording this, to max out your 401k, you can put $19,500 a year. Now, I know to some of you, that sounds like a lot. To others, you say I invest that much every year anyway. And what you want to do

is try to maximize the amount of money that you plow into your 401k because you can't get those years back. That time does not come back. You can only put it in each year as much as you're allowed. So $19,500 per year is what you want to try to do. But as you can see coming up, you don't have to put that much in every single year to be able to become a 401k millionaire, but you want to just maximize the amount you can put in because of the tax benefits that 401k's offer. And if you truly do that for a long period of time, if you really max out your 401k for a long period of time, you can be ending up with a multi-million dollars in your 401k by the time you retire. It really starts to pile up. It really starts to add up. It begins to swell. And this is truly exciting to watch your 401k grow. But maxing out

as much as you possibly can is the key to doing that. The fifth tip, never take. Never take your money out of your 401k. So storms are brewing, trials are coming. There's a lot of recessions that will end up happening throughout your investing career. There's a lot of things that are going to happen. But the key is to understand to not take your money out of your 401k. A, you have to pay a 10% penalty if you do that because you can't invest in a 401k and take your money out without paying a penalty. If you're pulling your money out and it's a bad time in the investment world, then you're really losing money because you're actually pulling your money out at the bottom instead of buying low and selling high, you're doing the opposite.

So never pull money out of your 401k unless it's a true emergency. Like if you're facing bankruptcy or something like that, then okay. But any other situation, then I would truly advise against pulling money out of your 401k. It's going to kill your gains. It's going to kill your results. And it's really, truly not a good situation to be in. So let's find out how much should a 401k be worth to be a million. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible.

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How much we talk in here? How much do I need to put into my 401K so it can be worth a million dollars by the time I retired? Well, you're in luck, my friend, because your boy, the Andy Man, has got you back. So let's go through this sequentially. And I have some charts on this if you want to look at it.

If you're a visual learner, and you want to look at these charts, I'll put them in the show notes so that you'll be able to see them. Let's look at it sequentially here. If you want to be a 401k millionaire in 25 years, and that's your goal. You want to retire in 25 years. And let's say you invest in VTSAX. And so VTSAX historically has performed around 8% give or tape. So let's say you start at age 25 and want to retire at age 50 in 25 years.

At age 30, or in your first five years, you want to have about 80 grand in your 401K. By age 35, or your first 10 years, you want to have about 199,000 in your 401k. By age 45, you want to have about 631,000 in your 401k. Now, listen to this. This is what compound interest does, because at age 45, you're going to have 631,000 in your 401k. Okay? That's 20 years into it. On the 25th year, you're going to have $1 million in your 401k.

That's how fast it accelerates with compound interest. In five years, because you're starting with $600,000, with it. in that five years, you're going to have another $400,000 in your 401k. That's absolutely amazing. But let's say you think 25 years might be a little too aggressive. What if you wanted to do it in 30 years? Well, in 30 years, in your first five years, you want to only have 50 grand. So remember, in 25 years, you have to have 80 grand. But in your first five years, if you want to retire in 30 years with a million dollars, then you have to have 52 grand. By age 40, 241,000. By age 50, 650,000. and again in the next five years you're going to have a million dollars so between age 50 and age 55

you're going to have a million dollars from 650 to a million dollars and that's again another example of how amazing compound interest is so that's why you want to plow as much money in as early as possible so you can get to those higher level numbers because it just starts to accelerate and snowball and compound it's unbelievable what happens once you get to that level so how much do we want to save from each paycheck if we're following this math so at an 8% interest rate we're going to the 8% interest rates on all these because that's what I like I said that's the average return on these so at an 8% interest rate you would need to save $742 a month for 30 years or $371 a paycheck if you get paid biweekly or every other week to be able to retire a millionaire in 30 years so

$371 a paycheck will make you a millionaire if you want to do it in 25 years then $575 a paycheck or 11 150 a month will get you to be a millionaire and if you want to do it in 20 years that's much, much more difficult. The reason why 20 years is much harder is you have to be able to earn a higher return because you're limited to the amount that you can actually put in. So that limitation makes it difficult because compound interest has to get going. And to get to a million dollars, it becomes harder and harder because you can only put $19,500 in.

Now, as time goes on, the 401K has rapidly increased the contribution limits. So you may be able to put more in as time goes on and you'll be able to reach this 20-year goal. But as of right now, if it just got stuck in the contribution limit right now, $19,500, and it's pretty difficult to get there in 20 years. But you could at a 9.1 interest rate, you'd have to contribute 16, 25 a month for 20 years to get there. So $813 a paycheck. And if you want to see how much you need every single year, I put together a chart for you. I'm going to link it in the show notes so you guys can take a look at it.

But you can see how much and how far along you need to be every year and how much you need to contribute to be able to get to the millionaire status. have it for multiple years, so for 30 years, 25 years, and 20 years, you can see how much you actually need to put away so that you too can just follow this chart every single year and make sure you're on track to become a millionaire. And before we wrap it up, I wanted to share with you guys exactly how I contribute to my retirement accounts, just so you guys have an understanding of exactly how I'm doing this, because some people will ask, you know, what's the difference between a 401k and a Roth IRA, which do you contribute to you first,

that type of thing. So I just want to share that real quick with you guys, so you understand exactly what I do and you can understand exactly how I go about doing this. So the first thing I always do is get my employer's match. So if your employer offers a match, you need to get that free money first. So if it's 3% or anything else, then make sure you get that free money first. The second thing I do is then I max out my Roth IRA. That's the first thing my wife and I do every single year. And the reason why is I like the tax benefits of being able to take the money out that's grown tax free. I just love that part. And that's the cool thing to me because you can potentially have a million dollar Roth IRA and you're not paying any taxes on that million dollars. So it's a big, big

benefit for me and it's something that we attack right away. The next thing we do is we actually max out our HSAs and HSAs have tremendous benefits. And we're going to talk about that in a future episode here. But we look at the HSA as a super retirement account. And I'll explain exactly why. And then lastly, we attack our 401Ks or our other retirement accounts because your final retirement accounts, you, the 401ks are something that you really want to go after because they have great tax benefits as well, but I just like the tax benefits of the other accounts more than just the 401k alone. So I utilize all of them, and they're all part of my plan. And it's something that you can really utilize. As your income grows, maybe you can only max out one or two, or you can get the match

and max out your Roth IRA. That's great. You're still utilizing both of them, but I like to utilize them so that as time goes on, you have those available to you. And especially as your income grows, we've talked about like the backdoor Roth IRA and various other hacks and aspects you can use within these retirement accounts and you have to have all of these moving and grooving so that you're able to utilize some of those hacks. So some of these things you have to have open and you have to be utilizing and contributing to so that they grow enough and you'll be able to do all kinds of different things with. So it's good to have a balance on these retirement accounts. But like I said, if your income, if you're just starting out, you have an entry level salary, then go ahead and do as much as you

can do as much as you can to contribute to these accounts but always get that match first because you want to get that free money in the 401k and then do whatever you think is the best option or the best situation for you if you don't want to deal with multiple accounts right away then just attack your 401k it's a fantastic retirement account for you to look at or if you want to max out your raw fireway then go for that but this is just how i do it that's the order i go in that's how i think about it and that's how we're going towards our retirement thank you guys so much for listening and if this our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one-on-one money coaching session with me. All you have to do to enter is subscribe

to this podcast and leave a rating or review on Apple Podcasts, then send it over to Andrew at dollar after dollar.com, and you'll be instantly entered to win the one-on-one, one-hour coaching session with me. Again, thank you guys so much for listening. We truly appreciate and we'll see you on the next episode. Have a great day. When a country's productivity cycle is broken, people feel it in their paychecks, their communities, their futures. What does this mean for individuals, communities, and businesses across the country? Join business leaders, policymakers, and influencers for CG's national series on the Canadian standard of living, productivity and innovation. Learn what's driving Canada's productivity

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