401k Millionaire - 7 Tips to Get There

Hey, what's up everyone and welcome to the School of Personal Finance. So according to Fidelity 401k balances are at an all-time high and 401k millionaires are also at an all-time high and it is no surprise considering the v-shaped recovery we've had in the stock market ever since March of 2020 when we hit the lows from the pandemic. So in this video I'm going to go over my seven best tips for you to follow in those footsteps and to become a 401k millionaire if you're not already. But these tips will apply to you as well even if you've already hit that million dollar milestone. All right let's get to it. All right so before I get started just a quick update with what's going on with me. I haven't uploaded a video in the last couple of weeks and the main reason for that is because I've been busy behind the scenes trying to build out the educational piece of the School of Personal Finance. So if you've been following me along this journey for the last year or so you might already know that my initial vision was to have different courses for different times in people's lives like for example if you're just getting married and having a family having a course for that or maybe if you're just graduating college and getting your first job. So courses were going to be a big part of it. Along with that I was going to do like short-term boot camps like maybe like build your financial plan in 30 days where we would have one-on-one coaching calls maybe twice within that 30-day period to create your financial plan. Also beyond that having a monthly membership program where you would get access to me and we would build your financial plan over a period of time while also getting access to all my other content. So initially I started with the investment management piece and also we're doing one-on-one financial planning and now it's time for me to really start building out the educational content and the community. So the best place to find all of my stuff is to go to schoolofpersonalfinance.com you can even subscribe to my mailing list on there. I won't inundate you with emails but I'll send out emails every once in a while when I upload a new video or just to keep you in the loop of what I have going on with everything. All right so back to it. So let's get you to become a 401k millionaire. You know the sad thing is I'm 43 years old if you're younger than me then you're going to need a million dollars in your 401k. I mean I guess not just your 401k if you had to have it through other assets like real estate or other investments that's good too but we're going to need like seven figures high seven figures if we want to be able to retire comfortably when our time comes. There's good chances that social security it'll still be around but it's going to look different they are going to have to make some kind of cuts in the future especially if you're like a 30 year old right now you can't count on social security being the same way that it is today it's just not sustainable. So your retirement it really all falls on your shoulders most employers you know unless you work for a municipality most employers are not offering pensions anymore so the importance of the 401k it has spiked dramatically over the last 10 years and it's just going to get that much more important. So my first tip it's an eye roller it's one where you're going to be like oh that's the best that you got but it really is the most important and it's just getting started and not only getting started but also pushing yourself like don't start by doing you know one or two percent or three percent I mean it's good even if you just get going but you got to push yourself in the beginning it makes such a tremendous difference if you start early. I've given numerous examples especially in the video where I talked about compound interest but if you're like 23 years old and you bust your butt to contribute as much as you can for the next 20 years then you could really stop at that point I mean it would help if you kept on going but if you did 20 great years of contributing at that point contributions going forward they would be small in comparison to the growth the compounding effect that you would get from the money that you already have investing so just getting started pushing yourself making sure you get that employer match it's silly to leave that money on the table take advantage of that but just go and do as much as you can until it hurts if it hurts too much you could always dial it back all right and then for number two many employers now offer a Roth 401k so what you need to do is you need to really understand the difference between a Roth 401k and a traditional 401k the biggest difference is really how it is taxed if you choose a Roth 401k then you get no tax deduction right now but the money will grow tax-free forever as long as you abide by the rules if you choose a traditional 401k then you get the tax deduction now the money will grow tax deferred all of those years and then when you take it out in retirement that is when you will owe ordinary income taxes on it so it is specific to you in your income and your tax situation so there's not a blanket right answer but you need to research which one is better for you most times if you are very young and you have a low income a Roth makes a lot of sense if you're in the very high tax bracket then getting the tax deduction now that makes a lot of sense but it definitely depends on your situation and you'll hear me in other videos and this is a good topic for a video in the future is tax diversification having some in all of these buckets so when you retire you could choose do I want to pull money from my traditional side where I'm gonna owe taxes or do I want to pull money from my Roth side where it will come out tax-free and maybe it'll be a combination of both in order for you to determine how you could pay the least amount of taxes every year in retirement so there's a lot of strategy around that but the first step is just figuring out right now what is the best for you and one point that a lot of people do not realize is that the match that you get on your 401k say for example your employer matches your first three percent that you contribute that three percent match that they are giving you that is going to go into the traditional 401k so even if your contribution is going into the Roth the employer match will go into the traditional all right number three is that fees make a huge difference now luckily the fees have been compressed they have come down so much in 401k plans over the last 10 years but that doesn't mean that there aren't crappy options or crappy plans that exist out there and you just want to be aware of it so you want to be able to calculate how much does it actually cost you to have your money in the 401k plan i'm like 403b plans are notorious for having very high expenses to the point where it's really so detrimental that a lot of times i'll advise people not to even use them but it really does depend on the plan but with the 401k what you want to look at i mean hopefully the 401ks with upfront sales charges those are all gone right now everybody has low cost index funds as options inside of their 401k but the best way to calculate it is you need to look at what's called the expense ratio so every investment option is going to have an expense ratio and obviously the lower the better but just to use two you know very different examples if you have a one percent expense ratio on the fund that you're investing in and you have a hundred thousand dollars in your 401k in that fund then you are paying one thousand dollars a year right one percent is the expense ratio so one percent of a hundred grand that's a thousand dollars a year where if you're only paying 10 basis points one tenth of one percent on a hundred thousand dollar investment in there now you're paying a hundred dollars a year so it makes a tremendous difference as far as the fees go so you want to be able to calculate the costs and be able to look at different investment options that you have available and sort by the lowest expense ratios now a lot of the lowest expense ratio funds are going to be what's called passive funds and i'm absolutely okay with that that's like index funds so like the vanguard total stock market index fund it follows the entire stock market or the s&p 500 index fund that follows the s&p 500 those are going to be lower cost because there's not an active manager that is picking stocks in there now active managers they have a long history of not beating the indexes so my opinion you are better off choosing the low cost index funds because you can control the cost and just investing in the broad market in a very well diversified portfolio and just to throw this out there i'm not giving you specific investment advice i know nothing about you this is all just for education and entertainment purposes only invest at your own risk all right and then number four is to be aggressive especially if you have a long time horizon before you are touching this money the best chance you have of growing this thing into seven figures is to be aggressive with your investments and that means having a much heavier allocation to stocks than to bonds especially if you are in your 20s and your 30s you need to be much more aggressive but i want you to also understand the risks and understand your risk tolerance so that you don't freak out if we have a big drop in the market like for example in 2009 the market basically dropped 40 percent and it was painful in 2020 just back in march the market dropped 30 percent in like a month and it was painful right but the best thing to do was to do nothing during those periods besides continuing to add to it so you have to be aggressive if you want to have a chance of reaching those goals and a great way to invest inside a 401k if you have available to you is a target date retirement fund so all you need to do is you pick the date that coincides with when you're planning on retiring or in that ballpark now you do want to look under the hood and understand how the allocation changes over time and where it actually is by the time you retire but it does all the heavy lifting for you it's like set it and forget it and a big mistake that a lot of people make in their 401k plans is they'll use a target date retirement fund and then they'll pair it with like a bunch of other funds that they'll throw in there with the target date retirement fund but those target date retirement funds they are meant to be the only fund inside of your 401k and the reason is because they're what's called a fund of funds so inside of that fund there might be five or six different funds that make up that target date retirement fund if you throw another stock fund on top of it now you might be more aggressive than what you want to be or if you start throwing other bond funds or international funds and pairing them with a target date retirement fund then you throw the whole risk equilibrium out of whack by doing that so they are meant to be the only fund that you choose if you are going to go with the target date retirement fund and i love the idea because like i said it is set it and forget it they will reallocate as you start getting closer to your retirement date where they will make it less aggressive but in the beginning it'll be very aggressive if you're in your 20s or in your 30s so it takes the guesswork out of it for you and you really could just set it and forget it and then tip number five it's one that i feel like we all fall victim to at some point in our lives and that is not trying to time the markets it really is a loser's game like for example right now the markets they continue to and you hear everybody saying you know what we're due for a correction the market is going to tank you see youtube videos all over the coming market crash and honestly it's been that way for like five or six years i've been seeing those videos in those headlines and people talking about it and it just hasn't come yet so timing the market it is impossible you could put the 10 smartest people in the world in a room have them on cnbc and debate what's going on with the markets and all of them will have a different perspective and a different point of view it's just nobody knows that is the bottom line so trying to time the market you could get lucky and then you could go brag about it to your friends but most of the time you come out on the losing side of that transaction it's just very hard to do one of my favorite sayings and i forget who said it was that time in the market always beats timing the market and it's true you just need to consistently invest and give it time to grow and to compound but it's great to understand that markets do go through cycles and there are ups and downs and highs and lows it's good to understand that just from the point of view that you don't panic and you don't freak out when you see the markets going down that it does happen but to think that you or anybody else can predict when it's going to happen it's just an impossible task all right tip number six is to rebalance your account but base it on drift rather than time so what some people will do is they will take their account and they will automatically rebalance it like once a quarter or once every six months or once a year so they base it on a certain time period and then they have the system the program go in and automatically rebalance it now this is okay it's good to rebalance your account but i would much rather rebalance it based on drift meaning how far is it away from my target allocation because then what you're doing is you are waiting for a trigger you're waiting for something in the markets to happen to give you the opportunity to go in and rebalance so say for example you set a drift of 10 that is your target once you get 10 out of whack then at that point you go in and your account will rebalance so just a simple example if you have a 70 30 allocation so say you're 70 stock 30 bond and we've had a stock market that has gone nowhere but up so as that's happening your stock part of the portfolio that's 70 it's becoming bigger and bigger and bigger and the bond piece isn't going anywhere so when we look at the overall allocation maybe you are now at an 80 20 allocation and that might be more aggressive than you want to be so by rebalancing at that point once you've reached that 10 out of where you want to be you go in and you rebalance it back to a 70 30 so what this forces you to do it forces you to take some off the top to take some of your gains sell them and then buy some of the bonds which haven't been doing nearly as well so rebalancing it forces you to sell winners and to buy losers which is usually you know goes against what your gut is telling you to do usually when the market's doing great your gut is like oh buy more buy more buy more but the right thing to do might be to rebalance and to do you know the opposite of what your gut is telling you another way to look at that would be the opportunity that was presented back in march of 2020 when the market dropped so the market had a sudden drop with the coronavirus and everything going on and everybody felt like the world was ending but if had a trigger to rebalance what would have happened when the market dropped 30 is you would have went in and you would have actually bought some stocks and sold some bonds to get you back into that allocation of a 70 30 portfolio or whatever your target is so rebalancing based on drift it is a good way to go to make sure that you're taking advantage of any opportunities that the market might present to you all right and then the last one that i will leave you with is a simple one and it is just to embrace the volatility and embrace the downturns so instead of looking like oh no the market is going down and having that mind frame look at it from a different perspective look at it like oh great the market is going down i'm gonna be i'm getting paid this week i'm gonna have money going into the market and i'm buying things cheaper than they were just a few days ago even an extended down period if you're in your 30s or your 40s and the market drops 10 15 20 and it lasts that way for a year two years three years it's like who cares you're not touching that money for a long time it's giving you an opportunity to build up more shares to buy more during this downturn so that you could accumulate more so then eventually when it does go back up you own more shares of these different funds so embrace the volatility and the downturn don't look at it as like a reason to get out of the market or to panic if you're using the money in the next few years that's a different story then it shouldn't be in the market right if you're saving for a house or if you're you know about to take a big distribution and you need that money to be there then you don't want to be at risk at a big downturn in the market but if you're investing for your retirement for the long term embrace the downturns and don't forget when you retire it's not like you take all the money out and spend it right if you retire at age 65 you might live another 30 years that money's going to be invested for another 30 years you might be drawing down on it but some of it still needs to grow and be in the stock market so it's not like it all comes out on the day that you retire all right everyone that is it for this one i hope that you found this one helpful it was good to be back after a few weeks away please make sure to check out schoolofpersonalfinance.com and check out everything that i'm 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