Last week I interviewed my young friend Jake and we discussed his family’s primary investments tools, including the 401-K Plan (401-K). The absolute best investment vehicle I and MILLIONS of other Americans utilize is the 401-K. Yet, of the 79% of Americans who have access to fund a 401-K, only 41% participate. Let me explain why 59% are making a huge mistake that will cost them dearly in the future…say about twenty years from now!

#1 RULE – GET STARTED EARLY
If you have a job with access to a 401K, get started today. NO EXCUSES- it takes less than 30 minutes to sign up. If you have questions, check your Human Resources or Company Intranet. The earlier you get started, the sooner you can walk up to your boss and use your smart phone to play at maximum volume “Take This Job and Shove It, I Ain’t Working Here No More”.

I know what a few readers are thinking. I have college loans. I am only 23. I cannot live without my Starbucks- Caramel Macchiato, Venti, Skim, Extra Shot, Extra-Hot, Extra-Whip, Sugar-Free. (Who can?) Retirement is too far away to worry about and plan for. {Several years ago, one friend insisted “I will not live that long.” The good news, she is alive, retired and is happy with her 401 balance.} Those are all excuses. And as George Washington Carver stated, “Ninety-nine percent of the failures come from people who have the habit of making excuses.”

When you land a job that offers a 401-K plan, I strongly recommend immediately starting your contributions to your retirement. The earlier you contribute, the earlier you can walk away from a J-O-B! Reality, unless you work for the Federal, State or Local government you most likely will not have a pension. How about Social Security? It’s guaranteed, right? The U. S. Government is $21 trillion in debt and has another ~$80 trillion unfunded liabilities (including those government pensions). Based on the Social Security Administration’s 2015 Report, the Social Security trust will be 100% DEAD BROKE by 2034. Don’t panic yet- at this point Social Security will be able to pay ~79% of benefits from ongoing tax revenue. Depending solely on social security is a risk not worth taking. Do you actually want to bet your future on our current esteemed (and rich) U.S. Senators and Congressmen?

LET’S DISCUSS ADVANTAGES OF THE 401-K
TAX ADVANTAGES
The very first entity to get part of your paycheck is good old Uncle Sam. Not my favorite Uncle mentioned in my previous blog posts. The 401-K allows you to NOT pay taxes (State or Federal) on a portion of YOUR money, (legally) by contributing to YOUR 401-K account. Instead of paying Uncle Sam first, you get to pay yourself first. Win-Win!! You can contribute up to $18,000 annually to a 401-K, on a PRE TAX BASIS (you pay zero dollars tax on this money). And when you turn 50, the government allows you to add catch up contributions of $6,000, bringing your total maximum contributions to $24,000. This maximum limit does not include what your employer chooses to contribute. Example: You can contribute $0 to $24,000 (if you are 50 years of age or older) and your company can contribute several thousands more.

Lets look at an example for you math incline geeks
{Please do not be offended by the word geeks. That places you in a club that includes: Bill Gates, Elon Musk, Warren Buffett, Jeff Bezos and several other BILLIONAIRES. It’s a great club}:

EXAMPLE:
You make $100,000, as a single tax payer and pay 28% taxes. If you make $18,000 contributions into your 401 account you pay zero tax dollars on the $18,000 and only pay taxes on $82,000. This saves you about $5,000 in taxes. So the $18,000 you contribute, actually cost you only ~$13,000. Not bad. Contributing to your 401K lowers your taxable income.
A second benefit, your earnings grow tax deferred. That means any dividends or capital gains earned inside your 401-K, even those accounts that are in the millions of dollars, are not subject to taxes UNTIL you begin withdrawing from the plan. Earliest age you can withdraw from a 401-K plan is 55. You may be in a lower tax bracket upon retirement.

ADVANTAGE_- EMPLOYER MATCHING CONTRIBUTIONS
If your company offers a matching contribution, it’s FREE MONEY! For the companies I worked for, I received from 2-7% match. Nearly two-thirds of plans provide employer matching contributions. So again lets take that individual making $100,000. If her company matches her contributions up to 3%, she will collect $3,000 (FREE MONEY-ANNUALLY). Employer contributions do not count toward your annual contribution limit. So this same employee can contribute a maximum of $18,000 – $24,000 and at the end of the year will have investment dollars of $21,000 – $27,000.

ADVANTAGE – SHELTER FROM CREDITORS
Majority of you will never utilize this advantage. However, a 401-K offers creditor protection. Example: You make some bad investments in real estate. You end up allowing those properties to be foreclosed. The mortgage holder(s) CANNOT go after your 401-K plan dollars, regardless of the balance. Additionally, 401-K often offer some protection from federal tax liens, a federally authorized lien against assets of a taxpayer who has unpaid back taxes. Because 401(k) plans legally belong to your employer, it makes it difficult for the IRS to place a lien on the account. Depending on the language contained in the fine print of your account, your plan administrators MAY be able to refuse to comply with an IRS lien. Even Corporations dislike Uncle Sam and are not inclined to assist.

ADVANTAGE – COMPOUNDING
The earlier you start saving, the longer this money has the time to grow and compound. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it.” The below table demonstrates what compound interest can do for those who start early.

HOW MUCH DO YOU NEED TO SAVE?

The above table shows how much you need to invest monthly in order to achieve >$1 million by age 65, assuming a 6% return. If you are just getting started at your job, you may struggle to fund $361-$500 each month. Get started with what you can afford today. When I first started investing in the 401-K, I could not afford to put the maximum amount. Each year, I would add my merit increase or promotion increase to my 401- K contribution. This allowed me to quickly get to annual maximum contribution level.

Previous blogs have talked about how to reduce your spending and increase cash flow to savings.
January 23, 2018- DO YOU WANT OR NEED A CADILLAC

Do You Want or Need a Cadillac?

January 22, 2018- BUYING CRAP IS BAD FOR YOUR WALLET!

BUYING CRAP IS BAD FOR YOUR WALLET!

March 23, 2018-THE THREE LITTLE PIGS ARE BROKE

The Three Little Pigs Are BROKE!

I also provided you the below link so you can do your own calculations with your unique factors-age, income, etc.
https://www.bankrate.com/calculators/retirement/401-k-retirement-calculator.aspx
Lets work through an example

EXAMPLE : TINA ZUCKERBERG (Mark’s 32nd cousin twice remove

Tina, 25 years old, making $75,000 annually.
She contributes 9% of her pay, coupled with a 3% company match
At age 55 Tina will have , ~$1,462,417 balance assuming 8% average return.
Above web site allows you to make your own calculations:

Bottom Line
Several of my peers have accumulated million dollar + 401-K plans. Just as they did, you MUST start contributing to your 401 K account as soon as you get a job. And move to the maximum annual contribution limits as soon as you can.
If your current employer does not offer a 401-K, or does not match, when looking for new jobs, consider any other firms, 401-K plans as part of your compensation comparison calculation and negotiation.

WHAT ARE YOU WAITING FOR! If your employer offers a 401(k) plan, and you have not enrolled or you can afford to contribute more, take action TODAY!

Next week, let’s tackle the differences in the 401-K versus the ROTH 401-K Plan. More and more companies are offering the 401K and the ROTH 401-K Plan. Together we can compare the plans so you can make an informed decision.

This Week’s Quote: “Don’t be afraid to give up the good to go for the great.” –John D. Rockefeller