Top of the Day Dear Readers!  There are too many savings strategies that require quantum physics to understand.  Personally I hated physics.  One of the best and simplest strategies I used to maximize my wealth is the 401-K plan, especially when powered by compound interest. When you combine the magic of compounding with the 401K you will see why it is a millionaire-building tool! 

ADVANTAGES OF A 401K PLAN

A 401(k) plan is a tax-advantaged retirement plan that is available to about 79% of full time employees.  There are other excellent tools for those without access to a 401K.  {A good topic for next week.} 

 All of my employers, with the exception of one, offered a 401K plan and matched my contributions ranging from two to six percent. If I put in the maximum matching percent, which I did 100% of the time, my company contributed anywhere from two to seven percent match.  The 401K also comes with two important wealth building powers:

1.  The money you contribute is transferred to your account untaxed.  Your employer places your contribution into your 401K, BEFORE taxes are paid.  Therefore saving you from ~10- 37% (2019 federal tax rates). 
2. Your money grows tax-free, until you withdraw it.  As long as you wait until 59.5 years of age, your can withdraw without penalty (withdrawing before 55.5 years of age results in a 10% penalty) .  After the age of 55.5 years, any withdrawal is taxed at your current income tax rate.  The theory is your retirement tax rate will be lower than your final working years tax rate as majority of retirees earn less income. For more information please read my previous blog: SIMPLY AMAZING BENEFITS -THE 401-K & ROTH 401-K

SIMPLY AMAZING BENEFITS -THE 401-K & ROTH 401-K

GETTING STARTED BUILDING YOUR WEALTH!

If you decide you want to join this non exclusive club of ~200,000 members of U.S. 401K millionaires, you must drive your contributions as close to the maximum contribution rate as you can afford. {Agent Annie – This is your assignment and should you accept it, you will be tasked with this assignment for the duration of your career. This message will NOT self destruct – due to budget cuts}

In 2019, you can save up to $19,000 in your 401(k), and an additional $6,000 for those 50 and over. Let’s do the math, if you and your spouse are < 50, this equals a total contribution of $38,000.  For those 50 and above you household can contribute a maximum of $50,000 annually.  IT ADDS UP!

For those normal folks, not contributing the maximum amount, which is about 90% of your fellow future retirees, here is a plan to help you get there.

First, you have to get off your behind and sign up for your plan.  Actually you need not stand up- just log into your company’s plan and sign up.  I can wait.  Let us know when you are ready to continue.

Marvelous, now that you have done that part, (Don’t know what you were waiting for) here is your next step.  Every year or whenever you get a raise or bonus increases your 401K savings contributions by at least half the percentage of your raise/bonus.  Now I know what you are thinking.  Most company’s raises are INSULTING. Agreed – but whatever that Uncle Scrooge percentage, add at least half (preferably more) of that to your 401K contribution percentage.   

For those of you just getting started and you are stunned at the numerous choices of investment choices, as my Apple Watch reminds me- BREATHE, simple pick the S&P 500 Index for now.  

You can fine-tune that strategy later.  {Read: “DO YOU WANT TO CRUSH THE MIDDLING 401-K INVESTORS? THREE FUNDS THAT’S ALL WE NEED!”

DO YOU WANT TO CRUSH THE MIDDLING 401-K INVESTORS? THREE FUNDS THAT’S ALL WE NEED!

ANNIE’S ABSOLUTELY BRILLIANT PLAN TO JOIN THE 401K MILLIONAIRE CLUB! 

Annie, is 30 years old, with zero college loans debt. Lucky INDEED!

Annie’s Pre-Retirement Assumptions: 

• Currently Saved: $100,000
• Annual Salary: $120,000
• Contribution: 14%
• Employer Match: 3%
• Current Age: 30
• Retirement Age: 60
• Return Rate before Retirement: 7%
• Inflation Rate: 2.5%
• Saving Increase Rate Each Year: 2.5%

ANNIE’S INCOME AT RETIREMENT – BEFORE THOSE NASTY TAXES!

• Total Value at Retirement before Inflation:$3,436,216.00
• Monthly Income at Retirement before Inflation: $16,560.00
• Monthly Social Security at Retirement before Inflation: 2,500.00
• Monthly Other Income at Retirement before Inflation: $2,000.00 from Rental Properties
• TOTAL Monthly Total at Retirement Income before Inflation: $21,060.00

TIPS TO REDUCE YOUR EXPENSES, AND CONTRIBUTE MORE TO YOUR FUTURE WELL-BEING/RETIREMENT FUNDS

• Stop buying new and expensive cars.  Buy a used reliable car.
• Live in a modest home. I am always amazed when a family of three buys a home with 17 bathrooms!    Who wants to clean 17 toilets- YUCK!
• Work in a job that pays you as much as possible. If you are worth more, look for a better paying job and stop complaining!
• Cut in half your eating out, or bar tabs.
• HAVE SOME FUN! Use some of your earnings to have fun.  LIFE IS SHORT!

STRATEGY TO JOIN THE 401K MILLIONAIRE CLUB: 

1.  ALWAYS PAY YOURSELF FIRST)- Sign up for your company’s 401K plan – NOW!
2. You and your spouse save as much as you can in qualified retirement plans.  401K, IRA, ROTH account’s, SEP, etc
3. Ensure annually (MORE OFTEN WHEN POSSIBLE) to give yourself a 401(k) raise, at the same time you get raise, bonus, promotion, better paying job, MORE MONEY!
4. ALWAYS capture your company’s match.  If your company matches X percent, DO NOT TURN DOWN PART OF YOUR COMPENSATION! – CONTRIBUTE X PERCENT.  I made the mistake of saying an employee match is free money.  I WAS WRONG!  (Go ahead and take a picture of this page. My wife and good friend Jake, can assure you – words I do not say often!). It’s not free money. It’s part of your planned compensation. Matching dollars are considered a compensation expense on the financial reports for your company.  Your company assumes you are SMART ENOUGH to accept part of your BASE SALARY!  Annie’s base salary is $120,000. Her company’s match is three percent, so her company has budgeted $123,600 plus benefits and bonus for Annie’s compensation, excluding benefits and bonus. By not contributing a minimum of three percent, Annie is telling her CFO, “Hey – It’s me the dummy, please take that $3,600 and keep it! The CFO is high fiving and praying for more dummies. DO NOT MAKE HER DAY! 
5. INVEST AGGRESSIVELY WHLE YOUNG: Do not invest your money in some CD paying 0.0005634%.  Invest in the market.  You have time to recover when corrections happen. 
6. ACCEPT THE REALITY – THE STOCK MARKET IS GOING TO CRASH SEVERAL TIMES DURING YOUR CAREER. On average the U.S. stock market corrects/crashes about every seven years. When it happens it is going to be painful and frightening when you see your life savings reduced by 20-40%.  You will want to sell, cry, scream, buy a carrot cake. You can do all the above with the exception of selling. Sit tight, calm down, eat your cake and BREATH. I live in IL and soon it will be legal to buy recreational weed.  Buy some if necessary. DO NOT SELL!  Just as you had no idea the market would crash you have no idea when it will rebound.  When that rebound happens and you are sitting in cash, you LOSE! 
7. INVEST MAXIMUM OF FIVE PERCENT OF YOUR 401K IN YOUR COMPANY’S STOCK.  Most companies do not require you to invest in the company’s stock.  If you work for a company with past great stock performance you may want to invest.  But do not tie your future 100% to any employer. Remember Enron-Bankrupt GE 90% drop in stock price, GM and Chrysler’s BANKRUPTCY, Kodak – Bankrupt, AND THE LIST OF FROM GOOD TO GREAT TO DEAD GOES ON AND ON!
8. CONTRIBUTE TO YOUR 401K IN GOOD AND BAD MARKETS: You actually buy more shares in bad times, which will help you when the prices rebound.  Read previous blog: “WEALTHY FOLKS BENEFIT FROM DOLLAR COST AVERAGING – WHY DON’T YOU?” https://wealthbuildingpowers.com/2018/11/15/wealthy-folks-benefit-from-dollar-cost-averaging-why-dont-you/
9. AVOID TAKING LOANS FROM YOUR 401K.  I recommend resisting the temptation to pull from your 401K even for you kids’ college expenses.  I know you love them, however, you will need your retirement money in some cases for up to 30+ years! 
10. IF NEEDED HIRE FINANCIAL ADVISORS: If you need an advisor, be sure to hire a Fiduciary Financial Planner  A fiduciary, is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person.

CONCLUSION

The average life expectancy in the U.S. is approaching 80 years of age.  Average Americans retire between 50 – 67.  Unfortunately about 25% of American workers are forced to retire in their 50’s due to layoffs, change of ownership or just NASTY, NASTY management! You must have enough money to not just survive but live the life you desire.  I have heard too many say: “I can’t afford to save.” Henry Ford said: “Whether you believe you can do a thing or not, you are right.”  Except for the chronically poor, everyone can save. The first step is taking an honest look at where your money is going,, especially differentiating between needs and wants. 

For decades, my wife and I have contributed the maximum amounts in our 401K accounts and our IRAs. I recommend this become your goal! 

By the way, my wife refused to help me join the mile high club!  Oh well- On to plan B!  

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DISCLAIMER

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age. 

I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOTa licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.  

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