How to Use a 401K Properly to Retire Faster (Do This Now!)

in today's video I'm happy to teach you how to use a 401k properly to maximize your wealth and retire early before we start I want to warn you with two things the first thing is we're going to keep things simple in this video and the second thing is that I refuse to give you generic advice so this is your retirement money on the line I'm not going to give you some crap advice I'm going to give you the truth because I actually want to help you out now with that being said I want to address these very important 401K questions that most people need clarification on when should you start your 401k what is the optimal amount to fund your 401k each year what is the best way to invest your money within your 401k what should you do with your 401k accounts when you change jobs what are the most common errors that will cost you a lot of your retirement money so let's start with this one when should you start I'm going to keep it real with you you know the answer I know that you know you should start as early as possible if you're in your 30s or your 40s you already know this let me emphasize this to people in their 20s if you're in your 30s or Beyond please back me up in the comments let let's make this very clear to gen Z now let me show you the math and here are the variables the average 401K return is 5% to 8% a year so let's work with 7% and we're using the standard employer match so this is nothing special so let's say that you put $100 a month into your 401k if you start at the age of 35 when you become 65 years old you will have $170,200 when you become 65 you will have $248,800 years old you will have $359,450 so as you can see from the graphs the difference becomes exponential and that's because of compounding the earlier that you get started the more time that you'll give your money to compound and to accumulate so you just witnessed the numbers the earlier that you get started the better next question how much should you put into your 401k each year I would say that you should fund up to at least the match because this is free money so I want to explain this it is common that your employer offers you a match so for example if you put $100 into your 401k then your company will put an extra $50 into your 441k so you can think of this as a perk to keep you happy so this example is a 50% match you put in $100 and they put in a matching 50% some companies are gener they'll give you a 100% match if that's the case if you put in $100 then your company will put in an additional $100 which is awesome that's a great deal some companies may be stingy and offer you only a 25% match or they might not match at all now this is very important there is a limit on how much your company will match you so their generosity has limitations it is common for a company to limit the match to 6% of your pay so let me explain this so if you make $100,000 then 6% of your pay is $66,000 right in this example your company will match you up to $6,000 if you put in any additional money and your 401k past that point past $6,000 then your company will stop matching you for the year so in this example the terms would be a 50% match on 6% of your pay so how much money should you put into your 401k each year at least up to the company match because again that is free money if your company offers you a 50% match then that's like getting a 50% return on your Investments immediately so take advantage of that offer now if you take full advantage of the company match and you still have additional money to put away for retirement then here are your best options so number one you can continue to fund your 401k there's nothing wrong with this option and this is if you have the luxury to do so with your budget option number two is to consider other retirement accounts so I personally really like the Roth IRA for flexibility in investment options as well as tax advantages your option number three is to consider other tax advantaged accounts so we're talking about the HSA or a 529 plan it depends on your situation so the standard guideline is that you should put away 10 to 15% of your pay for retirements or savings now let's talk about how you should invest your money within your 401k so you will have the option to invest in stocks bonds Commodities conservative funds aggressive funds value Funds growth funds domestic International there's going to be so many to choose from what do you do right now I want to ask you what is the typical advice that you'll receive about this all these advisers they're going to tell you that you should invest your money within your 401k based on your financial objectives your risk tolerance your age right in my opinion that is stupid advice there's no need to complicate this let's start with financial objectives you know what are these experts talking about the financial objective of your 401K money is to grow it safely that's how I would summarize it so they're going to ask well what's the financial objective is it early retirements better retirements for your child's wedding for a brighter future you know what's the difference it all boils down to the same thing growing your money that's the financial objective again let's keep it simple let's not complicate this now how should you invest your money well it depends on your risk tolerance no that that's just stupid also again let's not complicate this your risk tolerance for your retirement money should be low regardless of your age so I don't know what kind of stupid question this is your 401K money I that again this is for retirement you are depending on this money you don't mess around with this money your risk tolerance should be low now with that being said you're going to want to diversify your money within your 401k so you're going to hear financial advisers saying that if you're younger you want to allocate more of your money into a aggressive funds and more towards stocks right so listen there there is no need to get fancy spread your money out do some stocks bonds cash instruments domestic International small caps large caps conservative aggressive just spread your money out and diversify and I would say this if you're in your 20s or if you're in your 50s let's be realistic if you're in your 20s are you supposed to YOLO all all of your money in your retirement account and put everything into aggressive small cap stock funds no well at least I wouldn't do that or if you're approaching retirements are you supposed to put everything into bond funds and take the risk that something terrible happens in the bond market you know no why would you be Reckless with your retirement money spread your money out diversify it doesn't matter what your age is just keep it simple now let's talk about what to do with your old 401K accounts about 50 million Americans quit their jobs each year when you do this what should you do with your 401k accounts you're going to have four options option number one is to do nothing you can leave it with your old employer your option number two is to transfer your 401K money to your new employer option number three is to transfer your 401K money to your individual retirement account your IRA and your fourth option is to cash out you know you can have a great time with that money but suffer the consequences of taxes and early withdrawal penalties so I would highly recommend that you do not choose option number four of option number one two and three to be honest it's not going to make a big difference do whatever is most convenient for you so it's not like oh there's a clear advantage to option number two you would be a fool not to do option number two no it's not like that if you've switched jobs multiple times and you've got 401ks all over the place with multiple employers then yes for your convenience you may want to consolidate them but if it doesn't bother you then honestly it's no big deal personally I would transfer it to my new employers 401K that's just my preference because that way I can keep a better eye on my money but again that's just me now let me tell you about the most common 401K errors so please don't do these and hurt yourself I am rooting for you so it pains me to see these things happen please watch the fees I cannot stress this enough when you're investing your money in your 401k choose the funds with lower expense ratios High fees they're going to leave you with significantly less money I swear to you I'm not exaggerating over the course of your career we're talking about hundreds of thousands of dollars in fees so this is so important I want to see you keep more of your money now please do not borrow money from your 401k your 401k may allow you to take a loan from it but just because you can doesn't mean that you should it's not ideal borrowing money from your 401k is a setback because money that is borrowed is money that's not growing now please avoid early withdrawals cashing out your 401k before your retirement age will trigger not just taxes but penalties as well so the penalty is 10% right off the top so if you take out $10,000 then $11,000 goes straight to penalty and then you have to pay taxes on the full $10,000 now here's another common error it's not increasing your contributions over time so as you get pay raises over the years you should increase the amount that you're putting into your 401k so I know that this seems straightforward but this is just a friendly reminder now I have to tell tell you about this one hiring a financial adviser is a big waste of money in my opinion in most cases many financial advisors will charge you a percentage of all your assets that they manage it's generally around 2% of your assets so if you hypothetically have a million dollar they're going to charge you $20,000 a year to manage your money but honest question what's there to manage when you're investing your money in mutual funds you know not much so it seems like a ripoff to me now if you've enjoyed this video please give this video a like I'd appreciate it very much and also share this with someone that you care about because you're going to be doing them a big favor because this is your retirement money on the line and you want to make sure that you or someone else that you care about is optimizing their 401K for Success Please Subscribe thank you so much for all the support and I wish you a very nice day take care

Channel: ClearValue Tax

Views: 224,888

Keywords: 401k, 401k hardship withdrawal, 401k loan to buy a house, 401k vs roth ira, roth ira vs 401k, Roth IRA, IRA, 401k limit, 401k loan, 401k millionaire stories, retirement, retirement crisis, how to become a millionaire, stock market, stocks, investing, real estate investing, housing market, credit cards, crypto, bitcoin, what is a 401k, 401k explained, ira vs 401k, roth ira, how to avoid taxes, how to avoid taxes legally, how much money you need to save, social security

Id: Xuc8Gri8j0Y

Length: 11min 55sec (715 seconds)

Published: Sun Mar 10 2024