AAR43 - Your 401k Might Be Holding You Back

0:00But there are a lot of people out there that will reach retirement age or reach 40s or 50s. And they've got a ton of money in a 401k. Maybe even they're a 401k millionaire. They have millions of dollars in their 401k. And they still will struggle financially because they didn't think about some of these things. So the first one is that... This show is sponsored by Liquid Ivy. With the days getting longer and warmer, I'm spending way more time outside. But lately, I was hitting a massive afternoon slump. I quickly realized that plain water just wasn't cutting it. I needed a better hydration I could actually trust to keep me going.

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3:05good day everyone and welcome back to at any rate my name is evan right and we are here to help you make sustainable financial changes without breaking a sweat and i am pleased to welcome back my coffee expert or coffee not expert or coffee in training coffee expert in training andrew saver oh like what is the opposite of a coffee expert i i i grab keurig pot pod and i put keurig pod in that's coffee aware he's a coffee aware person yeah i'm like if you and i were on a a scale like i would be i would be four times less does that make sense i'd be a quarter so a quarter okay yeah but but you're you're drinking coffee that's like a quarter the size of me so that that's true that's true that's completely counterintuitive yeah so four four good espressos versus one i won't say bad but different keurig cup thank you i appreciate your acceptance of my differences.

4:10Hold on, hold on. Acceptance is a very, very strong word. We don't have to jump to that kind of word. That's way too expensive of a Scrabble word. So today, we're going to be discussing 401ks and how, in a lot of ways, they could actually be holding you back and holding a lot of people back financially in ways that you may not expect. Andrew, do you want to quickly break down for the listeners what a 401k is, just kind of the 10 ,000 foot view of it. Yeah, basically, 401k is usually a benefit from your employer. They take money from your paycheck automatically, so you don't even have to think about it.

4:48And that money usually is tax advantaged, and usually it's advantaged on the front side. So that means if you were taxed whatever your bracket is for this year, you'd not tax on that money that comes in. So obviously, you're not seeing it, so you don't feel like you're getting the tax benefit. but actually in the background, you're getting this huge benefit. And so what it does is it allows you to save more money than if you had taken the tax. And that is a huge, huge... I mean, I've heard multiple stories of people who just... They just say, yeah, I just have been contributing to my 401k for this amount of time, and now it's six figures.

5:29And you're literally... You're an automation dream, right? Because you never have to think about it. And it's such a great tool for people these days. Yeah. And speaking of that automation, it's really nice too, because it's, this will definitely be one of the big downsides that we'll discuss in a minute, but because it's so inaccessible, that can also be an upside for a lot of people. I know when I had an episode with Steven recently, we were talking about how it can be good for a lot of people of different financial mindsets and financial struggles to have money not super accessible to them because otherwise they just don't have the willpower or trust in themselves or you know whatever it is to to make those good short-term decisions but if you have a bunch of money in a 401k that is very difficult to access you know you're going to take on penalties have to pay all the taxes at the time blah blah blah then you're much much less likely to just go on a spending spree with your 401k versus if you had that money even in like a high yield savings account or something it'd be so much easier to get it out of there and so you're much less likely to use it and it can help with a lot of self-control so that's definitely one big upside about it and and like andrew mentioned it it has huge huge tax advantages so the best way to think about it is because that money is going in there pre-tax it's like growing money over time with compound interest it's like a snowball effect and the bigger the snowball you start with or the more snow you add to that snowball the faster that snowball is going to grow and the bigger it'll be at the end of the hill or the end of the mountain.

7:00And what is 401k does for you is it gives you a bigger snowball up front because everything is pre-tax. And as you add snow to it over time, as it's rolling down the hill, you're, you're able to throw more and more snow at it because the money that you're continuing to add to it is also tax free. The only downside to that process is that at the end of the mountain, yeah, I guess we'll say a troll at the bridge or something has to take a tax from you in this, in this analogy and they they chop off a part of the snowball to take for themselves but the rest you get to take and the math still works out in your favor because of compound interest that the having that bigger snowball up front is more beneficial for you financially in the long run than if you had started with a smaller one and been able to keep everything at the end and then the biggest 100 guaranteed cannot miss thing about a 401k is that a lot of employers out there will offer an employer match and that is just a free guaranteed immediate no risks 100 return on your investment and you're just not going to get that anywhere else so if your employer offers a three four five six percent match it's incredibly beneficial for you to just put in that amount at least of your paycheck and get that 100 return on it there's there's nothing there's nothing to miss there are there any pros to 401ks that they feel like i missed andrew no i feel like those are the biggest one.

8:21I mean, the match is huge. Free money is hard to come by these days. So where you have it, take it. Yeah. That's, you're just not going to get that anywhere else. High-level savings accounts are great. Other brokerage accounts are great. Roth IRAs, you know, investing in alternative, um, alternative methods or whatever. Those are all great, but nothing is just going to, nobody else is going to hand you free money alongside you putting in money and you just can't miss that. So those are the big, big upsides about 401ks and, and those all still stand no matter what we say going forward so for example the match as just the biggest thing nothing we say is going to deny getting that 100 return that you can't beat that anywhere else but to go through some ways that 401ks can hold you back that people just may not think about or realize or it's easy to overlook because you see all these benefits and it feels like just a win-win-win-win-win to put money in a 401k but there are a lot of people out there that will reach retirement age or reach 40s or 50s, and they've got a ton of money in a 401k, maybe even they're a 401k millionaire.

9:25They have millions of dollars in their 401k, and they still will struggle financially because they didn't think about some of these things. So the first one is that for young people, that's one of the first things that comes to mind as a young person myself, is that 401ks are essentially locked up till 59 and a half. That's a massive deal because Because anything you want to use a 401k for otherwise going forward, so if you want to purchase a home or purchase a car or maybe go on vacation or do something that you don't quote-unquote need to do, but it's something that you want to do with your money to live a full life, 401ks are locked up from you unless you want to pay extremely hefty fees along with paying all the taxes from withdrawing that money.

10:07and now you're basically chopping off a chunk of that snowball while it's rolling down the hill and that will slow down your compounding significantly. So it really just doesn't help for also early retirement. If you're in your 40s or 50s and you're lucky enough to have been able to earn enough money and save enough money to be able to retire, if let's say 90 % of your net worth is in your 401k, that money just isn't really accessible to you to live off of and so you still can't early retire Even if you had, you know, just making up numbers,$2 million in your 401k, but$20 ,000 elsewhere, you can't retire because you don't have access to any of the money unless you want to turn that$2 million into, again, just making up numbers like 1.3 because of paying extremely hefty taxes and fees on it.

10:54It's just not a one-for-one comparison. So big numbers in a 401k are fantastic and a huge deal and nothing to poo-poo or look down on. But they're not the whole story. And that's why it's very important when you track your net worth or financial success over time and the trajectory you're at financially, it's very important to look at where that money is and how accessible that money is and what you can use that money on. And if you don't do that, then you can just look at all the numerical upsides of 401k and get stuck in a situation that you didn't think you would be in because you felt like you were doing all the right things, saving and investing, but it just didn't really work out quite how you expected.

11:33yeah and the the um the inaccessibility is a double-edged sword in that um like if you are if you go too overboard with taking money out for the 401k it's uh the one of the things i like about the way you think about money is is how does it fit into your life and so when people take it overboard and you are basically being too frugal because you're feeling like i gotta put i gotta pile up my 401k and then you just stay in this perpetual state of frugality miserable frugality because you're allocating so much to the 401k and you forgot that that's a lever that you can ratchet back down so it is like the the way they make it so easy to take money and and put it in it can be a double-edged sword in my opinion yeah absolutely and i've got a couple of friends of mine actually that i mean it's kind of a tricky scenario because the the other the other side of the coin is young people is that by putting money in so early it's going to have a crazy amount of time to compound and so again just in terms of net worth ignoring where that money is there's nothing you could do better for yourself than pile a bunch of money into a 401k because you're going to stockpile so much wealth in the long run.

12:58And that's true. The math absolutely does work out that way. But yeah, like you just said, if that leads you to have a life where you still have to be extremely frugal because all that wealth you have is piled up somewhere, then you're going to have to be the kind of person who is willing to drive a beat up car and live in an older home and all this sort of stuff, even though you have a ton of money in the bank so to speak just because of where that money is and if you're that kind of person then that's fantastic you know if you're just like a rise and grind kind of person that just wants to finds joy from grinding through life knowing that you'll be able to you know enjoy the fruits at some point then then that's okay there's nothing wrong with that whatsoever but i think that a lot of people overestimate their enjoyment of that rise and rise and grind process in the long run just because they they see the numbers working out in their favor and i would challenge a lot of those people to see that having enjoyment for the next 10 20 30 years is is the point of living you know it could all disappear in a flash out of nowhere and i just for myself don't think it would have been worth it the whole time to be stockpiling a 401k only to never have been able to touch it and have been sacrificing other things just to prioritize something that i never even got to touch yeah totally totally yeah not to get too depressing about it obviously but but the next way the 401k um can hold you back is is kind of a a mindset that people when they look into 401ks again look into the upsides of 401ks how they work and everything is they see they see a very high contribution limit for it which is absolutely fantastic depending on what you are and so the The current limit for 2026 is$24 ,500 into a 401k annually.

14:46Again, that's a very high limit. That's great. That means you can stockpile a ton of money in there, take advantage of a ton of pre-tax income, and take advantage of a ton of compounding over the long run. And there's no income caps to being able to contribute to that. So that's fantastic for a ton of people out there. But I would challenge you as to whether that's an upside for the vast majority of people. Because if we look at, for example, the median household income of the U.S., it's around$85 ,000 depending on where exactly you get your numbers or whatever. And to look at that$24 ,500 limit, that's 28 % of pre-tax income into one single account, which, as a reminder, you can't touch or access until 59 and a half unless you want to pay a ton of fees for it.

15:30so what you're doing is almost a third of your income or at least over a quarter of your income household income going towards a single account that you're not going to be able to touch anytime soon and so that means you know maybe a family of four family of three or something with children that money is not going to be able to help pay for their education or pay for their diapers or their food or or their you know kindergarten it's not going to be able to pay for anything because it's just locked up somewhere. And I would say that if the limit is so high that for the vast, vast majority of people, it's an insustainable amount to be able to contribute to it, then that high contribution limit is, I don't want to say it's not an upside, but it's just not nearly as big of an upside as it might look on first blush compared to something like a Roth IRA that might have a contribution of 7 ,500 or something.

16:20That 24 ,500 looks fantastic, but it just doesn't affect a lot of people out there. and makes you feel like you're never putting enough in yes yeah i definitely get that as well you always are like i could be contributing more because i you know i only put in twelve thousand dollars to my 401k and it's like that's still twelve thousand dollars pre-tax that's going to compound tax free that's still a lot of money to put in somewhere but you're not even halfway to that number and that's not that's not nearly as good of a feeling as you know maxing out of roth ira or something like that and saying i did everything i could for this account that that's a really good feeling for people as well.

16:56Yes. Yeah, good points. What else? How else does a 401k hold you back? The last big thing that comes to mind is 401ks have very limited investment options. Now, I will say that this is probably by far the smallest downside to me, but that's just for me personally, and I'm interested to hear what Andrew says as a stock picker, as a much more avid investor. how it affects him. But the downside for that is you're just not going to be able to pick and choose the highest performance for yourself or use that as a real stock picking engine or brokerage account for yourself. It's going to be very limited, very difficult to trade within.

17:38And you're just sort of going to be putting in that money into one of the given funds in there that's selected by your broker, by your employer and everything. And those options are going to be very limiting for you. But is that something that bothers you, Andrew, or that you know bothers other people around you. Whatnot is quickly becoming the next big thing for you to pay attention to, and its success isn't even slowing down over time, but it's compounding faster and faster. More and more people on this platform are making millions of dollars, and this goes from anyone's small or large solo sellers or large businesses.

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20:40Yeah, it totally does bother me. part of the fun of investing to me is thinking that, Hey, this could be the next NVIDIA or the next Apple. So obviously when you're constrained to only being able to do ETFs and mutual funds and things like that, you just know you're not going to get that chance of a huge home run like you would, if you could pick an individual stock. So it does. I mean, again, the, the match is the match. You can't, you can't beat the match, but outside of that, it is demotivating because it's like, well, if this is just going to only double or triple, how boring I'd rather just spend it now.

21:21You poor thing. But yeah, but it's like, okay, if this could be a huge thousand percent winner, you know, it's more motivating. It's like, frankly, to, to put, to sacrifice that money and, and put it in, um, like a Roth or something. Yeah. 100%. And if you're, if you see your money as something that you earn to be able to invest in those kinds of companies and pick those kinds of companies and hope to earn crazy crazy returns then anything you put in your 401k or if you try and you know hit that 24 000 limit or whatever that's 24 000 a year that can't go towards any of those opportunities and is stuck up somewhere else that that's very very limiting and locked up yeah yep so those are some of the big downsides to a 401k and ways that the 401k holds you back so i kind of just wanted to go over how i view my 401k personally and i want to hear the same for for how how andrew has has and does view his 401k but for me first thing i know we're going to mention over and over getting that sweet sweet match is a is a absolute must no questions whatsoever so i'm lucky enough that for me it's six percent for my company and a big part of this that's also easy to ignore is that even applies to bonuses as well so recently uh we got our raises and bonuses those happen in march i'm not sure why specifically march but they do happen in march and this six percent even applies to bonuses so my bonus i they always warn you ahead of time and say hey bonuses are gonna be coming soon if you don't want your 401k to be deducted from it, then, you know, cancel your 401k contributions on this date and then restart them on this date to avoid touching your bonus from it.

23:02And I just like to leave my bonus running through that because that's going to be a 6%, another 6 % match from the bonus. And then the paycheck the next day, it's 6 % on that as well. And that's just one of those ways to continue getting that free guaranteed money. And I definitely don't like the idea that a chunk of my bonus is going to be stuck up somewhere. Like I said, I'm not going to be able to touch that for a very, very long time, but I know that that's basically an additional 6 % that I get on top of my bonus just because I'm going to get that match that goes to the 401k, and then that's going to compound and earn me more wealth over time.

23:39So that match is always worth leaving there. And for me, that even applies to intermittent stuff like bonuses or commissions and that stuff as well, if you're able to afford it. But for me, anything past that 6 % contribution, I'm putting that elsewhere. I'm going to put that in a Roth IRA. I'm going to put that in a high-hold savings account. It's going to go towards something specific, whatever. It's going to go elsewhere. And even though I haven't been contributing a crazy, crazy amount to my 401k or anything, I've still seen a ton of growth in there. and I don't actually have the specific number for how much I've earned over the lifetime of the 401k but it's been a significant amount of returns over the long run without having a crazy concentration of wealth in my 401k so I did the math and it stands at about 30 % of my net worth in my 401k and over the long run I'd probably like to leave it at about that number where it's enough of my wealth that it has enough weight of my net worth that if it swings like crazy or if it compounds like crazy it's going to have an effect on on my long-term financial well-being but it's not so much that if we you know wanted to to move or wanted to buy a car whatever it is i'm not looking at my 401k like god dang it all my wealth is in there and i can't touch it so for me that 30 is kind of a good balance to have but how do you view and use and then kind of manage your 401k So I'm going to jump the gun a little bit.

25:04I just want to sidetrack to Roth IRAs because we talked about how, again, the inaccessibility, the fact that you really can't touch the 401k unless you pay all these penalties and fees, taxes, all of that jazz. The Roth IRA, you can withdraw your contributions early. So you still have to pay a fee on it, but you don't have to pay all the taxes that are involved. So like real quick, I'll ask you a very literal question because you said how you view your 401k. Like how do you view your 401k? Like how often are you looking at it? Oh, man. Like what's that? That first question for you would be how often do you look at your 401k?

25:51not any more often than once once every month to month and a half when i go through and kind of update you know financial net worth and that sort of stuff but no more often than that okay so that's probably most some most people probably uh certainly more than i did but what about um like when you see that number you kind of think like this is the number yeah what do you mean like it like if if it says okay i have 40 grand in this 401k like you're like i have 40 grand right yeah yeah it definitely just feels like i have that amount of money in an account and no questions right so to all the points that have been made already you're thinking you have 40 grand but because it's so inaccessible after taxes and fees you're you actually don't have that much if you need the money now.

26:44So if I need to pull out 20 grand, you're not going to be left with 20 grand. You're going to be left with a lot less. And while that is still in effect for the Roth IRA, because if you pull early, you will have to pay. The tax implications are much, much less. And so especially if you've had a lot of capital gains in your account, if you started early, which is an awesome thing, obviously, you probably have a ton of growth from the stock market that has gone up. But all that growth is capital gains growth, which if you pull it out early is a huge tax bill. More so than if it was just contributions in a Roth, for example.

27:27So I guess to beat the dead horse of at least with the Roth, you can pull more of that and more of it is actually yours than it would be in a 401k. so I know when I was with a company that had a super generous match I would definitely max that out and then outside of that I think how much you want to put in is a personal preference and you live or die by those choices not to sound super dramatic but those do make an impact on your future finances and you just make the right choice for yourself yeah I think that that that's a really um easy to overlook or underappreciate point that whatever money you have that in that account isn't actually accessible to you and if you did need to access it it wouldn't even be that that same amount of money I think that that is a very a very important factor because we never know what's going to happen in our lives we never know when we're going to need need to access money no questions asked don't care what your budget was doesn't freaking matter.

28:38I just need money to live right now. And if you end up in that kind of situation, a 401k is not going to be some straightforward, easy math for you to do to be able to figure out what you have. It's not going to be able to be a quick, easy process of receiving that money. And it's a very complicated, stressful process to go through. And it's not going to, it's not going to land you with as much money as you saw in that account in the first place. And so it's, its effect on your financial life until you reach 59 and a half is nowhere close to what the number you see in your account is and and that's very very difficult and yeah the last piece here is going over alternatives of 401ks and the roth ira is is absolutely that first best alternative to 401k it's still going to grow tax-free and so that's that's a massive massive tax advantage to have over compounding over time and you can you can withdraw your contributions at any point tax fee free, whatever it is.

29:37You know, if you contribute$6 ,000 and earn$3 ,000, you can still pull out$6 ,000 whenever you want. No questions asked, nothing complicated going on whatsoever. It's only if you needed to pull out more than that$6 ,000 that you would be paying additional taxes and fees on top of it. But a Roth IRA is a fantastic alternative to a 401k that's going to give you a lot more financial flexibility that if stuff hits the fan and you need money right now, a Roth IRA is going to be able to give you a lot more easily than something like a 401k can. And then past that, if you max out your Roth IRA or something and you still want to be investing and growing your wealth and stock picking and looking for the next Nvidia or whatever it is, taxable investing is going to be your next best fallback option.

30:24You're not going to get all the crazy tax advantages unless you hold stocks for longer than a year. You're going to get big tax advantages if you do that, but it's never going to be completely, like can be completely tax free. but usually it won't end up being completely tax-free. And so it's not going to be quite as easy of a process, but it'll still allow you, you know, if you're doubling your money in the stock market, okay, fine, I paid some fees on it. Who gives a crap? You know, it's still close to doubling your money. And then another thing that's easy to overlook that I've mentioned before, but I know a lot of people still aren't aware of it, is that you can actually invest your money in a health savings account.

31:00So if you have a health savings account through your employer or through another process, that money can actually be invested and it can also grow tax-free and so if you pile up a bunch of money in there knowing that you're going to everybody's going to have health expenses at some point but you're not going to need it too soon then investing that in the short term gaining a bunch of tax-free wealth and then using the money as you need is a fantastic idea to have and then the very last thing if you still have money left over is just just a savings account like a high high-old savings account or something like that.

31:33It'll probably earn you about half as much as the stock market could, but it'll be guaranteed 100 % risk-free, and it's going to be accessible whenever you need it. So if you need money right now, a high-old savings account is going to be just as easy to access as any old savings account out there. And that would be the last alternative I have in mind if you have any kind of closing thoughts, Andrew. HSA is awesome. Every time I hear HSA, I just get excited. the downside is you have to have a high deductible, but there's something fun about paying a medical bill with gains from the stocks in your HSA.

32:12I'll just say it is... I'd recommend it. Try it out. Yeah, it's really nice. Pre-tax money and grow tax-free. Spend it tax-free. It's just triple tax advantage. That's the kind... A 401k has tax advantages. You're just not going to get anywhere else. And an HSA has tax advantages. you're just not going to get anywhere else and i guarantee you will have health expenses at some point you're going to need ibuprofen at publics whatever it is it's it's going to be it's going to be covered under an hsa so question for you then if the numbers kind of just stress somebody out or they just you know they they hear you they take the match and then they don't know how close to that annual contribution max to go on the 401k like just like no idea like what what number of the pick what kind of uh recommendation would you have for somebody in that spot uh real quick aside are you talking about like how to pick what percent to contribute yeah okay so for me again not not advising anybody or knowing anybody's specific financial situation if it were me which which it is me i would just hit that go to hr ask what percent Does your company match if you're not currently aware of what that percent is?

33:28And open up a brokerage account, set that percentage to be contributed to your 401k from each paycheck, and I wouldn't contribute any more to it than that. Then open up a Roth IRA and contribute whatever else you can to that Roth IRA, and then anything past that kind of let flow over to a high-yield savings account. for me that's the best three tier way to go about it that will get you that 100 % match from a 401k will get you a lot of good compounding from a Roth IRA that's still not completely locked up and then anything else you have left over with no contribution limit of course to something like a high savings account you can pile that as high as you want and it's still going to grow and that'll still earn you a ton of money in the long run even if it's not super exciting and then you can use that money whenever you need emergency fund house savings whatever it is yeah love it yeah for me it's the best place to work to work through it but feel free to comment below or email me at evan at einvestingforbeginners.com again i'm going to say evan at einvestingforbeginners.com not ethan not even not kevin not keven i don't think that's one that's one of them but very very similar his name so that evan at einvestingforbeginners.com and let us know how you use your 401k how do you view your 401k and I think it'd be really interesting to hear what percent you contribute to your 401k.