Retirement - How To Invest In 401k or Roth 401k - YouTube

hello everyone and thanks for tuning into the financial investor channel my

name is Brent and today we're going to be doing part two of our 401k sort of

screening the very first time we talked about what's a 401k what is a Roth 401k

the differences between them and their similarities today we're gonna be

covering my six step process on how to begin investing in your 401k or your

Roth 401k smart you know a smartest can be so let's go ahead and dive into it if

you're brand new to my channel thank you guys for checking out my videos hit the

subscribe button on the bottom right hand I just click on my logo my icon

subscribe to my channel I put out weekly stock market dividend financial videos

so subscribe for that now as always you know I always talk about this prior to

investing and always pay off your high interest that this could be your school

your school loans your credit cards I know people that are in debt for $25,000

for their school loans or they have these credit cards that are sitting at

18% and they only have a you know a thousand or so on them but $1,000 at 18%

that's a hundred and eighty dollars that you're getting hit against you versus

the 7 to 8% you know 7 to 10% you may get while invest in the stock market so

you always want to pay off your high interest debt this includes your you

know before investing in a 401k Roth 401k pay these off because it's gonna

it's not gonna affect it too much um so the second thing create your rainy day

fund I made a video in an article I believe on what a rainy day fund is

essentially just expenses for 3 to 6 months this can cover your rent your

mortgage food water utilities basically the essentials that you will need to

survive in case of an emergency so let's go ahead and get into it choosing

between the pre-tax 401k or your Roth 401k is one of the steps in here and

I've already covered that that's you click on the article it's there it kind

of links it over it kind of helps you decide whether you want to invest in

your 401k or your Roth for okay so here we are six steps to begin

investing in your 401k or Roth 401k step number one read the capital accumulation

plan or sometimes it's just the summary plan of your the summary plan

description you want to read everything inside this plan this will tell you if

your company does any profit sharing if they do any matching contributions if

they offer if they do any like weird fees if they allow you to create you

know create a loan from your 401k or Roth 401k if you can do a loan off of it

one of the key areas that I always have people check out is the bastion schedule

now some people a lot of people don't know that you can take a loan against

your 401k I wouldn't recommend it unless it's something critical maybe you're

making like a down payment on a rental again you would want to get with a

financial advisor or tax advisor on that I am NOT neither you know I'm neither

one of those so always talk to your financial advisor on that but I know

some people that have done that in the past the one of the main things that I

missed myself was the vesting schedule I was with my last company for three years

I was only eligible for 60% of the matching contributions that they made

towards me so that means if they paid out ten thousand dollars in my 401k I

only got to keep six thousand of those and was able to roll roll over six

thousand of their matching contributions into my IRA or my my current company's

401k program so always take a look at the vesting schedule they can be

increments of say twenty twenty percent for one year forty percent for two years

just sixty percent for three years eighty percent for four years and then a

hundred percent for five but normally it's like three to seven years

so check out with your guys's vesting schedule is and that will essentially be

done while you're reading your plan summary step number two decide between

your 401k and your broth 401k you want to know the differences between these so

essentially the pre-tax for one came this money comes out it's it's it's tax

it's taxable income that's contributed to your 401k

it's contributed prior to being taxed meaning that you will be taxed on it

eventually down the road so as soon as you hit fifty men and a halfie me can

you begin taking contributions your interest your dividends your capital

gains will all be taxed at your current your future income bracket so definitely

want to decide if you're making more money right now if you're sitting in the

thirty eight percent bracket right now and in the future you might be getting

down into the fifteen or a lower percent bracket you may go for the pre-tax 401 K

I know some people that you know they're married they make more than I believe

it's one hundred and forty four thousand so they sit in a very high bracket but

if they both put in the full amount the eighteen thousand dollars they knock out

thirty two dollars from their summary and they're able to lower themselves

into a lower tax bracket right now whereas in the future there might be

more settled so they might be in a lower tax bracket in the future and then Roth

401 K I'm in a pretty low tax bracket right now

so my ideal thing is going for the Roth 401 K Roth IRA I love the idea of having

a tax sheltered area where I can grow my dividends my interest my capital gains

100 percent tax-free because I don't know what my future you know I don't

know what the future plan is for me but I don't plan on being on a lower income

tax bracket in the future and I also don't know if universal health care is

going to be coming in the future so the Roth 401k essentially you're

you're getting taxed right now you pay taxes on your money that's being

distributed into your Roth 401k and then after fifteen and a half all your

dividends or capital gains your interest will be tax-free and that's very nice so

that is step number step number two is you know deciding between your Roth IRA

our Roth 401k or your 401k step number three is determine if your employer will

match contributions now check the plan make sure that the employer does you

know have some sort of matching there plans very very differently some match

up to three percent match some match up to five percent some match even more so

always do your research on your matching some people

also do like a third you like a 1/4 of whatever you match laughs you match in

8% they'll put into some people do half and it's weird sometimes so I always

check that out that should be if you've read your plan you'll know exactly how

much they match and my company that I'm going to that I'm in right now my

company offers a come employee match so I will be participating in my 401k

otherwise I may choose to put my money in somewhere else but in this case they

do do some sort of a matching program so I will be contributing to my 401 K Roth

401k plan step number four is figure out exactly how much you want to invest and

this kind of goes back to you does your employer match in if they do determine

exactly how much you want to contribute to your 401 K is probably one of the

most difficult steps and I always suggest doing the matching portion that

way you know what your lemon is you know of course you don't want to overdo it

and you don't want to be pain or taking any money out because if you do withdraw

money out of your 401k you'll get hit with a penalty of 10% also you'll have

to pay capital preciate taxes on your capital appreciation any dividends that

you made in there whereas if you invest in your Roth 401k and you do need to

pull money out you've already paid taxes on it so you don't you won't get hit

with any sort of penalty and you won't have to pay taxes because you've already

been taxed on it now if they didn't have a matching program for my company then I

would not opt to do a 401k I already do my Roth IRA I have my thrift savings

plan I have mine on retirement account I have

other investment options that I'm interested in getting into I'm

interested and get in the real estate I have silver and some other materials I

have bonds so I have a variety of investment options that I'm already kind

of doing so if my company did not do a matching contribution I probably

wouldn't go that route but because they do it's free money and I always am

willing to invest to get free money step number five

is choosing your investment now always log on to your benefits website opt to

customize your selection my default was a a much higher mutual fund than if I

had just gone in there and customized it and looked at what their options were so

you will normally have a selection of options from guaranteed accounts money

market accounts target date funds asset allocation funds bonds large cap mid and

small cap stocks and then some international stock so those are some

that we're inside my plan and take a look at what's inside yours because that

is going to be important step number six is implement your screening process so

you've already reviewed all the et apps and mutual funds the bonds the the

market in the money market accounts that are within your account that you can

target and invest them so what do i screen for myself you know I always want

to take a look at what are the annual operating expenses these are the costs

of the investment company you know what it costs the operate the investment

company to operate over the course of the year so these are usually pretty low

in general so these can be may be point point zero two to say point two so they

range but it's essentially money that it takes for that specific ETF or mutual

fund to just be operated throughout the course of a year thus the main important

thing I I did list these in any specific order but I would always take a look at

the expense ratio this is a very important one because this will affect

you it may not be it will be small right now but it will impact you a lot over

time so the expense ratio is an annual fee based on the value of its assets

over the course of the year while it may be small I can impact you over time now

one of my friends at work he said you know I don't care about the expense

ratio you know as long as they're gonna get me some sort of a good deal and I'm

sure he doesn't he's not one of the ones that really goes in that customizes that

I told them go ahead I said I'm this article told them take a look at how to

implement your screening process and these ranges can be very small from

point 0 to 2 like 0.72% so these are pretty big differences number 3 how long

is the specific fund or you know the mutual fund ETF been around I want

something that has some history I want it to have been through some sort of a

downturn and the stock market have been through like oh way oh 9 or the 2000s

era so I need at least like a 5-10 year average to kind of keep up with the S&P

500 I want something that'll have seven ten percent capital gains and then also

have some sort of a dividend yield and those downward turns you know I want

something that'll still be generating some income that can be reinvested into

that specific fund and then what percentage when you know once I've

chosen like a breakdown of like two to four meet your funds or ETFs I want to

take a look what's inside them I want to know what percentage of stocks or what

stocks they're actually invested in percentage of bonds if they have any

international stocks if they have any physical materials they're just kind of

money held on the side etc so what does it what exactly does it hold and then

down here on the bottom I included some averages of some mutual funds versus ETF

so the average mutual fund mutual fund expense ratio is around 0.7 for in 2010

which means for every thousand dollars that you're investing you're getting

charged seven dollars and forty cents in annual fees now you may think that's not

a lot right now but if you invest $5,000 which is five percent of $50,000 then

you're going to be hit with what five and seven thirty five dollars of annual

fees and this is only your very first year imagine two years they're getting

it was seventy dollars in four years one hundred and forty dollars imagine your

portfolio has finally reached a hundred thousand dollars and you're getting hit

with over seven hundred and forty dollars in just annual fees this is

money that you would rather have invested working for you instead it's

working against you and this is an average ETF expense ratio is around

point two four percent in 2016 which again means for every thousand it

would cost you roughly four dollars and forty cents in annual fees now I saw

some very nice ones you know I saw some neutral funds that

had some pretty high expense ratios I'll actually be covering that in another

video I went through the whole process that I've actually picked out what

specific fund I'm investing in my for my Roth 401k and that's coming up next week

and I'll kind of be covering that now consider the following we have an

employer who's currently thirty years old he earns $50,000 per year and he

wants to retire somewhere around the age of sixty-five if the employer matches

five percent of the person's salary check out the big difference that

additional contributions can make in his or her final retirement egg nest egg so

here's the base here's kind of like my view right here I put in five percent of

my salary my employer puts in five percent for a total salary of ten

percent that would be roughly that would earn me seven hundred and fifty thousand

dollars at year 65 this isn't including dividends so when I was doing these

calculations I didn't include dividend so this these numbers will be much

higher if you put in six percent and your employer match five again employer

match is capped at at five because that's pretty normal average for a lot

of companies so if I bump it up to six percent that's now eleven percent of my

total salary that's eight hundred and twenty five thousand so automatically

there's another fifty thousand and then if I bump up to seven percent

that's another seventy five thousand four over nine hundred thousand and then

if I bumped up to eight percent that's nine hundred and seventy five thousand

so the difference starts off right around this whole seven percent range is

a really nice factor when you're trying to get some more growth but again this

is if you don't this isn't including dividends if you choose an ETF or a

mutual fund that has a say yield of what 2.5 percent that's going to be earning

you quite a bit more over the course of that 35 years no I and you know I put in

a calculator here on this website this article is going to

in the description below if you guys are interested in kind of taking a look at

this a little bit yourself if you have any other information that's useful so

as an example someone who makes $60,000 a year and they put in five percent they

employer matches five percent and their estimated rate of return is say seven

we're just gonna put seven percent and then we have I would like to retire in

thirty years so let's calculate that out it loads up so when I retire my 401k

will roughly have six hundred and nine thousand dollars six hundred and nine

thousand nine hundred and eighty five dollars so that's just my 401k I also

have my Roth IRA I also have my non retirement account I have my bonds and

some other investment options so this is just one of your investment vehicles

that you should be using to invest in your guys's future and that is

essentially it for this video I do have the snippet at the very end as a

disclaimer I'm not a financial adviser or tax professional the information

provided is my opinion and anything in less articles really just I pulled a lot

of information of it's how I would be investing in my Roth 401k or a my 401k

and some of my thought process that kind of goes into it again if there's

anything out there that you guys have any if you guys would like to see

something Alice or if you see any information here that you may might be

beneficial to somebody else to have included in here and go ahead and let me

know in the comments below if you have any questions over anything that was

covered here go ahead and leave it in the comments below I want to thank

everyone for watching up into this point if you like the video hit the thumbs up

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my channel for future financial videos thank you for tuning in and I will see

you next time have a great day guys bye bye