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401K Loans and Other Ways to Doom Your Retirement - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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401K plans are easily the best return you’ll
ever get investing but most employers do a
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horrible job at answering your questions.
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By the end of this video, you’ll have your
401K questions answered and will see exactly
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what you need to do to get your nest egg back
on track.
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We’re talking 401K investing today on Let’s
Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's talk money.
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Joseph Hogue with the Let’s Talk Money channel
here on YouTube I want to send a special shout
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out to everyone in our community, thank you
for taking a part of your day to be with us.
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If you’re not part of the community yet,
just click that little red subscribe button.
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It’s free and you’ll never miss an episode.
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Now we already saw some of the worst 401K
mistakes in last week’s video and got a
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glimpse at those tragic 401K average balances.
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More than seven million retirees are living
in poverty according to a study by the Kaiser
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Family Foundation and tens of millions are
just barely scraping by.
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I got a lot of 401K questions after that video
so I wanted to make this one to answer your
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most common questions, talk more about the
average balance by age and show you how you
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can catch up even if you’re already behind
on your retirement investing.
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For those in the community, following the
channel, you know I’m a huge fan of 401K
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investing.
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I spent more than a decade as an investment
analyst and wealth manager and can tell you
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the decision to invest in your company’s
401K is the best you’ll ever make.
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That company match on your contributions is
like free money and it is without argument
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the highest return you can get anywhere in
investing.
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This is the second of our three-part video
series in partnership with Blooom on 401K
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investing.
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Now Blooom is an independent 401K manager
that works with your existing retirement account.
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You can connect your 401K account and Blooom’s
software will show you the investment fees
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you’re paying, and how to get back on track.
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I’ll tell you more about Blooom later and
share a special offer to get your free 401K
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health analysis but first I want to get to
your 401K questions.
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I’ll cover the five most common questions
but if I don’t answer yours, scroll down
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and ask it in the comment section and I’ll
answer it personally.
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The most common 401K question I get is just
about those basics of the program, what is
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a 401K.
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This is a special retirement investing account
set up by your employer with a plan administrator,
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usually an investment company.
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The plan includes a list of stock and bond
funds in which you can invest.
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You set up how much you want to invest regularly
and that money comes out of your check before
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taxes are taken out.
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Besides that pre-tax benefit, most companies
will match a portion of your investment.
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So a typical company match is your employer
will put in another half of what you put in
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up to 6% of your total salary.
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These are two huge benefits of a 401K plan,
that tax benefit and company match.
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Another common 401K question is around vesting,
what it is and what does it mean.
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The vesting schedule is how much and when
you get to keep the money your company puts
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in the account for you as a match.
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I know, it sucks that you don’t get to keep
all your company’s match immediately.
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You’ll always keep everything you put into
your account but the company’s match is
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yours gradually.
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It’s just a way for the company to keep
people around longer.
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For example, we see the vesting schedule for
workers at Sprint here.
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So if you are a Sprint worker and contributing
to your 401K account, the company matches
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half of your investment up to 4% of your salary.
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If you make $40,000 a year, the company will
match 50% of your contributions up to $1,600
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so they’ll put in another $800 a year.
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Sprint will put its match amount in every
time you invest but according to this schedule,
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if you leave the company after a year then
you only keep 33% or a third of what they
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put in.
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If you work two years and leave then you keep
two-thirds or 66% of what the company put
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in.
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This is actually a really nice vesting schedule.
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When I was an economist for the State of Iowa,
the 401K vesting spread out over decades so
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it took much longer to keep all the employer
match.
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Our third 401K question was How Should I Invest
My 401K?
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Now that’s really the million-dollar question
right?
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This is one of the big 401K mistakes we talked
about in the last video, being too aggressive
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or too conservative in your 401K investments.
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Too aggressive and you set yourself up for
huge losses in the next market crash.
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Too conservative and you won’t reach your
goals.
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I’ve got a video here on the channel about
how your investments change as you age but
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this is really where that free 401K checkup
from Blooom comes in handy.
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The Blooom software will look at your 401K
investments, your age and goals and will show
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you exactly where to adjust your money to
reach those goals.
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Not only that but it’s also going to uncover
the hidden fund fees you’re paying.
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It’s all free and takes less than two minutes
to check your 401K so I’ll leave a link
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to that in the video description below.
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The fourth 401K question here is a huge one,
Should you borrow from your 401K plan?
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Short answer, no!
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Taking a loan on your 401K account might seem
like easy money to pay off debt or whatever
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but it comes at some very high costs.
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First, you’re paying the money back with
interest and with after-tax dollars so you’re
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just destroying those sweet tax advantages
with 401K investing.
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A lot of plans also don’t let you contribute
while you’re paying back the loan so that
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could be a very long time you miss out on
the benefits like a company match and tax-advantages.
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Worse still here is the fact that you could
be up for a 10% penalty and taxes if you can’t
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repay the loan or leave your job before it’s
paid.
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Our fifth question we got was, How much should
I have saved and how do I get back on track
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with my 401K? so that’s why I wanted to
go back to those average 401K balances by
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age and give you a few tricks to help grow
your nest egg.
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Now we saw from the Fidelity survey the average
retirement balances by age, so you see here
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that the average 401K account is about $167,700
for people age 60 to 69.
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The red bar here is how many times your salary
Fidelity recommends you have invested by that
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age.
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Someone between the age of 40 to 49 they say
should have about three and a half years’
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worth of their salary saved by that point.
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There are a couple of huge warnings here with
both of these numbers, the average 401K balance
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and that recommendation for how much you should
have saved.
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First, if you’re comparing your 401K balance
by the average here, you might already be
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off track.
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That’s because most people are tragically
under-invested for retirement.
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That $167,000 average balance in your 60s
is only going to provide around $560 a month
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in retirement if you’re withdrawing 4% - so
that is definitely not a target you want to
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aim for.
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Second here, and while I like the simplicity
of Fidelity’s target for how many years’
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worth of salary to save, it’s not the kind
of personalized advice you need.
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This is 30+ years of your life you’re planning.
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Do you really want to leave it to a rule of
thumb or quick guess on how much you need?
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No, you want to save for your personal goals
and that bucket list you always wanted to
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do in retirement.
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So actually sit down and write out a story
around your retirement.
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What do you want to do and what does life
look like.
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This is not only going to help you put a number
on your expenses but it’s going to make
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your goals real.
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You’re going to have a mental picture of
retirement that will be your motivation to
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keep saving even when your budget gets tight.
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That’s your first tip for getting back on
track, just knowing exactly what your goals
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are and finding that motivation you need to
save.
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Then, and this is another of the big mistakes
we saw in the first video, you’ve got to
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watch those hidden fees in 401K plans.
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Between load fees, annual management and other
costs, these fees can cost you hundreds of
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thousands over decades of investing.
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In fact, Forbes found in one study that a
difference of just 0.93%, less than 1%, in
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fees can cost a single investor up to $215,000.
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Besides saving on the money you’ve already
put in, you can also put more money in once
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you reach 50 years old.
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These are called catch-up contributions and
in 2018 you’re allowed to put another $6,000
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a year into your account and get those tax
benefits once you reach 50.
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It’s a great way to build your nest egg
just before it’s ready to hatch.
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Blooom is going to help you answer a lot of
these questions and maybe more importantly
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find those hidden investment costs in your
401K plan.
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The website is offering a free 401K checkup
with the link below in the video description.
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It takes less than two minutes to connect
your 401K and the software is going to show
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you where you’re investing, how to adjust
your investments according to your personalized
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needs and all the hidden investment fees in
your plan.
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It’s totally free and there’s no obligation
after the checkup so click through and see
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how you can put your retirement investing
back on track.
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I’m going to do a complete review of Blooom
in our last video of the 401K investing series
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including how to put your 401K plan on auto-pilot
so you never have to worry about it again.
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I’ll walk you through the website and show
you how Blooom can help put your retirement
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investing back on track, all in our next video
so make sure you don’t miss it.
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We’re here Mondays, Wednesdays and Fridays
with the best videos on beating debt, making
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more money and making your money work for
you.
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If you’ve got a question about money, just
scroll down and ask it in the comments and
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we’ll answer it in a video.
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