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Everything You Need to Know About a 401K | Investing for Beginners - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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Americans are missing out on $24 billion in
free retirement savings each year.
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Your piece of that could be as high as $250,000
if you don’t know exactly how a 401k works
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and how to take advantage of it.
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In this video, I’ll show you how a 401k
plan works, the average balance by age and
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how to get the most out of your plan.
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I’ll also reveal why I hate these plans
but why you should invest anyway.
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We’re talking 401k investments 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.
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I want to send a special shout out to everyone
in the community, thank you for taking a little
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of your time to be here today.
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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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We have got a retirement crisis in America!
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Nearly half of all retirees depend on social
security, about a thousand dollars a month.
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Worse though is that investors are passing
up free money and the best return you’ll
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ever make.
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A new study found that one-in-four Americans
aren’t maxing out their company’s 401k
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match, missing out on $1,336 a year.
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That’s free money and at the market rate
of return, it’s costing you over $250,000
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over 35 years.
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More than $24 billion of this free money is
missed every year with younger people missing
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more.
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One-in-three workers between 25 and 30 are
missing out on this free money.
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I get it though.
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When you’re barely making enough as it is,
you’re not thinking about maxing out your
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401k plan and there’s a lot of confusion
around what these plans really do.
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We’re changing that in this video.
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I’ll show you how a 401k works and why it’s
by far the best investment you’ll ever make.
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I’ll show you the average 401k balance by
age and how much to put into your plan.
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I’ll also reveal why I secretly hate 401k
plans but why you should invest anyway.
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As an informal survey of the community though,
I want to get your input here.
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Do you have a 401k plan at work and what is
your company match?
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Does your 401k match dollar for dollar or
50%?
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Scroll down and tell us in the comments and
we’ll show the results in a future video.
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A 401k 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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So breaking this down.
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Your 401k plan is a special benefit set up
by your company.
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You decide how much you want to put in from
your paycheck and the company matches some
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of that, giving you free money rewarding you
for saving.
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Your money goes into an account you own, managed
by an investment company so totally separate
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from your employer.
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Plus…PLUS!
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You don’t have to pay taxes on the money
you put into your account until you take it
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out in retirement!
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Now there’s a catch to how much free money
your employer is going to give you.
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Most companies cap this at 6% of your salary.
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So if you save 6% of your salary for retirement,
your company will match it or put in half
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depending on the program.
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Think about that.
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If you make $30,000 a year, you only need
to put in $1,800 a year, that’s 6% so about
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$150 a month, and your company is going to
give you an extra $900 a month to retire on.
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That $150 a month on your part plus the company
match is going to grow to over half a million
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dollars over 35 years and provide an extra
$23,000 a year in retirement.
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There’s one more thing you need to know
about your 401k plan before we look at those
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average balances by age and a strategy to
take advantage of all this.
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Your company will have a vesting schedule
which is how much and when you get to keep
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the money your company puts 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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Here we see average 401k balances by age and
this is data from Fidelity.
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So Americans in their 30s have an average
of $38,000 saved in their 401k plan.
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By the time you get to retirement, so that
age range between 60 and 69, the average American
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has just under $170,000 in a 401k.
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These red lines and the numbers on the right
are what Fidelity recommends you have saved
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by that time and this is in number of times
your salary.
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So by your 30s, they recommend having about
two-times your annual salary saved.
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That recommendation increases to 9-times your
salary by the time you retire so for example,
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if you make $36,000 a year then Fidelity says
you should have about $324,000 in your 401k
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plan by the time you retire.
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There is obviously a huge gap in that recommendation
and what people actually have saved for retirement.
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That $168,000 average 401k balance is only
enough to provide about $560 a month if you’re
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taking out 4% a year.
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Basically, the average retiree here is looking
at running out of money in less than 10 years.
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Of course, this is the average of people that
have anything saved in their 401k program.
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This doesn’t even include the 48 million
Americans with nothing saved at all, that’s
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three-in-ten people that will rely completely
on about a thousand a month from social security
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to live on.
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But this is a problem that is so easy to fix.
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Having that company 401k match means you only
need to contribute a small part of your check
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to be ready for retirement.
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Going back to our example, if you’re contributing
just $150 a month and getting a half match,
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then you’re set for a half million dollar
payday in retirement.
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Even contributing half that, so just $75 a
month and getting your company match, means
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having over $250,000 by the time you reach
65.
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But I want you to try maxing out your company
match, that’s the real secret to 401k plans.
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This means finding out your company’s match
rules.
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If they offer to match up to 6% of your salary,
then contribute 6% of your salary.
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If they only match up to 3% then at least
contribute that much.
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You can take it out of each check, just one
check a month or even take the whole year’s
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contribution out all at once.
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Now I want to talk about 401k loans pros and
cons and why I have a love-hate relationship
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with 401k plans.
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If you’re likin’ the video though and
the information, do me a favor and tap that
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thumbs up button below.
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I see a lot of people fall for the 401k loan
trap and it can seem like a way to get a cheap
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loan.
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How a 401k loan works is you borrow from the
account value, basically taking that amount
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out of your savings.
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You usually have five years to repay the loan
and everything you repay, interest and all,
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goes back into your 401k account.
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So basically you’re paying yourself the
interest.
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That might seem like an interest-free loan
and a good way to get a little extra cash
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but there are some big downsides to a 401k
loan.
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The downsides to a 401k loan are that you’re
missing out on a lot of returns and company
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match while you repay the loan.
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Your money is not longer invested so the only
return is that interest you pay and most plans
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won’t let you contribute while you pay back
your loan.
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That means no company match either.
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Even worse, if you leave your job and can’t
repay the loan, you’ll owe a 10% penalty
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and the taxes on the amount.
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So the simple answer is don’t borrow on
your 401k account.
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Now after all this, after telling you why
a 401k plan is such a great deal and how you
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absolutely must be contributing to your plan,
I want to tell you why I hate these programs.
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And the reason here is that 401k plans are
so damn expensive!
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The average 401k plan charges you 1% on your
money each year just to run the plan.
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On top of that, you pay a fee for each fund
you hold in your plan, an expense ratio that
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can average another 1% on the mutual funds.
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And while I love exchange traded funds, those
ETFs that trade like stocks and charge ridiculously
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low fees, most 401k plans only allow you to
invest in mutual funds provided by the investment
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company.
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Those mutual funds are typically five-times
more expensive than an ETF alternative.
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Forbes found in one study that a difference
of just 0.93%, less than one percent difference
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in fees, can cost a single investor up to
$215,000 in their retirement.
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Now the tragedy here is you really can’t
do much about it.
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Your company sets up the plan with the investment
company and the fees are set.
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I still want you to max out your company match
because that’s free money, even despite
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those higher fees.
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Getting a 50% match on your contributions
is like an instant 50% return.
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That’s the kind of return that would make
even Warren Buffett salivate so don’t miss
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out on the benefits of a 401k.
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I’m linking here to a new dividend portfolio
I just created, if you want your dividend
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stocks to pay your bills, click on the video
to the right.
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Seven dividend stocks that will put cash in
your pocket every single month.
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Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button
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