Ever wondered if you're making some major mistakes with your 401(k)? You could be losing out on free money or taking on dangerous risks without even knowing it!
In today's episode, I dive into the top five mistakes people make with their 401(k) plans and how to steer clear of them. I discuss the importance of participation, the perils of being over-focused on company stock, and ensuring your portfolio is structured just right. From avoiding loans to understanding the severe consequences of early withdrawals, I lay it all out to help you maximize your retirement savings and set you on the path to financial freedom.
Want to make sure you're getting the most out of your 401(k) and securing your financial future? Tune in to the full episode now!
IN TODAY’S EPISODE, I DISCUSS:
- The critical mistake of not participating in your 401(k) and how to fix it
- The risks of over-concentrating in company stock and why diversification is key
- Ensuring your portfolio evolves with you and maintaining the right balance of risk
RECOMMENDED EPISODES FOR YOU
If you liked this episode, you'll love these ones:
The key to building the life you desire and deserve is to build your Money Machine—a powerful system designed to generate income that’s no longer tied to your work or efforts. This step-by-step guide goes beyond the general idea of personal finance and wealth creation and reveals the holistic approach to transforming your relationship with money to allow you to enjoy financial freedom and peace of mind.
Part money philosophy, part money mindset, part strategy, and part tactical action, these powerful frameworks will show you how to build your money machine.
TAKE THE FINANCIAL FREEDOM QUIZ:
Take this free quiz to see where you are on the path to financial freedom and what your next steps are to move you to a new financial destiny at http://www.YourFinancialFreedomQuiz.com
Ever wondered if you're making some major mistakes with your 401(k)? You could be losing out on free money or taking on dangerous risks without even knowing it!
In today's episode, I dive into the top five mistakes people make with their 401(k) plans and how to steer clear of them. I discuss the importance of participation, the perils of being over-focused on company stock, and ensuring your portfolio is structured just right. From avoiding loans to understanding the severe consequences of early withdrawals, I lay it all out to help you maximize your retirement savings and set you on the path to financial freedom.
Want to make sure you're getting the most out of your 401(k) and securing your financial future? Tune in to the full episode now!
IN TODAY’S EPISODE, I DISCUSS:
- The critical mistake of not participating in your 401(k) and how to fix it
- The risks of over-concentrating in company stock and why diversification is key
- Ensuring your portfolio evolves with you and maintaining the right balance of risk
RECOMMENDED EPISODES FOR YOU
If you liked this episode, you'll love these ones:
The key to building the life you desire and deserve is to build your Money Machine—a powerful system designed to generate income that’s no longer tied to your work or efforts. This step-by-step guide goes beyond the general idea of personal finance and wealth creation and reveals the holistic approach to transforming your relationship with money to allow you to enjoy financial freedom and peace of mind.
Part money philosophy, part money mindset, part strategy, and part tactical action, these powerful frameworks will show you how to build your money machine.
TAKE THE FINANCIAL FREEDOM QUIZ:
Take this free quiz to see where you are on the path to financial freedom and what your next steps are to move you to a new financial destiny at http://www.YourFinancialFreedomQuiz.com
This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom. Because that's what it really means to be an absolute entrepreneur. All right, you know that I'm a fan of 401 ks, and I get that they have had bad press, but fact of the matter is, when you look at studies and data, the majority of millionaires have built their millions of in traditional investing and especially 401s. But it's not without its pitfalls because too often we're not sure about how to operate in a 401K environment, what to do, what makes it work, and some mistakes to avoid. So in this episode, I want to build on some of the things that I think we need to be aware of, five in particular, to avoid. When you're dealing with phone case, first things first. I mean, the reality is that I want you to participate. If you, if you look at my book, building your money machine, I talk about the how it fits into your wealth priority ladder and when you want to do it, because especially if your employer is matching, y'all, if your employer is matching, you need to be participating. Because think about this. If I came into your house and I started dropping hundred dollar bills on the floor, would you pick them up? I think so. I think you would. Now, if I came into your house and I told you, hey, if you drop a $100 bill on the floor, I'll put one on top of it, then you would. You could pick it up. Would you do that? I'm betting you would. If you sat back and said, wait, wait, wait, every time that, that I put dollar 100 bill on the floor, Mel's putting another hundred dollar bill on the floor right next to it. Yep. You would do that all day long. But that's what your 401K is, especially with the match. But we're not doing it, see, because what's happening is the employer saying, hey, if you put money into your 401K, we will match you. You put 100 in. We put 100 in up to a certain limit. But is free money. Why are we not playing that game? It's free money. It's 100% return. So. And I get it. People say, oh, there's fees and expenses, and I get it, it's still 100% return. All right? And most 401 ks these days have much more low cost options. They're much more effective, much more efficient, and you can get in there and low fees. And if they are higher fees and limited, limited types of investments, have a conversation with your HR. Become that kind of spearhead of the possibility to see what other options you can put into play to do it, because it is far easier today than it ever was. So the first mistake that is being made is not participating. Get in the game. If there is a 401K now, I get it, you might sit back and say, I can barely pay my bills. This okay. All right. This is going to be some tough love. All right? Your financial future is depending on your financial present. Okay, let me say that again. Your financial future is depending on your financial present. Your ability to build wealth is determined by the decisions you're making today. The decisions you make with your money today should be in the service of your future. You want tomorrow. I've said it a couple different ways now, but here's why this is important. I get that you may be sitting back saying, I got this lifestyle and I don't have a lot left over. At the end of the day, I want you to be critical of the lifestyle. You know me, I'm not one to tell you not to spend, okay? I'm not one to tell you not to spend, but I am one to tell you that you spend consciously aware and intentional. It's when we are unconsciously spending on things that actually are momentary pleasures that really don't mean anything, that we lose sight of wealth creation. It's important for us to look at it and say, I want to make sure that I am funding the things that actually matter. Because the sooner I can get you in the game of wealth creation on the field to win the wealth game, the sooner I get you in, the easier it's going to be. Watch what happens at 20 years old. If you start investing every dollar you invest, call it an S and P 500 fund, eight to 10% over the long term, okay? Every dollar you invest will turn into 80 plus dollars. By the time your retirement age 80 times, it's going to go up 80, y'all. Did you hear that? All right. If you just wait five years from 20 to 25, that cuts in half. Five years cuts in half. Wait five more years to age 30, cuts in half again. Wait ten more years to age 40, you're less than ten times six, seven times multiple. Still good. But imagine the difference between an 80 times multiple, a 70 times multiple, and a seven times multiple. Participate, get in the game and get in early, stay in early. That means that it's important and it's to your best interest, to your financial futures best interest, to be critical about your spending and saying, look, I'm making money. I want to invest first and spend after. And if I don't have enough to carry the lifestyle I want, I got to go back and look at not my investing, but my income. Can I get a bigger shovel? Can I increase my income? Can I do some things that make it happen better? Okay, that's the first mistake, is just not getting in the game. All right, let's get in the game. Number two, over focused on company stock. Here's what I mean by that. What ends up happening is that sometimes your companies, like, my wife works for a publicly traded company, and she has the ability to invest in the company itself through a plan. And part of that investing is at a discount. So she can buy their stock at ten or 15% discount. And so she does that. But the challenge is, if her portfolio is primarily made up of that stock, then it's a tremendous amount of risk that we're taking on, because now I have an investment portfolio tied up in that stock. I have my employment and my job tied up in that stock. In other words, my income stream tied up in that company also. And if the company starts to have difficulty, the stock price goes down, my value of my portfolio goes down, my employment is in jeopardy. Maybe I get outsized, downsized, or fired. And now I had all my eggs in that one basket. So it's important for us to start to look at and say, is there too much concentration in a single company? Is there too much concentration in the company I'm employed with? If there is, you want to look for avenues and ability to diversify the portfolio to reduce that exposure. Now, sometimes when you get into these types of arrangements, you cannot diversify immediately. You don't have liquidity, it's called. They've restricted it for you for a period of time, but you want to be aware of those milestones so you can diversify it. And you're not so ultra focused in one company, especially if it's the same company that you're employed by. Okay? So that's, that's mistake number two. Number three is your portfolio itself, the portfolio structure. Okay? And this is, this is really about, um, are you being too conservative? Are you being too risky? And where I see this come into play is often, especially if you're in a long term employment type of situation, you get in and you set your portfolio structure up at the beginning, and you never change it. You never change it. So if you get in, say you're young, you're 25 years old, you start employment, everything's ultra aggressive. You're in aggressive growth funds and a more growth style type of portfolio with ETF's and index funds, and you keep that. And now you've worked 40 years there or 30 years there. Now you're in a time where that portfolio should be a bit more conservative and you have not adjusted the portfolio, which puts you at a level of undue risk. This speaks to this other element that I think should happen just generally when it comes to wealth management and wealth building and your nurturing, your financial freedom, and that is having a review rhythm to your things. I meet with my wealth team once a quarter, telephonically, and at least once, twice a year, face to face. Now, you may not need that, especially when you're starting out, but at least once a year, you're checking the pulse on the patient. You're looking at the portfolio structure. You're looking at, is it too, too risky? Or on the other hand, I've seen people that they are too conservative, okay? And so they don't get the level of returns that they should be getting. Like when you're young, if you have a decade or more, the market goes up eight out of ten years. Eight out of ten years, okay, if you look at any 20 year period, any 20 year period, 59% of the time, it's over 10%, 90% of the time, over 8%. Get in, stay in long, and make sure that you're doing it. Now, there's a subset of this mistake, and that is this. And I'm going to kind of draw this out for you because I've seen this happen, and it's a tragedy when it does. Okay, you have your 401k, okay? And you have the 401k. You put money into it from your check, okay, the employer puts money into it, okay? And you sit back and you think that you have invested in your 401k. You did in the account. The reality is that what that is, is that you just put it into an account. It's like dressing up to go to a party, but you never left the house to go to the party. Now you got to leave the house to the party. This is step one. There's a second step to it, and that once it's in the 401k, you have to tell it what investments to go into. So this is where you're going to tell it which ETF's and index funds and things like that to invest in. But it is a two step process. And what I've watched happen is people do this step, okay, they, they do this step, but they forget to do that step. And then they spend their whole time putting money in. Employer puts money in and they spend their whole time in a situation where their money is sitting in a money market account earning 2%. Y'all, if you put $10,000 or $5,000 away over a period of time, you're going to end up at 2%. You'll end up at $300,000 instead of a million and a half. Big difference. Big difference. Okay, so we got to make sure that, one, we are investing it. Two, we're doing it in the right portfolio. One of the easiest ways to do it if you want to look at it and I talk about it in my book, building your money machine is a target date index fund. And the reason that I say if you're starting out, you might want to do that is because they will, on their own, adjust the portfolio to be more conservative as you get closer. So they will do the checks for you right from the get go. And so the decision we want to remove friction is all you got to do is say, I'm going to fund it. I'm going to put my money into the 401K. I'm going to go into this target date index fund. And the only choice you got to make is the date. So you might sit back and say, I don't need this money for 30 years. I'm not retiring for 30 years. So you're going to look at it and say, I want a 2055 fund. That means that their investing perspective is over 30 years. So it's very aggressive now. And in ten years, it'll be less aggressive. In 20 years, it'll be less aggressive. In 30 years, it'll be very conservative. So they will make the adjustments over time for you. So if you're questioning it, if you're unsure about it, if you're not sure where to invest. Simplest way, target date index fund. One decision, one investment. Let it run. Okay? But get in the game. All right? Number four is taking a loan. Oh, man, I hear this all the time. I can take a loan from my four hundred. One k. First things first. Yes, you can. There's a difference between what you can do and what you should do. I don't think that we should ever, unless it is dire, dire, dire straits to take a loan from a 401K. Okay? There's a couple of bad things that happen with this and why I say this. The first is actually, it's developing a bad habit. If wealth creation is built on behaviors, habits, decisions, and choices, then the thing I need to avoid is developing bad habits, bad decisions, and bad choices. Taking a 401k loan is a bad habit. Okay? It. It is saying, hey, now, look, I get that things happen. Unplanned expenses, unplanned situations. I get it. But I'm trying to not destroy your financial future for something that happened today. There's other ways to try and solve the problem. Now, at the same time, in my book, building your money machine, I talk about the wealth priority ladder. I tell you that one of the first things I want you to do, because I want safety first. I want an unshakable financial foundation. Then we build growth. And if you did that piece of it right, if you built the bottom rungs of the wealth priority ladder right, you won't be needing to borrow from a 401k because you have the liquidity and the foundation to carry you through any kind of emergency to make that happen. So the first thing is that taking a loan will create bad habits. Okay? I just. That's, that's my belief. Number two, what it does is you, you lose out. There is a huge opportunity cost when you take a loan out, because not only are you taking loan and you say, oh, well, I'm paying interest to myself, great. But you lost all of the growth on that money that could have transpired. You might be paying interest to yourself at three or 4%, but you lost the growth at eight or 10% because it's not invested. Okay? So you. There's a huge opportunity cost when you do it. The third thing that happens is that there are many plans that when you have a loan outstanding, when you have a loan outstanding, you cannot make contributions or the company will not, will not do matches. So you lose the free money from the employer, potentially, and you lose the ability to make contributions. And if that's the case, not only did you lose the opportunity cost on the growth of what you took out, but you cannot continue the financial journey until the loan is paid off. Okay. And then the next is this. If you lose your job or you separate from employment for any reason, that loan gets accelerated and you have 60 days to pay it back. If you do not pay that loan back, then it's deemed what they call a distribution. That means the whole value of the loan becomes a distribution subject to taxes and penalties. Okay? And so now all of a sudden, if you had a$20,000 loan, it could cost you as much as$10,000 in taxes and penalties. Plus you gotta pay the loan back, you know? And if you didn't pay the loan back, then you're gonna be paying the tax. Okay? So there is that precarious situation. Should employment terminate for any reason? And then the last piece is that, sure, you're paying the loan back, you're paying interest to yourself. But watch what happens. When I contribute to a 401k, I'm taking it out of my salary. So I'm contributing pre tax money to the, is growing, growing, growing pre tax money. When I take the money out in a distribution, I pay tax on it. But when I take the money out as a loan, I'm not paying tax on it because it's expected to be paid back. So let's say I take $10,000 out as a loan and now I got to pay $10,000 back. It's going to cost me more than 10,000, not just because of the interest, but because of the taxes, because I'm paying it back with after tax dollars. So if I need to pay back $10,000 in a loan, I might have to earn $13,000. So I pay the tax on 13,000, end up with net of 10,000 to pay the full 10,000 back. So I'm paying the interest and the taxes because I have to pay it back with after tax issues. Okay. Dollars. Okay. So I think the loan is a absolute no no. It, I mean, you need to be on sheer devastation before you start to think about it, in my opinion. All right, now, last, last thing. Number five, early withdrawals. Okay. This man, look, again, in a dire situation, you don't have, you might not have a choice, but I think that there's a lot of different choices now. But taking your money out of the 401K prematurely is going to cost you taxes and penalties. You will lose as much as 50% of the money. So if I have$50,000 in there and I take the whole 50 out, by the time I'm done paying a 10% penalty, the tax on it, and some states have penalties like my state has a penalty on it. On early withdrawal also, you will lose half of it. So you end up net with 25,000 and you've lost it. And now you have no growth, you have nothing. An early withdrawal is a mistake. I made this mistake early on in my career, I was uneducated, uninformed. I was a cPA, but a CPA didn't teach me how to do this. I didn't understand wealth. I didn't understand money. That's not what it taught me. And when I left my big consulting job back in, in the late eighties, I left my big consulting job. I cashed out my four hundred one k. I cashed it out so I could, so I could go and I went and lived in Japan, and I didn't have to worry because I had all this money, but it cost me $0.50 on the dollar. I mean, I lost half of it in order to do that. And if I look back and say, had I had that money still invested for those decades, it would have been hundreds and hundreds of thousands of dollars in value today. But I was clueless and I did it. And I said, oh, I'll make it up. I got plenty of time. Y'all. Don't take out of your 401K early if there's any way. All right, so those are the five mistakes that I see with 401 ks that I wanna make sure that you're not doing. Because a 401K is a great vehicle when done right with the right plan, making sure the expenses and fees are low, and you should be participating in it. So make sure you're participating. Don't be too focused on a single company stock. Make sure you have the right portfolio structure in there. I don't take loans and don't take early withdrawals if there's any possibility. All right. All right. I hope that this helps. I hope that this sets you up for success with your 401K as one piece of your financial journey to financial freedom. All right? If there's anything that comes up, or if you have any questions, do me a favor, reach out to me, let me know. All right, until we get a chance to see you on the road or as I'm out there speaking, as I always say, always, always strive to live a life that outlives you soon. Thank you for listening to the affluent entrepreneur show. With me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group, and I'll see you there.
