401K Loans and Other Ways to Doom Your Retirement

Updated : Sep 02, 2019 in Articles

401K Loans and Other Ways to Doom Your Retirement


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

8 Comments

  • I'll just like to support your channel, I personally have no need for this.

    Eventhough I don't feel it, we seem the have the best pensionfund in the world.

  • Joe, is it worth having a 401k through my company who does a dollar for dollar match? I’m not sure what or how many fees I’m getting charged but what’s a good way to tell if I should stay for that match vs. the fees. Thanks!

  • It's quite different over here in Europe. For example here in Belgium, we can save a maximum of 940 euros per year for retirement and we get 30% tax cuts on that 940 euro. The amount above 940 is also available via tax cuts of just 25% and there also is a maximum of I believe 1020 euros. 401K seems like a better option.

  • One of the biggest mistake, is when people assume their company is investing for them. No they don’t! I have help about 10 or so coworkers that have worked in the hospital for 30year and never rebalance their portfolios. They were put in only one mutual fund. The company offered 22 mutual funds with fidelity 😩. I ask why didn’t you ever go inside your account? Same answer everytime! “I thought they did it for me.” Ex: one person Make 80k and 401k has 90k and worked there for 30years! Mind blowing! Sad! I wish everyone would listen to you! Keep up the great work!

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