How to Get $1 Million in your 401k & Become a Millionaire Investor

Updated : Sep 05, 2019 in Articles

How to Get $1 Million in your 401k & Become a Millionaire Investor


Welcome Rockstar Nation to the Financial Rockstar
show. I’m your host Scott Alan Turner ready to help you get out of debt, save more money,
and retire early. In the studio with me is producer Katie, who owns a dog who hates me.
On the show today we will be answering your questions about money, business, and life.
If you have a question you would like answered on the show visit GoAskScott.com How would you like to have $1M in your 401(k)?
In America, the 401(k) has become the number-one way we save for retirement. More than pensions,
savings accounts, IRAs, regular investment accounts – the average person’s balance in
their 401(k) is at an all-time high. What do you need to do to get your 401(k)
to $1 million by the time you retire? Here are the strategies you can use to make you
a millionaire investor. 1. Never cash it out
According to Fidelity research, 41% of people between ages 20 to 39 are cashing out their
401(k)s when they leave a job. If you leave your job and take a cash distribution
of your 401(k) you have to pay all the interest that’s due and a 10% penalty. Let’s say you have $50,000 in your 401(k)
and you leave your job. You want to use the money to buy a new car and take a vacation.
If you’re in the 20% tax bracket, and you pay a 10% penalty, you’re only going to come
away with $35,000. But the worst part is that’s money that will
never grow into your retirement. 2. Do not borrow against it
1 in 5 Americans borrow against their 401(k). But what’s the real cost of that 401(k) loan? When we decide to borrow money against our
401(k), it’s probably not going to be for a reason that is going to benefit our retirement.
It’s a sign we’re living beyond our means, and we’re not paying ourselves first. When you borrow against your 401(k), you’re
not saving and time is working against you. Your money is not compounding. If you’re unable to repay the loan, the amount
you have taken out gets treated as a withdrawal. You have to pay the interest on it plus a
10% penalty. Also, most 401(k) plans require that if you
leave your employer the loan must be repaid immediately. So you’re trapped in your job. 3. Roll it over
The costs of owning a mutual fund is called the expense ratio and you pay it every year
out of your investments. The funds in your 401(k) are going to have some of the highest
expense ratios – or fees – you’ll find. When you leave a job, you should consider
rolling your 401(k) over to an IRA where you can invest in low-cost index funds which have
much lower fees. You’ll save tens-to-hundreds of thousands of dollars in expenses depending
on how long ou have until your retirement. 4. Increase your contribution percent
Bump up your retirement contributions with every raise. A raise is found money. You’ll
never miss the money if you automatically invest your pay raise. 5. Invest heavily in stock
If you’re young, select funds in your 401(k) that are 100% in mutual funds or low-cost
index funds if they are available. The stock market has a proven history of generating
wealth for investors who are in it for the long haul. Young people don’t need to be invested
in a bunch of bonds. When you are decades away from retirement, you can ride out any
market swings. Be aggressive. 6. Be consistent
The stock market is going to have it’s wild rides. In 2008-2009, the market lost 50% of
its value. If we sold all of our holdings at the bottom, we’re probably still trying
to recover. But if we stuck with it and kept investing
even as the market continued to go down, we’re sitting pretty today. We made up all of the
losses and reaped the rewards of the big gains over the past few years. Discipline and dollar cost averaging are key
wealth builders that every millionaire knows about. If you follow those steps, invest early and
invest often, you’re almost guaranteed to retire with at least $1M Now on to your questions. Graham asks about the benefits of paing off
a mortgage vs. investing in other assets. For anyone who wants to retire either pretty
soon or decades away, we kind of know having a paid-off house is important heading into
retirement. Pretend someone buys a house and they put
every dollar into paying off the mortgage. They don’t put away anything for retirement
and throw money at their mortgage for fifteen years. Then they decide to start saving for
retirement. What happens is they end up being house rich and cash poor. Time isn’t on their
side because they missed out on fifteen years of having their investments compound in the
stock market. Compare that to someone who has a thirty year
mortgage but invests regularly over the entire thirty years. They will end up having to invest
significantly less money to end up with the same amount of money in
retirement as the person who didn’t invest for the first fifteen years. Let’s look at an example. And you can use
any investment calculator online to play with the numbers yourself and I encourage you to
try it. If you invest $375 a month for 30 years you can have $1M by retirement. But
if you wait to start investing and spend 10 years paying off your mortgage first, you
have to invest $1,200 a month for 20 years to get the same $1M. It’s a lot easier to
put away $375 a month than $1,200 a month. Additionally when you hit retirement you can’t
eat your house. A paid for house with no retirement money to feed yourself doesn’t do you any
good. You’ll end up selling your house to eat. If you want to retire early you’re going to
need a lot of investments and a paid off house. It used to be financial planners would tell
you to invest 15% of your income to maintain your lifestyle in retirement. Now that we’re
living longer, 20% is the new amount we need to start saving to maintain our standard of
living when we retire. If you want to retire early, you need to put
away even more. 30%, 40%, 50%. Some people choosing frugal and minimalist lifestyles
are putting away 75% of their income so they can retire in their 30’s and 40’s. It’s not
out of reach. Graham I would say as a starting point, invest
20% towards your retirement. Then come back and pay extra on the house. The longer you invest the more time your money
will grow. Compound interest is your best friend for a rockstar retirement. Thanks for the question Graham. Antonio writes in and asks – How do I get
out from under a foreclosure, I went through a divorce and my EX wife would not sign the
papers to sell the house or rent it out so it got taken back by the bank. I make very
good money now, and would like to know if there is anything I can do to fix my credit
report. Antonio I’m sorry to hear about your situation.
Unfortunately once a foreclosure is on your credit report it can’t be removed other than
by time. A foreclosure remains on your credit report
for seven years, but its impact to your FICO score will lessen over time. While a foreclosure
is considered a very negative event by your FICO score, it’s a common misconception that
it will ruin your score for a very long time. In fact, if you keep all of your other credit
obligations in good standing, your FICO score can begin to rebound in as little as 2 years. The important thing to keep in mind is that
a foreclosure is a single negative item, and if you keep this item isolated, it will be
much less damaging to your FICO score than if you had a foreclosure in addition to defaulting
on other credit obligations. Some things that will help you if you’re looking
to get into a new home. And these things apply to anyone that has bad credit and wants to
improve their credit score. 1. Pay all of your bills on time – never have
a late payment. Paying your bills on time accounts for 35% of your credit score
2. Don’t take out any more credit/loans 3. Save up more than a 20% down payment. You
won’t have to wait seven years to get a new home but you will end up paying a higher interest
rate because you’re considered a greater risk. The greater your down payment, the lower your
interest rate. 4. Keep a low credit utilization rate. This
counts for 30% of your credit score. Six months prior to applying for a mortgage keep your
debt to credit ratio as low as possible (money you spend on a credit card each month vs.
the available balance). You may have to rent 2-3 years before lenders
are willing to take the risk on you again. But if you follow those tips you certainly
won’t have to wait seven years. Thank you Antonio for the question. **I want to hear from you**
If you have a money-related question you would like answered, please visit XXX to get in
touch with me. That website has my email address, twitter, and you can also leave me a voicemail.
Please contact me, I’m here to help you. And that brings us to today’s money hack. Money Hacks
This is our money hacks segment where I show you simple ways to save money in your life
while maintaining a rockstar lifestyle. A couple years ago I was out wakeboarding
one afternoon and my board didn’t feel quite right after I landed a jump. I hit another
jump and again, something didn’t feel up to snuff. I dropped the handle, got back on the
boat, and I saw my board had cracked in half. So it was trashed. My friend Nick said ‘hey,
you should contact the manufacturer and see if they’ll replace it for you.’ I wouldn’t
have thought of that because the board was a couple years old. Long story short, I worked
with the manufacturer and the place where I originally bought the board and got a brand
new replacement for free. If you’re a homeowner, if you own some electronics
like a printer, if you own some mechanical equipment like a lawnmower, you might be spending
money if something breaks when you don’t have to. One more example because I want to get
you thinking – double paned energey efficient windows. These suckers are expensive. Six
of these windows have had the seal break in my house since I had the house built. The
manufacturer has a lifetime warranty that is transferrable to whoever owns the home.
All I have to do is pay for the labor to have them replaced. If you own a home with energy
efficient windows and it looks like there is condensation between the double panes,
chances are the seal is broke. Which means your window is broke. Which means it’s not
energy efficient anymore. Find out who the home builder was, find out who supplied the
windows, and find out if there is a warranty. You’ll save money on your energy bills if
you get those windows replaced. So before you run out to Home Depot and pay
for a replacement part, do a little online research first and see if the item is still
under warranty. And if it isn’t contact the manufacturer anyway and see if they can help
you out. You won’t know if you can get a discount or a free replacement unless you ask. Now back to your questions rockstar nation. Jason has a question about emergency funds.
Should money in an employee stock purchase program, in an annuity or in and 401(k) count
as an emergency fund? I know what you will say about the 401(k) because you recently
talked about not borrowing money against your 401(k) but if you have an emergency does that
qualify? An emergency fund should consist of cash or
cash equivalents such as checking accounts, savings accounts, or money market funds that
can be converted to cash quickly. So let’s talk about some sources you shouldn’t
be tapping for an emergency. Life insurance cash values have delay clauses
built into them of up to six months, so they don’t meet the definition of being quickly
available. A side note that six month clause is built in to keep a run on the issuers from
happening in case of some type of economic meltdown. Typically you can get the money
out quickly. But you should use these as a last resort. Additionally in the case of if you lose your
job or become disabled and unable to work, when you cash out a policy you’ve done two
things – you’re increasing your debt and reducing your the amount of life insurance you have.
When you don’t have an income, you need to maintain your life insurance, and you want
to avoid more debt. Lines of credit like a HELOC aren’t appropriate
because they can be pulled by the bank. That includes second mortgages. You add risk if
you’re relying on those. Employee stock purchase programs, annuities,
and 401(k)s are all geared towards investing and retirement. If you have an emergency and
you rely on your 401(k), what happens if the market goes down 50% like it did in 2008-2009?
Not only do you have less money for an emergency, if you withdraw your money at the market bottom,
you completely miss out on the market upswing when it recovers. You’re getting hit twice.
You’re retirement is getting a big ding in it. What you need to do is build up a 3-6 month
emergency fund in cash. Do that after all your debts are paid off, such as your credit
cards. In your case Jason I would do a couple things. 1. I would reduce my 401(k) withholding to
just the company match. Get that free money if you’re employer is giving you some. Then
take any extra you were putting in your 401(k) and start building up an emergency fund.
2. I like ESOPs because it’s more free money. But my preference is to get in and get out.
Sell the stock as quickly as you are allowed to. Often that’s every quarter depending on
the plan. We want diversified investments to reduce our risk. Investing in company stock
is much more risky. You will be taxed at the ordinary income rate instead of the long term
capital gains rate, but for me I prefer the lower risk of not holding on to company stock
and paying the higher tax rate. Employees who had company stock in Enron, Worldcom,
Lehman Brothers – when those companies went bankrupt the company stock was worth zero.
Even if you work for a stable company like WalMart – you would never expect WalMart to
go bankrupt – the risk is higher because of the lack of diversification. So while you could use your company stock,
an annuity, or the 401(k) as an emergency fund. They should be last resorts. It’s much
better and less risky to have an emergency fund in cash earning a little interest in
an online bank. And that’s not just my opinion by the way.
Everything I’ve shared with you is taught to people who want to become Certified Financial
Planners. Thanks for the question Jason. Leo asks How do you budget for unexpected
expenses. Especially for me I whitewater kayak and we find out last minute about a good rain
and higher river flows. If that isn’t happening, a friend will find a rare opportunity to see
a show in town. This problem isn’t even limited to experiences, a friends birthday comes up
or a collection is taken at work for something new. I feel like my budget could have a million
line items that may or may not be used because of this nonstandard spending. I have a good hold on putting money away for
car repairs; it is probably pretty sad when that is more predictable than your social
life! Usually, these expenses don’t feel extravagant and saying no would a bit extreme. So for all of us, Christmas is coming again
this year. At least the last time I checked anyway. But we know this, right? We’re going
to have to buy presents. We expect December 25th to come around. Which makes it expected. Kids always go back-to-school. Fido always
needs shots once-a-year. Christmas is always in December. Property taxes are always due
in January. Leo, you have a lot of different things you
spend money on that are different types of expenses. Travel, gifts, unplanned weekened
activities. Those are all great, but we need an easy way to handle them. There not what
we would call unexpected, but some of them are variable and infrequent throughout the
year. My two biggest variable expense categories
are Groceries and Entertainment. But here is what Entertainment includes for
me: – Eating out
– Babysitters – Wine and beer if we throw a party
– Concert tickets – Parking fees
– Any type of show or sporting event – Netflix, movies, magazines, books for the
family I also have a big Vacation budget. It includes
big trips overseas and little weekend getaways. And a third thing that we have budgeted for
is Gifts. Not Christmas gifts but everything else you might get hit with in a year – birthdays,
weddings, funerals, someone needs cheering up. That category was a lot harder and it
wasn’t accurate until we had about a year of tracking to make a good estimate as to
what we were spending each month, and what we wanted to spend each month. Our budgets don’t need to have a million line
items like you mentioned. What I would suggest is you collect for a month or two all of receipts
on everything you spend money on over the weekends. Then divide them up into a few categories
that make sense to you. You could have a *weekend blow money* category if that makes sense for
you. Once you have everything named and organized, add up how much your spending in each category.
This becomes your starting point for either increasing or cutting back in each of those
categories. But here is where the change has to occur
– once you decide how much money you want to spend each month on your weekend activities,
you need to stick to it. For me, I know if I eat at Ruth’s Chris Steakhouse the first
weekend of the month, my eating out budget is shot for the rest of the month. I may have
to go out with friends at the end of the month and get a diet coke for dinner. And there is one way that will make your life
easier when it comes to sticking to your plan and make it more likely you will stick to
the plan – take out in cash at the beginning of each month how much you plan on spending,
and spend no more than that amount. It’s called the envelope system. You can search for the
term envelope on my website and you’ll see an article as to how it works. The basics
are you have an envelope for every budget category – entertainment for example – and
you put cash in it on the first of the month. When you go out you grab cash from the envelope.
When you run out of cash in the month, that’s it. You won’t be entertained again until the
first of the next month. This isn’t a restrictive system. Quite the
opposite – it’s a system that will free you to make wiser choices. You’ll have more fun,
not less, because you’ll be learn to manage your money better and stretch a dollar farther.
And you’re spending limits can be whatever you’re comfortable with as long as you’re
meeting your long term saving goals. If you want a $1,000 a month outdoor activity spending
category and that makes you happy – I’m happy for you as long as your saving for your future
and aren’t going into debt to spend more time on the water. I guarantee if you try this for 90 days, you’ll
still be doing what you want, having fun, but you’ll end up saving more money and have
a better handle on your finances. Thanks for the question Leo. Ok, quick break, back in 30 seconds, and I’ll
be answering more of your questions. Hey rockstar nation, Scott Alan Turner here
for Ben & Jerry’s Ice Cream. Now folks, for those of you that are my long-time listeners,
you know I’m not one of those guys on the radio who promotes every product that shows
up on their desk. You’re never going to hear my trying to get you to buy high fructose
corn syrup, or recommending you buy the DVD collection for Star Trek Deep Space 9. No
– I have a name to uphold to you, my rockstar listeners. But if I were – if I were to recommend something
to you – I would tell you about Ben & Jerry’s Ice Cream. Just listen to the amazing names
of these flavors: Boom Chocolatta
The Tonight Dough from Jimmy Fallon Americone Dream from Stephen Colbert
That’s My Jam Core Cake Batter
Chocolate Therapy And someday with your help we can make it
happen – ??? Tell them Scott Alan Turner sent you. Welcome back, everyone. Richard writes in I have been a contract construction
foreman in the oil and gas industry for about 10 years and have recently been laid off.
I’m 54 years old and this industry has hit quite a downturn. I have a mortgage on my
house and a loan on a large RV that I lived in while traveling for my job and of course
living expenses. I owe about $55,000 on the RV. I bought it new 2-1/2 years ago it’s now
only worth about $40,000 to $45,000. Should I keep the RV in case I need to live in it? I live in Texas and I’ve heard plenty about
the oil and gas industry. It was like the gold rush in the 1800’s where towns sprang
up overnight. Land was being bought and flipped multiple times a month prices were so crazy.
Hotel rooms that were once $50 a night were suddenly $150, $200 a night because of the
demand. I can understand why you bought an RV. You can move to where the work is and
you never had to worry about finding a hotel room – it makes sense to me. You can pick up a temporary job – doing anything
you can – to keep paying on the RV loan, and hope you find some work soon. If you find
yourself not being able to get a job in oil and gas where you would need the RV, then
you have to consider selling. Since you’re upside down on the loan if you don’t have
the cash sitting around to pay the difference you have on the balance, you may need to borrow
the difference. Call whoever has the loan now and see what they can do for you. Say
– ‘hey, I’m out of work. The RV is worth $45k, I owe $55k. I’d rather be on the hook for
$10k instead of $55k, can I sign a loan for the difference between what the RV will sell
for and what I owe.’ If it’s a national company they might not be willing to work with you.
Call your local credit union or a local bank and explain the situation to them and see
what they can do too. If you decide to sell I wouldn’t raid your retirement accounts to
pay the difference. You can pick up an extra job to pay off the difference in twelve months.
It won’t be easy, but you can do it. There’s not an easy solution and because we
dont’ have a crystal ball to tell if you’re going to be out in the shale fields three
months from now, you have to make a decision on where you are today. And if you sell the
RV and find a job in five months – that’s ok. I wouldn’t look back and say ‘man, I wish
I would have kept that RV.’ You might need to unload it now to keep your head above water
until the industry starts hiring again. Thanks Richard and good luck. Choose to be more today, nation. More than
just average. You may not be there yet, but you can be closer than you were yesterday. Those are the words. I know you have a choice in who you listen
to for financial advice and I truly appreciate you letting me borrow your ears today. I’m
here to help you. Thank you, thank you, thank you. That’s it for this episode. I’m your host
Scott Alan Turner. Rockstar Katie is my producer. Today’s episode was powered by Ben & Jerry’s
ice cream. We won’t quit until we get a flavor named after the show. Thanks for listening!

15 Comments

  • If you work 40+ years, and your spouse works 20+ years, and each year you both contribute the maximum possible to an IRA invested in a USA stock index fund, you will retire with $1M of savings. 1M is a good deal easier to attain with 401k accounts, because the annual maximum is higher.

  • i have a 401 K i am matched to 6 percent, i keep getting statement's saying I need to increase to 10 percent, work will only match up to 6 percent. also I have silver/ gold, i was thinking doing my own Roth IRA, or buy stock's.

  • Scott please enlighten us the difference between manage account and self directed account particularly on fees,how is it calculated and the frequencies of fees. Thanks

  • How can I find my 401K, that have been sitting in different accounts for years. I lost all my information during a fire. Can you help send me in the right direction? Thank you for your time and consideration!

  • I cannot be convinced that 401K loans are such a bad thing. In the year 2000, I borrowed the 10% down needed to buy a house from my 401K. It's the only time I have taken out a 401K loan. I don't think that responsible 401K loans in a bear market are a great tragedy. When the 9/11 terrorist attacks happened that money was in a loan fund and that money was not gone. In 2008 my employer pulled everything out of our 401K to keep the whole thing from being lost. Then they took our profit sharing and put it into our 401K. Since 1995 we have had five different investment firms administrating our 401K. Is it possible that employers can do things that hurt your 401K? I always felt they should have asked us what we wanted to be done with our profit sharing funds. It was technically our money.

  • Have you tried dollar cost averaging and have proven viability? I guarantee this will not work. Every wall Streeter wants you to do that so they can get out while you are stuck in a position.

  • "1M is a good deal easier to attain with 401k accounts, because the annual maximum is higher."….and there is a company match. That extra 3 to 5% make a huge difference over time.

  • My mom is house rich and cash poor. Her house is paid off and worth $350K. Her income is $2K a month. She doesn't want to move so we're looking at a reverse mortgage loan for about $200K.

  • Jungle conclusions…. https://chrome.google.com/webstore/detail/threelly-ai-for-youtube/dfohlnjmjiipcppekkbhbabjbnikkibo

  • Two things that Scott says early on in this video I have a problem with. 1) Never borrow from your 401k!! I agree don't borrow a ton, like the upper limit that your plan allows, but borrowing a small amount say $10k or under, I don't see a problem. Maybe you have a large purchase that you would rather not liquidate cash for. The interest you pay back goes to your account, so why not. 2) Maybe my plan is just friggin crazy good, but I barely pay $12 a YEAR, in plan administration/management fees. That's cheap as hell..am I the only one.?

  • Honestly the only reason I have a 401k is because my employee does a contribution. If they didn’t, I’d just put my money in an Ira and brokerage account

Leave a Reply

Your email address will not be published. Required fields are marked *