What the Tech is a 401(k)?: Podcast

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What the Tech is a 401(k)?: Podcast

June 26, 2019 101 Level 401k Employer Benefits Investing Podcast Retirement Taxes 0
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Episode 6. of Techie Personal Finance Bootcamp

Please be aware. Transcript is for show note purposes only and has not been edited for accuracy. For best experience, I encourage you to listen to the audio version. Transcribed by https://otter.ai

1:15
Hello, welcome to this episode of techie personal finance boot camp. Today, I’m going to have fun talking to you about what the tech is a 401k. And so what I’m trying to do here is just give you a little bit more confidence. I know, one of the biggest things that I realized when I was first getting into financial planning and figuring out that financial planning existed, it had a lot to do with my first 401k and I’ll talk about that in a second. But what I found out was a lot of people don’t understand how their basic 401k works at work. And that’s something that I want to help address with this episode today.

My First 401(k) 2:00

Let me tell you about my first 401k so I was about 19-20 years old when I became eligible to start contributing to my first ever 401k I was working at a community bank back in Illinois. And it really opened up my eyes to what investing can do and some of the benefits of that. So actually putting your money to work for you, that was the first time I ever realized how that actually works.

Previous to that I’ve heard stuff and had like one very minimal consumer education class where they talked about saving pie not too much about investment at all, because that doesn’t really ring a bell. And I know my parents opened up a couple of savings accounts for me when I was younger, but other than that money wasn’t really top of mind. I was really good with numbers, and I enjoyed that. But I really didn’t understand investing or all the cool things that investing could potentially do.

So small amounts add up. I’m going to show you an example a little bit later about what that means in real dollars. And if you’re watching the video version of this podcast, you’ll actually see the comparison as a visual as well. So that will be helpful and I’ll make sure that I get it into the show
notes in case you want to check that out. So another thing was when I was first enrolling is right about before the recession started.

So initially, initially, the freaked me out a little bit because the small amount of investments that I had started to put up probably for the year, so I’m putting into that account ended up losing a significant amount of value. But what I realized was, that was all relative $1,000 $2,000 at that time when I was 1920 years old, and start to see that fall in half. Yes, it’s scary because that’s a lot of money to a 19-20 yearold. But at the same time, in the grand scheme of things, it wasn’t going to ruin my life. It wasn’t going to impact my life really in any way unless I was gonna let the stress get to me about it. What I did start to see was what happens in a recession is things start to become more affordable. So you may see that a lot more sales are going on at the stores and things like that.


The same thing happens with investments. So when your investments fall, if you’re still buying into it, which is what you’re doing with the 401k, every single paycheck, you’re actually buying a lot more shares for significantly cheaper than they were the previous time period before the recession hit.

So it’s actually a really great opportunity for young people. And not even just young people, anyone who’s still actively saving for retirement. Anyone that’s in their 50s and 60s and still working, a recession is probably a little bit scarier for them because they may be dealing with $500,000 or a million dollars before a recession hits then they may be impacted dramatically, it will definitely stress them out as they’re getting closer to retirement age. But as long as you’re still saving pretty substantially and hopefully, they’ve diversified their assets a little bit where some of their assets may have held up a little bit better during those times. So I’m not gonna be able to dive too much into how to diversify your portfolio other than talk about the benefits of why doing so is important. We’ll get to that later in the show.

So I mentioned this at the intro like I, I was so surprised that some of the older people I was working with they were in their 30s 40s 50s. And I was about 20 years old when all this stuff was happening. And I was really getting interested in my 401k, they had no clue what was going on in their 401k. They didn’t understand how it works. They just did what they were told to do by HR, or maybe they did a quick online search and says, yep, make sure you get that employer match. And we’ll talk about what the employer matches. It’s a really great feature most 401ks have.

5:37
So that was something that really started to open up my eyes to how a financial planner could actually help a lot of people because a lot of people just are either too busy or lack of interest in their financial topics. And it’s it’s pretty overwhelming, if it’s not something that you’re interested in. So, approaching these topics, hopefully through my podcast, you’re going to get a little bit more comfortable with these things and

6:00
So that you had more confidence as you’re applying towards your financial life and in any form or fashion. So start to build some of that confidence, and then start to feel like you’re making better informed decisions.

Why 401(k)s are Important 6:10

So why is a 401k even important? So it’s interesting, probably 30 years ago, most employers most larger employers, big, big corporations, provided their employees a pension. So it was very common actually, for a lot of probably either your parents or grandparents to work at the same company for almost their whole career, or probably they did work there for the whole career. They ended up retiring with a pension.

A pension is kind of like a guaranteed amount that they’re going to receive every single month, kind of like the paycheck while they were working. And the difference is, the employer was responsible for setting that up and managing that making sure it didn’t run out of money, and then also to make sure that they’re able to keep sending all their old employees who have now retired, funds every single month without having any issues.

They started to become a lot of stress on employers. Employers started to get sued and mismanage investments. And so what happened is they moved away from the pension system. And now that’s when 401k started to become introduced and became more popular. And so they shifted the responsibility of retirement planning from their employers to their employees, which isn’t necessarily a bad thing.

I think it’s good for you to be more informed and have more control over your financial future. The problem is, with that transition, no one knew how to talk about it or knew how to educate their employees, or their children as they’re starting to kind of grow into these new landscape for financial planning and retirement planning. And if you think about it, life expectancies had been gradually increasing pretty steadily. And so 30 years ago, the life expectancy was a little bit lower than it is now. And so it wasn’t as much stress

8:00
on the pension system or retirement plans if people passed away earlier than what you’d expect nowadays. Now, you could be living in for 20 to 30 years in retirement pretty easily, especially if you’re a couple. There’s a good chance one of you is going to live 20 to 30 years in retirement. So that’s a lot of time where you need to still have a paycheck coming from somewhere.

Social Security exists, but it’s not meant to cover your whole lifestyle. So if you’re used to making $70,000, $100,000, $250,000, Social Security is not going to get anywhere near that. You might be lucky to get $30,000- $40,000 from Social Security, that’d be a really high benefit from them. So I would not be relying on them to provide that same lifestyle that you may be used to or uncomfortable with today. And so that’s why 401k is important. You have the sole responsibility of creating and supplying a plan of income for yourself in the future.

9:00
It gets even more layers of responsibility when you have a significant other because you don’t want to use all the money either on your medical expenses or whatever it be. You pass away and your significant other, your spouse is still alive, and they don’t have any money left. So that’s a big fear of most people when they do retire. And maybe you’re listening to this show now in your 20s. In your 30s, you’re like, Well, I’m not really too concerned about it so far away, like why? Why would I care about it now?

There’s actually a huge benefit of letting time in your investments do the heavy lifting for you. Because if you get started earlier, it’s going to make your life so much easier. And it’s almost going to be like an autopilot from that financial standpoint. And if you don’t do those things, it’s just a huge burden to have to carry. And the biggest fear of most people when they do finally pull the trigger and retirement and this starts to become more top of mind for people in their late 50s. And in their 60s as they’re approaching retirement. Holy smokes do I have enough? Am I going to run out of money? And so that’s, that’s the biggest fear, it’s actually even above dying. So it’s pretty crazy that that’s the thing that’s most Top of Mind is one of the highest fears in retirement.

Power of Time (Compound Interest) 10:12

So I promise you as on talk a little bit about the power of time and just the benefits of what that can do for you. So I’m going to kind of explain this example. Because obviously, I don’t have visuals for you, they will be in the show notes. But this is what we’re going to be looking at the power of time and compounding interest.

So we’re going to be looking at the example of three different start periods for someone. This is all hypothetical and uses for projections. for illustrative purposes only. Your returns may vary your returns year to year may be negative, they might be all over the place. But for this example, we’re using someone starting to contribute $300 a month into your retirement account, and they’re going to do this from whatever date they start between the three examples, all the way through age 65. And we’re going to use an assumed return rate of 7%. So again, that returns going to vary substantially from your real life scenario. But this is just a good illustrated purpose, really, you need to assess your own situation as far as how you’re managing your investments, whether that’s going to be an accurate number.

So let’s, let’s look at the first starting period. So I’m a big fan of starting early. So let’s say someone starts at age 23. They graduated from college, they get their first 401k plan and they say, you know what, I don’t really have that much responsibility right now. I can start putting $300 a month towards this, if you just do the 300 a month, starting at age 23, through age 65, and a 7% return, you’re going to contribute a total of $151,200 over that time period, sounds like a lot, right? But you’re spreading that over the course of 42 years. So it’s not it’s not that much in the grand scheme of it.

12:00
When you kind of break it out that way, it’s $3,600 a year, basically, what happens is by having that time, and that potential growth and that compounded interest, the growth that would occur would be $767,230. So that is a ridiculous amount of growth, right? And so the total is $918,438. So your investment would have grown from $151,200 to $918,438. And that’s just contributing $3,600 a year for the next 42 years.

What happens? What’s the dramatic impact of waiting 10 years? And this happens a lot because a lot of people don’t want to think about retirement, or it doesn’t even seem like a real thing. Like what the heck is retirement when you’re in your 20s? Right? But that could be a mistake, and we’ll look at a reason why. So if you waited 10 years until you were age 33, to do that same thing saving $300 a month until a

13:00
65 at a 7% return, well, you’re saving for 10 last year, so you actually don’t save as much initially, for the previous example, you ended up saving 115 $1,200. But by getting a start 10 years later, you save substantially less. So you’re only putting $115,200 it’s still the same $3,600 a year. The difference is just subtract the 10 years of doing that, subtract to that 10 years is pretty substantial. And it’s more than that difference between your total savings, the growth amount that would actually occur in this scenario would be $315,823. drastically less huge. It’s, it’s less than half of what you ended would have ended up with, if you would have started 10 years earlier. And it’s not like you’re saving half the money you still saved a good chunk of the same amount. So it’s pretty ridiculous. So let’s compare those two total. So if you start at age 23, you will

14:00
I’ve had $918,438 wait in 10 years, sure you save a little bit of money by not saving over those 10 years, but your totals $431,000. And so it’s not even close. It’s not even close. It’s pretty ridiculous. And I’m not even to go into the third one, wait until age 43. That’s just a horrible idea. Because you end up with practically nothing when you retire. And, and so that’s not even worth going into Do not wait. If you are listening to this and you’re in your 40s and you haven’t saved anything yet. It’s not to say that you can’t turn things around, but you have to start saving substantially more than $300 a month to even get ballpark with someone that would have started at age 23. If you’re younger version of yourself where to start at age 23

14:49
they would have been sitting in a lot more comfortable position. So just be aware of that. And I’m not saying that you’re doomed. If you waited that long. I’m just saying there’s a lot more work to do and

15:00
At $300 a month, it will not do it at that point. For anyone watching the video version, it looks dramatic. So you look at if you start at age 23, practically saving not that much more than some of the other options. But the growth is more than double. And so it’s pretty substantial. It’s pretty eye-popping, actually, if you take a look at it, so I encourage you to check this out. It’s Yeah, just dramatic. And if you start at age 43, you can see kind of what I was talking about. It’s just practically nothing. You barely double what your savings is where if you start at age 23, you compound that so significantly, that it’s a multiple of what you would have saved in over that time period.

Benefits of 401(k)

Obviously, we talked about that, but what are some of the other benefits of your 401k it’s going to force you to save for retirement, I mentioned that it’s not really something that’s top of mind. So anything that’s going to help you do something that’s that’s not high interest, and it doesn’t give you that immediate short term benefit.

16:00
is helpful because it’s going to be something that you’ll do automatically. It’s not like you have to decide every single month, well, how much should I put in this month, you tell your employer what you’re going to do. And then it saves that much every single paycheck. So it’s an automatic retirement savings that you kind of set on just an automatic situation there. There’s some tax incentives too. So even if you have a Roth option for your phone, K, there’s special tax treatment will go into those comparisons between a traditional 401k and a Roth 401k. Either way, they both have really cool tax incentives to incentivize you to actually save for retirement because the government knows that a lot of people are not doing what they should be doing. And they don’t want people to be living in the streets and Social Security. That’s what social security was invented for is that keep people from living and dying in the streets during the Great Depression. Hopefully, that’s that’s not even going to be closest scenario for you or anyone that you know, but that’s why it’s beneficial. Start saving and and really, so security is not going to do too much more than

17:00
You basic housing and very minimal basic level of nutrition as well. Another cool benefit, almost all employers offer an employer match, which means if you put a certain amount of money in your employer is going to match it, either a fraction of it or a certain amount dollar for dollar. So that’s free money. And it’s, it’s, that’s one way to quickly increase your savings that the previous example that I kind of talked you through, that didn’t even factor in your employer putting in additional money for you, too. So that’s additional growth that’s going to help you feel more confident as you’re approaching retirement. And maybe you’ve been thinking about retiring early if you probably won’t be able to retire early with $300 a month but if you are able to increase it as your pay increases, it gives you a lot more flexibility and freedom to live the life you want to and make sure that if you’re not enjoying work that you have more options and flexibility at that point. There’s also some unique credit their protection so if you’re going through bankruptcy or getting sued

18:00
The assets in your 401k are going to be protected from a lot of those things doesn’t protect you from things like divorce, actually quite the opposite your required usually to whatever the court decides is going to get kind of protection out and the spouse could be entitled to it. If you’re on the receiving end, then you would be entitled to a portion of that. So something to be aware of.

Traditional 401(k) Vs. Roth 401(k)

Related: Should I Do a Roth Conversion

What I want to talk with you about right now is the the cool tech treatment between the traditional and the rock. So we’ll work down the traditional side first. And so another way that people may categorize and I call this aka also known as pre tax dollars, that’s the traditional 401k. The cool things about that is it’s text free when it goes in, which means that it actually reduces your taxes for the years that you apply your contributions. And so that reduces your taxable income which is helpful both on the federal and state level. It doesn’t relieve you from Social Security or Medicare.

19:00
taxes, though. So that’s important to be aware of. But the federal taxes and state taxes, that is something that is put off for now. So it’s tax free, it helps you reduce your taxable income for that year. And then the growth is also tax free. So as long as you leave your investments in there, if there’s any growth at all, that’s going to be tax free as it’s growing. And the big, the big thing to be aware of, though, is, eventually the IRS does want their money, the government wants their money, they’re going to tax you once you’re withdrawn. So it may be 20 years from now, 30 years from now, you’re starting really early 40 years from now. So when you retire it and start to take money out, that’s when it starts getting treated as taxable income, which who knows what the tax brackets are gonna look like at that point in time, but just know that that’s when that will be kind of filling your income brackets at that time. So how that compares to a Roth 401k. So Roth is actually the opposite. And if you take a look at the visual I provide, there’s like a complete opposite look to what the wrath looks like and

20:00
Another way that people consider a Roth account is post-tax. So it’s actually you pay taxes. I know this is a little bit complex by I want to make sure that you’re aware of it in case you ever see it while you’re looking at your text forms or anything like this. But if you make traditional contributions that are not allowed for tax deductions, those are also called post-tax deductions, but they sit in your traditional account. It’s very different. And it’s not that preferential way. If that ever does happen, you want to try to get that to a Roth account, but there’s some complexity there. So make sure you’re working with someone or do your due diligence, make sure you handle that right way. But a Roth account is also called post-tax. So I wanted to make sure I gave you that information. So you’re not too confused if you run into that scenario. But again, it’s the opposite of how the traditional 401k operates. Your contributions are actually taxed so it doesn’t save you in taxes today or this year. It’s tax free as it grows

21:00
So that’s the same as the traditional 401k. Right. And then the cool part about this is, as you take money out when you retire, that’s all tax-free. So it’s basically that inverse, or the opposite of what the traditional 401k does, instead of being taxed at the end, when you make the withdrawals, your texts at the beginning with the wrath 401k. And then when you withdraw your funds in the wrath, it’s actually tax-free. So an awesome benefit, and actually encourage people to try to have a little bit of both because it allows for a lot of texts, strategies, and flexibility during retirement.

How Do Contributions Work?

How do your contributions even work? You may be like, Oh, yeah, from one case on awesome, how I want to get a little bit more comfortable with what to expect as I’m making contributions. And so, contributions are typically going to be applied on a per paycheck situation, anything you put into your account is your money. So it kind of gets categorized and is tracked as this is your money. If it grows.

22:00
That’s still all your money, if it goes down, whatever is left of value of that portion is still yours. So you’re never going to lose them up that you put in. But your investments could potentially lose value, which is still your money, it just may not be as much, but it’s not like your money disappears or you lose investments or assets of those things are yours to keep, and they’re able to move with you to which we’ll talk about a little bit later.

22:26
employer contributions though, so when the employer gives you that free money, that free employer match, there’s that kind of gets categorized separately and sometimes your employer makes it available immediately for you and it becomes yours, the equivalent of your own contributions. But sometimes your employer wants to buuild in incentives to make sure you’re going to stick around with the company so they may wait. make you wait a few years to get the full amount but every year that goes by you receive an additional portion that becomes your so you’ll see everything in your account. But it may not be all

23:00
years if you quit that day, because you have to wait a certain amount of years and, and it varies, it might be three years, it might be four years, you’ll want to know what that looks like, especially if it’s part of your strategy when making a career change, thinking that you’re going to get a certain amount and be shocked if for some reason, you weren’t fully vested with your employer shares. So that’s what it’s called a vesting schedule. That’s what you’d want to look for in your documents for 401k.

23:26
And there’s actually a limit to what you can contribute and deduct from your taxes if you’re doing traditional, and it’s the same contribution limit, even if you’re doing the Roth post tax type contribution. So contribution limit for 2019 is $19,000. And if you happen to be over the age of 50, you can make an additional $6,000 a year. And remember that it happens per paycheck, you actually can’t pay it out of your own checking account or savings account. It’s not like you wait to the end of year and so you know what I want to make these contributions. I dump all this money and now that’s

24:00
How it works, it has to come out of your paycheck as you go. So make sure you plan accordingly and and make sure that you’re maximizing your employer match and benefit as well.

How to Distributions Work?

24:10
Alright, so you may be wondering, well, how the how the heck do I get the money out. And hopefully, hopefully you’re not in a situation where you need to, because it’s definitely better to let your investments have a long term growth horizon. Wait till you’re in retirement. And there’s a few reasons for that. So you’re actually not allowed to make normal distributions until you reach age 59 and a half. So some of you that may be listening to the Who’s that may be way out there. If you withdraw your funds earlier than that, there’s actually a 10% penalty, which doesn’t necessarily feel good. If your balances are pretty small. A lot of people justify it by saying that it’s not really that big of a deal. And as you change employers, you end up taking it out. The problem with that is if you keep changing players and you keep doing that, you’re going to keep starting all over and we know what happens a lot of times when you take that money out when

25:00
You move from 401k to 401k, you’re just spending on miscellaneous things, it’s not something that you’re moving at 10 other investments or it’s adding significant amount of value to your situation. So if you’re able to move from one party to pour it in, net, cash out your 401k is that’s going to be better, you can still consolidate them in another form or fashion. So as you take the money out of the traditional side, we’ve covered this already, but I just want to reinforce this if it comes out of your traditional 401k side of the equation, which is where most people tend to have their assets, it’s going to be taxable income as it comes out. So you which are early you might be facing not only textbook income, but that 10% penalty in addition, so I could be eaten up pretty quickly, you may end up with 80% 70%, just due to the taxes and penalties if you make those early distributions that have that penalty applied. I mentioned this but you can actually move those funds with you, at you, you leave your employer so it’s not like I hate my employer. I really wish that

26:00
I didn’t have to keep my funds there. Once I leave you don’t you’re able to take them with you, you’ll want to make sure that you follow a certain process so that you’re not taxed and you’re not penalize, you can roll it into an IRA or your new employer 401k if the plan allows that

Level Up : What to Do With Your Old 401(k)

Cool Features

There are some really cool features that I encourage you to explore and find out more about Mecca and go to them and too much up because they don’t relate to everyone that may possibly have them or they just may not be as beneficial. So one cool thing that I see every now and then I’m 401k says there’s a rebalance feature. So what that does is it basically allows you to set a time period, you can usually you don’t want to do it too often, the highest frequency I would recommend would be quarterly. So if you want to say every quarter, I want things to be rebalanced and placed at the same percentages as your plan for your investment. So when you’re choosing your investments, there’s a lot of different options and what you’ll probably end up doing is you

27:00
We’ll set out a breakout of how much you want where. And so this rebalance future will make sure as your investments kind of bounce around, some, some will go up, some will go down. And they kind of do it at different times and depending on what’s going on in the world and different industries and different countries and things like that. So they’re not all moving at the same pace, or the same speed or in the same direction sometimes. So the rebalance feature actually brings all of those percentages back online. And, again, the most I would ever recommend you do that would be quarterly, and probably the most beneficial one would just be to allow it to happen annually. That’s how I approached the rebalance feature. If you have it. It’s kind of a rare one. I don’t see it too often. But it’s a neat feature and it helps keep you on track and it doesn’t let your investments get too far out of whack, especially if you don’t have time to keep an eye on them. Most employers offer 401k loans, that’s where you’re eligible to actually take funds out of your 401k and not have to pay penalties or Texas as long as you follow the rules.

28:00
You do have to pay the 401k loan back. But that’s something to be aware of. Again, it’s not usually beneficial to do things like this unless there’s either a dire need and emergency situation or how you’re going to be applying it is actually an investment into kind of what your life is looking like. And so if you’re doing it just so you can go on vacation or, or go spend some money, that that’s not a good reason, I would not encourage that type of behavior for using our 401k alone. There’s also a cool benefit. So I work with a lot of tech employees and tech companies and a lot of them, especially if they’re associated with fidelity, have this cool option called brokerage link. So that actually opens up the world of your investment choices from all of the target date funds you may see and some of the mutual funds that probably like a dozen or so to being like hundreds and thousands of different options for you to choose from. So that one really takes an expert level of confidence and

29:00
With choosing investments, but I think it’s pretty cool option. And what I do with my clients from that is eligible is we build customized portfolios, and we try to reduce the cost and the expense ratios as much as possible. And I’ll talk about that here in a second.

29:16
Also another cool feature of our own cases, a few our age 55 or older when you leave, which 55 is younger than age 59 and a half right, which is to make those normal distributions but if your age 55, still working for your employer, but then leave after you turned age 55, you’re allowed to take distributions out of the 401k It’s a 401k, only two, so you want to make sure you don’t make the mistake of accidentally transferring it to an IRA account because if you do, you have to wait till age 59 and a half again to avoid the penalty, but age 55 working for your employer so you could retire the next day. And basically, you’re allowed to take contributions from that 401k as you need them without any 10%

30:00
l&t so it’s a cool unique benefit. It’s one that I know people make the mistake of consolidating or taking it out of their IRA account, then they need it and they’re like, oh, shoot now. Now the 10% penalty apply. So be aware of that. That is a good and awesome strategy feature.

Costs of 401(k)

A lot of people think their 401(k) is free, you some their employer provides for them for free, that your employer may pick up some of the administrative costs, but really, they’re not free. You’re paying a lot sometimes that the higher the balance, the more your pain because each of your investments have their own expense ratios built in. And it’s really unfortunate because they don’t make these transparent. It’s not going to show up on a statement essentially saying that you paid this amount this month or this quarter. It just gets taken out of the value of your share. So if your head is share that was worth $20. That gets reduced by a small small bit every single day that it’s that goes by to pay the fee.

31:00
You don’t see it or feel it. And then if there are admin fees most of times, those are the things that your employer picks up, which is pretty minimal in the grand scheme of things. But every now and then employers will also pass like a $15, a quarter type fee to you. So just be aware of those because those things add up. And they’re not an all plan. So you’ll just want to make sure that you understand where your money should be if you’re changing employers and know what all options are.

Investment Options in 401(k)

31:27
So investment options, this one’s a little tricky. I’m gonna have to do a separate video and podcasts and then different strategy get all together for investment options, because there’s so many things away and it takes a really good education and foundation to understand what’s going on. But that’s really a good core place to start. You need to understand the risk versus reward scenarios with investments, you know, because it’s super important. No one knows what’s going to happen. And I know there’s experts with people who have paid millions of millions of dollars, but the problem is 50% say things are going to be really

32:00
Awesome and 50% of people say it’s going to be horrible this next year, or and that’s for any given year, there’s always people on both sides experts kind of for their own reasons, think things are going one way or another. So no one really knows. And so you had to be very comfortable if things do not go well, how you feel about that, then you also need to make sure that the risk you are taking is going to be high enough to provide you the reward that you may need in order to retire or actually accumulate assets and wealth over time. I mentioned this way earlier, but diversification is super important. You don’t want all of your eggs in one basket because it’s very easy for that to not recover as quickly or as as easily so if you’re not diversifying and something happens to that investment, it’s not as easy to recover sometimes if as if you did have it spread out a little bit more and and spread the risk out a little bit further. A lot of people are automatically set up with target date funds which are not to bed. If you do start to get more

33:00
With investments, I do encourage you to look at what else is available, typically their mutual funds. And just kind of compare the cost compared the asset allocation, which is a fancy way. And again, I don’t have time or I don’t want to drill into that in this particular episode. But basically, that’s where you decide how much should I put here? How much should I put there? How much should be in the US how much should be in large companies, small companies, how much should be in Europe, all these different things. So you want to make sure those things are diversified and understand what’s going on. But once you get comfortable with it, it may be a lower cost or a better strategy to actually pick and choose your own mutual funds, but have a process and have an understanding of what’s going on. And I can’t tell you enough, again, the cost is very important. Sometimes the mutual funds in your phone case are super expensive, and there might be a little bit more affordable options. And so I’d encourage you to take a look at those things.

FAQ for 401(k)s

So a lot of the frequently asked questions that I get is how many

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much should I contribute? So it’s it’s tricky, I’d say early on to think about the trade offs, right? Because you’re probably thinking, Well, I’m not going to need this for a while. And maybe I don’t want to save that much right now. But you’re also probably don’t have as many responsibilities. And sure, student loans are a pain in the butt. But those are all these things that you had to kind of balance away. I would say, at a minimum, make sure you contribute enough to get the employer match because again, that’s free money. You don’t want to lose that opportunity, especially if you’re going to be with your employer for a long period of time. Should you pay down debt first, you don’t want to pay down debt first, and make that your only focus if there’s that employer match. So again, I think it’s at a minimum, you want to try to give them free money as much as possible because it’s basically 100% return sometimes with depending on what your employer matching percentages, but if you put in 3% in your employer puts in 3% that’s

35:00
100% return where most of your debts are going to be relatively lower interest, hopefully, hopefully you don’t have too much credit card debt where those are really high interest rates, once you start getting into an event neighborhood and if you have just kind of crippling debt with double digit and high 20% interest rates yet, then you start to focus a little bit more on the debt. But most people I have a little bit more balanced. And if you have auto loans, student loans and mortgages like those things, pretty reasonable interest rate, so I would definitely focus on getting your empire match as best as possible.

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Should you take out a 401k loan I hinted at this earlier, it’s kind of breaking a case of emergency, I would not do it just to supplement your lifestyle or to just enjoy or feel better about leaving your previous employer.

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The more responsible thing to do as you leave employees is to keep track of it. And then if you want to, you can roll it into an IRA or to your new 401k and make sure everything’s

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consolidated, you don’t have all these different pieces of retirements all over from your last five employers. So you can consolidate those things. And I urge you not to touch those things unless there’s just a huge emergency. And and really, you don’t have any other option. What if I don’t plan on staying long. So if you don’t plan on staying long at your part, I would say don’t let that be an excuse not to put in because again, your own contributions are yours to keep. So it’s not like you have fear of losing that. And so hopefully, address is part of the fear that you have. But the other part is if there is a vesting schedule, and you think that will maybe you’re not even going to get the Empire match to keep, well, that’s free money anyway. So that’s additional stuff. And every year that you do stick around, you still get a portion of that free money. So you’re leaving money on the table. If you decide that to do anything and you stay with your employer for two years, you would have gotten a decent chunk of what they put in and been able to keep that for yourselves. And then another kind of example, I will just

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Give us I thought the same thing when I first I was 1920 years old, certain my 401k and I was still working my way through school. And I didn’t I didn’t know what it looked like the next year. And so I was like I like I’m enjoying my work enough. But like, Am I really going to be here in a year or two to where it’s going to matter, and ended up being there five years. And I’m glad I did start doing it. And I had a good role model to get started and kind of encouraged me to do so. But basically, though, that set me up for a lot of good strong financial decisions and created a lot of opportunity, not only just learning for myself how to help clients tackle these issues and questions, but it just really helped me build financial confidence as I was making a big move out to Colorado. So if you have any additional questions, definitely reach out. I don’t mind getting back to you either through email or jumping on a phone call or even possibly just recording another chunk of episodes or a special special episode.

38:00
So to answer specific questions like these types of ones, so I do highly recommend it 401k for all the reasons we covered, but I just want to remind you certain too late just adds a lot of unnecessary stress to your future self. And so, I know it’s hard to think about it, but just try to imagine it. And there may even be some crazy filter on Snapchat or, or Instagram or one of these types of things. If you can make yourself look older, and try to put yourself in the shoes of that future self, of you, or current spouses future self. And just think about what that future looks like how you want to feel, and how much better it’d be if you didn’t have finances as a stress, maybe finances are currently stress. But as you start to make incremental improvements start to level up day by day, month by month, year by year. These things don’t have to be as stressed for you in the future. And you can just live a great life and be old and gray or whatever ends up happening to your hair. And so just think about that. I know it’s not easy to do, but try to

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Dude as much as possible. I know, from my perspective, I just watched a lot of movies and I like putting myself in other people’s shoes. I think it’s some that helps me with my clients is trying to think from their perspective. And obviously, I don’t have all their details on have all their history to know everything. But I do my best. And I think that helps me think about the future for myself as well to kind of take myself out of my body and kind of project out a little bit to the future. So I know it’s weird to think about, but I think it does help if you’re able to try to do that. And it creates a little bit more responsibility than probably what you’re feeling now, especially if you’re in your 20s 30s. And maybe you don’t have a significant other, you’re still going to be responsible for yourself in the future. And so 401k is just an easy way to increase your financial confidence. And it may not feel like much as you first start out. But we saw from the examples that I kind of put out there that over time, small amounts will add up to ridiculous amounts and it’s just gonna create a lot of confidence give you a lot more swagger as you’re approaching important financial decisions in your life.

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Your 401k is probably something you’re never going to touch as you’re making other financial decisions. But worrying when you’re getting married, or you’re buying a house or relocating for a job, it’s just one less thing that you have to worry about. Because you know that what I’ve been doing really well. And so it gives you that flexibility to take chances and things that you want to do, even if you weren’t planning on touching them. It’s well this is kind of in case of emergency, like a backup to your emergency plans and, or emergency funds and things like that. So definitely highly recommend it. Hopefully, there was some valuable information and maybe your new a little bit about your 401k. But just wanted to find out more Hopefully, you’ve got one nugget of information that you can continue to build upon and start to have more confidence and understand why it is so important to start today. And, and if if you’re listening to this now and you’re like yeah, yeah, I’ve been doing a 401k I’ve been saving I’m doing the right things. I would encourage you to take that next level. take that next step and increase your contributions, and it might feel a little uncomfortable at first, but

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By doing it it is automatic. So it’s not something that you’ll feel as much because you’re not physically having to push that money out. If you set it up to be automatic, you’re not going to miss the money after the next month or two you’ll adjust your new cash flow just like we do if we were to lose a job or where you as we get more income as we get more income, we tend to spend it all just the same as if we have less income. It’s funny how that works that every single month you kind of work at pretty close like a I call this like a spending ninja you get as close to running out of money and so that next paycheck so I encourage you to keep keep making progress and and don’t rest on your laurels because there’s there’s benefits and you’re not going to miss it. I guarantee it. But that I would like to thank you for listening to the show. And yeah, reach out let me know what I should be covering next who I should be interview next, and take you

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Thank you for listening to techie personal finance boot camp. I invite you to reach out review

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Let me know what you want to hear more of. If there’s things you don’t like, definitely reach out, let me know I want to make this that the best resource it can be for you. And just like you starting your kind of financial education and getting that foundation view, that’s essentially what I’m doing with that the podcast, I would say, I’m very well versed on the financial aspects of it’s not that much of a concern, but I tried to build it in a way that connects with you and it is really meaningful for you. To the point, actually, boy, you’ll start sharing it with all the people that you think I’m value. That’s really where I want to get this show. So any way you think I can improve any specific questions, feel free to reach out, I’ll be happy to incorporate that into future episodes and everything I do, whether it’s in my business, or any of the additional content I produce is really just to help people take their financial competence on next level and just really improve and just live a better quality of life. So catch you next time on taking personal finance bootcamp.

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