How to Maximize Your Retirement with Your 401(k)s
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Want to get the most of your 401(k)? Get tips, tactics, and more on how you can keep your investments simple, low maintenance, and effective!
Reviewing Your 401(k)s
During this break with the podcast, I was catching up on a few things, one of which was open enrollment.
Every year my husband gets a huge packet from H.R. and we sit down and we go over all of our options with health insurance, dental, disability, and retirement.
This was probably the most financially adult conversation we have because …..have you seen those things?
It's pretty dry and yawn inspiring. (Cure for insomnia right there!)
It's a lot of information and options to review and I see the temptation to just say yes to the default and be done with it.
But that's not the way to go.
Learning to Maximize Your Retirement with Your 401(k)s
I've been getting your e-mails and really appreciate the questions that you have.
From what you've been telling me you want to get the most out of your benefits. I understand.
You guys work hard and you want your money to do the same thing, especially with your 401k.
It's just there's a huge information overload and it's easy to get caught in the mess and not be sure how to actually do it.
Today we're going to give you a leg up.
Chris Costello, financial planner and blooom co-founder (a handy tool to manage your 401(k)) has some great stories, tips, and takeaways to get you two started.
Last month they sponsored a Marriage and Money Workshop and we had a blast! I had to share with you some of the highlights.
In this episode, we'll get into:
- why you want to invest in your 401(k)
- how your 401(k) fits in with the big picture
- how to get the most out of your 401(k) contributions
Hope you enjoy!
If you want to hear another episode on being effective and efficient with investing (without the jargon)?
Check out my interview with Michael Piper, certified financial planner and personal finance author.
Resources for Smarter Investing
If you want to learn more about investing and staying on top of your money, here are some resources to check out:
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- Free 401(k) Analysis: blooom
- Grow Your Stash Faster: High Yield Savings with CiT Bank
- Jumpstart Your Marriage and Your Money
- Investing Made Simple
- 8 Simple Portfolios
- Why Invest with Index Funds?
Blooom's Mission to Help Families with Their 401(k)s
Chris Costello: This for me goes back over 20 years when I graduated college. I went to work right away, stockbroker and worked for some of the very big wall street based brokerage firms.
Then in 2004, my business partner and I left the big firms and started our own independent fiduciary fee-only retirement planning company.
The niche that we were working in was one for people that were getting very close, kind of within spitting distance of the retirement finish line.
The other kind of classification of clients that we had is you generally had to have. Significant assets, to even get in the front door of my firm.
And towards the end of that, of that time there, if you didn't have at least a million dollars of investible assets, I usually wasn't taking on new clients less than that. And the reason why I say that is more around the fact that, of how much it, it kind of bothered me in that is that my own mom and dad did not have enough money technically qualify. And I use that word intentionally to be a client of my firm.
Now I obviously help them. They're my mom and dad, but had I not been in the business, actually, my younger brother's in the business too. My mom and dad would have had no help.
There wouldn't have been a financial advisor that was willing to sit down with my mom and dad given how little financial assets they had.
I just, I thought, We're providing these, I'm a certified financial planner. I've been doing this now for over 20 years and we're providing all this wonderful advice and investment management and, you know, reducing fees and helping them avoid taxes. And it's like, these are the people that have already kind of financially.
It's not representative of most Americans. Most Americans don't have millions of dollars and you can argue quite strongly that it's those people that don't have a gazillion dollars that really need the help from advisors the most.
How 401(k)s/403(b)s/TSPs Work
Chris Costello: Let's just start with why it's important.
So the 401 K, which is a terrible name, it's actually named after a code in the tax law, you know, that they pulled out the late 1970s, but effectively what a four one K is. And we might in our conversation today, use 401k a lot, but it can also mean.
Four, Oh three B if you're a teacher or a nurse or you work for a.org type company, it could also be a four 57 plan.
Some of your listeners may have even a TSP plan, which is a plan that if you're a government worker and that's the name of the plan being participated, all of those are employer-sponsored.
Retirement accounts are effectively a way in which employees at companies take some of their paychecks today and make the very mature decision to defer that meaning not take it in their paycheck, but defer it into an account in their name.
It's their money. It's their not doing it. The money back to the company or the record keeper holding their money.
There is choosing to basically defer it. Into this account with the intentions of using that as retirement savings. and so the reason why this is so dang important is I would guess that most of the people listening to this today are not going to get one of those things they used to call years ago a pension.
So my grandpa, when he retired in 1976, he got a pension, which means the company that he retired from, he was a pilot. Sent him and my grandmother, a check in the mailbox every single month for the rest of her life. My grandpa didn't even have to put any money into that. The company funded that all four of them, and then agreed to promise to pay that check in the mailbox for the rest of their life and many, many, many decades ago.
That was the U S retirement system. It is not the retirement system today. No, thankfully. Our firefighters, our police officers and our teachers, many of those folks will still get a pension, but for your listeners that are working in corporate America, 99% chance that they are not going to get that tension translation.
All of the responsibility is on our shoulders now to save our own money. Into these retirement-type accounts. And then if I'm going to part with some of my hard-earned dollars and make that mature decision that I hate, I know I'm going to need to save some money. I'd like to buy some things today, but I'm going to save this money for many years down the road.
At blooom, we feel like, dang it, that's a responsible decision to make let's at least make sure that money that you're forgoing into your retirement account. Let's at least make sure it's invested in working for you. And you're not paying outrageous fees you don't know about. So the other benefits of the 401k is the tax code allows people.
To put money into their own retirement before taxes are assessed. So what does that mean? If you made it this much money, you're not participating in the 401k. All of this money is going to be taxed, but if you choose to take some of your money and put it into your retirement account, only this much money is taxed.
So by saving some of your own money into your own retirement account, you actually sidestep and avoid taxes today. So that's a benefit. The other benefit you get out of the 401k type accounts is that the money goes in. You get this tax benefit of it going into the account, and then as it's growing while you're working.
You're not paying any taxes on the growth. Either the taxes don't come into play until years down the road. When you retire and start to take the money back out of the account, then you'll start to pay ordinary income taxes on that. The other benefit of the 401k, a lot of times the employer. As an incentive will some of your contributions.
And so advice point number one today is everyone listening to this. Please make sure if you are working at a company that provides a, a 401k or a full three B, make sure you know what the match is, what do you need to be putting into that account to get a hundred percent of that match? In almost no circumstances, should somebody be foregoing or giving up that free money?
That's literally like your employer saying, we're going to give you a bonus a little bit extra money and you say, nah, you keep it. I'm good. So you'd never want to do that. So figuring out what that matches
Elle Martinez: kind of hidden what you were saying fast forwarding to retirement. Cause I think a lot of couples are saying, okay, even if I.
Don't get my 401k, I'll have social security. And I was looking over the numbers with that. And it was saying the average American social security retirement
Chris Costello: benefit is
Elle Martinez: just over 1300 a
Chris Costello: month
Elle Martinez: couples for most families, that's not enough to live on. And yet it was around 21% of married couples rely on it like 90%.
Of their expenses and everything was dependent on security. So things have changed with the retirement system that the burden is on us. We make these investment decisions. So we want to maximize that because even if. So security downline remains similar, just the numbers. It's not going to work out, you can't live off of that, but for the majority of us, it's going to be relying on our choices and setting it up now.
So that later we can have a semi-comfortable retirement.
Chris Costello: That's exactly right. And then really social security was never intended to be a pension. Yeah. It was never intended to be the ability to provide a comfortable retirement income. It was literally meant to provide a safety net at the very bottom.
Like just making sure people had something and your existence of $1,300 and spot on my mom's social security is like $1,355 a month. And, you know, that'll increase a little bit as, you know, as they inflate those dollars forward, but the point and you're exactly right, is that's not going to be enough when we talk about whether it's bloom or other people talk about these, the word retirement.
I think I worry that sometimes people hear that word and I think that, Oh, that's too far off. You know, or it conjures up maybe an image that, that people aren't excited about. And so I'm retirement is part of it, but I would say even more important than being able to retire. We talk to our clients all the time about having the ability.
To decide on your terms when you want to stop working. I mean, I think that in, in, cause you may, you may stop working at what you're doing now and maybe you want to go, you know, travel the world or maybe you want to volunteer or maybe you want to start a business or something. At what point can you have enough financial independence where you control that decision, having the ability, maybe at some point in your life.
To really control your own destiny. That's what we talk more. I think those are the stakes that are, that are at play here. And so, you know, the 401k is a big part of it is your willingness to make that for decision at an early age and start contributing to that. And then obviously making sure. That you're not paying all these crazy to it's your money.
You know, let's make sure that you're not paying a bunch of these dang hidden fees inside of this 401k. Let's do our best to strip those out. Let's make sure you're invested properly. All those things are important.
Figuring Out How Much to Contribute to Your 401(k)
Elle Martinez: Get into that where a couple of they're sitting down and they're saying, okay, we obviously do need to contribute more to our for 401(k).
A lot of times they're like, ‘okay, well, how much do we need to contribute?'
I feel like they are jumping in too quickly with that. Cause you got to of course define what kind of lifestyle are you looking for retirement or when you want to stop working?
What are some things they need to keep in mind with investing in a 401k? Where do you begin the steps in the process in that?
Chris Costello: First of all, HR can't help them pick those funds. The HR are not, I mean, they might be kind of behind closed doors with the HR side, a financial advisor.
HR is the one that communicates the plan, but they're not the ones that can sit down and should not be the ones.
Most of the time, when I talked to heads of HR, they're like, I hate it when people come in and ask me for this spice, you know, cause they know that they're not supposed to be doing that, but before, before you even get to the point of like what to pick, let's talk about contributions and maybe how much you contribute.
So yeah. This is probably the most common question we get asked, ask any of our clients.
By the way. if we're just managing one, at least one account for our clients, they get access included in that $10 a month fee to an advisor at bloom through a digital interaction basically.
They can ask licensed advisors at blooom, any of these money-related questions. So don't ask the HR person, you know, ask an advisor,
Why You Want Your Financial Planner to Be a Fiduciary
Elle Martinez: Something that I appreciate is [that Blooom planners] are fiduciary, which means you have a responsibility to your clients.
Chris Costello: Yeah, one simple question. You can ask if you're in, first of all, we're assuming that people actually are getting access to advisors.
Do you remember what I talked about at the top of the show? There are a lot of advisors that won't even meet with people unless they have a huge account, but let's say some of your listeners, you know, get access to or meeting with an advisor.
The advisor came to their workplace or the school to about, you know, they brought in pizza for everybody and did the lunch and learn all they have to ask.
Is this, this question you, you are giving me advice. Do you legally have to act in my best interests?
Let me repeat that. When you are giving me advice, do you, by law have to act in my best interest.?
It sounds crazy. Cause you're like, well of course an advisor would have to, but if they're not a fiduciary, they are not bound to which means they can recommend products that are way more expensive for you but pay them more commission.
As a fiduciary, we have to put our client's interests first. And so in the case of recommending things for our clients, that cannot be for reasons, it helped us out, has to be for the clients. Best interest first and foremost.
Secondly, when client, when our clients come to us and ask us questions about how much do you contribute to afford or if they should refinance their mortgage or we're going to buy a car, should they lease or buy or pay cash?
We're not making, making money on those, on those transactions. And so the advice we give is in their best interests, there's no, there's no conflicts built into that.
We're going to tell people, we think is the best thing for them. Are still a lot of people giving financial and retirement advice that do not have to act in the client's best interest. It's kind of shocking, actually. So back to the couple that's thinking about contributions or 401k, so. Remember what I said earlier, first piece of the purse.
Go for the 401(k) Match
The first thing that must be done, is figuring out if your employer matches contributions and finding out exactly how much you need to contribute to get a hundred percent of that match to begin with.
If you're thinking about increasing it above that level, we always tell our clients. If you are paying on credit card debt or student loan debt, we would actually say, do not put any more money.
Above that amount into your 401k. The right thing to do is to tackle that burdensome that would get rid of the student loan debt as fast as humanly possible. Get rid of credit card debt as fast as humanly possible. So contribute just enough to get the match. And then nothing else, everything else should be funneled in attacking those debts.
If your employer does not match contributions, the right thing to do is actually not contribute to your 401k. If you have. We think the right thing to do is to free yourself of that debilitating ball and chain that debt that people drag around for way too long. It shade having debt affects you financially.
It affects you psychologically. And so getting rid of that as fast as humanly possible is, is always the right thing to do in our opinion, you know what, you know, what that really does more than anything, it takes away choice. It limits your choices. And I, I grew up in a household. I saw this firsthand, my dad.
His entire career worked in a job that he did not love, but my parents had debt. Yeah. I had a mortgage and they had three kids and they had cars and probably some credit card debt. And my mom and dad did not have choice on what they ultimately could do. my dad had to stay in a job that was not fulfilling to him because of this debt.
And. You know, be getting yourself out of debt, liberates you to be able to do other things you can go try or the things you, my dad, Ted used to always talk about wanting to start one of those restaurants that only serve breakfast and lunch, you know, big breakfast guy used to make breakfast on the weekends for us and would have loved to have started a business that just, you know, did the breakfast and lunch.
But. The situation financially that my parents were in, he didn't have that choice. And then so consequently, he spent 40 years doing what he didn't love and I saw that firsthand. And so that's why I think it's so ingrained in me, even at the sake of the 401k, if paying this off. so let's say maybe your listeners are at a point where they're, they're free of their debt.
No credit card debt, no student loan debt, house debts. Okay. How's that as long as you've got a good rate on that and those people maybe, right. I have any questions. So what did we got to look for? Money? Got our debt paid off. How much did we contribute? Aye. At that point, I think it's smart to start ratcheting up how much you are socking away.
And then because keep in mind, even right. Some of the crummy 401ks, you're still getting the advantage of the pretax that, that tax benefit we talked about earlier. I would say, yeah, it's still made sure if you're debt free, make sure you've got. We like to say at least three months of living expenses, sitting in a rattle account, the rainy day savings account tucked away forgotten about reason why that's important is if one of, you know, husband or wife loses their job got three months living expenses that allows that person take a little time.
To find the next job. You don't want to have to like rush out and find something quickly. so I have a couple, two or three months of living expenses tucked away. if that's handled, if they're not saving up for a down payment on a house or any big expense, then I, I basically say at that point, yeah, start to ratchet up those 401k savings.
Better Performance with Index Funds?
Elle Martinez: there's been so many studies. About the expenses, how they can affect long term, which you, you get out at the end, but also there's no reflection that these higher expense funds are better performers. It tends to be low cost index funds.
And just real quick, I was looking at the default. That if you don't pick out where they send the money in my husband's 401k, I was looking at this return and it was, the fee was actually like 11 times more than the index fund and –
Chris Costello: the performance was worse. Yes, that's in that crazy, like in life. Generally, you know, as consumers, we think that you know, take, take cars for example. you know, maybe that's not the best example, but I think this will work generally. You think if you pay more money for like maybe a Mercedes, you, you expect to get extra quality, you know, whether it's the quality of the engine or even the leather on the seat, you know, you expect that.
And I think when we buy consumer goods, that's usually the case. It's like sometimes the exact opposite with investing to your right point. Like sometimes the highest cost funds are the worst performing funds and a, it should be easier to know what the expenses are, but D yeah, a good kind of hack or a cheat.
Like if people are like, I'm going to do this myself, I'm never going to pay bloom or anybody else to help me. If you want like a cheap hack or trick. Going with index funds is a good way. Like if inside your 401k, just picking the index funds and allocating your money across those, that's, that'll get you a good chunk of the way there.
It really will minimize expenses putting your money in the funds. Like we've been talking about that. It tended to perform a little bit better than those higher cost phones. so that, yeah, that's something even Warren buffet, the greatest investor of our lifetime. Talks about that frequently that most Americans would be very well served to just pick a diversified basket of index funds and go with that
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Like the music in this episode? Our theme song is by Gentle Regime. Additional music by Lee Rosevere and Logan from Music for Makers in this episode.
This episode was originally released in January 2018. show notes have been updated in October 2021.