Average 401(k) Balance by Age (2023 Edition)

Introduction – 401(k) Feast (0:00)

Brian: Put on the bib we’ve got a feast for you today.

Bo: I am so excited about this show because we love getting to do this one every year because for most people your 401(k) account is a very important piece of your overall financial puzzle. So one of the things we want to make sure we can speak to is what are the things you ought to know about them, what are the things that you should be familiar with, and what we all are curious about is how do I stack up against my peers, how do I compare to those around me?

Brian: That’s definitely important. But I want to make sure everybody knows because I think there’s going to be a lot of people, we know we have approximately 40% of our audience are just people stumbling upon us for the first time. So here’s what we’re going to load you up with today. First of all, if you ever want to know the basics of a 401(k), got you covered today. If you want to know the secrets and some of the tips and tricks and other provisions that a lot of people don’t know, we’re gonna load you up with that. We’re also gonna share all the other things of why we love 401(k)s, and of course we will close it out with how do you stack up among your peers with this important wealth building tool.

Crazy 401(k) Stats (1:11)

Bo: Okay, so let’s start with some crazy 401(k) stats, some really interesting things that you may not know. Some of this might be surprising to you, some of them might not. Here’s the first one I thought that was really interesting. For those of you that don’t know, 401(k)s often allow loans, certainly more here in recent time that’s been something that people have had to utilize. Surprisingly, 17% of individuals right now have an outstanding 401(k) loan. 17% of folks have said I’m going to tap into my retirement savings to subsidize or somehow use those dollars today. That’s a good thing, bad thing?

Brian: Definitely we’re going to go into the details of why that’s a horrible thing. And I’m just sad that it’s getting close to one in five are taking these loans. This is not a good use of your resources.

Bo: How about this next stat, Brian? 34% of 401(k) participants, oh man, do not get their full employer match. So you might participate in a 401(k) plan where your employer says hey I’ll put some money in there for you if you do XYZ, and 34% of people are not doing all of XYZ.

Brian: How do you miss number two of the Financial Order of Operations, get that free money? I mean that one breaks my heart a little bit. That means we’re getting to one in three are blowing it with that.

Bo: How about this one? Now this one is a positive one, those two are sort of negative. 80% of 401(k) plans now in this country offer a Roth option. This has not always been the case. Roth 401(k)s have not always been a thing. So a number of plans are now offering that. However, less than 20% are actually taking advantage of it. So I’m curious, is that because for 20% of folks or for 80% of folks it doesn’t make sense, or do people not know about it? They don’t know why it’s exciting, they don’t know why it could be a valuable tool to use in their tool belt?

Brian: It’s because they haven’t watched this show. The Money Guy Show is going to load them up. But first let’s go ahead and just talk about the basics. Let’s go ahead and jump right in. Go ahead and talk to them about funding limits and some of these other provisions.

Funding Limits and Contribution Basics (3:09)

Bo: Yeah, so the one thing that’s really interesting, this changed in 2023. There is now a new salary deferral limit. So if you’re someone who’s putting money into a 401(k) and you’re electing to defer some of your salary into it, you can actually do up to $22,500. That can be across the pre-tax or the Roth side, we’ll talk about those in a moment. And if you’re someone who, I don’t know, just happens to maybe be turning 50 this year, maybe you were born in the year 1973, someone like that, you can actually defer up to $30,000 into your 401(k) out of your salary in 2023.

Brian: What I think is interesting because look, they inflation adjust these things, they adjust them over time. Last year was $20,500, gone to $22,500. That’s a pretty big jump, that $2,000. If this is a year that you fell asleep, that you haven’t been updating in the past, this is definitely, you need to be paying attention to because that is quite a big step up from what it was in previous years.

Bo: Another thing that’s happened is the section limits have increased. Now the total annual addition limits between what you put in and also what your employer puts in is now $66,000. And I know a lot of folks were thinking oh man, I can only do $22,500? There are a number of employers out there, now we have a lot of clients who work with them, that their 401(k) contributions for their employees are so generous that they actually do run into these numbers. I want to say last year the number was $61,000, it has now increased to $66,000. If you’re someone who’s over 50, your total annual addition limit is all the way up to $73,500. So this is a great place and a big opportunity for folks to stock away dollars for retirement.

Brian: Well and don’t forget, you know, even if your employer and the normal contributions don’t load it all the way up, if you are fortunate enough that you have enough money coming in, there is an apex predator moment where you potentially could do the mega backdoor Roth contribution. So tune in, we’ll go talk about that a little bit as well.

Types of Employer Contributions (5:10)

Bo: So I mentioned in there that you know you can choose to put money in, you can do $22,500, if you’re over 50 you can do $30,000, but a lot of employers will also have the opportunity to put money into your 401(k) plan. Now this is something that’s interesting. Employer contributions used to always go in pre-tax, but something else has changed recently. We’re now with the SECURE Act 2.0, employers can offer a matching Roth option where you can make an election that hey I want my employer dollars not just to go to the pre-tax bucket, I want them to go in the Roth bucket. There is a caveat, you have to pay income tax on that. So it’s an important thing to note in 2023. But maybe this is all foreign to you and this isn’t something you’ve heard of. We want to tell you the number of different types of contributions that your employer may be making into the account on your behalf.

Brian: Yeah, the first one, this is the one that we really talk about with step two of the Financial Order of Operations, this is employer match. Meaning that you have to give something, whether it’s 50%, it’s going to be a 50% match, it’s going to be a 100% dollar for dollar match. Pay attention to what your employer says you have to do to get this free money. Don’t overlook this because it’s so important. Because think about this, Bo, if somebody offers you 50 cents on every dollar you contribute up to like 6% of your pay, that’s basically a 50% guaranteed rate of return. If somebody gives you, if your employer offers you dollar for dollar up to like 3% to 6%, that is a 100% guaranteed rate of return on whatever dollar you put in. Take advantage of that, that’s free money. There’s not many things that are going to pay you at those levels every year guaranteed. And the reason they can do it is because the government heavily incentivizes your employers to essentially prime the pump. So take advantage of it because I think it’s crazy.

Bo: I love the way you frame that. If it’s a dollar for dollar match, it’s a 100% rate of return. We just showed you the stat that 34% of 401(k) participants are not getting their full employer match. So 34% of folks are saying I don’t want 100% rate of return, I don’t want a 50% return, I don’t want free money. Make sure that you do not fall into that camp. It’s why we put it so early on in the Financial Order of Operations. You cannot miss that.

Bo: So number one is matching, you put money in, your employer puts money in. Another type of contribution that your employer may make is what’s known as a non-elective contribution. And these are pretty fantastic. You don’t have to do anything. All you have to do is show up and meet requirements like I’ve been there for a year, I’m age 21, whenever your plan dictates. And the employer is going to say hey, so long as you are eligible to participate in the plan, we’re going to put money into it for you. So there are a number of plans that operate this way. I don’t do anything and my employer decides to put in 3% of my salary into the 401(k). It’s a pretty fantastic benefit to have.

Brian: Now this is great, probably especially if you have consumer debt, you know, credit cards, even student loan debt, you might be paying attention to this. But I do want to caution you, just because your employer is generous, don’t forget you do need to be prioritizing what you save and invest for retirement. There’s a reason we encourage you to get to that 20% to 25% of your gross income as fast as possible. But still very generous employer if you have a non-elective provision built into your plan.

Bo: All right, so we’ve talked about matching, you put in, they put in. We talked about non-elective, just they put in. There’s another type that you ought to be aware of and this is called a profit sharing contribution. A lot of employers will say you know what, I want to reward my workforce, I want to make available a benefit where if the company’s doing well, if we’re growing, in addition to the matching, in addition to the non-elective, we want to put even more money into the account. And profit sharing is most often where some of those section 415 limits get hit. If you’re hitting $66,000 per year in your 401(k), that’s likely some big portion of that is profit sharing, where essentially the employer rewards you based on either your work or your class or your status as an employee in the firm with additional contributions into your 401(k). So it is not uncommon again for large employers, big companies, to put a lot of money into the pot for their employees for saving for the future.

Brian: And realize these are all stackable. If you think about the fact your salary deferral, that’s what you put in, that goes in, the matching money from your employer goes in on top of that, and then the profit sharing sits on even on top of that. So this is completely stackable. It’s not an either or, this is an and opportunity. So really cool. You can see how this really builds and turbo charges and accelerates your walk to financial independence.

Vesting Schedules (9:52)

Bo: But they recognize, right, so the government as well as employers recognize this is a huge benefit. There’s a little bit of risk. Like we as an employer, when we say hey we’re going to put money into our employees’ 401(k) accounts, we really want to make sure that those employees are going to be here long term. We want them to be part of the ongoing firm, part of the ongoing process. So one of the things that employers are allowed to do with these types of contributions is they can put what’s called a vesting schedule, meaning you have to work here for a certain amount of time before all of these dollars become yours, before it’s actually your money. And so there’s a few different types of vesting options you ought to know about.

Bo: The first is safe harbor. Now safe harbor is a really interesting thing. I can’t remember when it was introduced, but it’s been around for a number of years, which basically said hey we recognize that for like small businesses, 401(k)s are a huge opportunity for tax savings for the owners. But we don’t want the owners and the highly compensated people to be disproportionately advantaged inside of the plan. So so long as an employer is willing to make a contribution on behalf of their employees at some minimum level, it’s usually no less generous than 3% non-elective or a 4% match, then we’re going to let the employer max out their salary deferrals, right? Well safe harbor contributions in almost all circumstances, not all circumstances but almost all circumstances, are 100% vested. So just like the money you put into the plan is always your money, if you have safe harbor contributions going into the plan on your behalf, it is also almost always 100% your money the day that it’s funded.

Brian: I think it’s interesting. I have to confess I’m old enough that I remember pre-safe harbor and a lot of small businesses didn’t do 401(k)s because they were worried about all the testing requirements, the complexities, the costs that went into this. Safe harbors were game changers because what they do is they basically, and this is something if you work for a small business or you own a small business, you would more than likely want to take advantage of because it’s going to basically cut through all the chaos of the testing and all the requirements and lay out a set of rules that if you will give your employees this with the 100% vesting that Bo talked about, we’re going to let you the employer contribute this without jumping through as many hoops as the old traditional 401(k)s. Really cool opportunity for everyone involved because you the employee, you get your money and it’s your money. You don’t have to have the golden handcuffs where you’re there for six years or so forth. It’s good for the employer because now they don’t have to worry about they put money in this plan, end of the year they have to yank it out because they failed some tests. This is a win-win. Advocate to your employer if you don’t have a 401(k) and this is something you might want to look into.

Bo: One of the, I don’t know if this was an intended or unintended consequence of this, with the introduction of safe harbor contributions and plans, it actually drove the overall cost to 401(k) plans down because now they’re so much easier to administer, there’s so much less testing. So now 401(k)s are way more affordable than they were when you first started practicing many, many, many, many, many, many, many years ago.

Brian: Okay, let’s chill on the manys.

Bo: So we have safe harbor contributions, safe harbor contributions that are immediately vested. Another type of vesting that you may have on employer dollars they put in is you might have what’s called cliff vesting, meaning after you’ve worked at the employer for some number of years, you become 100% vested. Most often it’s like three years. So a profit sharing contribution goes into your account, you have to work there for at least three years before that money is 100% your money. Well why does this matter? Let’s say you’re taking a new job and you’re trying to figure out if it works and one of the benefits is a big profit sharing contribution into your 401(k) plan. You get there in year one and year two, you’re thinking oh I don’t know if this is a great fit, should I stay, should I go? If you have a cliff vest, you kind of know in your mind, if I want to be able to take those dollars with me to my next job or with me into the future, I have to make sure that I’m at least here for the amount of time required for me to be fully vested in all of my employer contributions.

Brian: I know when I left the last employer I worked for before I started my first company in the early 2000s, I actually went and read the plan document to see hey what is the vesting, what works here, where does the, because we’ll get to a graded vesting in a second. But here’s what I think is interesting is you also need to make sure about last day provisions, you know, because some plans will have what’s called a last day provision on profit sharing and so forth. So as Bo shared, if you’re going to be taking a new job, do not overlook figuring out what the vesting is on your plan so you don’t walk away with a big oopsie. Oh my goodness, I walked away from thousands of dollars. If I just waited a month or two, I would have gotten this and more because you’d also qualified for the current, you know, the contribution that they’re going to do for the last year with profit sharing. Pay attention to this stuff. It’s very important and could be thousands upon thousands of dollars for your retirement.

Bo: And then the third type of vesting schedule is a graded vesting schedule. Essentially it occurs in increments over several years. Most often it’s a six-year graded vest that you see most commonly. Again, you want to make sure if you are thinking about changing jobs, if you are thinking about investigating other opportunities, you review your 401(k) balance to know how much of that money is actually yours and how much, if you were to leave, goes back to the company. Now here’s something I see people do all the time, Brian, that I think is crazy. Someone will leave and they’ll be like hey I noticed that I’ve only got, I’m only 60% vested in this employer contribution, but guess what, I left it, I didn’t roll my plan over, so they left those dollars in my account, they’re still there. Yeah, it is not your money just because you leave it in the account. Just because you’re seeing those unvested dollars continue to grow, it does not mean that they become your dollars. Because what happens is when you leave or when you do ultimately roll it over, all those dollars get forfeited. They do not belong to you unless you come back to work at that employer and begin working back towards that vesting schedule. So you need to be aware of this before you make job changes so that you understand what your dollars in your plan actually are.

Brian: And I think it’s one other clarifying point. Just like there’s different sources, there’s your contributions, they’re yours, employer match, and then there’s profit sharing and other parts, they can have different vesting. Now first of all, that’s a great point. Your contributions are always vested, 100% vested, what you put in. However, your employer matching, if it’s a safe harbor, more than likely it’s 100% vested. But that profit sharing is more than likely going to have some type of golden handcuff provision where there’s 20% per year for the first five to six years. You’ll quickly realize that they can be different. You need to do the full 360 research to know every component, what everyone requires so it turns into your money.

401(k) Contribution Types (16:40)

Bo: Sorry Brian, so we’ve talked a little bit about dollars that the employer puts in. Now let’s talk about what we can do, we as the employee, we as the participants. Well a lot of people don’t realize there are different 401(k) contribution types. We just shared this statistic that 80% of 401(k) plans right now have a Roth option available, but less than 20% of folks are taking advantage of it. And we think perhaps the reason is they don’t know what that means. So let’s uncover that, let’s talk about what that means.

Bo: So the first type of 401(k) contribution, this is the one that’s been around the longest, this is the one that most people are familiar with, is a pre-tax 401(k) contribution. I’m going to elect to take some of my paycheck and I’m going to put it in my 401(k) and it’s going to drop my taxable income. I’m going to get a tax benefit this year. My contribution goes in pre-tax, my dollars then grow tax deferred, and then ultimately when I go to pull the money out in retirement, that’s when I’m going to pay tax on those contributions. This is the one that’s been around since the beginning of 401(k).

Brian: Yeah, and this one is ideal for somebody who’s in a higher income tax situation. You think that when you retire taxes are going to be lower. You like taking the deduction now versus taking it later or getting the tax-free growth. So this is the oldest one, this is traditional.

Brian: Now if you’re a younger person, you’re probably going to want to take a look at this next provision because it allows you to potentially, the Roth option allows you to potentially become a completely tax-free millionaire, which that one just gets me tingly just thinking about it. Because if you think about the fact that when you retire you’re going to be able to pull that money out of those accounts and pay no income taxes on it, that’s powerful stuff. That means all that compounding growth, all the wealth multiplier, when I talk about one dollar becoming $88, all of that could completely be tax-free. That $87 of growth could be completely tax-free. But hey, don’t overlook the pre-tax because it is one of those things if you get into a high income tax situation, you’ll want to know all your options.

Brian: And we even have a little rule of thumb that’s worth sharing. If you’re someone and you look at your marginal federal bracket and your marginal state bracket and you’re below 25%, you add the two up and it’s less than 25%, there’s a really good chance that Roth makes the most sense for you. Again, you’re not going to get a tax benefit this year, you’re going to put money in the 401(k) but you’re still going to pay tax on it. It also is going to grow tax deferred, but then assuming that certain qualifications are met, when you pull it out it’s completely tax-free. So below 25%, we think Roth makes a lot of sense.

Bo: But if you add up your marginal federal rate and your marginal state rate and you’re above 30%, well then that current year tax benefit is so valuable that it’s really hard to walk away from. You can think about every dollar you put in your 401(k) is almost like a 30% rate of return because of your tax savings. So if you’re above 30%, we really think that pre-tax might make a lot of sense. And then if you’re somewhere in the middle, if you’re in that 25% to 30%, it gets a little gray.

Brian: Yeah, it’s one of those things where you have to pay attention to what state you live in, what’s your state income taxes, and also what happens after you retire. I had somebody send me a tweet and send me an article of somebody, I think a lot of it basically was just pooh-poohing the concept of 401(k) investing all together. And I had to quickly reply, look, I love this person’s research, they’re very analytical, they do really good work. However, if you read into the assumptions, they were keeping tax rates the same as you work and as you retire. And that’s not always the case because a lot of times you will leave behind when you retire your big earned income, your salary, your wages. And if you’re making a few hundred thousand dollars or six figures, you can imagine when you walk away from that you’re probably going to drop into a lower tax rate.

Brian: The other thing that comes into play, a lot of states love retirees to move into their communities because they don’t have kids that go to the schools, they tend to vote. So there’s a lot of reasons why they’re really making a big push to try to get retirees to move there. So they will incentivize it also in their tax policy. We come from the state of Georgia originally. State of Georgia does not tax Social Security, it doesn’t tax, it puts a huge exemption on, I mean at the time I left it was like $35,000 per person. I think it’s gone up even higher now. It’s much higher than that now where all 1099-R type retirement income is completely tax free. So there’s a really good chance that in retirement you might potentially pay a lower tax rate. And that’s why we always say do the analysis like Bo just shared. Look at your tax rates, look at your age, look at the benefits each one of these contribution types provides. Because everyone, just like you have a fingerprint, your retirement situation is going to be unique and you need to know all the variables. Don’t just go read a blog post and say 401(k)s, why would I do that? Make sure you understand the unique things that make you special and how that applies to your financial life.

After-Tax Contributions – The Apex Predator (21:43)

Bo: All right Brian, most shows would stop there. Yeah, most folks when they talk about 401(k) contributions, it’s binary. It’s pre-tax, Roth, ones and zeros. However, we like to go a little bit beyond common sense.

Brian: I hear it, almost, it’s almost like the great white shark, the dum dum, that’s it, you got it, the apex predator. The after-tax contributions. Now look, you have to, I gotta tell you, if you find out that you have after-tax contributions eligible in your retirement plan, you know you have a nerd that’s somewhere in that C-suite that has done their research and heard about that apex predator of the after-tax Roth mega Roth conversion opportunity. We’ve seen this with Toyota and some others that we’ve done some work for. And it’s one of those interesting things. Look and see what your benefits are. You might have an opportunity to load up that Roth account more than most people realize.

Bo: So what is an after-tax 401(k) contribution? Well it sounds a lot like Roth but it’s not the same. One of the unique parts of after-tax contributions is that they’re not subject to the same salary deferral limit. So where we said you can only put in $22,500 in the pre-tax bucket or the Roth bucket, if you have the income to substantiate it, you can actually take your after-tax contributions all the way up to the section 415 limits. You can go all the way to $66,000 of after-tax 401(k) contributions. Now when you put the money in there, you don’t get a current year tax benefit. The money that goes in is already taxed. So that’s $66,000, or whatever the number is, sits there. Well then all the earnings on top of that grow tax deferred. And when you go to pull that money out, you don’t pay tax on the contributions you put in, you do pay tax on the earnings, unless like Brian said, your plan has a unique structure where you can do mega backdoor Roth conversions, where you can essentially roll those after-tax contributions into a Roth IRA or convert them to Roth inside the plan and completely tax-free get $10,000, $20,000, $30,000 into your Roth buckets. A huge, huge benefit.

Brian: Make sure you understand if this is available inside of your plan. Don’t just assume that when it comes to making 401(k) decisions it’s pre-tax or Roth and stop there. If you see that third option, know that there’s something unique about your plan that you ought to dig into. It’s probably worth you looking into some more of our content on the mega backdoor Roth. We’ve done other videos on this. And also this is one of those measure twice, cut once, you might want to have a financial advisor that helps to make sure you don’t fall into a trap or mess up your employer’s contributions because you did it wrong. A lot of steps in this. So pay attention, do it right. But it’s still kind of cool to know what’s even available out there to you.

Unique 401(k) Provisions – Loans and Hardships (24:27)

Bo: All right Brian, let’s talk now about some unique 401(k) provisions. The first one we’ve already mentioned, 401(k) loans. A lot of 401(k)s will say hey you know what, if you get into a tough spot, we’re going to let you borrow up to either $50,000 or 50% of your vested account balance from your 401(k). And you might be thinking oh well that sounds great, I’m gonna borrow it and there’s going to be an interest rate I’m going to pay and I’m going to pay myself back the interest and I don’t have to pay the taxes on it. So it seems like a no-brainer. We just shared the stat that I think 17%, yeah, of 401(k)s have outstanding loans. So people are thinking this is a great opportunity. However, it might not be.

Brian: Well I just, I worry because with interest rates being so high on mortgages right now that somebody who’s trying to get into a house or trying to upgrade to a house that’s a little bit bigger than maybe they can afford will think this is an easy access point to go take this money out, pay themselves back. Because it sounds good in theory that I’m just paying myself back instead of borrowing from a bank, I’m paying myself. But Bo, here’s what I want people to be very aware of. You need to be cautious about this because there are some big catches. The first one is that if you get laid off or you quit, you want to have the ability to leave, if you have any outstanding loan and you haven’t paid it back, you either have to pay it back immediately or it is treated as a full distribution subject to early withdrawal penalties and all the other bad stuff that comes from taking that money. But that’s just one element that gives me pause. But I want you to talk about the opportunity cost because what are the things, because people think hey I don’t have to worry about the volatility of the market because I’m just paying myself back at this stated interest rate. But they’re missing out on something that’s pretty powerful.

Bo: We know that when it comes to investing, time in the market is so much more valuable than timing the market. Well one of the problems with 401(k) loans is when you take that loan, you are essentially taking your players off of the field. You are taking that money out of your 401(k) and those dollars are not invested, they are not working for you, they are not building. A lot of 401(k)s will be structured in such a way that if you have an outstanding 401(k) loan, you can’t even make new salary deferrals. All you can do is pay back the 401(k) loan. Not everyone works that way, but some of them do work that way. So you have to think about if I’m someone in my 20s, in my 30s, even my 40s, do I really want to take these players off of the field and have them sit there not working for me? We know how powerful our dollars can be. You can go to moneyguy.com/resources and download the wealth multiplier to see this. Well when you take out a 401(k) loan, you have to ask yourself a question. If I’m a 30 year old, do I really not want those dollars to be multiplying? If I’m a 40 year old, do I really not want those dollars to be multiplying? The cost to a 401(k) loan is substantially more than the interest rate you’re going to pay yourself. And by the way, it’s an amortizing loan, so it’s not like you’re truly earning that rate of return because as you pay yourself back, some of it’s principal, some of it’s interest. I think it should be a last ditch, last resort. Avoid it at all costs if you can.

Brian: Yeah, and some plans even take away some of the employer benefits while you’re on the loan. So it’s definitely, look, know what’s available to you, but that’s one that I’d be very wary of just grabbing as a first choice.

Brian: The second thing, hardship withdrawals. Now look, this one I’m going to give a little more grace on the fact that bad things happen to great people. I mean because here’s what qualifies for hardship. Excess medical bills, and we know if you look at bankruptcy, what causes bankruptcy, a lot of times it’s medical issues, procedures, emergencies and other things. If you become disabled, that’s right on that same tree of medical issues. You owe the IRS, I think that kind of makes me chuckle. I’m like of course the IRS made it a provision, your tax bill, from your retirement plan, why wouldn’t they have that provision in there? And then first time home buyer. That’s one, be careful because that’s getting in that gray zone. Is this an opportunity or are you really undermining your long-term future success? Be careful because there are some unique provisions in there for when you need a little more grace and flexibility in your life. But don’t let this be something that you go do without a second thought. Be very wary of taking because you might be taking away from your future self because these dollars need time to work.

Rule of 55 (28:58)

Bo: All right, so 401(k) loans not great, hardship withdrawals also not great. The third unique provision is something I think that’s kind of exciting and it’s the rule of 55. Most people know that when I put money in a 401(k) or when I put money in an IRA, the thought is that in order to be able to take those dollars out penalty free, and if it’s in a Roth tax-free, I have to be at least 59 and a half. However, if you are employed with your employer in the year that you turn 55 and you still have 401(k) dollars, you can actually begin taking distributions from your 401(k) at age 55 without having to pay early withdrawal penalties. That still qualifies as a qualified distribution. So if you’re someone who is planning on leaving the workforce early and you do want to retire before the age of 59 and a half, your 401(k) may very well be that tool that provides that gap to get you from 55 to 59 and a half. So when you do think about your retirement dates and you’re trying to decide do I retire at 54, 55, or 53, or 56, this needs to come into consideration. And you want to make sure you think through, okay if I am 55 and I am retiring, do I want to roll those dollars into an IRA rollover or does it make sense to leave them in my 401(k) so that I can start distributing some of those dollars to myself if I need them?

Brian: Yeah, listen up if you’re part of the FIRE movement, the financial independence retire early. 55 is still a very early retirement. It’s much earlier than the typical retirement. So this is a provision you should pay attention to. It’s very powerful.

Why We Love 401(k)s (30:34)

Bo: All right Brian, let’s talk. So we talked about some of the basics, we’ve covered sort of the blocking and tackling. Let’s talk about why we love them. Like why we love them. Because we know we sit in this unique position, we get to work with successful people all over the country and see what they do, how they did it, how they built their wealth. And here’s the simple fact of the matter. One of the reasons we love 401(k) plans is because millionaires use them. You know Ramsey Solutions did a study, they found that 80% of millionaires admitted hey one of the ways I got here, I invested in my company’s 401(k), I took advantage of my employer sponsored retirement plan. So if a bunch of successful people are doing this and they’re attributing some of their success to that, maybe it’s something we should all clue into.

Brian: Yeah, take that 401(k) haters. I mean that’s the thing because seriously, there’s so much drama out there from people who are saying all this madness, typically to try to sell you some type of life insurance product, what I’ve seen on social media. But 401(k)s are very effective. How could they not be with all the free money you’re given from your employer? But as the research shows, 80% of millionaires invested in their company 401(k). I think it’s, and by the way, don’t take it just off of that stat, we found it on our own research as well. Go ahead and share that, Bo.

Bo: We found that most millionaires who we investigated, who we questioned in our wealth survey, 67% said hey you know what, the way I did this, you know the way that I became a millionaire, the way I built my wealth, it was through simple saving and investing over time. It wasn’t that I was born with some crazy talent. It wasn’t that I’m some unique executive or I started some business. It was simply that I was consistent in my savings. Well if you’re someone who can be consistent in your savings and exhibit that behavior, one of the very best tools at your disposal to be able to do that is an employer sponsored retirement plan, is a 401(k) plan.

Brian: I want to talk about, because we’ve just shared that it’s really cool because millionaires, this is one of the, this is likely the first account that will cross into seven figure status. So that’s exciting. But here’s for all of my folks out there that are trying to figure out how do I minimize my taxes? Because you will reach a level of success where you’re like man, how do I quit paying the government so much money? I love where I live and I love these things, but even people who think that they’re all about different situations, they still don’t like paying taxes. I have not found anybody who says when they walk in, because I did tax preparation for 16 years, it didn’t matter what their worldview, how they voted or however else, they came to us and were like hey how can I minimize my taxes? And I get it. I mean we see it with Warren Buffett, we see it with all the people out there who say that their secretaries are paying more. They are, but they’re trying to minimize taxes as much as possible. And this is a great way to legally hide money from the government.

Brian: I was on a call last week, a gentleman, his business was coming into a very large windfall. And I was just asking about the structure and I was like so what do you have in retirement assets? He’s like oh I never, I never did that. I was like wait a minute, you had this level of income coming in and you never offered a 401(k) or a retirement plan to your employees? And it made me sad because I was like man, if you could have found us seven years earlier, for the last seven years I could have literally saved you six figures, multiple six figures every year, if you’d have just structured your business with this. Don’t overlook this. If you have success in your corner and you’re starting to get into higher income situations, real estate’s a great thing, but also don’t overlook what an employer plan can do for your employees as well as for your tax bill.

Bo: And what I love is that 80% of plans, they let you do it the Burger King way. You get to have it your way. You get to decide, do I want to lower my taxes now or do I want to lower my taxes later? Do I want to do pre-tax contributions, do I want to do Roth contributions? You can literally build and customize your plan in such a way so that it’s most beneficial for you. 401(k)s are an amazing way to do that.

Always Be Buying (34:25)

Bo: And then the third reason why we love 401(k)s, and Brian I think maybe this is the one that is our favorite, probably.

Brian: Yeah, ABB.

Bo: ABB, it creates an ABB opportunity. If you know what that means, it is an always be buying opportunity. It’s a Brian Preston specialty because when you ask him what he’s investing, he says always. I’m always buying, I’m always putting my dollars to work.

Brian: Well I had that question this weekend. I was out to dinner and somebody said hey it’s kind of scary right now, what’s going on? I was like I’ll tell you what I’m doing, I just buy every month. Yep. I mean I was like yes, I keep cash and other things, you know, for if it gets really ugly, but I’m like it doesn’t matter if the market’s good, it doesn’t matter if the market’s bad. A good retirement plan like a 401(k) creates an always be buying opportunity. As we like to say in the halls of Abound Wealth in the Money Guy Show, if you have pay, you’re going to want to do the cash. That’s what we say around here all the time and we love it because I got it in there, y’all. Shocked. Look how good that went.

Bo: It went great. Okay, so check this out. We did a case study to show you just how powerful always buying can be. Look at this. The market was flat for nearly six years from October of 2007 all the way out into 2012, right? The S&P 500 was at 1565 and then you go five and a half years into the future and it was at 1563. But what if you were an ABBer? You were always buying through that and you said you know what, I’m gonna do $500 every single month through essentially this flat period, this period where the market has not moved at all. The $33,000 total that you invested would be worth $46,327 by April of 2013. Remember, the market was supposedly flat. Five and a half years it went from 1563, 1565 to 1563.

Brian: Before you give the rest of the story, sure, I think it’s important to share with everyone, it’s not just 401(k)s but it’s definitely something that I love that 401(k)s kind of create that forced behavior of buying every month or every pay period. I want you guys to realize when you’re in periods just like right now that are volatile, dollar cost averaging, meaning a consistent, automatic, keep it easy, set it, forget it type strategy is going to serve you well. Because just like this showed, 1565, fast forward almost six years, 1563. You shouldn’t have made money in this period of time, but because you were consistent with your behavior, you made it easy, you made it automatic, you’re going to see you actually had a great rate of return. That $33,000 turning into $46,000 is an annualized rate of return of 11.9% in a five and a half year period where the market did not move. Technically you would have made almost 12% per year.

Bo: But that’s only part of the story. Because when we’re investing in our 401(k)s, we’re taking the long view. We’re looking out over the long term because here’s the rest of the story. Even if you would have stopped right there and you stopped in April of 2013 and you just let that $46,000 continue to grow, you didn’t keep doing the $500 a month, you just cut it off right there, we know that without contributing another dollar, that $46,000 over the next 10 years grew to $146,000 because of that hard work that you did while the market was flat, while the market was volatile, while the market was scary. That’s an annualized rate of return of 12.2%. Imagine what would have happened if you would have really always been buying. Yeah, what if you hadn’t stopped in that five and a half year period? Well now we’re talking about hundreds of thousands of dollars if not seven figure land.

Brian: Yeah, the financial mutant in me is like man, that’s exciting. That’s how wealth is built. You don’t stop. But I love when we show these things because they show how valuable your army of dollar bills are. They grow upon themselves naturally, but if you did just keep the consistent behavior, that is how you build independence sooner and you get to own your time and do what you want, when you want, and how you want on your terms.

How You Stack Up – Average Balances by Age (38:33)

Bo: Okay Brian, so we know 401(k)s are awesome. We’ve talked about the basics, we’ve talked about some of the unique provisions, we’ve even shared why you and I love them, why they can be so powerful. So let’s see how folks out there are doing. We want to say okay, we know that these things exist, we know that they’re available, how are people taking advantage of them? How are our peers taking advantage of them? So we want to give you some numbers, not because we want to compare, because comparison is the thief of joy, but more just to help you understand okay where am I? Am I doing what I need to be doing or am I following the herd moving in the wrong direction?

Bo: So we want to talk about folks in their 20s. If you look at all 401(k) balances for folks in their 20s right now, the average 401(k) balance for someone who is in that decade of the 20s is $21,529.

Brian: Yeah, and the contribution rate, 11.3%. That’s actually with the employee and the employer. That’s a little less, I will tell you all these numbers that we’re about to go over, I think they’re less than what they should be. But I don’t want to pick on people too much because I know in my 20s I was broke as a joke. So, but you do need to prioritize as much as you can in your 20s. Go to moneyguy.com/resources, look at our wealth multiplier. You’ll see everything in your 20s is an exponential growth opportunity. Don’t miss out on that. Remember our goal for you, we’re going to talk about this in a moment, our goal for you is we want you saving 25% of your gross income. So folks in your 20s, if your contribution rate in your 401(k) is only 11.3%, that includes the employer match, boy I hope you’re doing a lot of saving outside of that. And I just don’t think that’s the case.

Bo: And if you’re looking for a number to kind of hang your hat on to think about okay how can I check my progress, the goal, and this is based on research from Fidelity, is that by the time you get to 30, so by the time you get to the end of your 20s decade, inside of your accounts, inside of your retirement accounts, you ought to have 1.2 times your annual income saved. So whatever you’re earning at age 30, you should have saved 1.2 times that.

Bo: So we said Brian, the average contribution rate for someone in their 20s including the employer match is 11.3%, but we say hey we want you to save 25%.

Brian: Yeah, let’s talk about why do we want you to do 25%? Give them the carrot.

Bo: And this is why it gets so exciting. If you can figure this out and you can start saving 25% when you are 20 years old, and we’re going to assume a very conservative 6% rate of return, we’re going to assume very conservative wage growth of 1.5%, we’re going to assume a very conservative 4% withdrawal rate, so if you can start at 20 and save 25% of your gross income, by the time that you get to age 49, your portfolio will have grown to a point to where you’d be able to replace 80% of your pre-retirement income. That is early retirement. Dare I say that’s FIRE.

Brian: Yeah, that’s FIRE without figuring anything crazy out other than starting really, really early at 20. If you start saving at 25 and you save 25%, you’re still able to replace 80% of your income by 54. If you wait until age 29, you’re still retiring early. If you can start saving 25%, you can replace 80% of your pre-retirement income by age 58.

Brian: Here’s what I think is important. Be wary and careful of the YOLO crowd. Because I know in your 20s you think you’re just trying to maximize the fun factor. Just take a little bit of today for that great big beautiful tomorrow. Because every dollar that you do in your 20s is huge for your future. I’m telling you, if you want to get your 50, 60 year old self just sloppy crying happy and want to give you a bear hug, start saving and investing in your 20s. I promise you you’re going to live to a ripe old age and you’re going to be happy that you made that little bit of sacrifice when the money was so valuable.

Bo: All right Brian, so we talked about, we know that the average 401(k) balance for someone in their 20s was right around $21,000. Once you get into your 30s, if you want to look at the average 401(k) balance, it’s grown, it’s doubled, but it’s only about $48,000 on average for someone in the 30s. And if you look at the total contribution rate between employer and employee, it’s improved a touch, it’s 12.7%, but it’s not 25%.

Brian: Yeah, I think it’s interesting, you know, you’re going to notice every decade that we go through, the closer you get to the retirement goal, us procrastinators or you know anybody who thinks that, you know, why do I need to worry about retirement, I’ve got plenty of years, you’ll notice that savings rates keep creeping higher because people will become self-aware. Retirement’s happening whether I plan or don’t plan, so save more. I’m trying to give you the heads up, this isn’t enough. You need to go ahead and challenge yourself as soon as possible so that you don’t have a disappointment at some point in your future.

Bo: If you want to check yourself, if you want to do a state of the union, according to Fidelity, by the time you reach age 40 you should have 2.6 times your annual income saved. That should be the value of your retirement account. But again, we think if you can be saving 25%, there’s a good chance you’re going to blow these numbers out of the water. Because even for someone who doesn’t start saving until 30, if you just say at age 30, you know what, I just woke up, I just found the Money Guy Show, I just started taking this seriously, and I’m going to start saving 25% of my gross income, if you can do that starting at age 30, you will likely be able to replace 80% of your pre-retirement income by the time you get to 59. You are still retiring early even if you didn’t get off your duff until 30.

Bo: If you wait until 35, now we’re at what I’m going to call the normal retirement age. Even for folks who don’t start saving until 35, if you can save 25% starting at age 35, it’s likely you’ll be able to replace 80% of your pre-retirement income by the time that you get to normal retirement age, 64. If you wait until 39, to the end of the decade, okay now you’re having to work closer to 70. Now you’re having to push that retirement date out a touch. You know, there’s a lot of grace in the ability to when you start saving for retirement, getting serious under 40. So if you’re 20s, 30s, this is your chance.

Brian: Now you know, you said something. You said you got to check yourself. Would you say that so you don’t wreck yourself and wreck your retirement? Is that really what you were trying to share?

Bo: I think that’s exactly what I was saying.

Bo: So let’s talk about the 40 year olds, right? Okay, so we know that in our 30s, average 401(k) balance about $48,000. By the time we get to our 40s, Brian, you’re still in this decade for the moment. By the time you get to your 40s, average 401(k) balance about $108,000. Now again, it’s more than doubled, so it is growing. And just like you said, Brian, the savings rate is ticking up a touch. Average savings rate, now here’s what troubles me for folks in their 40s, this includes the employer match. If you’re someone who’s a higher income individual, higher income household, you should not be including the employer match in your 25% savings rate. Once you’re saving 25% outside of the employer match, but I don’t, this average does not get me super excited.

Brian: No, I don’t think, I think our folks should be ahead of that. And they say that again according to Fidelity, you should have almost five times, 4.8 times your annual income saved by the time you get to 50. I didn’t say anything in the 20s or 30s because I look, I think that money is so hard and you have to push yourself, you’re trying to figure out how you pay for the family and everything else. But by the time you’re in your 40s, I think this number is too low. I think it is. You’re going to see that’s gonna be a common trend. I think in the 50s that we’re going to share in a second, that’s too low. I want you to try to shoot for higher than what Fidelity is saying. And currently they’re saying 4.8 times your income by the time you’re 50 years of age.

Bo: Now I think, I think, save 25%, save 25%. If you are getting into that 40 age or the 40 plus age, depending on what your plans are, 25% may not be enough. And I know that’s cold water, but look at this. Even if you start at 40 and you start saving 25%, you still have to work till almost 70 until you’re able to replace 80% of your income. Now this doesn’t factor in Social Security, this doesn’t factor in pensions, it doesn’t factor in maybe only needing 60% of pre-retirement income, but you can see the longer you wait, the later it gets pushed out. If you get to where you’re 49, 49, that’s getting up there. If you get to 49 and you haven’t started saving, 25% is great, you ought to shoot for that, but you’re probably gonna, you’re not gonna have a normal retirement. You’re probably going to have to work a little bit later than what people normally think of as retirement.

Brian: I don’t, look, I am such an optimist. I don’t even, because there are going to be people that watch this that are in their late 40s, maybe even early 50s, and I don’t want them to think oh my goodness this sounds horrible. Because there are opportunities for you to figure out what levers you can actually control. And I would encourage you, first, if you do wake up and you’re like how do I play catch up, if you go to learn.moneyguy.com, we actually have a Know Your Number course. You can figure out are you ahead of the curve, are you behind the curve, are you sitting right where you should be? Because then you can figure out do I need to make more money now? Do I need to increase my savings and contributions rates and get aggressive where I’m saving 35%, 40%? Or maybe I need to, instead of, you are saying look you’re not gonna ever be able to retire, maybe it’s a modified retirement. There’s nothing that says that you can’t work part time, that you can’t figure out all other ways to subsidize. I don’t think it’s all cold water and all glass half empty. I think there’s actually even opportunities for those who start later.

Bo: I love it, I love it, I love it. And again, thank you for being the optimist. I appreciate that I do.

Folks in Their 50s and 60s (48:11)

Bo: All right, so now let’s talk about folks in their 50s and 60s. If you want to know where the average is, average 401(k) balance for someone in their 50s and 60s is about $179,000. That’s not enough. Remember we were doubling every decade? We did not double this decade. We did not go up. I’m gonna argue that you have to like change some things to get that figured out. Now I am encouraged, Brian, savings rate increased a touch, 15.7%. But if you’re at that dollar figure and you’re planning for retirement, I don’t know that 15.7% is going to get you there.

Brian: And then according to Fidelity’s study, by the time you get to 60, you ought to have 8.1 times your income saved. Again, I don’t, unless you have a pension, you have really healthy Social Security, you have a lower standard of living lifestyle, I don’t know if 8.1 is going to be the number that’s going to get you there. I think you need to know your number so you know exactly what it is.

Brian: Look, if you’re watching this and you’re in your 50s and 60s, you’re still in the workforce, you have a superpower in the fact that you can keep powering through no matter what’s going on in the economy, no matter if we’re in a recession, no matter what geopolitical stuff’s going on, you still have a job. I would encourage you, while you’re still in the workforce and you have the ability to start earning income and even doing side hustles or figuring out other ways to increase, focus on the contributions. Let’s get those savings rates as high as possible. Because just like when you hit a steep hill, what do you try to do? You try to hit the accelerator so you get some momentum so you hit it as fast as you can. If you’re behind on your savings and investments, get serious now. Because I do have that glass half full optimism where I think that you can figure out if there’s other levers like working part time in retirement. But right now while you’re in the workforce, go and prioritize your future. Because maybe you had too much fun when you were younger, this is the time now that you’re going to have to pay the price. Get serious and get disciplined so that you can actually have the retirement that allows you still to have some enjoyment. Because I am the optimist that thinks that everyone can create financial independence, but you’re going to need to prioritize your future as important.

Conclusion (50:20)

Bo: Now if you work at an employer that has a 401(k), don’t miss the opportunity. Make sure you understand what benefits are available to you because it can be a huge tool in your financial tool belt. Do not waste it.

Brian: Yeah, and don’t let social media be a bad influence on you. There’s so many people out there that are throwing cold water on the 401(k). I still think there is a reason when you look at the research and the statistics, this will more than likely be the first account that has the potential to cross seven figures in your journey towards wealth and financial independence. Don’t overlook it. It has free contributions from your employer, it grows tax deferred or tax free for many, many decades. It also encourages great behavior from you because you can’t touch it until you reach a certain age. That sheer fact allows you to always be buying no matter what’s going on in the world, not wasting any calories or horsepower on that. All those things will accelerate your success. Take advantage of the 401(k). I’m your host Brian Preston, Mr. Bo Hansen, for the rest of the Money Guy team, go check out moneyguy.com. We’re out.