00:00

Hello and welcome back to another episode of The Retire Once show. I'm

your host, Johnathan Rankin, the founder and CEO of Theorem Wealth

Management. And as always, I am joined by my lovely cohosts.

00:10

Hi, I'm Melissa Rankin. Thank you so much for joining us.

00:12

I don't get more lovely than she. We're here with another episode, actually,

this is a big deal. This is episode 50. So thank you for joining us on this

journey. And if you listen to all 50, thank you.

00:26

Thanks for sticking it out with us.

00:27

Yeah, we know those first few were a little rough, but we're always we've.

00:31

Improved a little bit.

00:32

Trying a little bit.

00:33

Yeah.

00:34

You know, we're getting there. That is all you could do. And we're going to

continue to put these out there, and hopefully you love them. And that's

why what do we want you to do?

00:42

We want you to subscribe. We want you to never miss one of these. I mean,

we're at 50, but hey, sky's the limit, so we never want you to miss one.

00:48

Oh, we do not. And today we've got a great episode. Today we're going to

be talking about whether or not you should be maxing out your 401K. Is

that a good idea? Is that something you should be doing? And then how

much should you be saving in your 401K or for retirement in general?

01:02

But first we got to talk about why this even came up.

01:05

Yeah, so this came up from an article that I came across, and the article

was titled, is It a Good Idea to Max Out 401K? Not a 401K. Not max out

your four and 101K. Not the 401K.

01:21

Just four hundred and one K. Four.

01:23

Hundred and one K. This, for some reason, reminds me where I grew up in

Sacramento, there was a place where we always got our hair done. My

family still goes there today called Hair and Nail Pro. Just one nail. Not

nails, one hair. Hair Nail Pro. Just one nail. That's what this reminds me

of. So I didn't write this article, and maybe this is proper grammar, but I.

01:46

Don'T know, maybe so initially, that's your first main well, that was my

first.

01:50

Takeaway, was just trying to read that. But then my first initial thought

was to me, it depends. I mean, what about you? When you first saw just

the headline, is it a good idea to max out?

02:00

Think it's yes, of course, if you can.

02:03

Yeah, and we'll get into a little more of that. But they started off talking

about how with pensions fading, obviously, we've talked about how a way

of the past very few people have those. And if you do, congratulations. But

401 KS are the best retirement savings vehicle. I think we all kind of know

that part.

02:21

That should be a general consensus.

02:23

Yeah, I think so. Just a reminder, for people who aren't familiar with the

current contribution limits, for 2023 is $22,500. And if you're over the age

of 50, you can do the additional catch up contribution and get yourself to

$30,000 for this year.

02:40

Okay, so we got to talk about this. The article goes into why you don't

need to max out your four hundred and one K. Yeah, why you don't.

02:47

They talk about a 40 year old making $50,000 a year, and they talk about

how $22,500 so if this person maxed out, their 401K is 45% of their salary

and maxing out is not feasible, is what they say. Obviously, I didn't think

you need to write an article to point out common sense.

03:07

Maybe they're getting paid by the word.

03:09

No, it's either by the word or the ads when you click on it. They probably

had a good title, actually, arguable, whether or not. But I guess I clicked

on it. So they averaged it's catchy, so that's part of it. But to me that was

common sense. But they did talk about some risks to maxing out and they

talked about the opportunity cost of investing where you're limited in your

options in the 401K. Obviously, if you invest everything in the 401, you're

only limited to the investments in there and you're giving up an

opportunity cost to invest in something else that you can invest in a

brokerage account or a Roth IRA outside of that.

03:49

And we have done an episode on that. Just want to throw that in there. So

if you missed that one, we did go into great detail on that.

03:55

That's true. And they also talk about a risk to maxing out your 401K. If

you need money for a large purchase and it's all tied up in the 401K, then

you're subject to penalties if you're under the age of 59 and a half and

income taxes. So just to recap those rules, if you're under the age of 59

and a half, there's a 10% penalty if you need to take money out on top of

the income tax, because most money that goes into a 401 is pre tax money

and when you take it out, then you're subject to income tax. So if you need

money for a house or for a car or a roof or just whatever you want an

emergency. An emergency. You don't want it all tied up in your 401.

04:37

Right. Makes sense. But the article actually goes to say when it makes

sense to max it out is if you're making over 200,000 a year or if you're

over 50 with very little saved. Again, I feel like common sense has just

fallen to the wayside.

04:53

Yeah. My favorite quote from the article was, for most people,

contributing the maximum to your 401K not only is unfeasible, but also

doesn't really make sense, particularly if you have a good long term

strategy. Okay, let's just back up the $200,000 a year. Completely

arbitrary. I mean, I get that's ten to 15% of your overall income if you're

maxing out, depending on your age. But that over the age of 50 with very

little saved.

05:21

And if you have a long term strategy, you're waiting too long.

05:27

If you're over the age of 50 with very little saved. And let's say that you're

saving a couple of year, most people aren't going to go from saving three

or four or $5,000 a year to 30. It's just most people practical, no. And

their lifestyle is already up to the point where they're saving what they

can. And I don't think they're going to just automatically know, what, I'm

50 years old, I don't have much save for retirement.

05:52

The light bulb just turns off.

05:53

I should use this 401K thing and I think I'm going to just I can max this

out, right?

05:58

401K thing.

05:59

Yeah. So this is what I should do. I've got to say, I'm not very critical of

much public content out there, but this has to be the worst retirement

article I've found. But it does bring us to a good point about 401K

contributions.

06:13

Okay, so the article aside, how much should you contribute and should you

max out your four hundred and one K?

06:18

All right, so let's just start off with no matter what age you are. So

regardless of age, obviously you want to start with the match because

there is no one number fits all type equation for how much you should

contribute. Not everybody should contribute 100% of their income or the

max, if you can't.

06:36

Afford it, no, they're going to live.

06:38

Regardless of your age. So let's just start there. Start with the match. Get

up to that point. As we talked about before, it's free money.

06:45

Don't leave any money on the table.

06:47

And then the article does bring up a good point, which is the ability to

access money.

06:52

That's true.

06:52

You want to have at least your emergency fund, three to six months of just

reserves sitting in a savings account that is there in case you need it. But

also if you're saving for a large purchase, if you're buying a home or

anything we talked about, have that separate to where you're saving

towards that goal. So if you need a down payment, you're not putting that

into your 401K or into your emergency fund, you're putting it somewhere

separate from there. Get rid of all revolving high interest debt so credit

cards, knock those things out, and then you can start going back to the

401 and other vehicles from there. That's for everybody.

07:28

Regardless of the general rule.

07:31

You could be 21 just starting out. You could be 55 planning for retirement

the next ten years.

07:36

Hopefully you're not just starting then.

07:37

But no, but let's say that you are in your forty s and you want to know if

you're contributing enough. I think that's really the main question. It's not

necessarily how much you should contribute, because for a lot of people.

Yes, that question is going to come up when you first start getting access

to a 401K. But usually the question is, am I contributing enough? And

that's where retirement planning starts to become very important.

Because retirement planning in your twenty s and thirty s, that's going to

be really hard.

08:06

Looks a little different.

08:07

Yeah, your life's going to change. But in your forty s and fifty s, you have

an idea of what life is like. I mean, you may not know the specifics of what

your 65 year old self is going to need from an income perspective, but

you're going to know if you have kids and you're going to know probably

where you live. If you own a home, you're going to have an idea of things.

Whereas in your twenty s and thirty s, you don't know. We didn't know if

were going to have one or two kids or four, which I didn't ever thought

were going to have four.

08:34

I never thought were having four.

08:36

I never saw us owning 104 year old home.

08:39

True.

08:39

So there are things that you just don't forecast when you're in your twenty

s and thirty s. So when you're in your forty s, fifty s, this is where you can

have an idea. And starting to plan for retirement is important.

08:50

It is. But I think one of the things that we always recommend is to start

running a few different scenarios. I mean, based on your age, based on

your current savings rate, your accumulated savings, that's going to help

you kind of decide, am I saving enough? How long is this going to last?

You have to start somewhere.

09:09

Yeah. That's going to give you a good idea. If you have never done any

retirement planning before and you just want to know, am I contributing

enough, you start running those scenarios. So let's just, you just throw at

an age, we'll say 67, full retirement age for most people. If you're in your

40s, it is your full retirement age as of now. And you want to know, how

much income am I going to be able to generate at 67? So you start

running through those retirement plans and let's say that it comes back

with Social Security, your savings and your continued savings rate. You're

going to be able to generate $70,000 a year. You go, okay, well, the

problem is I need currently 120 to live my life. Well, then you have an idea

of to maintain your current standard of living, you might have to save

more, you.

09:57

Might have to adjust.

09:58

Yeah. So this is going to give you an idea of whether or not you're at least

on track to that is that time to start that planning. And one of the things

we always recommend is that even if you are on track, it's always a good

idea to auto increase your contributions. So you run a couple of scenarios,

but still go in there and ratchet up every year by a percent and up to a

certain point. But if you're not on track, this is going to give you an idea

of what it's going to take to get there.

10:27

But you're never going to know unless you start running the scenarios. I

think that's the main thing.

10:30

Yeah. And we've always talked about the statistics, how, what is it? One in

three people know how much they actually need to live off of in

retirement. So if you want to know how much you should contribute, start

thinking with the end in mind, build out those retirement plans, and you'll

have a very good idea because there is no one size fits all answer. The

earlier you start saving, the better. Obviously, we know that. That's

common sense. This is like writing the article. Guess what? The more you

contribute, the better off you're going to be.

11:01

What?

11:02

So at a certain point, you have to figure out what's right for you. And this

is where some people recommend that general ten to 15% rule. I've ran

across people whose retirement needs require them to save more than

15%. So meaning that they're going to max out their 401, but they also

have to save other money elsewhere, additional something. So just

because you're saving that 10% or 15% into the four, okay, that still might

not be enough. And for some, it might be more than enough. So some

people recommend that, or some people also recommend living by the 50

30 20 budgeting rule, which is 50% of your take home pay is spent on

needs, 30% on wants, and then 20% on either debt or savings. So kind of

base it that way. But if you're making $50,000 a year, like in the article,

you're probably not expecting that when you retire, you're going to need

to have $100,000 to live off in retirement.

11:59

Probably not. I mean, based off your lifestyle, you're.

12:02

Going to base everything off your lifestyle. I've seen people who will have

a successful retirement with $100,000 saved, and that's it. But to them,

retirement success is different.

12:14

Looks different to everybody.

12:16

And you have to define that first. You have to figure out what is success to

you. And for some, it's, I want to have millions of dollars, and I want to be

able to leave millions, you know, millions of dollars to our kids. I want to

have $400,000 of income. And that's great for some, it's I just want to live

the rest of my life. I don't want to worry about money. I can make $40 to

$50,000 a.

12:38

Year, and I'm good, be perfectly happy.

12:40

Those are two different scenarios, both with retirement success. So if you

want to know how much you should contribute, start somewhere, keep

increasing that, and then start planning to see, is that going to generate

you enough of an asset base to pull income from.

12:55

So kind of work backwards.

12:56

That's exactly what you have to do. And if you need help and you don't

know where to start, hit the link in the description below. Our team will be

happy to help you walk through that process.

13:04

Absolutely.

13:05

That's what we do all the time. And before we get out of here, what do we

want people to do again?

13:10

We want you to subscribe. We never want you to miss one of these

episodes, not only to the show, but also to our weekly newsletter.

13:15

You mentioned that at the very beginning. Thank you for that plug. The

retirement newsletter comes out every single Friday. Make sure you hit

that subscribe button to that, as well as to the channel. And with that, I'm

Johnathan Rankin.

13:26

And I'm Melissa Rankin. Thank you so much for joining us.

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