- I royally screwed up with my 401k.
I've literally lost thousands of dollars because no one
told me certain things about investing.
You'd think your employer or 401k servicing company
would give you a little bit of education on what to do
with your 401k,
instead of just saying, "Oh here you go, good luck."
But I guess as long as they stay out of the
education business the more videos that I can make.
Look I don't wanna see you make the same bone-headed
mistakes as me.
So in this video I'll go through some things that you should
know and mistakes to avoid when investing in your 401k.
Some of these might be obvious to you but I guarantee
there's at least a couple that you had no clue about.
To be honest with you I'm a little embarrassed to share
some of these stories with you but I'll do it anyways.
Because I always have to remind myself that you don't know
what you don't know and I shouldn't beat myself up about it.
Hey I'm Jarrad with an A, and on this channel we like to
talk about all things (imitating beatbox)
personal finance and investing.
Just a disclaimer this video is for educational and
entertainment purposes only.
Nothing I say should be taken as financial advice.
If you have a decent amount of your 401k invested in your
employer stock then you might wanna rethink
about your investing strategy.
It's good that you're rooting for the company that you
work for to do well,
but this can turn really bad very quickly.
When I think of investing for retirement,
I like to be diversified.
I don't wanna have too many eggs in one basket
because if something happens to that one basket,
then you're in for a tough road going forward.
Your main source of income already comes from the
company you work for so your livelihood hinges
on that company doing well.
That's already enough risk right there.
Don't mess it up by investing in their stock as well
because that's just too much money
riding on that one company.
This is one of the main reasons I prefer to invest
in low-cost total stock market index funds.
I read an article in the Wall Street Journal
where a guy named Gary worked at GE for 40 years.
He retired with a pension and company stock
valued at $280,000.
A couple of years later the stock price tanked
and that $280,000 instantly became worth $110,000.
Our buddy Gary is now forced to find work in retirement
and not by choice either.
This is really scary to think about.
Because of stories like this I've never owned and never plan
to own any shares in the company that I work for,
it is just not smart.
Next you need to understand what it means to be vested
if you have a 401k or your employer offers
any sort of match.
I learned this the hard way.
Let's say your employer matches your 401k contributions
up to 5%.
All of that contribution money gets invested just like the
rest of the money you invest.
But it's technically not yours until you're fully invested.
To be vested means you have full rights
to some sort of benefit.
In this case,
it's your 401k contribution money.
If you leave the company before the predetermined timeframe
then you lost the rights to that benefit.
So if you have to be vested for three years to receive
all of the employer contributions
and you leave the company after, we'll say two years
11 months and I dunno 22 days.
Than they will take back all of the money that they've been
contributing for you and the gains on that money as well.
So you're essentially investing that money for the employer
you just left.
Yeah you've still been investing but that sucks that they're
taking that money from you.
Yeah, this basically happened to me years ago
because I didn't realize that this was even a thing.
I have to be invested for three years and I left the company
after about two years and nine months.
When I went to my new job I started to transfer my 401k
money from the old job and the numbers did not add up.
I had thousands of dollars missing.
I was like what the heck is going on.
That's when I found out what it meant to be vested.
If I knew about this then I probably would have found a way
to stick it out for another couple of months
to get the fully vested amount.
I felt like such an idiot after learning about this.
I greatly appreciate it if you Hulk smashed
that thumbs up button to help support myself, this channel
and my dog Molly would love you long time for it.
If you know someone who could benefit from seeing this video
then do us both a favor and share it with them.
Is that a 401k and IRA are different but kind of the same.
In the past my thought process was if I have a 401k
then there's no reason to invest in an IRA as well.
They're both retirement accounts but a 401k is offered
through your employer and an IRA is self-directed.
So you basically have to go invest in your IRA on your own.
As of right now the maximum amount that your can contribute
to your 401k starting in 2020 is $19,500
and an IRA is $6,000.
If you were curious about investing in a Roth IRA,
then I'll link up my playlist to all of my Roth IRA videos
in the description.
You can also have a 401k and an IRA at the same time
and in my opinion you should taking advantage of both.
This is one that won't make or break you but you're still
gonna wanna know about so you're not surprised
when it comes time for you to retire and you're wondering
why some of your money is in this bucket.
The money that your receive from your employer match
is always invested in a traditional 401k.
Which means that this is pretext money.
Which also means that when you go to withdraw any of your
employer's contributions when you retire,
then that money will be taxed.
For example if your invest $1,800 per year into your
Roth 401k and your employer matches $1,800,
then that $1,800 that you invested will grow tax-free,
while the $1,800 that they match and the investment gains
on that money will be taxed once it's grown
and you retire and your start pulling that money
out of your 401k.
If you leave this job and roll it over into an IRA
then you have to roll it into a traditional IRA
not a Roth IRA.
So if someone invests in their Roth 401k forever and
they expect not to be taxed on any of the retirement money
then they're wrong.
Don't feel like you were getting screwed over here though
because this is the case for everyone who works for
a company that matches their contributions.
You are not gonna be able to change it.
If you're not investing up to your employer's match
then you're either an idiot or you're just not aware of
how important it is to do so.
I'm guessing you're probably the ladder though
because I don't think you're an idiot.
The simple explanation is because it's literally free money.
Think of a company match like giving you free shares
of an index fund out of every single paycheck.
Even if the shares of that index fund go down
you still have those shares that'll have the potential
to grow and pay you dividends every single quarter.
You also have to look at an employer match like a part of
your compensation for working there, because it is.
Just like your health benefits and vacation days as well.
Let's go through a quick example,
say your employer matches 50% of your contributions
up to 6% of your annual salary.
If you make $60,000 per year then you are eligible for them
to match up to $1,800 for the year.
Because 6% of 60,000 is $3,600 and they are going to
match 50% of that which is $1,800.
This means that you invest $1,800 and they'll match you
with $1,800.
You can consider this an instant return because you're
guaranteed to double your money as long as you invest
up to that amount.
I'm a dummy and didn't realize this when I started my first
job so I didn't bother investing because Dave Ramsey
told me to put all of my money towards debt.
Then of course I did my own research and realized
he wasn't giving the best advice here.
So I started contributing up to at least the match,
even though I was still focusing on paying off my bad debt.
Was this a bone-headed move on my part?
Did I learn to not take Dave's advice at face value anymore?
I sure did, but you don't know what you don't know.
Don't make the same mistake as me and please please please
invest at least up to your employer match
and make sure you're fully vested
before leaving the company.
Don't listen to Dave Ramsey.
Because he's an idiot about certain things,
sorry not sorry.
You need to be aware of the fees involved with investing
in your 401k.
Now there's two types of fees that you need to look for.
The first is the expense ratio of the investment offered
within your 401k.
This is going to be different for each investment option
that you have.
One thing to note don't just base your investment decisions
on the one with the highest return over the past 10 years.
You need to understand that what the holdings are within
that particular investment, what the goal is of that fund
and how it aligns with your goals,
and you need to pay attention to the cost to own that fund.
I made the mistake early on in my investing career
where I would just pick the one with the highest return
and I didn't even bother looking at the expense ratio
or what was even in that fund.
If you've got one fund that has a 10 year return of 16.5%
and an expense ratio of .80% and a low-cost index fund
that has a 10-year return of 16%,
but an expense ratio of .03%.
Then you may wanna stop to think before you automatically
chose the one with the highest return.
A, because you don't actually know the goal of that fund
with the 16.5% return,
and B, you should be trying to limit your fees as much
as possible.
Just to be clear you shouldn't only chose investment options
because it has a low expense ratio.
You need to understand what the goal of that fund
actually is.
I talked to you a little bit on understanding investment
options in one of the Roth IRA videos that I made.
I'll like it up in the description for you to check out
after this video.
If you need some help making sure you're not paying
too much in fees then check out Bloom.
It's a free 401k analyzer tool that'll look through your
portfolio to make sure that you're not over-paying in fees
and will check to see if there's any hidden fees
you're being charged.
I tried them out and was extremely impressed
with the results.
It felt good letting someone else take a quick look
at my 401k portfolio.
Link to run the free analyzer on your 401k
is in the description.
The next expense that you need to be aware of within
your 401k is how much they're charging you to manage
your 401k.
Now I'm fortunate enough to where I get charged a flat
$5 fee every single quarter no matter how large my 401k
balance is.
But I've heard about some people's 401ks who are getting
charged a lot more than that.
Or even an ongoing percentage of their 401k portfolio.
These expenses are the same for everyone across the company.
Now you may not think that you have the power to get your
company to do something about it but you probably do.
If you notice that the management fees of your 401k
are really high then reach out to your HR department
and make them aware of what you're actually seeing.
A lot of the times the higher ups within your company
are clueless.
They were probably just pitched by a sales rep from one of
these investment management companies
and didn't pay attention to how much their employees
would actually be paid.
If you're able to articulate how much these fees are costing
all of their employees then you maybe surprised
at how willing they are to change companies
or try to get the fees lower for you all.
This mistake is easy for forget about.
If you're not increasing your contributions on a regular
basis then the future you going to wanna punch the you
of today directly in the throat.
You've done your research, you've educated yourself,
you know what to invest in.
So you adjust the settings in your 401k to invest 20%
of your income and forget about it.
I find a nice little picture from Fidelity that shows you
how much your leading on the table if you don't increase
your contributions on a regular basis.
The difference between increasing it by 1% every year
versus only increasing it by 1% is an extra $1,700 per month
you're screwing your future self out of.
Yes we're talking about a measly 1%.
This is something that I do every single year
no matter what.
Whenever my income increases I automatically increase my
contributions by the exact same amount.
I don't ever see that raise on a day to day basis,
my overall wealth gets that raise.
We should all be very aware of what our actions today
are going to do for the us in 20 or 30 years.
That future person is just as if not more important
than we are right now.
It is our obligation to set him or her up for the future
so they don't have to work until the day that they die.
Don't forget to Hulk smash that thumbs up button
and check out these videos to my left.
The top one I'll show you exactly how I invest
in my Roth IRA.
Or you can watch the one below it where I show you
exactly how I save and invest 70% of my income.
Check out in the description for a differently playlist
and resources to help you out with all of your personal
finance and investing needs.
I'll see you in the next one and friends adios.