Current future millionaire? What does that even mean you ask yourself. Let me explain what I mean by this. Unfortunately, many of us won’t ever become millionaires any time soon. The Youtube videos you watch about the drop-shipper who made their first million at the age of 25 is not going to happen to 99.99% of us. The finance mogul who bought Bitcoin in 2013 and is now a millionaire isn’t you. But what can be you is a current future millionaire. How can this be? Well, it’s quite simple, but definitely not easy. Max out your 401k.
What is a 401k?
A 401k is an employer-sponsored defined-contribution retirement account defined in the Internal Revenue Code. This allows employees to contribute a portion of their wages to a personal account. As an employee you can defer a portion of your salary to this account, which reduces your yearly income tax liability. Most employers also do a matching scheme where they will match up to a certain percentage of your deferral to incentive savings. Upon retirement, distributions, including earnings, are considered taxable income.
Benefits of a 401k and why you should max it out:
- There are ways to access your 401k funds if you want to FI/RE early without penalty (Roth conversion ladder, 72(t) withdrawals). I will cover the concept of the mega backdoor Roth IRA conversion in a future post.
- 401k funds have federal bankruptcy and creditor protections.
- It’s easy to save in a 401k because the money comes out from each paycheck so you don’t “miss” it. Out of sight out of mind.
- A 401k is a tax haven at any income level.
- Most 401k’s have some low cost investment options.
- Your dollar earned grows tax free for the duration of your retirement horizon.
How will a 401k make you a current future millionaire?
Let’s take a look at the Scenario 1, this is what I advocate everybody to do. Max. Out. Your. 401k. Say you’re 25 or even 35. You start saving $19,000 per year for the next 30 years. By the end of this you will be sitting on about a $3 million nest egg. This is what I mean by being a current future millionaire. You are currently a millionaire in the future.
Let’s say you were cash strapped due to low pay, family needs, or other personal things in life that never allowed you to save as much and max out your 401k. Where would you be in this scenario? Would you be a current future millionaire still? Absolutely! If you and your employer were able to contribute just $7,000 per year, you will be sitting on just over $1 million in 30 years. If your employer matches dollar for dollar, you only need to contribute $3,500 per year.
Easier said than done…
I understand this sounds too simple, pedantic even, but trust me. The numbers don’t lie and Albert Einstein was right when he said that compound interest is the most powerful force in the universe. As someone aged 25-35, time is your ultimate ally. Use it to your advantaged. Max out your 401k and rest easy knowing you are a current future millionaire.
In a future post I will discuss how you can access your 401k early without any penalties in case you decide you do not want to wait until the age of 59.5 to start withdrawing your 401k penalty free. If you want me to dive deeper about this topic please leave a comment below as there are a lot of nuances regarding this topic that is tough to cover in one digestible post.
Read about the the latest update in my career in our past post here.
Thank you,
– E J
