Feb. 23, 2024

Common 401K Myths

Are you confident that your retirement plan is set up for success? Join us on our latest episode as we debunk some common myths surrounding your 401k. Don't miss out on valuable insights that could maximize your savings! Please share our...

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Transcript

EP 54 - Common 401K Myths

[00:00:00]

Welcome and thank you for joining us on our financial Friday show, where we dig deep into the world of personal finance and investments.

Let me start today with a question: for you. Are you confident that your retirement plan is set up for success?

We'll stay tuned today because we're going to debunk some common myths and set you on a path to financial independence.

Today, we're going to shed some light on five common myths surrounding your 401k retirement plan. These misconceptions can often lead to missed opportunities and prevent you from maximizing your potential. [00:01:00] savings. So, let's debunk these myths one by one.

And before I get started, I want to remind you, you can visit our podcast page askralphpodcast.com. As we're talking about finance day, I'm going to give you a quick plug for my book and you can find that on askralph podcast.com/store. the name of my book is mastering your finances. A great guide. If you're looking to master your finances. You can also schedule an in-person meeting with me or a zoom meeting askralphpodcast.com/store . So let's get started on today's topic. And let's jump right into it.

Myth.

Number one. And I hear this all the time in my practice. "I don't need to contribute the maximum amount to my 401k, Oh, I'm going to debunk that right now. Many people believe that contributing the maximum amount to their 401k is unnecessary. You know, they look at that and they say, well, why do I need to be putting $22,000?

And why do I need to be putting. $25,000 in, but trust me, folks. This is an absolute myth and couldn't be farther from the truth.

Here's the real deal. [00:02:00] By maximizing your contributions. You take advantage of the power of compounding interest. so that money builds up over time. So another great thing.

It reduces your tax liability, in the year that you do it. And the best part you're building a secure retirement.

So, don't be afraid to maximize that contribution and reap those long-term benefits.

This is something I stress to my clients. every day. Think about it this way. By contributing to your 401k plan.

You're effectively getting an immediate return equal to your tax rate on the day of your investment. So let's think about this from a practical standpoint. Let's say you're in the 22% tax bracket. So for every dollar you put into that 401k. You're saving 22% of that dollar. So effectively, it's only costing you 78 cents to put a dollar in and that doesn't even consider the state taxes.

So myth number one is absolutely debunked. It's okay to contribute the maximum to your 401k.

Let's move on to myth. Number two. "I can't touch my 401k until retirement [00:03:00] age,

Ralph. Well, that's another popular misconception. You can touch it. Now, I'm going to be blunt with you. There are ways to make early withdrawals, but they come with penalties and taxes. There are certain situations where you can tap your 401k, such as a down payment on your first home or in a case of an extreme financial hardship.

Now I'm going to say this. You definitely want to discuss this with a financial professional, like myself. another option you could take if he didn't want to take a distribution, which you could do a 401k loan. And again, I talked about that in a podcast a few weeks back, the downside to those, or if you leave the employment, it could become a distribution.

But again, You can touch your 401k plan. Before you reach retirement age and retirement is just so we understand each other. As of right now, it's 59 and a half. So. The only issue you're going to have is if you take that money out. before 59 and a half. You're going to pay a 10% penalty plus it's ordinary income.

So it does come with a pretty good tax hit. But to say that you [00:04:00] can't take it out is just not correct. So again, myth number two. I can't touch my 401k until retirement age debunked.

Let's move on to myth. Number three. Myth number three is "my 401k is a guaranteed source of income in retirement. Wow. You know, and that's a tough one too.

I hear clients say this to me all the time, but unfortunately. Your 401k is not a guaranteed source of income in retirement. It is a savings vehicle that allows you to invest in a variety of funds and assets. Now, if you do it correctly, that can ensure a steady income stream during your golden years. But it's important that you create a diversified portfolio. And have a clear retirement plan in place. like this.

Isn't a bank investment, it's not insured up to $250,000. These investments that you're making, you could lose everything to be blunt. this may involve you working with a financial planner. now most of the time. If you work for a company, they're going to have a person, their 401k rep, HR rep, you need to sit with them.

You need to understand your [00:05:00] investment choices and you need to come up with a plan that meets your objectives and also addresses your risk tolerance. As you can invest in something that's very safe or you can throw the dice on the table, invest in something that's not so safe, but you have to remember. This is not a guarantee folks. If you diversify your portfolio over the long run, then you should be fine.

But again, this is a thing you want to talk to a financial advisor and make sure you understand what you're getting into. So. I'm going to say this debunk number three is my 401k is a guaranteed source of income and retirement. I can't say that. That's true. So I got to debunk that one is also

let's move on to number four. Myth number four says "I shouldn't contribute to my 401k.

If I have debt. Well, that's an interesting one. Contrary to popular belief, contributing to your 401k while simultaneously paying off your debt can actually be a smart financial move.

I tell clients this all the time, you can do both. You don't have to pick one or the other. By contributing regularly, [00:06:00] you continue to take advantage of an employer matching and see that's the key.

So if you work for an employer that matches your 401k. And you're not contributing up to at least the match. You're making a huge mistake. You're leaving money on the table. So if you work for an employer and they're willing to match, let's say up to 4% of your salary. For every dollar you put in, they're going to match that up to 4%.

If you don't take advantage of that, you're losing money. That's just a truth. Now, I think there's a balance here. So if the myth is I shouldn't contribute, if I have debt. I can understand part of that. I think you need to work both things at the same time. You can strike a balance between paying off your debt and retiring. And that balance is crucial.

again, I'm going to say this consult with a financial planner or a financial expert like myself. And I said before, you can schedule an appointment with me wherever you live. Doesn't matter. Go to our website@askralphpodcast.com slash store. You'll see a button there to schedule with me. But sit down with somebody and go over this because it's not, a zero [00:07:00] sum game.

You can do both at the same time. So myth number four. I shouldn't contribute to my 401k. If I have debt again. Debunked.

Let's move on to number five. Myth number five is “I don't have options when it comes to my 401k investment choices. And we kind of talked about this one when we talked about the diversification. This is a common misconception.

most people think that if it's a plan sponsored by their employer, will it has to be in employer stock . It has to be in the stock of the company. I worked for it. That is just not true. All 401ks offer a range of investment options, and it's absolutely essential that you understand and leverage them to your advantage.

don't settle for the default or ignore the available choices.

Take time to research. Understand what those investments are. These could be long-term assets where you want to understand what you're investing in. You need to make sure they align with your goals, and they align with your particular risk tolerances. Remember, this folks, your 401k plan is your financial future.

And the truth is these days we don't [00:08:00] have traditional pension plans for the most part. If I meet with a client that works in the public sector, there are still some pension plans out there. For, first responders and firefighters and that sort of thing.

But for the most part in the private sector, there is no such thing as a defined. a benefit anymore. Meaning that you're going to get a certain amount of retirement every month. You really are in control of your retirement, these 401k. So it's absolutely important. That you understand, this is your financial future, and you've got to understand the investments that are there and your employer has an absolute obligation to provide you with information on the investments and provide you with someone to talk to about that.

Well, folks, I hope this information has shed some light. On the common myths surrounding your 401k. Remember this always seek professional advice and educate yourself. I can't stress that enough. On your retirement planning strategies. And as always, I'm here to help you navigate the complex financial landscape, tune into our show frequently.

We talk about all kinds of [00:09:00] topics. So before I wrap up, I want to remind all our listeners again, to visit our podcast page. You'll find our show notes there. That's at askralphpodcast.com. You can leave us a review. You can share your thoughts, or even send us a message with questions for future episodes. and listen to the special deal right now. Make sure you join our email list because what we've set up now, if, for people who join our email list every week, we're going to have a drawing and we are going to give away a $25 Amazon gift card

just by being a member of the Ask Ralph Podcast, email list. So sign up yourself and tell a friend. You can also, like I said, schedule a consultation with me to discuss your specific circumstances. or buy my book, mastering your finances.

It will change your financial landscape. And one more thing before I go, we're going to start something new. And that is our question of the month. And the way you respond to that is if you go to our ask Ralph podcast.com website and you click on the bottom right

corner, you'll see a microphone there. And what you're going to do is you're going to click record. So here's this month's question. What do you [00:10:00] find is the most difficult part of creating and living with a budget?

We need your answers by March 1st and we'll discuss the answers on the show in March.

So don't forget to leave your answers.

Well folks, thank you for tuning in today. And as I always say, stay financially savvy. And God bless! you abundantly. Take care. [00:11:00]