Monday, September 21, 2015

Another major milestone reached: over 100K invested in my 401K

In June of 2014, we hit a major milestone when our total investments surpassed 100K in value.  I logged into my 401K account today and noticed that we hit another major milestone:  I now have over 100K invested in my 401K plan! 

What is a 401K?
Let me remind you that a 401K plan is a type of salary deferral retirement account that allows you to contribute part of your income towards your retirement.  Most large companies offer 401K plans and automatically enroll workers when they first get hired.  If you work for a non-profit, your equivalent plan will be called a 403B.  Your 401K plan uses pretax money for investment. Investing with pretax money allows you to make larger initial contributions.  None of your contributions get taxed until you withdraw money for retirement (after age 59.5).  Other investments such as Roth IRA or taxable investments use after tax money.   

When it’s time to leave your job, you can transfer your balance over into an IRA or roll it into another 401K.  If you cash out your 401K balance before age 59.5, you will incur a 10% early withdrawal penalty and be subject to income taxes.  Remember, the money in your 401K is meant for your retirement, not a new car or house remodel.  If you are in an emergency and need access to cash, you can borrow money from your 401K, but I would not recommend it.  Money in your 401K should be growing for your future retirement needs.  

Contributing to a 401K is simple and automatic
Without a doubt, contributing to my 401K has been my easiest investment.  My 401K contribution money gets deducted from my paycheck twice a month automatically.  I don’t need to log into any investment accounts to buy any shares.  I’ve set up my accounts to rebalance automatically as well.  With 401K investing happening automatically, I can use my free time to do other things.  For many workers, companies typically automatically enroll people into a 401K plan, forcing them to save something for retirement.  Studies find that when employees are automatically enrolled into a 401K plan, they are likely to keep it instead of opting out.  It’s a simple and forced way to save for your future.      

Company matching is like getting a free raise
Many companies offer 401K matching up to a point.  You may need to check with HR to determine how much money your company will match on your contributions.  It’s important to contribute at least up until the match.  By not contributing up to this amount, you’re leaving free money on the table.  Taking advantage of your company’s 401K match is like getting a free raise.  Don’t leave free money on the table.  My company offers a match of 3%.  Other companies may offer 6% or even 10%.  

Dollar cost averaging with your 401K
While the U.S. stock market has been performing well over the last few years, market volatility has been much higher lately.  This will not change the way I invest in my 401K.  I receive a paycheck twice a month, and $750 is deposited into my 401K with each paycheck.  $750 deposit x 24 months equals the maximum 401K contribution of $18,000 per year (new rules starting 2015 if you are under 50 years old).  These regular deposits help me dollar cost average my investment contributions into the U.S. stock market.  When the market is down, I purchase extra shares and when the market is up, I purchase less shares.  Automatic dollar cost averaging helps me stay invested in the market during downturns, taking my emotion out of investing. 

A long journey with my 401K
I first started investing in my company 401K plan in October 2011.  I started off slow with a 3% contribution per paycheck.  I then gradually increased my contributions by a few percentage points every few months.  By June 2014, I finally reached the maximum contribution amount in my 401K, which was $17,500 per year at the time (company matching contributions do not count towards the maximum individual contribution amount).  In 2015, the new rules allow me to make a maximum contributions up to $18,000 per year into my 401K.

In my 401K, I’ve kept my investments simple by choosing funds that best mimic Vanguard’s total stockmarket (VTSAX) index fund.  My investment includes 81% U.S. Large Cap stocks, 6% U.S. Mid cap stocks and 13% U.S. Small cap stocks.  This keeps my investments diversified.

My company provides me with profit sharing and when our organization is financially successful, I get extra deposits into my 401K.  I’d rather have these deposits go into my 401K instead of directly into my bank account, because this directly goes to fund our financial freedom and retirement.  If I received a sudden large bonus in my bank account, we may be tempted to spend all of it.

The bull market of the last 6 years has really helped to boost our investment returns.  While 100K in my 401K is not enough to retire on, it’s a nice milestone to reach and encourages me to stay the course with my investments.  I just wish I started investing more significantly back when I first started working in 2008.  If I had, my portfolio would be a lot larger by now.  The stock market can crash at any time, and my 401K will still be on autopilot.  I’m not touching this money anytime soon.  Aside from the real estate that we hold, my 401K is currently our largest investment. 

If you’re just getting started, I recommend contributing enough to reach the company match.  Then contribute to your IRA until you max it out ($5,500).  Afterwards, increase your 401K contribution by 1% every few months until you max it out ($18,000).  A 1% increase is small enough where you won’t notice a significant difference on your paycheck.  Over time, your 401K balance will continue to grow and will support you in your future.  

I make these posts not to show-off or compete with anyone, but to keep track of our financial goals year to year.  If you don't track your financial progress, you won't be able to understand or improve it.  I only started contributing to a 401K in October 2011 and a Roth IRA around the same time.  If we only started investing more earlier, we would be further along our progress towards financial freedom. 


Where are you at with your 401K contributions?  I think it’s time to increase your contribution amount, even if it’s just 1%.  

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