Maximize Your 401(k)_ The 3 Biggest Mistakes Costing You Thousands _ Intentional Money Moves Live
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[00:00:00] Welcome to Intentional Money Moves Live. I'm Leah Hadley, and this episode was recorded live and is brought to you in audio form so you can take it with you wherever you go. Each week, I tackle the money topics that matter most to women who are ready to build wealth with purpose and confidence from investing and retirement planning to navigating finances through some of life's biggest transitions.
No topic is off the table. Now. Let's get into it.
Hey everybody. Welcome back to Intentional Money Moves Live. I'm Leah Hadley and I am so glad that you're here with me today. If you are new welcome. Every Tuesday I go live at noon to talk about real money strategies that will actually make a difference in your life. So feel free to drop your.
Questions in the comments as we go. I do always want this to be a conversation. I will just tell you I've had a few technical difficulties over the [00:01:00] last couple of weeks with some of the comments, so. I absolutely wanna make sure your questions answered. It is helpful for me to know what your questions are, even if I can't answer them live because then I can include them in another episode, right?
So please go ahead, drop comments, questions. I'll see if I can see them. And actually, you know what I can do, I can pop on my phone and pull this up and then maybe I'll be able to see them on my phone, even though I cannot see them here. We'll see. We'll give it a shot. We'll see what happens. At any rate, let's get into it.
While I am trying to do that today, we are talking about honestly, something that can cost you tens of thousands. I've even seen a hundred thousand dollars over your lifetime. Okay? And that's your 401k. Now I know leave, I know talking about your 401k may not feel like the sexiest topic in the world, right?
I get it. Here's the thing though, and this is I think, really, really important for you to understand and that is. For most people. For most [00:02:00] people, your 401k is actually your largest wealth building tool, okay? And that's really important for people to, to be aware of, right? It's where a huge chunk of your retirement money is gonna come from.
And with that being said, I still see the same mistakes. Over and over and over. And these are mistakes. Oh, this is weird. I can see myself on here now. That's, that's a little weird. But anyway hopefully I'll be able to see any comments. Oh, Jennifer, I can see that you're watching. Thank you for commenting.
I can see it on my phone. That's awesome. So now if you guys do have questions or comments, I will be able to see them. So go ahead and pop 'em into the chat box. Thank you. Okay, so by the end of this episode, my goal is for you to know exactly what to look for in your own 401k, and you're gonna have the action steps that you can take this week.
Okay? So number one mistake. I'm gonna say this the way I say it, and then I'm gonna say it the way other people say it and we're gonna talk about it. [00:03:00] Okay? The number one mistake that people make, and this really does break my heart. Because it is that you are not taking full advantage of your employer match.
Now, here is the way that I say that. I say that you are not taking your full compensation, that you are choosing to leave some of your compensation with your employer when you don't take that full advantage of your match. That's part of your compensation. Now, I have heard many times over the years people say, that's free money.
You're leaving free money. You might wanna think about it like that, but I truly believe that you are giving up a portion of your compensation if you're not taking advantage of the full match. And let's talk a little bit about why there's some confusion around this. Okay. Many employers do offer a 401k match.
Not all I know. But they'll say something like this, we match 50% of what you contribute up to 6% of your salary. Annually. Right. That match, that's part of your total [00:04:00] compensation package. Right. It's not a bonus. It's not extra. It's part of being what you are, what you're being paid to work there. Right?
It's the same as taking advantage of other benefits that your employer offers. Okay. Hi Denise. Thanks for being here. Yes, absolutely. Jennifer, thank you for saying that. I'm explicitly addressing the 401k today, but Jennifer made a comment in the chat that this also does apply to 4 0 3 Bs, TSPs, and other kinds of retirement accounts that your employer may offer.
So thank you for for saying that. I appreciate that, Jennifer. All right, so here's what we see all the time. People contribute 3% because it feels like enough or they contribute nothing because they feel like they can't afford it. That means they're choosing not to take part in that compensation. All right?
I wanna give you a very real world example here. Now, let's say you make a hundred thousand dollars a year and your employer offers a 50% match up to 6% of your salary, but [00:05:00] you're only contributing 3%. Okay? And that means you are contributing $3,000 a year. Fantastic. That means that your employer is matching 1500 a year, that's great.
But if you were contributing the full 6%, the full 6,000, your employer would be providing 3000 as the match. So when you do that, you're leaving $1,500 a year of your compensation on the table every year that you do that, right? Over 20 years, if we assume a 7% average return. That $1,500 a year that you're not taking just over 20 years, over a hundred thousand dollars, you're walking away from, I'm gonna say that again, over a hundred thousand dollars.
You're walking away from, if you're not taking that $1,500 a year. Now, that's assuming a 7% average return. Okay. That's part of your compensation, [00:06:00] that you are just leaving there and not, and you're just saying like, you know what? Your employer's offering a hundred thousand. That's okay. I'll just take 98,500.
Right. I'll just leave that 1500 there. You would not do that with your salary. I really don't want you to do it with your match. Now I get it. Not everybody can afford to max out their match right away. You are barely making ends meet. Contributing 6% in the example that we provided may not feel realistic.
Okay? But if you can do it, even if it means tightening your budget somewhere else. This is a part of your compensation. I cannot say that enough. You have earned this compensation. Take it. Take advantage of it, right? So here's your action step. I want you to log into your 401k this week, and I want you to find out what your employer match is.
And if you're not contributing enough to get that full match, figure out how to increase your contribution. So let's say in the example that I shared, you were going, you were, [00:07:00] you were contributing 3%, right? Maybe right now you can only bump it up to 4%. That's great. That's fantastic. That's progress, right?
Then maybe in three months you bump it up to 5% and then maybe next year you get it up to 6%, right? Take all of your compensation, okay? All of your compensation, it's yours to take, right? All right. Mistake number two that we see that is thinking that you're diversified when you're actually not. And this one actually, it comes up all the time.
And it's really interesting, I see it with target date funds. Sometimes, you know, target date funds are those funds that have a name like with a year. So maybe it's like Target Date 2050 or Target Date 2060, right? The idea is that the fund automatically adjusts your allocation as you get closer and closer to that year of retirement.
So a lot of times people will pick that retirement year. As the target date year, right? When you're young, it's more aggressive as you age, it shifts to become more conservative. It's designed to kind of be like that [00:08:00] one stop shop. You pick the target date fund closest to when you plan to retire, then invest in that fund, and then kind of that's, that's how it's designed.
And for a lot of people that may work fine. But here's the mistake that I see people making all the time, and that is to invest in multiple target date funds, thinking that by investing in multiple target date funds, that they are actually, like they're not diversifying in that way, right? Like let's just give an example.
So let's say they put 30% in a target date fund. That's 2045 and 30% in a target date fund, that's 2050 and like 40%. And a target date fund that's 2040, great. But all of those funds actually own the same underlying investments. They just are not gonna own them in the same amounts. Right? So you're not.
Spreading your risk out. You're, you're actually just kind of duplicating your holdings. It's kind of like going to the buffet and putting three different scoops of the same mac and cheese on your plate and [00:09:00] calling it variety. Okay? Real diversification means spreading your money across different asset classes, so stocks, bonds, maybe international investments, real estate, not just spreading it across multiple versions of the same thing.
Okay? So if you are going to use a target date fund. Understand how that fund was designed and pick the one that matches what is appropriate for you. Okay? And that's the strategy. That's kind of the way to use those funds. Or if you want more control in what you hold, which I like to have control. I mean, if you guys have been following me for any amount of time, you know that, right?
Then you build your own diversified portfolio using the funds that are available to you through your employer, right? And you can pick, you know, US Holdings, international Bond, et cetera. You don't have to have, you know, a variety of target date funds. That's not gonna, that's not what's gonna diversify you, right?
It's, it's having those different holdings. Now, the other version of this mistake is actually [00:10:00] people who think they're diversified because they own a bunch of different funds, but they don't actually know what's in those funds. They'll own three different growth funds, as an example, that all invest in the same US large cap stocks.
Again, not diversified, just duplicated, right? When we're holding onto different funds, we wanna understand how those funds are designed and structured. So here's what you wanna do. You wanna look at what do you actually own? Or are you just owning the same thing multiple times? And if you don't know how to figure that out, that's okay.
That is exact kind of thing that we're gonna help people with in our, our full masterclass that we're doing right. And then we even have a service that we will, will help you max out your 401k too. If you want someone to do it for you. But if you come next week to our masterclass, I'm gonna walk you through very specifically how to take a look at what you own and, and look at what's available to you.
Now. Oh, I see. [00:11:00] Yay. The actual this is actually working for me today. So this is, jennifer's comment from the chat. What I realized is that because the deduction is pre-tax, I didn't feel the deduction as much, so an extra a hundred dollars contributed only felt like maybe $75 less in my check. I'm so glad that you shared that, Jennifer, because that's what a lot of people do find.
They're actually surprised that increasing that contribution. Doesn't necessarily feel as difficult as maybe they thought it would feel. And a lot of people do have that experience, so I so appreciate your willingness to share that for others who might be, you know, hesitant to increase that contribution.
All right, so mistake number three is investing to conservatively because you don't understand what you're invested in. And honestly, this happens a lot. It especially happens with women. And I don't say that to be critical. Obviously I say it because it's what the data shows, right? And it, it is what I see in my practice.
When people don't understand investing, they get scared. And when they get scared, [00:12:00] they play it safe. And so they may put all of their money into maybe a bond fund or a stable value fund or a money market fund that. Feels a lot less risky. And yes, in the short term, there's no question, it is less risky. Your account balance won't fluctuate as much.
You won't see big drops when the market goes down. But here's what you're giving up. You're giving up growth, and I wanna talk about what that means in terms of real numbers. Okay? Let's say that you're 35 years old and you have 30 years until retirement, and you're contributing $500 a month to your 401k.
If you invest conservatively an average, a 4% return over those 30 years. You're talking about having something in the $350,000 range, okay? If you invest more aggressively, an average of 7% return over those 30 years, you're looking at something over $600,000. You're looking at a difference of over [00:13:00] $250,000.
Just from the difference in investment return. That's not changing how much you're actually putting in. Now, I'm not suggesting that that means that you just go a hundred percent into all stock, right? But I think it's really important that you understand both your timeline and your risk tolerance when you're making those investments decisions, right?
If you are 30 or 40 or even 50, and you've got 15, 20, 30 years until retirement. Being too conservative is costing you a lot of money. I mean, realistically, right? Here's the thing about the stock market. Yes, it goes up and down in the short term, no question about it, but over the long term, historically, we have seen it go up, right?
And we're talking 10 years, 20 years, 30 years. Now obviously all investing involves risk, can never guarantee investment returns, but we can learn from what we've seen in terms of what drives the market, right? Now, if you're 60 years old and you're [00:14:00] planning on retiring in the next five years, you may decide you wanna be more conservative.
You don't have a lot of time to recover from a huge drop in the market right before you retire. Now with that being said, there seems to be this messaging out out there that automatically you need to become more conservative as you approach retirement. And for some people it makes a lot of sense, but for a lot of people.
You're not actually even gonna be touching your retirement accounts, right when you retire. You may have other sources of income, or maybe you're gonna be pulling a little bit out, but most of it is really saved for several years down the road. You may still wanna have those funds growing, right? So it's important for you to understand your own timeline, not just until retirement, but when you actually plan to use these funds as well as your tolerance for risk right now.
If you're 40 and you're investing like you're 60, you really could be leaving hundreds of thousands of dollars on the table over time. So here's what I want you to do. I want you to look [00:15:00] at your allocation, look at your allocation, and see what you're invested in. How much of your 401k how Stock market exposure versus bond market exposure?
General, very general rule of thumb is 110 minus your age. So if you're 40, that's 110. Minus 40 is gonna give you 70. You would want a 70 30 portfolio, 70% stock, 30% bond. That is a very general rule of thumb, right? That is not a hard and fast rule to be very clear, and your personal situation may differ from that.
So I wanna be clear about that. But. If you are 40 and you only have 30% exposure to stocks, it is likely that you're probably being too conservative. And if you don't know how to figure out out your allocation or you're not sure what you should be invested in based on your specific situation, this, that's where getting help makes sense.
Right. So let's see if there have been any other questions or comments.
Oh, good. I'm happy this [00:16:00] is making sense for you, Denise. That's fantastic. I'm an independent contractor and have a Roth IRA. Would like to know your thoughts on whether I should open either a solo 4K SIRA or traditional IRA in addition. Sarah, this is a great question. It's a question that we talk with a lot of business owners about extensively.
The things that we're talking about and figuring out what's gonna make the most sense are a couple things. First and foremost, your overall financial picture, right? We wanna get a sense of, you know, what's your income? What are your expenses? What are your assets? What are your liabilities, right? What's gonna compliment your overall financial picture in terms of saving for that retirement?
It might be that right now your income is so high that maximizing your deduction is the most important thing, and you might be looking at something like a solo 401k that's gonna give you more flexibility in terms of that profit sharing piece from the business, right? That might be something that makes sense for you.
You might be a person who's looking at just [00:17:00] saving. A little bit more, in which case going that route might not make the most sense, right? And so those are the kinds of things that we're thinking about and looking at when we're determining what to recommend for our business owner clients. So, you know, what have you already saved?
How have you saved it? Is it in pre-tax accounts? Is it in post tax accounts? How close or far are you away from retirement? What's your current income situation? Are you looking for tax deductions in the current year? So there are a lot of considerations, Sarah, but I'm really glad that you asked the question because it's an important question that you're absolutely right.
Getting into the right vehicle is, is really critical. Denise asks, does this work in Canada as well? I am not well versed in retirement planning in Canada, so I am not gonna be the best person to answer that question for you, Denise. I apologize in advance but I will see if I can, and a resource for you to make sure you get an answer to that question for sure.
Okay, so we've talked about the mistakes. Now [00:18:00] let's talk about what, what I really wanna encourage you to do instead, right? First and foremost, make sure that you understand your investment options. Your 401k plan is gonna offer you a menu of investment choices. It might be. 10 funds, it might be 50 funds.
All right. You wanna know what they are. So log in, take a look at the fund options, read the descriptions. The descriptions are gonna help you to really understand what is held within that particular fund option. Okay? Second, I do really want you to pay attention to fees. Okay? This is huge and it's really interesting.
Fees are are like a silent wealth killer that people just don't pay attention to. Every single fund does have an expense ratio. That's the percentage of your investment that is going to pay for managing that fund, right? So some funds might charge a half a percent, some charge one point half percent, right?
And that may sound. Like, not a big difference, right? [00:19:00] Like 1%, but actually over 30 years when we're talking about retirement savings and planning we're actually talking about, you know, 1% making a huge difference compounding over that period of time. So let's say you have a hundred thousand dollars invested, if you're paying that 0.05% NB is you're talking about, you know.
Well actually this is a, a half a percent is really what we were talking about. So if we are paying half a percent, then that's, you know, gonna be 500 versus one and a half, you're talking about 1500. So over 30 years, that difference definitely compounds. So I, I want to encourage you to look for low cost index funds if they're available through your retirement plan provider.
Generally speaking, when we're talking about, you know, index funds, we're talking about something even lower, like something less than 0.2%. Usually. I do want you to understand the difference between index funds and actively managed funds. An index fund is designed to track a market index, right? A lot of people talk about.
The s and p [00:20:00] 501, it's not trying to beat the market. That's really, really important. An index fund is designed to match it. And so because it's not actively managed, generally the fees are gonna be lower. Right? An actively managed fund has actually a team of portfolio managers that are doing the research and trying to pick the stocks or pick the, the holdings within that fund in order to beat the market.
That's their goal, right? Because of that active management, because of that act extra layer of labor that's involved in that fund, there's extra costs. The fees are higher. Right now, I will say that the data shows over the long term, the vast majority of actively managed funds do not actually beat the market.
Okay? So for some of you, you might be paying higher fees and not actually getting better performance. You may actually be getting lower performance now. I will tell you there are certain areas of the market where I like to use active funds. That's got, that's my equity research background, right [00:21:00] from when I used to meet with the portfolio managers and whatnot and the work that I did there.
But a lot of the investing that we do is in those passive funds because we wanna keep the expenses down. Right now, I talked about how important it is. For you to know what you own. And this goes back to that diversification piece, right? You should know what percentage of your 401k is in various kinds of investments, right?
So like what percentages in US stocks, what percentages in international, a lot of 401k statements actually have a nice graph on the first page that does show you your allocation. Not all, but some of them do. Now, if you can't answer that question, I wanna be clear you're not. It's not because you're bad at this, right?
It's because in the past maybe you didn't know how to do it, or maybe you didn't take the time to do it right. When we know better, we do better. So I don't want any of you giving yourselves a hard time around this. My employer recently added the options to change to a Roth in our 401k. Is it worth doing that?[00:22:00]
Going that avenue to avoid taxes in the future for a 56-year-old. Thank you for asking this question. This is a fantastic question. It's one that everybody should be asking themselves. Do I want to put in pretax? Do I wanna put in after tax in or Roth? Do I wanna, you know, split the difference? Do I wanna put a portion pretax and a portion Roth?
I know Elena, this isn't gonna be an answer. That's super helpful, but it depends. It depends on your overall financial situation, right? A big part of retirement planning is tax planning. Really looking at over your lifetime, how do we minimize the amount of taxes that you're paying so that way you can keep the most in your pocket.
Part of that is determining. How much goes into a pre-tax versus a post-tax account. So that's gonna be a very, very, very individualized recommendation. But it's well worth it to take the time and sit down with money to figure it out for yourself so that way you know you can have that tax diversification.
In retirement, which can be so [00:23:00] valuable and really helping you to manage taxes and have control over your taxes in retirement. So I'm glad that you're asking the question but like I said, it would require a lot more information to give you any kind of individual guidance on this. Okay, boy, you guys have lots of questions and I'm actually seeing them today.
This is fantastic. I love it. I love it. Okay. Fifth is to rebalance. Over time your allocation is going to drift. We've been doing this with most of our clients. If we haven't done it this month, we've probably done it in the last couple of months. And that is during a review of what the current allocation is.
Right? Stocks have had a really nice, strong run over the last few years, so what happens? The natural occurrence is that stocks are gonna become. Naturally a larger portion of your portfolio because of the outperformance right now, that does make your overall portfolio more aggressive than maybe you had set it at initially, right?
So we really encourage people to check their account allocation at least once a [00:24:00] year. And if you do find that you have drifted from that target that you initially set for yourself you know, five to 10%, you may wanna look at rebalancing. Okay. Most 401k plans let you do this with just a few clicks.
Most of the time it's not hard, but I have been on enough of these platforms to know that sometimes there, it can be a little bit tricky to navigate. And you may need to to call the plan provider if you're not sure what to do. All right, now, let's see. We have a couple of, oh, I've like got questions. I got comments.
I got like a little bit more content to get through and we're wrapping up on time here, but that's fantastic. I love it. Okay. Would doing trading yourself be a good idea, Denise? That really depends. That really depends on your own skillset, your own ability to make investment selections that are in alignment with your goals.
It's not rocket science, but it is time consuming. And so it's one of those things where I feel like if [00:25:00] you want to learn to manage your own investments, you absolutely that you, you are capable and able to do that. But if you just, that's not your cup of tea, you don't wanna spend your time on that you don't wanna be researching the individual holdings and all of that.
Well then that's really when you wanna take a look at having somebody else do it for you. Right. And, and there's no judgment either way, but I think that's kind of an easy way to think about it.
Now I do understand that. For a lot of people, you know, thinking about expense ratios and asset allocation and rebalancing, like for, for, hopefully for those of you are here with me, your eyes aren't glazing over. But for some of you, you, you may find that this is just not your thing and it just feels overwhelming.
It's just not everybody's idea of a good time. And that's fine, right? If that's you, you do have a couple of options. Simplify, right? Pick a target date fund that matches your retirement year. Call it a day. It's not perfect, but it's a way, it's way better than doing nothing. Okay? And certainly better than making some of the mistakes that we talked about.[00:26:00]
Now, if you follow me for a while, you know that I'm not a huge proponent of target date funds, but it does offer reader simple solution, and especially for those who. Or just starting out. I think that's great. Second option is to get help, right? That's why we actually created that max, your 401k analysis that we do, you know, for less than a thousand dollars.
We do a complete review of your 401k. We look at all your investment options. We analyze the fees. We build out your personalized allocation strategy based on your timeline and your risk tolerance. You know, I think it's a best value for people who have at least a hundred thousand dollars in their 401k and just wanna make sure that they're optimizing it for growth without taking unnecessary risk.
If you are comfortable doing it yourself, fantastic. Do it. But I do want you to know that if you're not comfortable doing it yourself, we do have an option, right? If you want expert eyes. On your 401k, let us know and we'll get you set up [00:27:00] with that. But I'm actually offering a more in depth masterclass on this very topic next week.
And it really is walking you through in a very detailed way, step by step, how you can take a look at these things in order to make sure that your 401k is invested well. It's open to everybody. You do not have to be a client to join us. You don't have to buy anything, it's free. And I will walk you through kind of how to analyze your particular retirement account step by step.
We're gonna talk about how to read your statement, how to evaluate your fund options, how to build your allocation, all of it. So if you do wanna learn to do it yourself, join us for the masterclass. If you would like somebody to help you with us, let us know and we'll get you set up with that. So we have just a few minutes left.
We are really wrapping up on time. It looks like I've gotten to all the questions and comments, which is great. So here is a recap of what we covered today. Mistake number one is not getting your full employer [00:28:00] match. I want to just reiterate. It is part of your compensation. It is part of the way your employer is compensating you.
It is not free money that you are leaving on the table. You are literally saying, I don't want all of my compensation if you're not taking it. So I wanna encourage you to make sure you're taking a full advantage of your employer match. Mistake number three, or excuse me, number two was. Thinking you're diversified when you're actually just kind of duplicating your existing holdings.
And so it's important that if you're going the target date fund route, that you pick one or that you really build a diversified portfolio. And mistake number three that we talked about was investing too conservatively. If you've got time, let your money work for you, right? Don't leave hundreds of thousands of dollars on the table.
Because you don't understand the investments, and so you're gonna play it safe. If you want help with this, we have that masterclass. It's February 12th, one o'clock Eastern time. I'll be sending out the link this [00:29:00] week. I'll actually, I'll, I'll make sure to include it in the, the show notes here too, so it'll be easy for you to register next Tuesday at noon.
I am gonna do things a little bit differently. We're gonna be talking about the 30 day challenge that we just held. We're gonna talk about kinda what we learned through the challenge and some things that we're seeing. People kind of doing next, next steps, that kind of a thing. You know, we just wrapped up our financial reset challenge on Monday, yesterday, and so I really wanna reflect on what happened.
Really wanna celebrate some of the incredible wins that we've seen and then of course talk about how to keep that momentum going. So make sure that you are subscribed, that you have your notifications turned on, and if this was helpful, I just really wanna encourage you. To share it with somebody.
I really firmly believe that 4 0 1 Ks are a huge opportunity for most Americans, and we're just not taking advantage of it. And I wanna see more people really maximizing the opportunity that they.
Thanks [00:30:00] for listening to Intentional Money Moves Live. If you enjoyed this episode, make sure to hit follow so you never miss one. Wanna join the conversation live? Tune in every Tuesday at noon Eastern time on YouTube. And if you're ready to take the next step in your financial journey, head over to watch her thrive.co.
To learn more about how my team and I can help you build wealth with purpose and peace of mind. I'll see you next week.
