The Real Truth About 401k's and Building Wealth
The Real Truth About 401k's and Building Wealth
How can business owners align their financial habits with their future goals?
I think the easy answer is discipline, but that’s not the real answer. The real answer is understanding your personal values. My values are extremely clear: my kids and wife are number one, my health is second, and my business is third. These are the only three things I care about. I don’t golf or play in a softball league—aside from enjoying fantasy basketball, those are my priorities.
If my family is truly my top priority, I’m going to put that $300 away before I spend any other dollar on anything else. There are a lot of classic books, like The Wealthy Barber and Rich Dad Poor Dad, that emphasize the same message. Figure out your values, save for those values, pay yourself first, and spend the rest.
When clients know their values, saving isn’t an issue. The ones who don’t know what they truly want or value are the ones who struggle—they don’t have direction and end up all over the place.
What does ‘pay yourself first’ practically mean?
"Pay yourself first" is incredibly simple. It means funding your goals before spending on today’s wants. This applies to any goal—whether it's charity, saving for your kids’ college, or retirement. I have clients who are willing to work part-time until they’re 80 just to send their kids to college because that’s their top priority. Others value independence and prefer their kids to pay their way through school, even if they have millions in the bank.
The key is to understand your value ladder—what you value most—and save towards that. It’s about identifying your number one priority and committing to it financially. That’s where a good financial advisor is essential. They help determine how much you should be saving and where to invest. With all the noise out there—whether it’s buying crypto, rental properties, or gold—it’s important to have guidance on how to save and where to invest. Once you know the amount and the right vehicle, the rest falls into place.
What are the key drawbacks of relying on 401(k) plans for retirement savings?
For us, strategy is key. I strongly believe that 401(k)s are essentially a Ponzi scheme designed by the government, particularly affecting middle- and lower-class people. You can make up to around $115,000 and still be in the 12% tax bracket, which is very low. Many people are advised by friends, family, and coworkers to invest in 401(k)s, which might be good advice for some, but it has significant drawbacks.
If you're making $150,000 and get into the 12% tax bracket, you're saving 12 cents on every dollar you contribute. Over time, the money grows, but when you withdraw it, 100% of it is taxed at an unknown future tax rate. The majority of people aren’t in a lower tax bracket when they retire; most of our clients are in the same bracket. You get a small tax break when you contribute, but you pay the full amount when you withdraw, and it also makes your Social Security taxable if you withdraw too much.
Social Security itself isn’t taxable, but if you withdraw too much from your 401(k) or IRA, it can trigger taxes on your Social Security. This can have a huge impact, especially for clients who have saved a significant amount over their lifetime. A simple decision, like choosing between a Roth or a pre-tax 401(k) or IRA, can make a significant difference over time.
This advice can also be passed down to the next generation. We often talk to our clients’ kids to help them avoid the mistakes their parents made, especially those who are just starting out. Single-digit millionaires, in particular, tend to be the most anxious about their finances. They've seen market crashes, like the Great Recession and recent downturns, and they don’t have the high incomes that pensions used to provide. They’re nervous, and even simple advice can make a big difference.
How can 529 plans help build tax-free wealth for future generations?
One of the coolest things I’m doing, and many of my friends are doing, is using 529 plans, which are college savings plans, but we’re setting them up in our own names. I have a doctorate, so I don’t need more education, but I’m using a 529 plan for myself. I have nine-year-old twins, so grandchildren aren’t in the picture yet, but I’m saving for them.
The reason I set it up in my name is that it falls outside of my estate. When I die, the government won’t tax it, and it grows tax-free indefinitely. There’s no age limit, and I can pass it down through generations. I’m saving just $300 a month into my 529 plan, which will eventually go to my kids and then help pay for my grandkids' college. Since I have time on my side—around 40 years before my grandkids may need it—that $300 a month at an 8% return becomes a million dollars tax-free in 40 years.
It’s incredible to think that this small amount of money can create such a large impact on future generations. People spend more than that on coffee. Small, smart decisions today can have a massive financial impact over generations, and it often costs no more than the difference between buying a new car and a one-year-old car. You can build $10 million in tax-free money just by making thoughtful choices early on.
*This interview has been edited and condensed for clarity.*
