Pod Insights Money Guy Show How to Make Your First $1,000,000 (And Then the Next Four) About this episode Our show, “Retiring with $1,000,000 (by age)” - showed you that $1M probably wasn’t enough for financial independence especially if you’re 10+ years from retirement.
But to get to those other millions? You have to get to the first million!
We wanted to walk you through exactly how to grow your dollars, get to that first million (and then next four!). And, we’ll show you when you can expect to meet those milestones.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:00 Brian Preston? How to make your first million and then turn that into five.
1:09 Speaker 05 Brian, I am so excited to talk about this because we love talking about building towards financial independence. But oftentimes, people will say, "A million dollars just isn't enough, isn't enough, isn't enough." Well, you can't get to two, or three, or four, or five unless you get that first million first. So we want to tell you how to get to that first million, and then, just like you said, how to get to five million.
1:32 Brian Preston? Well, I like that we're people's millionaire gateway. We are their tour guide. We've come from humble beginnings. We know that the world is out there telling you, "You can't do this." But we've got so much experience. We've got so many people that we've helped bring across the gates of seven figures. We want you to just breathe in our optimism, and you can do this too.
1:56 Speaker 05 So let's talk about this through the decades. How to make that first million. Let's start at the very beginning, Brian. Let's talk about the 20s. This is the stage where you're just starting out. So you don't have to get a lot of things. Exactly right, but there are a few things that we want you to know because if you can get these few things right, there's a really good chance you can set yourself up. And the first one, Brian, is just simply at this stage, knowing what tools you ought to use.
2:23 Brian Preston? I like that you just said, just simply. I think an important thing is, is that don't overcomplicate your life at this level. This is where I want you following the financial order of operations. If you're trying to figure out what to do with your next dollar, you don't have to create a better mousetrap. We've actually created what to do with every dollar that comes into your army of dollar bills. And I like the fact that this is, when we're talking about this, we're talking about Roth IRAs.
2:49 Speaker 05 That's right.
2:49 Brian Preston? I mean, why not start in step five with Roth IRAs, help savings accounts where these things are growing completely tax-free and letting you take advantage of maxing out the growth opportunity of compounding interest.
3:03 Speaker 05 And then even how about your employer-sponsored retirement accounts, whether that be a 401K or a 403B or a 457. These are all great tools that you have at your disposal. So just being in your twenties and understanding what tools you have available can be wildly beneficial. But then not only do I need to know where to invest in terms of what kinds of accounts can I use, I also need to think about what do I invest in? What are the tools that I use? And we actually have a great mini-show out there that you can go watch called Investing 101. And it walks through the different types of investment accounts that are available to you, the types of investment options you can use inside of those investment accounts,
3:44 Speaker 05 and then how you know which one to choose. Am I someone who should be using index funds or active funds or managed funds? What's the best solution for me?
3:53 Brian Preston? Well, and what I like is, is that I remember when I just graduated from Georgia with that accounting degree. Everybody thinks just because I graduated with this accounting degree, I knew what to do with money. I was so far from it. I didn't even know where to make that first investment. I love that we kind of open it up. We talk about index target retirement funds. We talk about the power of buying index funds for their low cost, their tax efficiency. We actually try to load you up so you can make the best decision possible. For your personal finances.
4:21 Speaker 05 So in your twenties, you don't only need to know what tools to use. You also need to make sure that even at the very beginning of your journey, just starting out, you keep a long-term perspective. Building towards financial independence is a marathon, not a sprint, but it is so easy as life happens for us to lose sight of the big picture.
4:39 Brian Preston? And I've told many stories where I've had friends who are just now introduced to the wonderful world of finance. They start investing, but I always know it's that first five to 10 years is risky for them because they just don't know any different. And then we hit our first downturn because we know every decade, there's going to be two downturns. And you're just worried, how does that brand new investor handle that? So we've come up with something, and you've heard a lot of other comment, you know, financial content talk about this as well is, when in doubt, zoom out. Do not get distracted by that first downturn. Just keep driving through it, always be buying, and you'll come out on the other side better.
5:17 Speaker 05 And as an investor, when you zoom out, you'll recognize that perhaps the long-term is not nearly as frightening as the short-term. We have an illustration that we like to show that just shows the S and P 500 over the last 20 years. And if you think about the Great Recession, you think about the year 2008. If you just look at where the S and P 500 started 2008 and where it ended 2008, it lost 37% in that single year. But if you can zoom out and you can look six years into the future, the S and P 500 was positive. If you can look 10 years into the future, the S and P over that decade annualized 7%. And if you can even zoom out 15 years past the Great Recession, past that one singular point of volatility,
6:02 Speaker 05 the S and P 500 annualized over that period 15% per year. So even though today, the ups and downs might seem uncertain, might seem volatile, might seem scary. If you can pause and zoom out, you recognize that over the long-term, it's a pretty attractive picture.
6:20 Brian Preston? Well, for all my visual learners, I've been using this analogy for decades now. And I think it clicks with a lot of people is that I want you to envision somebody who's walking. Up a hill, a hill with a yo-yo. So yes, they're throwing that yo-yo up and down. And in the short term, yes, each, you know, it's down and then it's up. It's all over the place. It's volatile, just like the financial markets. But here's the thing about when you're walking up a hill, you're going to higher and higher elevation. Even with that yo-yo going up and down, that's exactly how investing is. I think everybody, what I love to show clients is when we, on our, on our quarterly report, we have since inception, what their graph of investments looks like.
7:01 Brian Preston? And I was like, do you remember how stressed out you were about 2008? Can you go back and look on the graph now, what that looks like in your portfolio? And it's just a slight little hiccup. It really is. But at the top, it felt massive. And that's just the power of zooming out and also keeping your perspective. And understand that over the long term, that volatility cannot, it can feel not great, but it can actually be a value add or something that helps you build your great, big, beautiful tomorrow.
7:31 Speaker 05 And one of the single best things that you can do to keep that long-term perspective is make good habits as easy as possible to replicate. In your twenties, this might be a great season of life to start budgeting. Understand, okay, where are my dollars going every month, every week, every pay period? And am I allocating and deploying them into the right places? Am I just wasting a bunch of money every time my paycheck hits? Or am I commanding my dollars so that I build this habit of continually and consistently saving over time?
8:03 Brian Preston? Well, a great way to make the good habits easy, make them automatic.
8:06 Speaker 05 Yep.
8:07 Brian Preston? So I love dollar cost averaging every month. I always talk about always be buying where I've automated a lot of my wealth building journey. So that I don't have to worry, is the market up, is the market down? Is there a presidential election going on? Are we, you know, what's going on in the real estate economy? It doesn't matter. I'm always be buying. And if you can just have that mindset and then couple that with how do you make other good habits as easy as possible? Couple that with, we have an illustration on what 1% more can do for you. It doesn't have to be, I think. Everybody thinks about to build a million dollars. Oh, my gosh, that is, I'm so far from that. I've got credit card debt. I've got student loan debt. How am I ever going to get to a million dollars?
8:48 Brian Preston? Don't think about it in terms of where the whole big kit and caboodle that you're trying to reach. You've got to think about this in small incremental, small steps you can do. And that's why I love our illustration. If you go to moneyguy.com/resources, it breaks it down to say, if you can just give me 1% more, what does that do in the long term? And I think you'll be shocked at how just a little goes so far.
9:09 Speaker 05 Okay, so if we're in our twenties, how does this play out? How do we actually build towards that first million? Well, let's investigate a case study. Let's consider Manny the Mutant starting out in his twenties. And let's say that Manny begins his working career at age 25, making $50,000 a year. And we're going to assume over his career, he gets on, on average, about 3% annual wage salary increases. Let's assume that he starts investing at 25. So if he graduated early, that's going to be the first year he starts investing. And let's say that when he starts investing, he can only do 15%. He can't save the 25% that we prescribe right out of the gate. He can just start at 15%. And because he's a more aggressive investor, we think he can average an 8% annualized rate of return over the long term.
9:54 Speaker 05 But every single year Manny recognizes the power of just 1% more. So he is going to begin increasing his savings rate by 1% every year. So at 25, it's 15%, at 26, it's 16%, 27, 17%, so on and so forth. Well, if he can do this for the remaining half decade of his twenties, by the time he gets to age 29, at the end of this decade, Manny will have accumulated $54,680.
10:24 Brian Preston? Yeah, that's pretty amazing if you think about, because one of the things we try to tell you to do, by the time you get close to age 30, it'd be nice if you had one time salary.
10:32 Speaker 05 Yep.
10:32 Brian Preston? We've already shared that Manny started out with $50,000. He got 3% pay raises.
10:38 Speaker 05 Pay raises increases.
10:39 Brian Preston? So he's right there, just from starting. He didn't start at 20, by the way. He started at 25 and he made those small incremental decisions. But Bo, that's only half the story.
10:47 Speaker 05 Yep.
10:47 Brian Preston? Because I think a lot of people are going to say, well, $55,000. That'd be nice to have that in the bank. Maybe that helps you buy a car. Maybe that's a good house down payment. But how is that my journey towards a million dollars? Well, hang in there and we'll show it.
11:00 Speaker 05 Yeah, remember, the goal is to get to a million. Well, at the end of your 30s, you're about 5% of the way there if you've accumulated $50,000. Well, if you don't save, if Manny does not save another dollar and just lets those dollars continue to grow at 8% all the way out until he hits a million, he will cross his first million. He will become a millionaire at age 66. Mind you, he did not save anything else. At age 29, he stopped saving and just let that $54,000 continue to grow. And age 66, he crosses into millionaire status.
11:34 Brian Preston? So 10 years worth of savings.
11:36 Speaker 05 Not even. He started at 25.
11:38 Brian Preston? Five years of savings that equaled almost $55,000. If you give it enough time, it can reach a million dollars by 66. Now, a lot of people are like, okay, but I thought you guys said this headline was going to be how to turn your first one into two, three, four, and five. What's the rest of the story? Because that's, that seems like a long time. 30 to 66 to reach the first million. What does it make to make the next million?
12:02 Speaker 05 Well, once you've done that, the bigger the numbers get, the bigger the numbers get. So again, if Manny just let his dollars continue working without saving anything else, he crosses 1 million at 66, 2 million at 75, 3 million at 80, 4 million at 83, and 5 million at 86, assuming he lets those dollars continue to grow. But remember, Manny is a mutant, so I don't think Manny's going to stop in his 20s.
12:26 Brian Preston? Well, no. I mean, let's, this, I love that we gave it the extreme. Now, let's bring it back to reality because I think a good, a person who starts at 25 is not just going to shut it off after that first five years of saving and investing. They're going to keep the good habits going forward. Let's see what happens if they add to this in their 30s.
12:44 Speaker 05 So now, as we get into our 30s, there's a really good chance we have sort of the basics down. So now, we want to start optimizing. We want to think about what are the decisions that we make that can be small marginal decisions today that can have large impacts. Later on, so there are a few key takeaways we want you thinking about in your 30s. The first of which, maybe this is the time of life, the season where you should reassess your tax situation.
13:09 Brian Preston? Well, yeah, you're starting to make more money. We love for our 20s and even early 30s while you're in those lower income tax brackets. When you're under 25%, we want you to max out those Roth IRAs. But I do think it makes sense, especially when you get in your 30s, you start making more money. Let's reassess that tax situation because you might need to balance out. Are we doing Roth, which grows tax-free currently and forever? Or are we doing traditional where we get a tax deduction now? But we're going to have to pay the full ordinary income taxes on when we pull it out. There's a balancing act. If only there was somebody out there telling you how to navigate this decision.
13:47 Speaker 05 Yeah, so how do we think about this? Well, it's not incredibly complicated. What you want to do is you want to look at your combined marginal tax rate. That's the marginal tax bracket on the federal side plus the marginal tax bracket on the state side. Well, if you add those two marginal rates up and they're under 25%, there's a really good chance that Roth is going to be the best solution for you moving forward because you're in a very low tax bracket. If you're between 25 and 30%, it becomes a little more nuanced based on your individual factors like age, your current estimated tax rate, your future estimated tax rate, your account structure. But once you add up your combined marginal federal and state tax rate and it's over 30%, the tax savings you accrue today are so valuable
14:32 Speaker 05 that it's really, really difficult to walk away from that pre-tax savings. So if you do find yourself in this income situation, pre-tax 401k contributions might be the best solution for you.
14:42 Brian Preston? Don't miss out on that tax arbitrage situation because those that are over 30, a lot of you, think about the federal tax top marginal rate is 37%. There are states out there that will tax you at levels as high as 13% on your income. You add those two numbers together, that's 50% is going towards taxes. It makes sense when you're paying 50% towards taxes, why don't we take a tax deduction now with the thought that down the road? When I no longer have high earned income, W-2 wages or however how it's flowing in, maybe there'll be an arbitrage situation is that once that earned income goes away, my tax rate's crater because now instead of being at the 37%,
15:25 Brian Preston? maybe I'm at a 12% tax rate for local and maybe my state because it gives retirees some tax favored, you know, planning opportunities, they don't even charge on certain type of distributions. What if you could go from 50 down to 12? That's an amazing opportunity and as much as I love Roth, sometimes I think that tax arbitrage is powerful and you don't need to sleep on that.
15:46 Speaker 05 And these decisions can be impactful even in this present time. I mean, think about someone who's in 24% marginal bracket and another 6% of the state side. So they are at that 30% threshold. Do you realize just switching your contributions from being all Roth to all pre-tax in 2025, so $23,500 of salary deferrals, just making that one decision to get that tax savings this year will save you over $7,000 in taxes. That in and of itself is enough to fund an IRA, to put money into your HSA, to continue adding to your army of dollar bills. So then the next thing we want you to take away, the next idea we want you to have in your 30s is,
16:29 Speaker 05 make sure you don't miss out on low hanging fruit savings opportunities. One of our favorite Brian, our health savings accounts.
16:36 Brian Preston? Yeah, we love the triple tax advantage. You get the deduction on your contribution, it grows tax deferred. If you use it for qualified medical expenses, you get to pull it out completely tax free. And here's the cool thing, it turns into a retirement account that you can use even for outside medical expenses. If you don't need it for medical and you just want to use it for lifestyle or retirement expenses, you can still get access to your health savings account post 65. You just have to pay income taxes on the gains. Pretty cool thing.
17:03 Speaker 05 We love HSAs. It's why they're step five, Brian, we hold the thing up. It's why it's step five of the financial order of operations. But it's not just HSAs that offer tax-free growth. We also love Roth IRAs. But maybe you are in this stage in your 30s and you are beginning to reassess. Yes, okay, am I where I'm supposed to be from a savings standpoint and from a tax optimization standpoint? Because once I'm single and I make over about $150,000, I'm not able to do full Roth contributions. Or once I'm married and I make over $236,000, my ability to do Roth contributions is now limited. So perhaps I need to be thinking about doing backdoor Roth IRA contributions.
17:45 Brian Preston? Backdoor Roth contributions is what it's known, but it's really, it's a Roth conversion strategy. If you realize, if you know anything, if you follow financial history, in 2010, they changed the tax policy to where there was no income limits on doing Roth conversions from traditional IRAs. So here's how it works. You gotta make sure you contribute to a traditional IRA. You then convert those dollars to a Roth IRA. You don't pay taxes except for any gains that occurred as long as, and this is a big asterisk, you don't have any other IRA assets out there. So you need to be careful if you have a rollover IRA, a former traditional IRA that, you know, you took tax deductions on. If you have a simple IRA through an employer or SEP,
18:30 Brian Preston? be careful because those things can create some weirdness in how you have to allocate that conversion. But if you don't have any of those accounts I just named, and all your money's in your 401K because they don't count against you, or an inherited IRA, you're A-OK to consider this type of strategy.
18:45 Speaker 05 And then as you're thinking through this, as you're not missing out on that low hanging fruit. The other thing we want you to keep your eye on and stay mindful of is, should I be rebalancing? Should I be rethinking about how I have the risk assets inside of my portfolio structured? For a lot of people just starting out, if you're using a target retirement index fund, all you have to focus on is how much can I save? And when do I think I need the dollars? And the portfolio will automatically rebalance for you. But as you hit your critical mass, as you hit your boiling point, and you move from a generalized investment solution to a specialized investment solution, you want to make sure you're factoring in your unique risk tolerance, your unique risk capacity, and rebalancing your portfolio accordingly so that it can be
19:30 Speaker 05 Maximize and optimize for your unique situation.
19:33 Brian Preston? You just kind of covered, I love when people start, you know, you start out in the index target retirement fund because your savings rate is more important than the investment. But once you reach multiple six figures, this can get scary. You do need to start thinking about tax location and spreading out the money in different ways. But I also want to point out, we have a lot of you, we know you're out there from your, our mutant survey, where you have restricted stock units, you have employee stock purchase plans. You have a lot of concentration, not only of where your human capital is, meaning your wages and your time, but also your investment capital through your employer. Don't sleep on the fact that you might need to be rebalancing those great incentives. So you just don't have everything all in your employer. We want to make sure we diversify that over time.
20:17 Speaker 05 So, okay, how does this play out in our case study? How does this look for Manny? Well, let's remind you of the assumptions. Manny started working, making $50,000 a year at age 25, and he gets about a 3% pay raise every year. He began investing at 25 and he began investing at 15% per year, increasing it by 1% each year until he maxed out at 25% savings rate. We're also going to assume that Manny can make about 8% annualized on his investments over the long term. He hits his 25% savings rate in his 30s. So, once he hits that, he gets to stop. Because at that point, once you hit that, you get to decide what you want to do with your dollars above and beyond that.
20:58 Speaker 05 And so, he decides, I'm going to keep investing that 25% all the way until I get to age 39, or when I get to age 40. So, if Manny did this, beginning at 25, going all the way out until the end of his 39th year, Manny would have $352,000 saved up in his portfolio.
21:19 Brian Preston? Yeah, that's pretty amazing. You think about, because we covered the 20s where he ended up a little over $53,000. Now, he's ending right at the end of his 30s and he's at $352,000. That's starting to feel like a large sum of money, but it's still, Bo, in a lot of ways, it's a long ways from a million dollars.
21:36 Speaker 05 Yep.
21:37 Brian Preston? But we know that we're missing some key components here. This is from, is ending at age 39. I'm curious to know with that $352,000, if you give it the most powerful of the three ingredients of wealth building, time. What does this look like in the future? When does he actually cross over seven-figure status?
21:56 Speaker 05 That's right. At 40, he is 35% of the way, but not all the way there. If he lets that money keep working for him, earning 8%, he will actually cross into millionaire status at age 53.
22:07 Brian Preston? Wow.
22:08 Speaker 05 Remember, that's no more additional savings in his 40s and 50s. Just letting that $350,000 grow. So now, he has shaved, just by saving in his 30s, what is that, 13 years off of his 20-year-old self? Just by staying consistent for the next decade.
22:24 Brian Preston? I think that when I, when we were, you know, when we're setting up this show content, and I saw just the rewards you get for investing in your 20s, just that 10-year decade of your 20s was going to reward you crossing into seven figures at 66. In a lot of ways, that sounds old.
22:39 Speaker 05 Sure.
22:40 Brian Preston? I mean, it really does. But when I see 53, I'm like, wait a minute. 53 feels much more of what people, is an ideal of when you want to cross into seven-figure? Because now you, you get the flexibility of, what do I want to do with my time?
22:54 Speaker 05 That's right.
22:54 Brian Preston? Maybe I keep working, but I'm also maybe getting to the level of assets where I'm at financial independence, where I can let my army of dollars work harder than I do with my back, my brain, and my hands. This is a powerful age to really reach millionaire status.
23:07 Speaker 05 And not, it doesn't just stop there. If Manny were to let his dollars continue growing past age 53, he'll actually hit $2 million by age 61, $3 million by age 66, $4 million by age 70, and $5 million by age 73. Remember, this is him not saving another dime after age 39. And when you compare this trajectory versus what his trajectory was at his 20s, it is a very different picture. Instead of not hitting $5 million until age 86, he now hits $5 million at age 73, and that has him only saving for 15 years. But again, Manny is a mutant. I don't think he's stopping at 39.
23:50 Brian Preston? Well, you're definitely not stopping there because think about this, the highest earning years are typically in your mid to late 40s. The other thing is I know most millionaires, despite what you see on social media, cross into seven-figure status in their 40s. So, why would we stop on applying the gas and making this thing go until we actually reach the seven-figure status? And it's a perfect transition to talk about the 40s.
24:16 Speaker 05 So, in our 40s, obviously, we got the basics down in our 20s and then we began to be optimized in our 30s. Well, in our 40s is likely our financial situation looks very different than it did 20 years ago. So, we want to think about, okay, am I not just optimizing that the accounts I'm, not just optimizing the accounts I'm using, optimizing how I'm using those accounts? Am I building my assets in the best way that's going to allow me to live my great, big, beautiful tomorrow? So, as we move through this decade of the 40s, some of the takeaways we want you to have center around specifically setting yourself up for a positive tax situation.
24:56 Speaker 05 One of the most impactful ways that we do that in the accumulation phase is thinking through our three bucket strategy.
25:02 Brian Preston? Yeah, I mean, I loved how you kind of set that up is the fact that I love that in the, you're thinking about tax strategy in the beginning. A lot of the financial order of operations is motivated by maximizing taxes. But when we get into and focusing on the financial order of operations, step seven, and in your 40s, it's very likely you could be crossing into step seven. All the other strategies, we're talking about how we maximize the taxes, but what actually says, hey, how are you going to use this money? How do you think about from a tax strategy plus a goal-based strategy? Where's the intersection? That is the perfect segue into thinking about your different account structure and what the three different buckets, because they all do things more efficiently than others and we ought to lean into that a little bit.
25:45 Speaker 05 Yeah, we know that each one of the three buckets is treated a little bit differently. Tax-free bucket obviously grows tax-free. That's Roth 401Ks, Roth 403Bs, Roth 457s, Roth IRAs, Health Savings Accounts. We know the tax deferred. Bucket grows with taxes being deferred until you put it out. That's traditional 401ks, 403Bs, 457s and traditional IRAs. And then you have your regular after-tax bucket. Well, given the fact that each one of those buckets is taxed differently, the types of assets that you hold in each one of those buckets ought to be thought about differently. So obviously, in your tax-free bucket, you want to hold your highest growth potential assets. You want the things that are going to really give you the biggest bang for your buck from a tax-free perspective.
26:28 Speaker 05 In the tax-deferred bucket, you want to hold anything that's going to generate ordinary income, like fixed income investments or different types of bonds, because you want to be able to defer that income. And then, in your after-tax bucket, you want to hold anything that's subject to capital appreciation or maybe has favorable distributions at lower capital gains rates. If you can make those small adjustments, not just in your asset allocation, but in your asset location, they can have significant impacts through time.
26:54 Brian Preston? Well, after-tax is especially powerful if you're retiring early, because it can serve as a very powerful bridge account. Because not only has it got some tax-favored status with qualified dividends, with long-term capital gains rates, but it's also usually an account that you can get easy access to for retirement purposes. So we want to make sure we're making good management decisions to really maximize this great bridge account.
27:18 Speaker 05 That's right. There's a couple of things you can do with that. Because obviously, the beauty in tax-free accounts and tax-deferred accounts is that all the taxation gets deferred. But in after-tax accounts, you pay taxes as you go. However, there are some ways you can plan around that. And one of the very best ways, because we know that about two out of every 10 years, markets are going to be down. And we know that intra-year, on average, we see 14% drawdowns in the market throughout the course of a year, even good years. If you can take an active role in your portfolio, and when the market shows you volatility, when it shows you uncertainty, when it shows you downturns, you can execute a strategy known as tax-loss harvesting. And this is something we love seeing and something we love doing for our clients every year.
28:02 Brian Preston? Yeah, I like it because it turns lemons into lemonade in a lot of ways. I mean, I get very busy, not only for my clients' accounts, but also for my own personal. When we go through these downturns, I'm locking in some of these paper losses as much as possible because I know in the future, when we get back to the growth phase of things, it's nice if I can take those losses that I've built up in the past, use those to offset any future distributions and other gains out there. It really can be a powerful tool. Don't sleep on tax loss harvesting. The other thing I like is when we do tax planning and other things, it's not uncommon because here you are, accepting losses and turning those negatives into positives. There might come a time in your tax planning that you're also accelerating all the capital gains as well.
28:45 Speaker 05 So what's the logistical way that you do this? How do you actually execute it? Well, when you have those bouts of volatility, you sell a security at a loss, the value of your holding goes down. You can then buy a similar fund or you can wait at least 31 days to go rebuy the same fund. You get to report those losses on your tax return. And if you don't have capital gains to offset this year, you can offset up to $3,000 of ordinary income or you can carry those losses forward. And one of the great benefits, Brian, if you do carry those losses forward, is that then in years where you do have big gains, you can accelerate those gains and you can harvest gains to use those losses against. Or maybe you're just in a really unique income situation this year where you're going to be very low income.
29:30 Speaker 05 You might want to trigger capital gains, but you're able to trigger them at the 0% capital gains rate.
29:36 Brian Preston? 0%, that's an awesome capital gains rate.
29:38 Speaker 05 So there are certainly ways that you can consider optimizing that after-tax account so that it's not just an account that sits there that you can't touch because of the tax implications. It's an account that you can tax manage through time and can be one of the most valuable tools in your financial tool belt.
29:54 Brian Preston? Another good after-tax strategy that we've seen people use is once you've been investing for a period of time and you start having appreciated long-term holdings, if you're charitably minded, you're crazy if you don't take advantage of donor-advised funds. One of my favorite things to do is because you get to give to your favorite charities and organizations you care about. They get the full fair market value of the assets you donate. You get a charitable deduction at the Full fair market value of the contribution and you never pay income taxes on the gains that are built into those portfolios. That's a pretty powerful thing. Bo, do you have some guidance or thoughts on how people can implement this in their own plan?
30:35 Speaker 05 Yeah, I think that if you are someone who is charitable minded, you want to think through, well, obviously being able to use appreciated securities is a great way to do that, but also you can look at charitable bunching, or it might just be a logistical way for you to keep track of all your charitable contributions in a very nice neat way. But that's not the only advanced strategy you may have access to in your 40s. A lot of people don't realize that when you put money into your 401k, there are normally two ways to do that. You can do pre-tax contributions or you can do Roth contributions. Few people realize there's actually a third way that you can put money in your 401k and it's called an after-tax 401k contribution.
31:13 Brian Preston? Also known as potentially a mega backdoor Roth contribution.
31:18 Speaker 05 That's exactly right. And these after-tax contributions are not subject to the normal 23,500 salary deferral limit. They can actually go all the way up to $70,000, the full section 415 limit. So if you're someone who is high income, not only can you put in your 235 and not only can your employer put in a matching contribution, but you can do after-tax contributions all the way up to $70,000. And those dollars will end up growing tax-deferred. When you go to pull the money out, you get to pull your contributions out tax-free, but you'd have to pay earnings, you have to pay taxes on the earnings unless your plan allows for in-service Roth conversions or in-service rollovers where you can then roll those after-tax
32:03 Speaker 05 contributions directly into a Roth. This is a non-taxable event because you already pay taxes on those dollars. So a lot of folks, by using this mega backdoor strategy, they're able to execute large 20, 30, maybe even $40,000 backdoor Roth 401k contributions, which are huge.
32:24 Brian Preston? Well, you just threw a lot at our audience. I want to make sure people understand is that there's usually a progression on how this steps. 23,500 is the amount that is considered like your salary deferral that you get to put in. And that can be pre-tax, that can be Roth. You're talking about going beyond that. That is the part. Now, there is a cautionary tale. You have to be careful. You don't crowd out your employer's money too. You know, the matching as well as the profit sharing. But it is pretty powerful when you compare and contrast these different contribution types.
32:57 Speaker 05 But I think a lot of people get confused on it. So I think it's worth pausing for a moment. After-tax contributions and Roth contributions are different. Even though we're talking about mega backdoor Roth using after-tax. They are not the same. Roth 401k contributions go in with after-tax dollars, same as after-tax contributions. Roth are limited to the 23,500, after-tax are not. Both of these grow tax-deferred. Roth 401k contributions can be tax-free, but after-tax must be converted in the plan or must be rolled out of the plan in order for them to be tax-free. So often, we see people get excited about this. I'm going to do it, I'm going to do it, I'm going to do it. And they get halfway there.
33:40 Brian Preston? They skip the step of this conversion.
33:43 Speaker 05 That's it. They skip that. And it's the most valuable step. Because until you do the conversion or until you do the rollout, the dollars don't actually become tax-free. They stay tax-deferred. So again, if you're going to execute this strategy, you max out your salary deferral, then you do an after-tax contribution, and then you must convert that after-tax to Roth or do an in-service rollout to Roth. If you don't do step three, the dollars do not grow tax-deferred. Brian, I have a good friend who got so excited watching our content, and he built six figures up in his after-tax bucket and never converted it. And now, we've caught it and we're going to correct it. But man, there's so much tax-free growth that was missed out on
34:28 Speaker 05 because he did not carry out that third step. That's why if you are someone who is considering this type of strategy, this is a great example of when it might make sense to potentially take the relationship to the next level.
34:38 Brian Preston? Well, yeah. You measure twice, cut once. You don't want to... Screw up something where you got all the key components, but then you just skipped a step. You know, it's the same thing when you find out from Vanguard that so many rollover IRAs just go uninvested.
34:51 Speaker 05 It's tragic.
34:51 Brian Preston? And I hate when I see good behaviors, but they just didn't finish the drill and complete all steps or measure twice, cut once. And then you see them unfortunately not getting the maximized financial mutant benefit out of this opportunity.
35:04 Speaker 05 Okay, so if Manny begins to again, execute on these strategies consistently through his 40s. Let's remember, he started investing at 25 years old. He was making $50,000 a year and his wages have increased by 3% every year. He started saving 15% when he was 25 and he increased it by 1% every year until he hit 25% savings rate. And then he stopped his savings rate at 25%. We also assume that Manny can earn 8% on average on his investments over the long term. So he's going to save 25% from age 25, all the way through retirement. He's just simply following the money guy rules.
35:42 Speaker 05 Well, if Manny does this and Manny carries this behavior through his 20s, through his 30s and into his 40s, he actually crosses the $1 million mark at age 48.
35:54 Brian Preston? Isn't that amazing? I mean, that is statistically, we hear all the time that most millionaires reach that level at age 49 after 28 years of saving and investing. And here we are doing a case study on Manny the mutant and it almost mimics those numbers. And here's another thing, a lot of people are probably gonna be like, "Yeah, but he probably makes a fortune."
36:12 Speaker 05 He's probably a huge income guy.
36:13 Brian Preston? No, we started off on purpose with a case study for somebody who makes $50,000 a year and gave him 3% pay raises every year. You realize when he crossed into millionaire status at age 48, his annual income was $98,679.
36:27 Speaker 05 Never crossed six figures.
36:28 Brian Preston? Never reached six figures, but yet crossed into seven figures with his assets. But that's, that's only part of the story.
36:34 Speaker 05 That's right.
36:35 Brian Preston? Because we know, and this is when I get really excited, you have $1.1 million at age 48. That's just the beginning of you controlling your financial life and maximizing this. Cause remember what we started this show with is how to make your first million. Turn that into two, three, four, and even five million dollars. Look at this, it took you those 28 years. Well, for this case study, we started at 25, so we'll just keep it at that. So that's 23 years to get to your first million. But then you reach 2 million at 55?
37:06 Speaker 05 Yep.
37:06 Brian Preston? 3 million at 60? 4 million at 63? Five million at age 65, pretty slick.
37:14 Speaker 05 It's what, 23 years for the first million, then seven years for the next million, then only five years for the next million, then only three years for the next million. And then, at the very end, going from four to five million, it only took two years.
37:27 Brian Preston? Yeah.
37:28 Speaker 05 To do double what took you 23 years, this is why, the bigger the numbers get, the bigger the numbers get. And let's remind you, this is just Manny staying consistent from age 25 all the way through age 65. When you compare that to someone who stops in their 30s because the messy middle got too middle, and stops in their 20s because they believe that they'll always be able to save at some point in the future, if you can start early and save consistently, your great big beautiful tomorrow gets pretty exciting. Because 48-year-old Manny, and 55-year-old Manny, and 60-year-old Manny has options. He gets to live life on his terms, the way he wants to, when he wants to, because he made those decisions early on.
38:11 Brian Preston? Well, and it's small decisions. You know, when you look at this, and you think about the fact that we're doing 15 to start off with, but then as we get, each of those pay raises would go up 1%, till we finally, somewhere in our early 30s, reach 25% savings rate, and that's it. We never increased it beyond that point. I love that we cut off close to 20 years
38:30 Speaker 05 That's right.
38:31 Brian Preston? On the savings investment journey through those small decisions. I love that you see how, the sooner you reach seven-figure status, you know the sooner it's going to have that doubling effect, and tripling effect, and then, you know, head on its way into $5 million. So whenever you hear anybody out there, who is talking about how hard it is to reach millionaire status, and they even pick on, they say, "Millions of dollars is not enough." You know what gets you to $5 million? That first million, and then rolling into the next two, three, four, and five. This is so powerful, and like I said, that's why I like us to be your gateway. We are your tour guides. We come from humble beginnings. If we can do it, you can do this too. You just have to make those small incremental decisions to help you build your great big beautiful tomorrow. By the way, if you're
39:16 Brian Preston? looking to fast-track that, let me go ahead and give you some head starts on some things. I want you to go to moneyguy.com/resources. We have so much free stuff out there, just to go ahead and speed you up, and maybe after you've taken advantage of all of our free stuff. You say, "I need something more specialized to me, but I don't quite need a financial advisor yet. I want you to go to learn.moneyguy.com." And we actually have a net worth tool. We have a Know Your Number course. You can figure out if you're ahead of the curve, behind the curve, right where you're supposed to be. And then we also have our Financial Order of Operations. I mean, this is the course that will actually go deep dive into tell you exactly what we're doing. And we have made this a much more affordable pricing for everyone because we think it's that important. Because this is the abundance
39:59 Brian Preston? cycle. We give it away. We want you to learn, apply, grow, become the best version of yourself. And you're going to reach a point that life has gotten so complex from this success. That's where we're going to leave the porch lights on for you. And we're going to take that relationship to the next level. And that's the completion of the abundance cycle. And hopefully, you'll become clients of Abound Wealth. If you want more information, go to aboundwealth.com or Money Guy. And we have a work with us. We just love creating this content. Money is nothing but a tool, but it can help you live your best, most abundant life because we're going to give you the tools, the techniques, and all the things you ought to be thinking about. I'm your host, Brian Preston. Mr. Bo Hanson. Money Guy team, out.
40:37 Speaker 06 The Money Guy Show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment, or legal advice.
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