3/27/26 401(k) Game Plan: Contribution Limits, Roth vs Traditional & Smart Allocations

The Moneywise Radio Show and Podcast Friday, March 27th BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Radio Show & Podcast" call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com facebook: Moneywise_Wealth_Management LinkedIn: Moneywise_Wealth_Management The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

• 0:00Speaker 00

  Live from the basement inside the historic Woolworths Building in downtown Bakersfield. Call or text in at 661-396-1000.

• 0:29Speaker 01

  Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through LPL Financial. LPL Financial and MoneyWise Wealth Management are independently owned and operated.

• 0:37Speaker 00

  Now, let's start the MoneyWise Show.

• 0:40Speaker 02

  Hey, welcome to the Friday edition of the MoneyWise Show. Live from the basement of the historic Woolworths Building in downtown Bakersfield. For the next hour, you're on KGO Money Talk, 1230 AM, 101.1 FM. And as always, streaming at MoneyWiseGuys.com. MoneyWise.Guys.com. MoneyWiseGuys.com. You can call or text into the show anytime, 24 hours a day, 661-396-1000. Again, that's 661-396-1000. We are your hosts today. I'm Justin Leland here with...

• 1:16Speaker 03

  Frank the Tank.

• 1:17Speaker 02

  Frank the Tank.

• 1:20Speaker 00

  Watch out.

• 1:21Speaker 03

  Just before the show, he showed me a clip of Wolf Thorin in Old School.

• 1:26Speaker 02

  See, the problem is, he had never seen it.

• 1:29Speaker 00

  Wow.

• 1:31Speaker 02

  That's what I'm saying. So he's like, I called him Frank the Tank. He's like, why do you keep saying that? And I'm like, dude.

• 1:36Speaker 03

  I've been called Frank the Tank before. I just never, you know, yeah, just never seen it.

• 1:39Speaker 00

  Man, that makes me feel so damn old. Because when we first, when he first started with us, I was like, Frank the Tank.

• 1:46Speaker 02

  Frank the Tank.

• 1:47Speaker 00

  And everyone's like, oh, that's Chris. And he's like, no, I'm Frank the Tank. He's never even seen Old School. Wow.

• 1:54Speaker 02

  That's his, as his boss, as his boss, that is his...

• 1:58Speaker 00

  Weekend work.

• 1:59Speaker 02

  That's his work, weekend work. He needs to go figure it out on, I think it's on Netflix, go get Old School. And I want a book report on Monday morning.

• 2:09Speaker 00

  I was gonna say, I'll bring the DVD, but that'll just prove how old I am.

• 2:13Speaker 02

  Right, exactly.

• 2:14Speaker 03

  Or not VHS.

• 2:15Speaker 02

  Betamax.

• 2:18Speaker 02

  Good grief. Yeah, so we're your hosts today. I'm Justin here with Frank. If you'd like to listen to the show, any part of the show, or any past programs, by all means, please subscribe to the Money Wise Guys podcast, commercial free on all major podcast platforms, like Apple Podcasts, Spotify, iTunes, or wherever you get your podcasts from. Hey, we're gonna do what we do, but we're gonna have a great show today. I really wanted to do this. I've been wanting to do this for a while. We're gonna do a top to bottom show on 401ks today. We are gonna get back to basics. I think everybody that's out there listening to me

• 3:00Speaker 02

  either has a 401k, or their company offers a 401k, or they're like, what is a 401k? We're gonna talk about it. We're gonna kind of do a deep dive on what it is, why you need to use it, and what it can do for you. But first, we're gonna do what we do best, and that's we're gonna do the numbers. Frank, what happened today on the markets? A lot of red on the screen.

• 3:20Speaker 03

  Yeah, man, it's a red sea out there. And it's pretty, pretty...

• 3:26Speaker 02

  Pretty ugly.

• 3:27Speaker 03

  Pretty, yeah, yeah, sure. I didn't want to sugarcoat it. So yeah, let's go with that. But Dow Jones down about 173 basis points, S and P 500 down 167, NASDAQ 215, Russell 2000.

• 3:41Speaker 02

  2.1%, wow.

• 3:43Speaker 03

  Yeah, and the Russell 2175. So it's, not only is it a red sea out there, but it is a deep red.

• 3:53Speaker 02

  Yeah. Yeah, and it's, I mean, we've been seeing this for the last four or five weeks. So the broader market, the S and P 500 has notched its fifth straight weekly decline, dropping about 2.1% this week. The NASDAQ has gone down by about 3.2% just this week, and the blue chip stocks, the Dow 30, the dumb Dow, the idiot Dow, down a little less than a percent for the week. So here's kind of what happens, though, is that when we have situations like this... People kind of are freaking out like what's going on in the market, what's going on in the world? Obviously with what's going on in global politics, people try to put, you know, correlations there.

• 4:37Speaker 02

  It's not necessarily causation, more correlation. But the markets were overvalued to begin with going into this situation. And corrections happen. So I want to make sure that everybody kind of, you'll find that there's a 10% pullback in the markets. Right around once every 14 to 16 months.

• 5:00Speaker 02

  Think about that for a second. When was the last time we had a true correction? Been a while and you can't remember it, right? It's been a minute, right? So this is normal. This happens, you know, a correction in the market is, is normal. It's actually healthy in many ways. Kind of gets rid of some of the, the junk that's out there and kind of gets markets back to a normal, a more normal valuation. And so we expect this from time to time. Now, the global politics could cause maybe to fall a little bit more, what, you know, whatever you have, but nobody has a crystal ball, right? So we just kind of have to kind of roll with it for the moment. But right now, the Dow as of today

• 5:45Speaker 02

  went into correction territory on an intraday markets basis. It didn't close in correction territory, but it did fall into correction territory at some point during the day. The NASDAQ fell into correction territory yesterday. What a correction is, is basically a 10% pullback from its most recent high. The S and the S and P 500 has not hit that mark yet. It's, it's not in correction territory yet. The NASDAQ, which is more tech heavy, that did yesterday and fell a little bit further today. It's down about 13% from its all time high. Which happens.

• 6:22Speaker 03

  Yeah.

• 6:23Speaker 02

  Especially in a tech world that we're in, the tech winds up being much more volatile.

• 6:27Speaker 03

  Right. Technology.

• 6:29Speaker 04

  Technology.

• 6:30Speaker 02

  Technology.

• 6:34Speaker 03

  But for the right reason, again, the NASDAQ itself is heavily concentrated in.

• 6:38Speaker 02

  In tech.

• 6:39Speaker 03

  Yeah, so you're gonna see greater pullbacks and greater runs for that matter.

• 6:46Speaker 02

  And it happens.

• 6:47Speaker 03

  It happens, it happens. And it's actually kind of funny, I wanted to bring this up. Have you seen the recent news about Sora?

• 6:53Speaker 02

  No.

• 6:53Speaker 03

  The AI video generator.

• 6:55Speaker 02

  Oh, no, no.

• 6:56Speaker 03

  From OpenAI.

• 6:56Speaker 02

  No, uh-uh.

• 6:57Speaker 03

  They've officially made the announcement this week saying that they're shutting it down because they're not getting the amount of traction and revenue from it. So it's like.

• 7:07Speaker 02

  No kidding?

• 7:08Speaker 03

  Yeah, yeah, yeah. But like, this has become the tipping point. Everyone on social media is using this, it's like, oh, the AI bubble, AI bubble. Yeah, yeah. So it's like, eh, I mean, we.

• 7:18Speaker 02

  Maybe, maybe AI is in a bubble, maybe it's not. But do you think that if the AI bubble pops, let's say there is a bubble, let's say the AI bubble pops, do you think artificial intelligence just crawls back into the genie bottle? No, it's still gonna be there.

• 7:32Speaker 03

  Yeah.

• 7:33Speaker 02

  So.

• 7:33Speaker 03

  Yeah, yeah.

• 7:34Speaker 02

  Yeah. We got a couple of messages that came in, so, ah, this is a good question. With you guys working in the financial side of things, say, in the last 20 years, are there a high percentage of Americans working well past retirement age? I don't want to steal my thunder, but this is gonna be part of the conversation we talk about with 401Ks. I'll give you one stat right now. One in three Americans, one in three, cannot afford a $400 emergency. I'll say that again. One-third of Americans don't have enough money in savings to be able to withstand a $400 emergency.

• 8:16Speaker 02

  That's scary. So I'll answer that question, but it's gonna be more in tune with what's going on at the rest of them. Stay tuned, we're gonna do that. There's another question here. You got that one there?

• 8:27Speaker 03

  Yeah.

• 8:28Speaker 02

  Yeah.

• 8:28Speaker 03

  Second one is, with gas prices expected to go up, would it be smart to put money into oil stocks?

• 8:35Speaker 02

  I am not going to give any kind of a recommendation on that. That's a compliance nightmare.

• 8:40Speaker 03

  Yeah.

• 8:42Speaker 02

  But yeah, gas prices are high, you know, but the issue is many of those stocks have already had their run up with oil prices going up. Typically, you know, what is the old adage on the Wall Street is you, you buy the rumor and you sell the news.

• 9:01Speaker 03

  Yes.

• 9:01Speaker 02

  Right?

• 9:02Speaker 03

  And if you're hearing the news.

• 9:03Speaker 02

  So if you're buying on the news, you're too late.

• 9:05Speaker 03

  Yep.

• 9:05Speaker 02

  Right? So that's just take that for what it's worth. And we have one other question here.

• 9:11Speaker 03

  Third one is, I don't understand with so many people struggling financially with so much going up, this may be a good time for one of those stimulus checks to help out Americans. What do you guys think?

• 9:22Speaker 02

  Oh, boy. Jimmy, Jimmy O. Yeah, don't, don't get me started. Yes. Stimulus checks would be great for us as individuals. I think it would be absolutely, it would decimate the economy.

• 9:33Speaker 03

  Yeah, yeah. Inflation?

• 9:35Speaker 02

  Yes, yes. Inflation is already going to pick up because of the oil prices, right? We're already seeing it. We're already seeing inflation ticking back up into the 3% range, which is where we don't want it. Let's just add fuel to that fire. That's like adding kerosene on top of an already burning pile of junk.

• 9:56Speaker 03

  Oh, yeah.

• 9:57Speaker 02

  Right? So let's not do, it sounds good on paper, but so was communism. Communism sounded good on paper, too.

• 10:06Speaker 03

  I have yet to use that reference.

• 10:07Speaker 02

  Right? Yeah, sorry. Hey, we're gonna take a quick break. When we come back, we're gonna hit it really hard on 401ks, why you need it, why you should use it, and the best ways to, to do it for yourself.

• 10:19Speaker 00

  Money Wise Wealth Management is the only locally owned, independent firm that uses a comprehensive wealth, tax, and estate approach, working closely with a highly trusted CPA and attorney. For information on how Money Wise can help you invest and plan for your future, call 661-847-1000. That's 661-847-1000.

• 10:49Speaker 02

  Welcome back.

• 10:53Speaker 02

  Haven't heard that one in a while.

• 10:57Speaker 02

  Thank you, Stevie.

• 11:00Speaker 02

  Welcome back to the Money Wise Show. I'm your host, Justin Leland, here with Frank Lee. We're going to get down to business and we're going to start talking a lot about 401ks and what they can do for you and what they mean. Now, here's a stat for you. Roughly 20%, 21 in five. 20% of workers with access to a 401k don't participate at all.

• 11:30Speaker 02

  Potentially leaving free money on the table.

• 11:34Speaker 03

  Yeah.

• 11:34Speaker 02

  Free money, meaning an employer match that your company provides to you. I don't know about you, but I like free money.

• 11:42Speaker 03

  Yeah, don't we all?

• 11:43Speaker 02

  Somebody's going to hand me, you know, 50 bucks or 100 bucks. I'm going to take it and say, "Thank you."

• 11:48Speaker 03

  Yeah.

• 11:49Speaker 02

  Right?

• 11:50Speaker 03

  Yeah.

• 11:50Speaker 02

  I don't understand it. I guess I do. I mean, there's people that are like so paycheck to paycheck that it's difficult and I get it. But we're going to talk about ways to alleviate that pressure here in a little bit. But what I wanted to talk about first is, you know, the 401k at your company.

• 12:14Speaker 02

  The deferral limits have changed. The thresholds have changed, the catch-ups have changed. A lot of things changed between 2025 and 2026. So I'm going to start by asking you here.

• 12:30Speaker 02

  Frank, what's the single biggest contribution mistake that you see from participants right now?

• 12:38Speaker 03

  Oh, that's a good question.

• 12:41Speaker 03

  Not contributing enough to get the full match, I would say.

• 12:46Speaker 02

  Yeah.

• 12:47Speaker 03

  I would say.

• 12:47Speaker 02

  Yeah, at least putting in the minimum necessary to get that full match. Now, so Frank and I work closely together, uh, doing 401ks in Kern County. Frank does a lot of education meetings, um, and is the face of, uh, the.

• 13:05Speaker 03

  I wouldn't say face.

• 13:07Speaker 02

  The face of the 401ks, like, so from a governance standpoint, I help a lot with the governance, with the, with the business owners and such. You know, I, I've done a, a fair number of, of education meetings as well for participants. Frank is really the guy that goes out and does these education meetings. And so when I ask him that question, I want like, what is the thing that you find is the, the one thing that if you could change people's minds about what they do in their 401k, what would be the thing that you would want them to change?

• 13:39Speaker 03

  Yeah.

• 13:40Speaker 02

  And that would be it.

• 13:41Speaker 03

  Yeah.

• 13:41Speaker 02

  Put in the minimum amount necessary to get your company match.

• 13:45Speaker 03

  Yeah.

• 13:45Speaker 02

  Simple as that.

• 13:46Speaker 03

  Yeah, even if it's 3%, 4%, as long as you're getting, uh, some of that match or even if all the match, because that's what the, the employer is offering. It's like, take advantage of it, right?

• 13:58Speaker 02

  Right. And

• 14:02Speaker 02

  now as financial advisors, we recommend people to save at least 10% of their salary.

• 14:12Speaker 02

  Better if you get up to 15%.

• 14:14Speaker 03

  Yep.

• 14:14Speaker 02

  But at minimum 10%. Now, we also understand that that's not realistic for many people's lifestyles and, and livelihood. I mean, it's, it's tough out there right now, right? And it, it is tough to squeeze out that extra one or 2%. I get it. But

• 14:34Speaker 02

  there's a way on your 401k that you can make this change.

• 14:40Speaker 02

  You don't have to go immediately to the 10% right now. What I would say to you right now, log into your 401k portal, whether it's Transamerica, whether it's Fidelity, whether it's John Hancock, wherever you get your 401k from your company, log into your portal today, this week. Look at your deferral percentage. Okay, that's the percentage you're putting in. Is it 2%? Is it 5%? If it's under 10%.

• 15:10Speaker 02

  Set a reminder or set an automatic increase.

• 15:15Speaker 02

  Okay. Have your plan automatically increase you by 1% every January.

• 15:23Speaker 02

  So if you're at 3%. On January 1st of the following year, you're going to move to 4%. You want to know what's going to happen? You're not even going to notice it.

• 15:31Speaker 03

  No.

• 15:33Speaker 03

  No.

• 15:34Speaker 02

  And the following year, it's going to go from four to five. And you know what?

• 15:38Speaker 03

  Yep.

• 15:38Speaker 02

  You're not even going to notice it.

• 15:42Speaker 02

  In about six years, you'll be at 10%. And you will have not really noticed it over that period of time.

• 15:50Speaker 03

  Yep.

• 15:51Speaker 02

  And now you're at the 10% plus you're getting the matching contribution from your employer.

• 15:56Speaker 03

  Yep.

• 15:56Speaker 02

  Right?

• 15:59Speaker 02

  And if you set it like that, you set it and forget it. And you cap it at that 10%, you're going to be so much better off, you're going to be so much happier with your savings because here's another stat. The average 401k balance at retirement. Okay. At 65, at retirement, the average 401k balance at retirement is around $280,000. That is not enough to support your lifestyle in retirement. When you take into account, hey, I'm taking social security, I'm taking this, I'm $280,000 in a 401k, some people can make that work.

• 16:43Speaker 02

  I'm not saying that you can't, some, but it's far too little for most people.

• 16:49Speaker 03

  And even so, they're barely getting by.

• 16:51Speaker 02

  Right. You're a fixed income and when that money's gone, that's gone. I'll tell you right now, there's no loan and there's no bank that's going to give you a loan for your retirement. Right? Like, it doesn't work that way.

• 17:02Speaker 03

  Nope.

• 17:03Speaker 02

  You gotta save it. And $280,000 just isn't going to cut it. So how do you not do that?

• 17:09Speaker 02

  Increase your contributions. Get from 4% to 6% to 10%. Little baby steps will get you there.

• 17:15Speaker 03

  Yep. Auto escalation.

• 17:16Speaker 02

  Auto escalate.

• 17:19Speaker 02

  The next piece here. The next mistake I see is cashing out when changing jobs. I don't know how many times I've seen this. Like I said, we do 401ks. We don't control, I mean, honestly, if you're a participant in the plan and you're leaving the company and you're moving to a different company and you want to take that 401k with you. Please take it with you. Don't, don't cash it out.

• 17:43Speaker 03

  No.

• 17:45Speaker 02

  Roll it over into the next 401k that you have. Or at least roll it into an IRA that you can then transfer to your next 401k if you so chose. But keep that money geared for retirement. The minute you cash it out, there's two things that happen.

• 18:04Speaker 02

  You immediately pay taxes on that money. And if you're under the age of 59 and a half. You just added an additional 10% penalty on top of the taxes you're already going to owe.

• 18:18Speaker 02

  So that withdrawal penalty plus the taxes could mean that 40% of your portfolio is gone.

• 18:23Speaker 03

  Yeah.

• 18:24Speaker 02

  Immediately.

• 18:25Speaker 03

  It's a big amount.

• 18:27Speaker 02

  So if you, let's say you had $50,000 in your 401k and you cashed it out at the age of 35. You're 35 years old, you're changing jobs, you have $50,000 in your 401k. You leave the job and you're like, just, just hand me my cash.

• 18:42Speaker 02

  You just gave up $350,000 in compounded interest in the time it would take for you to get to retirement 30 years later.

• 18:53Speaker 03

  Yeah.

• 18:54Speaker 02

  That's unbelievable.

• 18:57Speaker 03

  That's if you didn't contribute additionally on top of that.

• 19:00Speaker 02

  Right. If you just, that's 50, if you had $50,000 in your 401k at 35 and you just let it ride.

• 19:07Speaker 02

  $350,000 worth of compounded interest that it would be gone.

• 19:11Speaker 03

  Yeah.

• 19:13Speaker 02

  So there's a couple of other mistakes here. I think one of the biggest ones that I see, and we talk about it a lot, is taking loans from your 401k.

• 19:25Speaker 03

  Yep.

• 19:26Speaker 02

  Now, I understand there's a reason for it. Like, there's, there's sometimes you have to, like, you, you, you need it.

• 19:31Speaker 03

  Yeah, but it has to be a very specific reason.

• 19:33Speaker 02

  Correct.

• 19:34Speaker 03

  Yeah.

• 19:34Speaker 02

  It's not because you want to go out and buy the latest and greatest new BMW.

• 19:39Speaker 03

  Oh, really?

• 19:39Speaker 02

  No, probably shouldn't do that.

• 19:40Speaker 03

  Looking at some Beamers.

• 19:41Speaker 02

  No. Finance it elsewhere. Don't take it out of your 401k. I know folks will say, oh, I'm paying myself interest. Well, here's the kicker. You're putting that money into your 401k on a pre-tax basis in most cases. You haven't paid taxes on that money.

• 20:01Speaker 02

  And you take the loan. Well, guess what? That loan interest that you're paying, plus the loan principal that you're paying back, you're now paying back that loan with after-tax dollars. So that loan just became, if you're in the 30, if you're in the 24% tax bracket, that loan just cost you 24%.

• 20:19Speaker 03

  Yep.

• 20:20Speaker 02

  That's like taking, it's like financing your car on your credit card.

• 20:24Speaker 03

  Woo, can you imagine?

• 20:25Speaker 02

  Uh, no.

• 20:26Speaker 03

  Oh, my gosh.

• 20:27Speaker 02

  It would be miserable.

• 20:30Speaker 02

  Don't do it.

• 20:30Speaker 03

  Yeah.

• 20:32Speaker 02

  Yeah, I just, there's so many mistakes that can be made. If you have questions, by all means, reach out to the Money Wise guys, myself, Frank, any of the advisors here, would talk you through, you know, the options that you might have if you're in a financial pinch.

• 20:50Speaker 03

  Yeah, and, and I feel like that mistake number four should be highlighted even more because of the fact that, yeah, you, you don't understand the repercussions of the loan, the money you put in was pre-tax. If you take that loan out, you're paying it back post-tax.

• 21:04Speaker 02

  Right, and then when you take the money back out again,

• 21:07Speaker 03

  Yeah.

• 21:07Speaker 02

  it's taxed again.

• 21:09Speaker 03

  Yeah.

• 21:10Speaker 02

  Right?

• 21:10Speaker 03

  Yep.

• 21:10Speaker 02

  So, we don't want to do that.

• 21:13Speaker 03

  Nope.

• 21:13Speaker 02

  By all means. Hardship withdrawals are a different story, right? If you're, if you're about to get foreclosed on, your house is gonna, like that kind of a thing, then yeah, duh, you need the money and it's sitting there in your 401k. Yeah, you might, you might need to dip into that to be able to save yourself from being foreclosed upon or something like that. Or major medical bills or any of those types of things that are available through the hardship withdrawal rules. But taking a loan out with the idea that, oh, I'm just gonna pay myself back.

• 21:44Speaker 03

  Yeah.

• 21:45Speaker 02

  You're really digging a hole for yourself and I don't, I don't think many people really pay attention to that. Now, we're gonna take a quick break. When we come back, we're gonna talk about the investment menu. How do you pick the right funds for you when we come back?

• 22:00Speaker 00

  Are you curious to learn more about how you can be money wise? Check out the Money Wise website at MoneyWiseGuys.com to get more info.

• 22:13Speaker 02

  You take a model man.

• 22:18Speaker 02

  Welcome back.

• 22:24Speaker 02

  Heavy metal Friday.

• 22:26Speaker 03

  Oh, I like that. Heavy metal Friday.

• 22:30Speaker 02

  Welcome back to the Money Wise Show. I'm Justin Leland here with Frank Lee and we're doing all things 401k. We came into the break, uh, said we were gonna start talking about investment choices, allocation choices as a participant in a 401k. How do you know how you should, uh, be allocated? It's different for each and every individual, right? If you're a 20 something, uh, that's just starting out, your, your idea of, of allocation should be, how aggressive can I possibly be?

• 23:04Speaker 03

  Yeah. How much growth?

• 23:05Speaker 02

  How much growth do I really want? I have 40 years before I'm gonna use this money, 50 years before I use this money. I might as well go absolutely crazy and be as aggressive as possible. Yet if you're 62 and you're only a few years away from retirement, um, if you're thinking the same way, uh, be prepared for some pain.

• 23:28Speaker 02

  Right?

• 23:29Speaker 03

  Yeah.

• 23:29Speaker 02

  You would definitely need to be reallocated. Uh, there's a difference between risk tolerance and risk capacity. Somebody who's that age, their capacity for risk is much different than somebody who's in their twenties. They might have the same risk tolerance. They might be like, hey, I'm very risk tolerant.

• 23:49Speaker 03

  Yeah.

• 23:49Speaker 02

  But your capacity then takes it, takes over and says, hey, you probably shouldn't.

• 23:53Speaker 03

  Yeah, yeah.

• 23:54Speaker 02

  Be as aggressive as you are.

• 23:55Speaker 03

  Yeah.

• 23:56Speaker 02

  Or maybe you should.

• 23:56Speaker 03

  When you're at that stage now, the, the, the flip is that you're going to be relying on this account for income.

• 24:02Speaker 02

  Right, for the rest of your life.

• 24:04Speaker 03

  Exactly.

• 24:04Speaker 02

  For possibly 25 to 30 years. Right?

• 24:07Speaker 03

  Yep.

• 24:08Speaker 02

  So here's what we're going to talk about. Asset class. What asset classes are available in your 401K? And you need to know the difference. What is the difference between equities, i.e. stock and bonds?

• 24:24Speaker 02

  We go back to the wayback machine and we start talking about there's two ways to invest. Own or loan. If you own something, that's equity. If you loan something, it's a bond, right? So there's two ways to invest. You can do either owning by equities or you can loan it out by buying bonds. Okay, there's also stable value assets. In most 401Ks, there's going to be a money market or a stable value. Basically, it's a dollar, you know, it's basically a dollar, right? It has maybe like a fixed interest rate of say three or 4%. And you just park your money there for stability. And then there's also other assets, whether it be real estate, uh, small caps, large caps.

• 25:07Speaker 02

  You know, all sorts of different asset classes that are in there. Secondly, I want you to pay attention to expense ratios. In your 401K, every 401K now, the expense ratios on the funds that you are allowed to invest in have to be produced. So they have, they have to show you what the cost of the, the internal expense of that particular mutual fund is.

• 25:29Speaker 03

  Yep.

• 25:30Speaker 02

  Now, it's important. It's not the most important thing, but it is very important. Every 0.1% matters.

• 25:41Speaker 02

  Right? If you're investing in a large cap growth fund and it's charging 1% internal expense ratio, but you can do an S and P 500 index fund and it's 0.05%.

• 25:57Speaker 02

  Which one do you think you probably want to choose?

• 26:01Speaker 02

  Probably want to look at the S and P 500 unless that growth fund is burning it at, you know, 20% a year or something like that.

• 26:09Speaker 03

  Or even 30.

• 26:09Speaker 02

  Or 30, you know, but that, that 1% eats away at your growth potential. There's a big headwind there when the S and P 500 is going to be a great investment regardless. Right? Growth versus value, we've talked about this before, large versus small. You know, pay attention to the Morningstar style box, but don't, you don't, don't have to get too deep into it.

• 26:34Speaker 02

  Now, almost every fund, every 401k now that, that I've seen, and the ones that we manage, all of them have target date funds.

• 26:44Speaker 03

  Yes.

• 26:45Speaker 02

  Under most circumstances, these are default funds. You and you put your money in and if you don't choose what allocation you want to be a part of, these target date funds are supposed to do that for you automatically.

• 26:56Speaker 03

  Yep.

• 26:57Speaker 02

  Okay. And they're, they're a good option for people that are not sophisticated investors.

• 27:00Speaker 03

  Right. If you don't want the headache of having to research through all these asset classes, all of the expense ratios, all of the different types of styles.

• 27:09Speaker 02

  Right.

• 27:09Speaker 03

  Then the target date, the qualified default investment alternative is the way to go because it's geared towards to fit that individual based on.

• 27:19Speaker 02

  On where they are in their, in their career.

• 27:21Speaker 03

  Yeah, exactly.

• 27:22Speaker 02

  And I will say this, that some, not all target dates are created the same, right? Some are expensive, right? I've seen some that are as much as, you know, 60, 70, 80 basis points, so 0.8%.

• 27:38Speaker 02

  I've never used one of those, like those, those, every one that I've used are in the 0.1% range. Okay. Very low cost, they can be very low cost, but they're not, not every target date is the same. If you have questions on it, by all means, give us a call, we can take a look at it for you. But I kind of have an idea for most people, you want to have a, a structure, kind of a three bucket approach in your 401k. If you're not using the target date fund, so this, let me, let me preface that. If you're using the target date fund, stay with it, 100% of your money stays in the target date fund. Okay. If you want to be a sophisticated investor that kind of pulls the levers and does your own thing.

• 28:23Speaker 02

  There's kind of a three bucket approach. You want your first bucket to be your growth core. And that can be roughly 60 to 70, maybe even 80% of your portfolio can be in this very high volatility growth side of the portfolio. Broad market equity, we're talking S and P 500 index funds. Large growth funds. Basically your stock portion of your portfolio. Okay. Bucket two. You want it to be your stabilizer. You want it to be something that's gonna. As Gero would say was the the ballast on the ship, right? That if the waters got rough, the boat wasn't going to tip over. Right?

• 29:04Speaker 02

  So these stabilizers anywhere from 10, maybe 30% of your portfolio. You want that to be in either stable value or bonds. I would prefer bonds in that case, but for most, some people that stable value looks good as well. Winds up being in, you know, for car guys, Frank's a car guy. That'd be your shock absorbers.

• 29:23Speaker 03

  Not much of a. Not, not much of a car guy. You, you're more, you're more the, the car guy in that sense.

• 29:29Speaker 02

  Nah, maybe not. Nah. Bucket three would be kind of your alternative piece of your portfolio. Maybe call it satellites. It's something where you're talking about small caps, sector funds. Real assets, if there's a, a real estate fund in there. Sometimes there's a precious metals fund that's available in a 401k.

• 29:52Speaker 03

  Commodities.

• 29:53Speaker 02

  Commodities, things like that. That should only make up less than 10% of your overall portfolio. In, in, in any stretch of the imagination, you want to make sure that those things are not a major part of your portfolio. I hear people want to, I want gold in my portfolio. You only want about maybe 5%. At tops. Tops. Uh, yeah. So I don't want to, you know, uh, create any enemies out there, but yeah, we want to be a little careful with the commodities piece.

• 30:23Speaker 03

  Yeah, yeah. Especially with recent moves within.

• 30:26Speaker 02

  Yeah, silver was down like 6% today or something like that. It's ridiculous.

• 30:31Speaker 03

  Yeah, it's easy to look at the, the market moves now compared to what they've been relative to the overall market. You know, so it's, yeah, it's, it's always hard to navigate that conversation with certain clients and everything, but.

• 30:48Speaker 02

  Right, right.

• 30:51Speaker 02

  So, um, yeah, I mean, that's where we're looking at it right there. So that's what I would do.

• 30:55Speaker 03

  Yeah, yeah, yeah. Um, there, there was a question that did come in. I don't know if you wanted to go through that. Yeah. So, uh, first question is, when I look at my 401k, I don't really understand what I'm invested in. Should I be worried about that or just leave it alone? And I think this goes in line with what you just said.

• 31:12Speaker 02

  Right. We want to be cognizant of the allocation that we're in. So if, if you're looking at your 401k platform and it's a, let's say a target date fund, you're probably going to be okay. It's probably going to be a mixture of stocks and bonds.

• 31:32Speaker 02

  But you, you probably, you know, if you absolutely have no idea, no clue what it is in, you can always give us a call at our office, uh, eight four seven one thousand, six, six, one, eight, four, seven, one thousand. One of our advisors would, would sit down with you or at least, uh, look at it, you know, if you email us the statement, we can kind of look at it and tell you what, what you're looking at. Um, but for the most part, do a deeper dive, look at the mutual funds you're invested in, look at the style or the category with those funds are, and determine if that's right for you.

• 32:04Speaker 03

  Yeah, especially if you're younger and if the asset class that you see on your 401k says a hundred percent bonds, it's like, ah.

• 32:13Speaker 02

  No, not a good idea.

• 32:14Speaker 03

  Might want to rethink that.

• 32:15Speaker 02

  Right, right, right. Was there another question there?

• 32:18Speaker 03

  Yes, yes. Uh, if I recently got a raise, would that be the best time to bump up the contribution?

• 32:24Speaker 02

  I love where your head's at.

• 32:26Speaker 03

  Yeah.

• 32:26Speaker 02

  Uh, man, music to my ears.

• 32:29Speaker 03

  Yeah, yeah, yeah.

• 32:30Speaker 02

  So if, if, let's say you receive a merit increase of say three percent or four percent. What's the harm in taking one or two of those percentage points and slapping it into your 401k? You're still getting a raise.

• 32:44Speaker 03

  Yeah.

• 32:44Speaker 02

  You're still budgeted for the, the money that you were currently making, right? So if you're getting a, a decent raise, two or three percent, take that one percent and escalate your portfolio from five to six percent. That compounding will take effect.

• 33:00Speaker 03

  Yes.

• 33:01Speaker 02

  The first, I will tell you this, the first hundred thousand is the hardest to get to. But once you get to that hundred thousand, it becomes a snowball rolling downhill. It actually, in many ways, that, that seed of that hundred thousand dollars will, will wind up.

• 33:19Speaker 02

  The growth on that portfolio will exceed the amount that you're actually putting in.

• 33:23Speaker 03

  Oh, yes. Hundred percent. And I do this a lot in my education seminars.

• 33:27Speaker 02

  Yeah.

• 33:27Speaker 03

  It's the, the whole investing early, why you should invest and the compounding effect.

• 33:33Speaker 02

  Right.

• 33:33Speaker 03

  Because yes, if you're starting at an early age, giving yourself 40 years to grow the investments, the amount that you have to put in, assuming, let's say, for example, in this scenario, it's a 7% rate of return, assuming that's the rate.

• 33:48Speaker 02

  Right.

• 33:50Speaker 03

  And if the goal was a million dollars, the amount that you have to put in is a staggering 200,000.

• 33:58Speaker 02

  Whoa.

• 33:59Speaker 03

  Less than, actually, it's about 180. It's about 180 of the money that you yourself have to put in. The rest is pure growth.

• 34:09Speaker 02

  Right.

• 34:09Speaker 03

  Pure growth.

• 34:10Speaker 02

  Right. Almost 800,000, more than 800,000 dollars.

• 34:13Speaker 03

  Exactly. Yeah. You just quadrupled your, your assets.

• 34:17Speaker 02

  Now, to come up to get to a million dollars in your portfolio and you're starting at the ripe old age of 35.

• 34:23Speaker 03

  Mm hmm. Probably around 290.

• 34:28Speaker 02

  350.

• 34:29Speaker 03

  Yep, yep.

• 34:30Speaker 02

  Right. So you're having to put in double the amount of money in there.

• 34:33Speaker 03

  Exactly. And then guess what? At 45?

• 34:36Speaker 02

  It's, it's almost impossible.

• 34:38Speaker 03

  Yeah. About 500.

• 34:40Speaker 02

  Yeah.

• 34:40Speaker 03

  At 55, it's about 800,000.

• 34:46Speaker 02

  So here's the problem. At 8, if you're just starting out at the age of 50 and you want to get to a million dollars in your 401k.

• 34:53Speaker 03

  Yeah.

• 34:54Speaker 02

  It's technically impossible.

• 34:56Speaker 03

  Just to do it solely on 401k.

• 34:58Speaker 02

  If you're doing it based on your contributions, you would not be legally allowed to contribute enough.

• 35:05Speaker 03

  Right.

• 35:05Speaker 02

  To be able to make up for that difference.

• 35:07Speaker 03

  Right. So then now the question is, what else?

• 35:09Speaker 02

  How much growth do I have to take on or how much risk?

• 35:11Speaker 03

  Right. How much risk? How much growth? And is there any additional accounts that I have to open to grow, to, to invest this and, and grow my, my investments? So.

• 35:23Speaker 02

  Now, so we've kind of touched on, you know, contribution limits, contribution rates, asset allocation.

• 35:32Speaker 02

  We're going to take a quick break and when we come back, we're going to talk about the age old question Roth versus traditional, which one's better and why when we come back?

• 35:41Speaker 00

  Are you an employee with a company sponsored retirement plan? Do you fully understand how you're invested and whether or not you are maximizing your retirement plans options? For more information on a free assessment, contact MoneyWise's 401k specialist, Justin Leland at 661-847-1000. That's 661-847-1000.

• 36:12Speaker 02

  Frank is Iron Man.

• 36:23Speaker 02

  Welcome back.

• 36:26Speaker 03

  Black Sabbath.

• 36:27Speaker 02

  There it is.

• 36:28Speaker 03

  I only know that because of Iron Man.

• 36:31Speaker 02

  Only song he knows.

• 36:36Speaker 03

  That's funny.

• 36:37Speaker 02

  Welcome back to the Money Wise Show. We're talking for all things 401k.

• 36:41Speaker 00

  You gotta start somewhere.

• 36:42Speaker 02

  We'll get him into the.

• 36:43Speaker 03

  Yeah, don't worry.

• 36:45Speaker 02

  We'll get him into the deep, dark.

• 36:47Speaker 00

  Yeah, I'll give you a medal and you give me some 401k info. It's a perfect trade.

• 36:51Speaker 03

  Yep.

• 36:52Speaker 02

  Maybe a little 90s punk if we can.

• 36:54Speaker 00

  Every once in a while.

• 36:55Speaker 02

  Every once in a while.

• 36:55Speaker 00

  Let's see how that 401k works first.

• 36:57Speaker 02

  Right. So we're going to talk real quick. We have another question that popped in. I do want to take some time on that question, but first the, we came into the break and we said Roth versus traditional, that age old question. So I'm going to give you kind of a rule of thumb. It's not always, I'm not a huge rule of thumb guy, but this one tends to work. If your 401k and most 401ks now offer Roth availability. If your 401k offers a Roth option and let's say you are a young individual, say twenties or even early thirties.

• 37:36Speaker 02

  You're probably in a lower tax bracket, or you're probably not in your peak earning years, right? You're not in your 40s or 50s, in your peak earning years. So you're probably in a lower tax bracket, and you have a lot of time for that money to grow. Put that money in Roth.

• 37:52Speaker 03

  Yep.

• 37:53Speaker 02

  Use the Roth as much as possible. Okay, because that money, you're putting in on an after-tax basis, at a low tax basis.

• 38:00Speaker 03

  Yes.

• 38:01Speaker 02

  Letting it grow for 30 or 40 years, and you're not going to have to pay taxes on that money when you take it out.

• 38:07Speaker 03

  Yep.

• 38:08Speaker 02

  I like that. I like tax-free.

• 38:11Speaker 03

  Yeah.

• 38:11Speaker 02

  Tax-free is nice.

• 38:12Speaker 03

  Mm-hmm. And you don't have RMDs.

• 38:15Speaker 02

  And you don't have to take required minimum distributions if you don't want to.

• 38:18Speaker 03

  Yep.

• 38:19Speaker 02

  Right?

• 38:19Speaker 03

  Exactly.

• 38:20Speaker 02

  If you're older, and let's say you're in your peak earning years, and you're, say, in the 33, 34, 37% tax bracket, you're not going to get much of a benefit by doing the Roth. Your benefit is most likely going to be, I need that tax write-off today, because I'm in a very high tax bracket. Hopefully, when I retire, I will be in a lower tax bracket, because my income is going to hopefully drop, or my needs are going to be different.

• 38:48Speaker 03

  Yep.

• 38:49Speaker 02

  And so my tax bracket's going to be different or lower. So, yeah, I'm going to go ahead and take the tax, I'm going to pre-tax now, and I'll pay the taxes later.

• 38:58Speaker 03

  Yeah, exactly.

• 38:59Speaker 02

  So, older and higher-income people probably want to use that traditional method, the pre-tax method. Younger, lower tax bracket, you probably want to be in the Roth. That's basically my rule of thumb on that. But, we got a great question that popped in, and it's something we were talking about in the, like, the second segment. Uh, let's hit it.

• 39:18Speaker 03

  All right, so, question that came in. My brother is one of those guys you were just talking about. He takes loans out of his 401K for big purchases, like down payment for a home or repairs, but he says as long as he puts it back in a short period of time, it doesn't affect him. Is that true, or is he paying taxes on interest or whatever?

• 39:37Speaker 02

  It affects him.

• 39:38Speaker 03

  Yes, short, short answer.

• 39:40Speaker 02

  Short answer, it affects him. Period. Full stop. Now, why does it affect him? Now, I will preface this. I also understand people will maybe take money out for a down payment on a house and they will use the 401k as that down payment. I have reasons why I don't agree with that, but I can understand, conceptually, I can understand why people would do that.

• 40:04Speaker 02

  They're done with renting. They want to own their own home, piece of the American dream. I get it. Still not necessarily the best option for you. Now,

• 40:16Speaker 02

  buying a big purchase, let's say you're going out there and you're buying that car, you're buying, you're putting a new kitchen in your house or something. You need $25,000 and so you decide you're going to take that loan out of your 401k. There's a couple of things that happen there. One, if you're putting it in on a pre-tax basis,

• 40:33Speaker 02

  you're, you, you haven't paid taxes on that money. You take the 25 grand out, you pay that back over a five-year period, you have paid interest on that loan and you didn't pay the interest to yourself. You paid it to the loan company, the insurance company.

• 40:51Speaker 02

  Secondly, you're paying that loan back with after-tax dollars. We already went into the math on that. If you're in the 24% tax bracket, you basically just got a 24% loan, not including the maybe 6% on the, you're paying 30% on that loan.

• 41:05Speaker 03

  Yeah.

• 41:07Speaker 02

  The last thing, and I think even more important, is that's $25,000 that's been removed from your 401k that is no longer getting compounded interest until you pay it back in full.

• 41:21Speaker 03

  Yes.

• 41:22Speaker 02

  Remember, we talked about early, earlier, if you cash out your 401k and you take $50,000 out of that 401k at 35, how much does that cost you in lifetime earnings?

• 41:32Speaker 03

  $350,000 or more.

• 41:35Speaker 02

  $350,000 or more. Now, this $25,000 loan is not going to cost $350,000 because you are paying it back over a period of time. So you will eventually get that compounding interest back, but that loss of five years is not immaterial.

• 41:52Speaker 03

  Yeah, yeah.

• 41:54Speaker 02

  You could be losing out on substantial gains on that $25,000 and then the compounding, because you've now, you've now basically stopped that compounding from happening and now you've restarted it again.

• 42:07Speaker 03

  Yeah. There's a great slide, either from First Trust or wherever it was, but it demonstrates, here it is. If you had

• 42:19Speaker 02

  Slides work very well on radio.

• 42:20Speaker 03

  I know, it does, it does. So I'll do this the best I can. If you had $10,000.

• 42:25Speaker 02

  If you look at this PowerPoint presentation he's looking at.

• 42:27Speaker 03

  It's like, you can see.

• 42:30Speaker 03

  In this, in this slideshow, it's basically saying that from, if you invested $10,000 in S and P 500 from the year 1979 to 2025.

• 42:41Speaker 02

  Okay.

• 42:42Speaker 03

  During that period. If you've participated in the market for every day for those years, you would have at least $2 million from that $10,000.

• 42:51Speaker 02

  Yeah. So $10,000 turns into 2.3, I think it was that I saw on the slide. It was something like that. I was like, yeah, it was at least 2 million, but that's from 71.

• 43:01Speaker 03

  From 79 to 25. But here's, here's the thing, and this goes in line with what you just said. If you miss five of the best stock market days, that 2 million goes to 1.2 million.

• 43:15Speaker 02

  You lose half.

• 43:16Speaker 03

  You lose almost half.

• 43:18Speaker 02

  Just taking five days out.

• 43:19Speaker 03

  Five of the best days out.

• 43:20Speaker 02

  Five of the best days out.

• 43:21Speaker 03

  Yeah.

• 43:22Speaker 02

  So there you might, there's what I'm saying is that if you're taking a $25,000 loan and during that five-year period, we have one of the best possible days ever in the stock market history.

• 43:32Speaker 03

  Exactly.

• 43:33Speaker 02

  How much did you just lose?

• 43:34Speaker 03

  Yep. So it's more than just the 25,000.

• 43:36Speaker 02

  It's more than just the 25,000.

• 43:39Speaker 02

  This is why I always say.

• 43:42Speaker 02

  Each dollar that you make. Needs to have its own purpose. Right? If you're saving for retirement and you're putting that money into your 401k, you are not paying yourself today. You're paying your 65, 70, 80-year-old self 20, 30, 50 years down the road. That dollar needs to be meant for that, your future self, my 80-year-old self to be able to support my life.

• 44:10Speaker 02

  If I earmark that money that's not in my 401k, it's just operating money for paying my mortgage, or my rent, or my car payment, or whatever, that's money that's needed for those things.

• 44:22Speaker 02

  Live within our means, and the money that we put into our 401k needs to be spent in our 401k, spent in our retirement for our lifestyle when we retire. Every time we dip our hand into the cookie jar, we're stealing from our future self. And I'm gonna say this one time, and this is one that I've heard quite a bit.

• 44:44Speaker 02

  Your 401k is like a bar of soap. The more you touch it, the more it dissolves and goes away.

• 44:54Speaker 02

  Don't touch your 401k, you're putting that money in there, leave it there, don't touch it. You start taking loans out, it's like the soap. Every time you touch it, it goes away.

• 45:05Speaker 03

  Don't touch it.

• 45:06Speaker 02

  So, hopefully, we answered a lot of questions about 401ks. Hopefully, people got their notebooks out and started taking notes. We're gonna continue doing this from time to time. I think that our Friday focus, we're gonna get back to doing the 401k style focus on 401ks. And this is more of a generalized 401k. We're gonna get into more details as we go forward, but, you know, stay tuned. We're gonna continue doing these types of things and getting more questions on your personal finances and answering those questions for you. Frank, thank you very much for joining us today.

• 45:40Speaker 03

  No, thank you, thank you for joining me.

• 45:42Speaker 02

  Yeah, absolutely. We're gonna, we're going into a great weekend, spring break coming up.

• 45:47Speaker 00

  If people do have questions, they can send those questions in, right?

• 45:50Speaker 02

  Absolutely.

• 45:50Speaker 03

  Yes.

• 45:51Speaker 02

  Absolutely. And, you know, it's gonna be a great, spring break's here, so, hey, go out there, have some fun with your kids, if you got them.

• 46:00Speaker 02

  You know, spend some time with the family and have a great time. And with everything else, you know, take care, take care of your 401k, but all, by all it means, be smart, be safe, be money wise, see you Monday.

• 46:14Speaker 01

  Securities offered through LPL Financial, member FINRA, SIPC. Investment advisory services offered through LPL Financial. LPL Financial and Money Wise Wealth Management are independently owned and operated.