Why Maxing Out Your 401(k) Hurts High Income Earners Most

Joey Muré (0:00)

In the next 10 minutes, I'm going to show you why maxing out your 401k. This is the thing you've been told is the most responsible thing to do with your money, is mathematically keeping you working until you're 65 Before you get the wrong idea about this video, we're not just bashing 401ks today, we're actually talking about the math behind it. See, our company has walked thousands of families through their actual numbers, and it's the same pattern over and over. They're all smart people, they've made tons of money in their career, they've done decades and decades of contributions to plans just like this, and they wake up in their 30s or 40s and they realize, I really will never be able to stop working.

So before you start saying, my advisor says I'm on track, of course they do. They get paid whether you make it to financial freedom or not. The plan you're on is not bad for them, it's bad for you. Here's what we're going to do.

I'm going to walk you through the four specific things your 401k is doing to your wealth right now, and why the math has never really been in your favor and what to build instead. Stick with me through the diagram.

Russ Morgan (1:06)

Welcome to The Wealth Without Wall Street Podcast, your guide to understanding how to get out of the Wall Street rat race and start your own mailbox money lifestyle.

Now, don't let these handsome Southern draws fool you. These financial minds are teaching our country to enhance savings, increase cash flow, and create passive income, all without the help of Wall Street. Are you ready to break through? Now, here are your hosts, Russ Morgan and Joey Mure.

Joey Muré (1:36)

The plan that most people are on looks exactly the same. Max out your forward K, trust the market, retire at 65 Maybe at some point you roll over an IRA. This is the entire strategy. Every high income producing W2 worker or business owner has been told the same exact thing. The wild thing nobody ever talks about is the people that are funding these at the highest level are the ones that get hurt the most, because they're the ones putting the most money into it. So whatever the plan is doing to their money, it's doing at a much higher level. Let me draw out for you the four things that this plan does, that nobody's sharing with you on your retirement projection sheet. First thing, the lockup.

Your money is not yours until you're 59.5 without penalty, period. You may be even saying to yourself right now, that's fine, this is a long-term investment. I don't need access to it today. But what is the actual cost? The cost? Liquidity. When you're 42 years old and a ridiculous real estate deal hits your desk, or you need money for your business, your kids need money for a down payment, your 401k cannot help you. It's literally locked in an account you don't have access to, and the only way to get access is with a 10% penalty plus income tax. It's essentially the institution saying, we trust ourselves with your money more than we trust you with your money. That's awesome for the institution, terrible for the family that needs flexibility. So you've been told that this is to your benefit, that this is going to compound to be over $3 million.

But the reality is, it's compounding away from you. Okay, so lock up is the first problem. Maybe you're okay with that. You're like, eh, I can wait. The second big thing that your money is doing in a 401k is the tax timing trap. The pitch with your 401k was always, hey, defer tax today, pay tax in the future, with the assumption that you're going to be at a lower tax bracket in the future. For the most people that we work with, that assumption is just plain wrong. If you're a high income W-2 earner and you're putting over $20,000 a year into your 401k, or maybe you're a business owner and your CPA says, hey, you need to max out this SEP at over $70,000 a year. The reality is when you retire and you need to live off that money, you're going to be in a higher tax bracket, not a lower one. Here's what that does to a million dollar account. Say you've got a million dollars in your 401k and the pitch you were given is that you're going to retire at a lower tax bracket. Let's just say 15%.

So you do the quick math, you're like, oh, that leaves me with 850k. But what's the assumption that we have to work on?