Perhaps no other food is as versatile as the humble egg. You can scramble it, poach it, bake it, or boil it, or turn it into the start of a brunch buffet. Yet once upon a time, we were told that the rich fatty yolk at the center of the egg contained too much cholesterol, and so we, as consumers, tried to do the “right thing” by ordering egg whites. Is there anyone out there who actually enjoys egg whites?Science has since vindicated the yolk – they contain powerful nutrients that may help lower the risk for heart disease. Still, many people continue to order egg whites because they were told to. The 401(k) is perhaps another thing that we’ve been told we have to do in order to build a healthy nest egg for retirement. While it’s true these plans can have a positive impact on your ability to save, you might be able to grow MORE money on your own if you subscribe to the idea of “thinking big.”Here are five things that self-made millionaires do to build wealth without saving in a 401(k) – and we’re not yolking.
FOCUS ON EARNING THE MOST THAT YOU CAN
Self-made millionaire and author Grant Cardone says that he would never invest in a 401(k) because the plans are too limiting. The IRS imposes limits on how much you can contribute and how long you have to wait before you can withdraw this money without a tax consequence. If you have access to a plan, the free money is usually worth it, although multiple job changes can make it difficult to accrue the minimum number of years in order to become fully vested. If your eye is on your career, then you might be focused on the right thing. According to Cardone, “you can’t save your way to millionaire status.” He suggests that it’s better to focus on earning big than saving big. Are you being underpaid for the work that you do? The jobs marketplace Glassdoor.com has a new tool you can use to help determine if you’re getting paid what you’re worth.
BUILD AN EMERGENCY FUND
Before you start investing, it’s important to establish an emergency fund in order to avoid the credit card debt cycle. What happens if the car breaks down or the water heater goes out? If you’re like most people, you don’t wait and save up for a new one when it’s so easy to finance the purchase. These debts can add up and hamper your ability to save to the max. The No. 1 reason most young people give for not saving for retirement is debt. One way to break the cycle is to establish an emergency fund. While Cardone himself prefers having $100,000 accessible at a moment’s notice, most financial experts suggest having anywhere from three to six months of your basic expenses. You don’t want this money tied up in the market because you don’t want to have to sell funds at a loss. Instead, put the money in a savings account that you can easily access.
CONSIDER TAX DIVERSIFICATION
One of the biggest benefits of a 401(K) is tax-deferred investing. The way it works is a nice perk: you get to put the money into your savings account on a pre-tax basis. Your income taxes for the year are reduced by the amount you contribute and the money grows in a tax-sheltered account. On the flip side, when you retire and start taking the money out, every single penny is taxed as ordinary income. There are other tax-deferred investments that you can grow your money in. For example, all deferred annuities benefit from triple compounding. Capital gains on security investments are also taxed at a lower rate than your regular income. You can invest in a low-cost, tax-efficient index mutual fund or exchange-trade fund (ETF) and take advantage of earnings that would be mostly tax-deferred until withdrawn, and then enjoy the income later with only a small capital gains tax applied.
HAVE THE FUNDS AUTOMATICALLY DEDUCTED
A 2016 study done by Wells Fargo found that among the 1,200 people interviewed, those with a 401(k) had saved on average $87,000 as compared to the average $10,000 saved by those who had no access to a plan. Yet the biggest reason for the increased savings isn’t necessarily the investments themselves but rather it has to do with the power of automated investing. You don’t need a 401(k) plan to set up automatic investing. Hundreds of mutual-fund groups, advisors, and investment companies can set you up in growth funds designed to build wealth, complete with an automated amount that is withdrawn every month from either your paycheck or your bank account.
PUT YOUR MONEY WHERE YOU CAN’T TOUCH IT
Some companies have made it easier for people to access the money in their 401(k)s. The SEC recentlyissued a consumer alert warning against 401(k) debit cards that allow people to “charge” emergency expenses to their 401(k) account. Pulling money from 401(k) plans has its risks, and if you fail to pay back all of the money during the specified time period, there can be significant penalties and tax consequences. This is another reason why having an emergency fund is so important.The bottom line: you’re less likely to spend money that’s hard to access. That’s one reason money grows faster in a 401(k): you don’t even see the amount as part of your paycheck, and so you are not tempted to spend it. You can apply the same kind of discipline yourself. Choose to have your savings automatically deducted and put into accounts or investments that tie up your funds purposefully so that you won’t be tempted to spend it. Do you have questions about tax-deferred investments other than the 401(k)? We at Annuity Gator are here on standby, ready to help. If you’d like to talk with an advisor about retirement income planning without having to deal with a high-pressure sale’s agent, we’re happy to give you the facts.