Maximizing your 401K each year after we are Debt Free is one of the rules and action steps that we teach our boys for them to head towards their Financial Freedom goals. It is Action Step 9 in our 10 action steps to Financial Freedom.
Action Step 9 is to maximize their Retirement Savings and Investments up to 25 times their expenses. There have been many examples that if you have 25 times your expenses and take out a 4% withdrawal a year it could last them the rest of their lives. Check with your Professional Advisor on what the maximum is that you can Invest this year in your 401K and IRA.
We want them to have their Emergency Fund fully funded and also be completely Debt Free before maxing out their 401K and IRA accounts each year. It is such a great feeling being Debt Free for us. It makes things less stressful when we are Debt Free.
Investopedia said “if you have both a Roth 401(k) plan and a Roth IRA, your total annual contribution for all accounts in 2020 has a combined limit of $25,500 ($19,500 Roth 401(k) contribution + $6,000 Roth IRA contribution) or $33,000 if you are 50 or older ($19,500 Roth 401(k) contribution + $6,500 catch-up contribution + $6,000 Roth IRA contribution + $1,000 catch-up contribution).” For you fact checkers you can see the link in the below show notes.
As always, I am not giving you any Financial Advice and you should seek advice from your Professional Advisors to see what is best for your situation. See my Disclaimer at MillsWay.com. This is for entertainment only.
With our boys let’s say their expenses are running $40,000 a year currently then we would have them shoot for $1,000,000 in their 401K plans. This isn’t including their Emergency fund money and any of their Passive Income Streams.
If they do a 4% withdraw of the amount of money, they have in their 401K at retirement time they should have a great chance of the money lasting them the rest of their life time. Of course, things can happen and they could end up spending more than the 4% withdraw. Some people believe in 3% draws and of course that would be even better for them.
We teach our boys constantly about creating Passive Income Streams so they could have the choice to retire early if they wanted to someday. We encourage them to develop at least three forms of passive income and build them up. If they ended up with ten streams of income even better as long as they all add up to replacing their current incomes.
With the Passive Income streams, you may be saying that they don’t need to maximize their 401K and IRA accounts. You could be right but why not use the tax advantages of the retirement accounts and maximize your contributions each year you can? We invest our retirement funds into Roth Accounts so we have the money growing tax free, they have no minimum withdraw after age 70 and we won’t pay the tax on the money later in life at the higher values.
With our Roth Retirement funds if we never have to touch them then great for us and we have even more choices on if we want to donate more of it to charity or to leave our Kids and future possible grandkids if our kids ever get married. LOL
We hope to have the following Passive Income Streams at least when Darlene retires;
- Dividend Stocks.
- REIT Investments.
- Real Estate Investments with Capital Investment Company.
- Darlene’s Pension Check.
- Book and CD’s royalties.
- Business Income from Online Commissions.
- Possible Other Business Investments.
Then the whip cream and cherry on top would be if we ever get any money from Social Security. We plan on waiting till age 70 to start to withdraw from Social Security.
We hope our boys will learn from our examples and continue to do them when they are adults and living on their own. One of my dreams is that our kids will all reach Financial Freedom at a young age. We constantly talk to them about having Passive Income streams and investing in Assets not Liabilities. We also have encouraging signs up around our house to help remind them the lessons we keep teaching them.
Here are some positive quotes I like;
“Get your Money to Work for You… As hard as You Work for it.” By Napoleon Hill
“1. Make Money. 2. Use the Money to Make More Money. 3. Repeat the Process.” By Warren Buffett
“There is no way to happiness; happiness is the Path.” By Buddha
“Change Your Thoughts – Change Your Life” by Wayne W. Dyer
Let me know your thoughts about this blog and let me know of others you would like me to do in the future. I feel we can all learn from each other. That is why I am in the helping people retire early, enjoy life more and be more successful. Also, please see my Disclaimer page.
Don’t give up on your dreams; don’t let others talk you out of your dreams. Make your dreams happen. Make it happen today.
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Sources and Resources from Podcast (Available in Show Notes)
- 2020 401K Limits by https://www.investopedia.com/ask/answers/102714/what-are-roth-401k-contribution-limits.asp
- 4% Withdraw Chart “Portfolio Success Rates: Where to Draw the Line” 10/25/19 by Philip L. Cooney, Ph.D.; Carl M Hubbard, Ph.D.; and Daniel T Walz, Ph.D. https://www.onefpa.org/journal/pages/Portfolio%20Success%20Rates%Where%20yo%20Draw%20the%20Line.aspx