Today we’re going to talk about what it takes to become a 403b or 401k multimillionaire. To many people, the idea of saving up $2 million or more through your employer retirement account might seem unrealistic. However, it’s actually much easier than it seems if you do the right things consistently over time. In today’s episode, we’ll explain what those right things are and share some of the wisdom behind them. We’ll break it down into four specific steps, or behaviors, to follow to get you on the right path. We’ll talk numbers in terms of ages and amounts you need to save, but also anecdotal evidence from our own experience working with clients who are 403b or 401k multimillionaires themselves, and some of the common behaviors we see from them. Join us!
Outline of this episode
- How saving is like growing a garden [1:15]
- Step 1: Start saving as early as possible [2:24]
- Step 2: Maxing out your 403b or 401k each year [6:03]
- Step 3: The right stocks-to-bonds mix for your comfort level [13:05]
- Step 4: Getting out of your own way [14:16]
- What these steps look like in practice [16:45]
Starting early to get compounding interest and growth working in your favor
The concept of compounding interest isn’t something everyone understands, so here are three different scenarios as an example. In the first scenario, you get an allowance of $25 per week for a full year. The second scenario is $15 a week and increases by $1 per week. The third scenario is starting with one penny of allowance but then it doubles each week. In which scenario will you end up with the most money?
Well, after 20 weeks, your total amounts would be as follows. In that first scenario of $25 a week, you’d have $500. In the second scenario where you started at $15 a week, you’d have $490. In the third scenario where you started with just one penny and the allowance doubled each week, you’d have $10,485, and as time passes, the more it compounds, the more scenario three would grow.
Taking advantage of “free money” through your employer match
Whether it’s a 403b or 401k, almost all employers offer some type of matching contribution for their retirement plan. That’s free money and by not taking advantage of it you’re working for less than your employer is offering to pay you, since you’re leaving some money on the table. It’s an immediate 100% or more return on your investment. You contribute a dollar and it immediately doubles, or triples, depending on the match. There’s no other place where you’ll find a guaranteed return that high.
When contributing to your 403b or 401k, at the bare minimum you should contribute enough to take full advantage of your employer’s matching program. But we always recommend that physicians not only contribute enough to receive the full employer match, but make the maximum allowable contribution to their 403b or 401k each year. These contribution limits tend to increase over time but for 2020, the maximum contribution is $19,500 for people under the age of 50 and $26,000 for people who are 50 or older, since the government allows you to make additional catch-up contributions as you get closer to retirement. Check out the episode for more tips on maximizing your retirement savings.
Avoid doing things that will undo your progress
Avoid tinkering with things over time – in other words, try to stay out of your own way. When it comes to managing your 403b or 401k, there are a number of different pitfalls you want to avoid, and we discuss a few of the biggest ones in this episode so be sure to check it out.
Resources & People Mentioned
- Download our guide: Toolkit for Optimizing Your Finances as an Employed Physician