Saving More Than Your 401k

Speaker 1 – 00:00
Welcome to EWA’s Fin-LYT podcast. EWA is a fee only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners
of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And
we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your
family and also save time. Welcome everyone. James and I today are excited to talk about how much to save
outside of your 401k, specifically if you’re a high income earner. So Jameson, break it down. You know, a lot of
people think if they max out their 401k that’s enough for retirement and then kind of spend the rest. But just give us
some quick math on why this isn’t the case.
Speaker 2 – 00:46
Yeah, I mean if you’re, we’ll say what we’re just going to say high income earner, 500,000 a year or more.
Speaker 1 – 00:51
Yeah.
Speaker 2 – 00:54
The max you can put into 401k. If your salary deferrals, if you’re under the age of 50 is 23,500, you’re getting an
employer match. Maybe your spouse can do the same thing. If you’re really lucky and you can put more under 401k,
you can get a total of 70,000 a year into it. But even if you do that and get the full 70, yeah. It’s not going to be even
close to enough. So let’s just do a quick interest calculator. If you took $70,000 a year, how.
Speaker 1 – 01:23
Did you choose $70,000? That’s the full 415c limit with your deferral plus the match. And plus let’s assume that
there’s a mega backdoor Roth component to that as well.
Speaker 2 – 01:32
Yeah. And let’s say you did that for 20 years. That’s $1.4 million over 20 years. And to safe withdrawal rate would be
40, 50 grand a year. Ish.
Speaker 1 – 01:47
Yeah.
Speaker 2 – 01:48
And so if you’re used to making 500, that’s, you know, not even close.
Speaker 1 – 01:51
Yeah. So 500,000 or more, I mean you’re taking home about 23,000amonth in the state of Pennsylvania. Could be a
little bit more, a little bit less depending on if you live in a state without taxes. State tax, but you know, generally
speaking you’re going to, we hear all the time like 60 or 80% of your net take home will be enough to retire. We don’t
find that’s the case at all because we know life’s like a, money’s like a temperature gauge and it’s going to go up the
more you spend. So sure, when your student loans paid off, your kids are out of the house, you may have, you know,
less expenses. But unless you’re saving that money, that’s going to find a way to disappear pretty quickly. So that’s
why we recommend a concept called reverse budgeting. But lifestyle group’s a huge thing.
Speaker 1 – 02:32
But if you so Hypothetically at that $500,000 income range, most of the time when we analyze budgets, you know,
the 23,000amonth after the maxing out the 401k, usually they’re spending, you know, somewhere between 15 to
16,000amonth and you know, fixed and variable cost. And so when we go to replicate that in retirement, let’s just
round that up to $200,000 a year. You’re really going to need about 5 to 6 million dollars of liquid assets to replicate
that lifestyle and adjust it for inflation and use a safe withdrawal rate, whether that’s the 4% or using a guardrail rate,
which could, you know, fluctuate between 3 to 6%. And so the importance depending on where you start.
Speaker 1 – 03:20
Because even if you started at the age of 30 and you were maxing out the elective deferral because a lot of
companies don’t have the ability to make it back to Roth. So let’s say you were doing the 23,500 plus getting a match
of 3%. So just doing some really quick math. So 3% of 500 would be 15. But quick catch on that you only get 3% of
the IRS limit. So they cap you at I think 345 this year. So that’s really only, you know, about 13,000 plus what you’re
putting in. So all in all, it’s about 3,000amonth that you’d be putting in. Let’s say you start at the rate ripe young age of
age 30. You do that for, you know, 35 years. That’s about 4.9 to $5 million. But if that’s all pre tax safe withdrawal rate
on that’s 200.
Speaker 1 – 04:09
But after taxes you’re talking about 150. So you still have a 50 or 60 thousand dollars gap to address. So Jameson,
give us some examples of how we do. You know, how would you recommend someone saving outside of their 401k
to make sure that they’re on track for financial independence? By the way, that was age 65. A lot of high income
earners want to retire a lot sooner.
Speaker 2 – 04:28
Yeah, and you can’t touch your 65 account till 59 and a half. So you want some flexibility. But Yeah, I mean 401k I
guess what’s order of operations here? 401k would be you know, first place and then a backdoor Roth IRA if you
have that ability, 7,000 a person if you’re under the age of 50, married couple, you get 14,000 a year into it. And then
from there, I mean health savings account would be one option. You get a tax deduction, grows tax free, takes it all,
you get it pulled out tax free for health expenses. That’s. What’s the limit this year? 85 or 80, 83.50 I think. Yeah,
somewhere in that range. And then from there 529s. If you’re saving for college, that’s obviously not going to be
retirement geared.
Speaker 2 – 05:14
And then from there everything really has to funnel into what’s called non qualified accounts, which would be your
brokerage account, just like a stock account, cash in a bank account, anything that’s outside of those tax favored
accounts. So the reality for most high income earners is you are going to max out all these taxidered accounts,
there’s limits on them and you’re making way more money than that. And so most of your money is going to
accumulate in a non qualified taxable investment account.
Speaker 1 – 05:41
Yeah, no question. So in order of importance I would say, you know, if you have a 401k, you’re in high income earner,
forego the tax savings, get the Roth elective deferral, put the 23, 500 in the Roth 401k at least put in the free money.
So if you have to put in 6% to get 3% match through that 6% the Roth, then max out backdoor Roths. Then if there’s
extra money go back and max out your 401k to the 23,500. So now you’re four one, your Roth 401k and backdoor
Roths are maxed out. You’re getting that pre tax match put in there. The next order of importance I would say is Duke
the mega backdoor Roth. So you can go all the way up to that 70,000 or 69,000 in 2025.
Speaker 1 – 06:26
So figure out the difference between your elective Deferral of the 23, 5 plus the match and put in the difference that
mega backdoor off. Then outside of that max out the health savings account and then after that you know, start
saving in that brokerage account and specifically in the brokerage account. Direct indexing is a good platform. If
you’re in a high income earner, you’re just investing in mutual funds or ETFs. You’re not to pay a capital gain tax
whenever you need that money. With direct indexing you can tax loss, harvest within the individual stocks and erase
a lot of that tax liability. So that’s a great strategy for money outside of your 401k.
Speaker 1 – 07:01
So in that example, the I think it’s important, you know, to realize most likely you’re not going to be a high income
earner until you’re, you know, late 20s or 30s. And so we have a shorter Runway and usually a high income earner
means you’re in a job that typically has higher stress. So you’re typically thinking of, you know, getting to that point
where you’re working because you want to, not because you have to as quickly as possible. So we talked to a lot of
people over half a million dollars. I mean I would say on average they want to be financially secure by 55. It doesn’t
mean they’re going to retire by 55, but they won’t have that optionality to walk away by 55.
Speaker 1 – 07:40
So then we’re really talking about, you know, making sure they’re saving about 40 to 50% of their take home pay to
get that on for sure. And that does two things. One, it forces a lower lifestyle so when they retire they have less
money to replicate. And the second thing is it allows them to save, you know, to really inject like steroids into their
plan because they’re saving so much earlier and then they have the compounding interest overgrowth. I found like
these dials can happen so quickly. I, I was, you know, talking to a business owner. We had a initially planned on his
family retiring off 8,000amonth. And you know, at that point he was taking home like about 300,000. He was very
disciplined. Well, fast forward seven years. This advantage of owning your own tech company.
Speaker 1 – 08:28
He was bringing home about 3 million a year. And so were like, well what are you spending? He’s like, well I think, you
know, maybe we could double it. And we analyzed spending and it was close to, you know, 30,000amonth. So almost
four times the initial. So the initial plan was to get to, you know, $3 million of net worth to be financially secure. That
now turned into nearly $10 million of liquid net worth he needed and he wanted to do that in accelerated manner in
his mid-40s. So if we hadn’t had that conversation, what we Found is, you know, whatever doesn’t get saved typically
gets spent or it gets allocated to some crazy thing.
Speaker 1 – 09:05
Whether that’s a vacation house, a private investment or you know, typically if you’re an entrepreneur, business, it’s,
you have a new idea, a million miles a second and it’s like, okay, put here and. But having a consistent plan in place
and that’s often it needs to be revisited so much to be calibrated because just one a thousand a month of spending
that could greatly affect your nest egg number by the time you want to be financially secure. So it’s really important
to keep that dial up and keep that temperature gauge in place between what you’re spending versus saving. What
are your other thoughts on that?
Speaker 2 – 09:43
Yeah, no, I think that’s spot on. I would say overall, I mean anywhere between 20 to 30% of your gross income should
be the savings target. And then like you said, if you want to accelerate financial independence, could be closer to 40
to 50. And you’re not just simply not going to be able to accomplish that only through a retirement account or
retirement vehicles. There’s going to have to be brokerage accounts, other things that you know you’re going to be
able to have to save into.
Speaker 1 – 10:10
Yeah, no question. And a lot of people look at their net worth and like they’re typically like a lifestyle, like their house.
A lot of people, I think it’s a big mistake, say, oh, I’m going to downsize my house. Most of the time when we’ve seen
people sell their houses, they’re usually, even if they’re downsizing, they’re taking the proceeds and it’s pretty much
going to the new house, furniture upgrades, whatever. I wouldn’t count on a downsize of your house by the time you
retire as a way, as a part of your plan, if that makes sense. How often have you seen someone downsize their house
and actually invest some of that money? I can think of like one example in the past 10 years.
Speaker 2 – 10:49
None that I can think of that actually save the money. It usually just goes into the next house. And even a downsize
might be like you get into your 60s, 70s and you want like a one where you don’t have to go up steps like it’s a one
floor house or you know, house in a base or one floor basement and it’s probably just as expensive or more because
now you want like luxury things in the house and you want it to be nice. And so you sure may be a downsize, but the
net cost is probably the same price as the house you’re in now.
Speaker 1 – 11:20
I think humans, we can be very competitive. You have to have a plan in place to make sure that you’re saving with a
purpose, not just for the sake of accumulating to accumulate. But what do you think a good number is to have
saved? Let’s just say by the time you’re in your 30s, to be in like the top 5% of net worth in America. What do you
think you need between like 30 to 39%? Yeah.
Speaker 2 – 11:41
Would you say 30 to 30?
Speaker 1 – 11:43
Just say in your 30s.
Speaker 2 – 11:44
So 30 to 39.5% is a big variant. So I’m going to say like a couple hundred thousand dollars.
Speaker 1 – 11:57
The top 5% between 30, 39 would be 1.1 million, 40 to 49, two and a half million, 50 to 59, 5 million and then 60 to
69, about.
Speaker 2 – 12:08
I thought those numbers would be 7 million, like 1 or 2%. Interesting.
Speaker 1 – 12:11
Yeah. So I. And even like the, like, looking at. I think it’s important to have those metrics in mind. So there’s
accountability because as humans, we can always say, oh, I’m. That my stocks are going to vest or my RSUs are
going to vest, or my business is going to sell or. And maybe that is the case. But I also think that you need to have
the discipline to create that liquidity, irregardless of what happens with those events that you have in the back of
your mind, kind of as of the backup plan. Because a lot of times those backup plans stay as backup plans and they
don’t actually happen.
Speaker 2 – 12:46
I had a business owner just tell me this a week or two ago. He said, I don’t care about what the piece of paper says
my balance sheet is. He said, all I care about with people’s net worth is if you need to get cash tomorrow, what is
that number?
Speaker 1 – 13:00
That’s a good. I love that. Yeah.
Speaker 2 – 13:01
He said, too many people talk about all this fake stuff on the balance sheet. Business is going to sell or this
investment’s going to hit. It’s like, no, what do you have liquid that you could put on the table tomorrow if you needed
it? It’s true.
Speaker 1 – 13:13
Yeah. No question. Well, on top of. So I would say, you know, generally speaking, for someone in their. Let’s just say
someone wants to spend like 15,000amonth right now and they’re retiring. Generally speaking, with Social Security, I
would target. You would want a net worth, a liquid net worth between two and a half to three and a half million. But if
you’re in your 30s right now and thinking, what do I need to kind of replicate a good lifestyle? If you’re, you know, half
a million dollar income earner around that, you’re going to need almost double that. You’re going to need between 5
to 7 million dollars because of inflation and other factors that are going to come into play.
Speaker 1 – 13:59
So when we used to, you know, here when were growing up, I don’t know if you ever heard like, oh, you need a million
dollars in your set for retirement. Now we’re six or seven times that.
Speaker 2 – 14:08
Oh yeah, a million dollars.
Speaker 1 – 14:10
I mean it’s a lot of money. But for if you’re high net worth.
Speaker 2 – 14:14
Yeah.
Speaker 1 – 14:15
High income earner doesn’t go as far.
Speaker 2 – 14:17
As it used to. How about.
Speaker 1 – 14:18
That’s a good way to put it. Absolutely. Yeah. You just have, you’re going to have to adjust your, those old sayings
and those, and calibrate appropriately.
Speaker 2 – 14:26
Yeah.
Speaker 1 – 14:26
So. Okay, well, other things. So I think the important part is this can change so quickly based upon your income
going up. And if you set a stagnant plan of I’m saving this and your income goes up and it’s, you spend the
difference, you could find yourself halfway on track if you wake up at 65. So you got to constantly update and review
your plan. And then also from a tax perspective, you have to diversify and don’t just put all your money in a
environment that’s going to save you taxes. Now you have to think about the end game in mind. And that’s why we’re
huge believers in Roth. Most people that are high income earners value high autonomy and have a high autonomy. It
means every aspect of your life.
Speaker 1 – 15:07
You don’t want to have things dictated on you like a pre tax 401k where the government’s telling you to take it out
every year. You want to have the ability to decide, I’m going to take this because I want it when I want it, with no tax
consequences, etc. And you do that through Roth. You do that through direct indexing, you do that through, you
know, the HSA, etc. So any closing thoughts on the importance of saving outside of your 401k? Jameson?
Speaker 2 – 15:32
No, just save outside your 401k. Don’t rely on just your 401k.
Speaker 1 – 15:38
So I’m gonna ask Rapid Fire to see how quickly your brain works. So someone’s making 300 grand, they’re putting in
23,500 of the 401k, what. What would you sit. They’re in their 30s. What do you think a healthy amount is to be
saving in a brokerage account?
Speaker 2 – 15:52
They’re making how much?
Speaker 1 – 15:53
300 grand.
Speaker 2 – 15:59
It depends on spending 2,3000amonth.
Speaker 1 – 16:03
Okay, let’s adjust that to half a million bucks. They’re maxing out their four. There’s the 23, 500. They don’t have the
mega back to Roth.
Speaker 2 – 16:09
There’s variables here. Kids, a lot of student loans, of course.
Speaker 1 – 16:12
Yeah, of course. But what’s the minimum healthy number?
Speaker 2 – 16:16
Probably five a month.
Speaker 1 – 16:18
Five a month. Okay. Yeah, yeah. I’d say most of our clients, you know, would be saving like 5 to 20amonth in a
brokerage account because they’ve. They’ve maxed out all those other avenues, and that’s the excess. And I think
the most important part of saving in a brokerage account also is not just the fact that you have liquid available
money. Not no penalties before 59 a half. It controls the temperature gauge. Because if you don’t save that
5,000amonth, that’s a huge difference when you go to retire and you’re used to spending that 5. Wanted to edit out
that sneeze. It’s a huge difference in someone that’s saving that 5,000amonth that allows you to be so flexible. And
as you go in your 40s, maybe you do want to buy a second house, you can shut that off and send that payment
somewhere else.
Speaker 1 – 17:19
So saving that brokerage account, it not just gives you extra financial stability in the long run, it gives you extra
financial flexibility in the short run, which we’ve seen come to use all the time and the financial plans that we’ve
helped clients through. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as
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