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Flip of a Coin: How I Decided to Own A $250K 401(K) Vs A $250k Mortgage

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House, Garage, Driveway, Architecture

This is not a post for the faint of heart. So some of you out there may need to do what you did when the nurse swabbed your arm with alcohol right before she gave you the Covid-19 shot, turn your head away and close your eyes!

It was years ago, but I had to make a call. I had to make an executive decision. Would I like to buy a $250,000 home or become a 401(k) Quarter of a Millionaire.

It was almost like flipping a coin. Do you choose heads or tails?

Heads and be a $250k homeowner.

By the way, home values over 30 years have risen about 4% on average but stocks have been able to return 10% over that same time period.

Now back to the coin toss.

Tails and have $250k, that’s right a quarter of a million bucks, in your 401(k).

I chose not to go with the path of least resistance, which is the American dream of being a homeowner, and to put my money in stocks. Best decision I ever made.

After watching the housing crash or 2008-09, it dawned on me to put some money into businesses that pay you dividends instead of a mortgage that you have to pay. Missing even a single payment on a mortgage and never being able to catch up could put you on the short list to foreclosure. Nobody wants that.

Fast forward 10 years later and Covid-19 is not only derailing retirement savings but also increasing the likelihood that many renters will be evicted.

According to CNBC, 20% of renters in America are behind on rent and owe an astounding $57.3 billion. The average amount owed by each renter is $6,000 and they are a minimum of three months behind.

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Once you get that far in arrears, rental companies and landlords are quick to start the eviction process.

Especially, mom and pop landlords that cannot afford the losses. They depend on this income to pay their own bills and fund their retirements. I knew after watching millions of Americans lose their homes to foreclosure in 2009 that I did not want to be in that predicament.

Therefore, I made the conscious decision to keep fixed low housing costs and to put my money into stocks. I put my money into index funds because they consist of thousands of stocks. All those businesses are not going to go bankrupt at the same time so it gives your money some security as opposed to putting all your money in one stock and then you lose everything.

The S&P 500 and other indexes will remove any stock that is not meeting its standards. Therefore, you do not have to do this on your own with stock picking. This also insures that your money stays invested in firms with a good balance sheet as the ones that are not pulling their weight are dropped from the index. Thus, you do not lose all your money as you would being invested with only one stock or placing your bets in speculative investments like cryptocurrency and bitcoin.

I actually know someone who says they invested all their money in bitcoin and lost all of their money! What were they thinking? If you are going to invest in bitcoin, then it with money, you can afford to lose and only invest more than 5% of your savings. That is all the risk that is adequate with bitcoin, in my opinion.

Not enough to money to become a bitcoin millionaire, but also not enough to lose your life savings, your home and all your possession in case you bet the farm on a losing investment.

Let us learn from the recently deceased creator of McAfee software founder who invested $25 million in Lehman Brothers bonds and lost every penny after they collapsed and went bankrupt in 2008.

You can read more about the demise of Lehman Brothers in my post called Don’t Trust the Commission-Based Advisor in Wall St Cubicle 23

I decided to just put my money into the VTSAX because it includes the total stock market. Want some Tesla stock? Drop some money in the VTSAX. It will only cost you $107.

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Instead of buying stocks one by one, you can just get them all for one price. That way you do not have to pay $685 for one share of Tesla.

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Don’t even get me started on the S&P 500. One share in this stock will set you back $4,267.

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If you have that kind of money just burning a hole in your pocket, then be my guest and buy some. However, if you want a piece of the whole market then just start buying the VTSAX.

I sleep like a baby knowing that my money just can’t fall to zero because the every stock in the fund will not blow up overnight. Even if businesses tank, the fund will correct this by replacing them with a better stock, and I still keep making my money.

I think of it like this, a home you have to feed but your 401(k) feeds you.

As a homeowner, you cannot realize gains until you sell. Therefore, you must feed the beast until you do!

take my money gif - Flywheel Coworking

Considering that most American homeowners only stay in their homes for an average of 9 years, all the money spent on maintenance and repairs is burnt if you are foreclosed on. However, according to Fidelity, many 401(k) millionaires keep their accounts for open for 20-30 years to amass that type of fortune. That means people are holding on to stocks longer than homes!

Therefore, on my path to millionaire status, I decided to go for stocks over real estate. Don’t get me wrong, you can make a fortune in real estate, but you have to maintain the property until you sell. I can make my fortune in index funds simply by breathing and automatic investing.

Seeing and listening to the stress of homeownership versus the ease of index investing I think I made a good choice going with stocks. My low housing costs allow me to invest more. This also allows you to pay off debt faster and travel more. However, it is always your call. This is just my 2 cents.

I mean who wouldn’t want to be a Quarter of a Millionaire. I’ll take that any day of the week over being broke!

And just so you know, if you let that money sit and ride it out in the market, you would have $1,000,000 in 14.5 years with a 10% return. That is without adding another cent.

How many homes that were bought for $250k do you think will be worth one million in the same amount of time? None.

I have no problem at all with being a 401(k) millionaire. None whatsoever!

Financial Freedom

How I became a 401(k) Quarter of a millionaire

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I remember it like it was yesterday. I was just starting out and knew I needed to look into saving for my future. I was beginning at ground zero with $0 saved for retirement.

This was in line with the average 401(k) balance for a young person starting out in their 20s. My employer was offering 50% for every dollar we contributed up to 6% of our salary. I was all set to start making some moves into investing for my future so I got started right away. Then boom! Barely into starting out on my journey, the housing market crashed in 2008.

The Great Recession rolled in and people were losing homes and jobs left and right. I got my pink slip in 2009. I felt like I had just put $2 in my account. Not only did I lose my job, but also my employer contributions including thousands of dollars due to the fact you had to be an employee for 5 years to be fully vested. I was discouraged, but not defeated.

I always keep an up to date resume so I started sending it out. It took months, but I finally got a new gig that allowed me to be 100% vested from Day 1. This has helped me grow my nest age from $6,500 in 2010 to past a quarter of a million ($250,000) over a fairly short time later thanks to a raging stock market!

Total Vanguard Assets beginning from 2010

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After I read a Fidelity report that stated 401(k) millionaires are on the rise, I figured I could be one of them too.

Retirement Savings Balances, Numbers Of Fidelity Investments 401k And IRA Millionaires Set Records | Investor's Business Daily

According to numerous financial pundits, it is recommended that you even need a minimum of $1 million to retire.

The Latest 401(k) Balance By Age Versus The Recommended Amount

First, I had to get to $100k and that put me on the path to eventually passing the $250,000 mark. So you see, you have to have a goal. This is what I did to make it happen.

1) Set a goal

You can’t get anywhere without first knowing where you want to go. Therefore, I set a goal for myself of $100,000. I did this because after doing some research, I found that the first $100k is the hardest.

However, once you reach this milestone you can stop contributing completely to your 401(k) and still become a millionaire in 30 years without adding another penny.

As long as the stock market continues what it has done over the last 40 years (1980-2020), then you can expect returns of 10% a year. This will get you where you want to go over the long term. I’ll show you.

In 2012, I had $25,000 invested and by 2015, I reached my goal of $100,000. I have more than doubled my money since that time. You see how much faster your retirement accounts go up once you reach $100k. That money is doing all the heavy lifting for me.

It can take 5-10 years to reach the first $100k, but the next $100k may take only 3 years. Therefore, every year the next $100k takes less time.

Why Saving Your First $100k is a Big Deal - Four Pillar Freedom
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2) Cut expenses

I learned about house hacking from listening to a podcast on Bigger Pockets years ago. House hacking allows you to cut your housing expenses by 25% or more. Basically, you rent out your property and decrease your mortgage payment by having renters and becoming a landlord.

The other thing you can do is move to a less expensive location in order to save and invest the difference. You can also do this with a partner or roommate as you will have shared expenses that lower your living expenses.

I got my expenses down very low which allowed me to go from a savings rate of $1 to $5 dollars a day or 3% of my income to eventually working my way up to saving and investing 40% of my income.

Around 2013, my savings rate was 15%. Then it went to 25% in 2015. And I got it to around 40% by 2018.

I would incrementally increase my savings rate by 1% a month or a year depending on what I had going on. This is one of the best ways to give yourself a raise without feeling like you are being deprived.

Confessions of a Shopaholic: How to Stop Impulse Buying! – THE FASHION HALL

Sacrificing when you are young and loose like a mongoose is best. Limiting your expenses during the lean years are well worth it.

Consider this. According to Vanguard, while the average 401(k) savings balance is over $100,000, the median account balance is much less at $25,775.

Age Average 401(k) balanceMedian 401(k) balance
Under 25$5,419$1,817
25 to 34$26,839$10,402
35 to 44$72,578$26,188
45 to 54$135,777$46,363
55 to 64$197,322$69,097
65 and up$216,720$64,548
Source: How America Saves 2020

3) Pay off debt

There was a time I was paying $448.65 a month for a car payment. I also had a $20,000 personal loan at $333 a month. Talk about a money suck!

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This was draining my ability to save more. Once I got those items paid off, I started redirecting that money to my savings and investments.

That allowed me to put money into an emergency fund, brokerage account, 401(k) and my Roth IRA.

4) Start an emergency fund

The only way to stay out of debt is to have money in the bank so you will not need credit in the first place. Access to credit can become a nightmare when you have to start paying a large percentage of your income toward managing it. Therefore, I found a good number to start with is $1,000.

Then I worked my way up to $5,000. Again, I moved this number up to $10,000.

My personal suggestion is for people to have at least a minimum 3-6 month emergency fund. You can keep the credit card debt off you, if you can have money set aside for car and home repairs that tend to pop up at exactly the wrong time.

5) Be consistent

No matter what, I made sure to put money in my retirement accounts . If the choice was between having fun on a vacation or saving $10,000 first, I choose to save. Responsibility first, fun later. That is what my dad always used to say.

I save and pay myself first before doing anything else. That includes paying the rent! After my 401(k) and Roth IRA contributions are made, then I pay the bills.

6) Keep increasing your income

I increased my income through both annual cost of living increases, asking for and receiving pay raises, or getting a promotion. I was able to increase my income by 50% from my early 20s.

Every time I earned more money, I increased my contributions. However, please know that income is not enough alone to build wealth. It’s what you save. Notice the Vanguard chart below shows that higher income does not correlate with a higher 401(k) balance.

Annual income Average 401(k) balanceMedian 401(k) balance
Less than $15,000$8,260$1,356
$15,000 to $29,999$13,069$4,020
$30,000 to $49,999$29,740$10,439
$50,000 to $74,999$66,033$27,630
$75,000 to $99,999$113,143$54,020
$100,000 to $149,999$177,597$91,470
$150,000 and above$298,851$154,989

7) Live on cash

I know you hear this all the time, but cash is king and it is best to stay away from plastic. Debt just weighs you down. That money could be put to work for you in Mr. Market.

America likes to reward investors and shareholders by paying dividends. The more you invest the more you earn. Without doing any additional work, you are making money from income you already earned years ago. That is truly how you work smarter and not harder.

8) Invest in growth stocks

I started with a few thousand bucks and put it into Amazon and Apple back in May 2013. You can see from below that was the prices they were selling for back then. Amazon was going for $258 a share.

AMAZON.COM INCBuy5.0000$258.84
APPLE INCBuy3.0000$463.66

After investing more with both companies, as you should not only buy the product but the stock as well, the stock splits and appreciation has caused my investments to go up. I remember being amazed that Amazon had gone up to almost $2k a share. I even took a picture of it. Cause you know, seeing is believing. Back then it was going for $1,897 a share.

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Amazon is now $3,300 a share! That is inching closer to the S&P 500 price of $4,000. Keep in mind the S&P 500 is made up of over 500 stocks.

Amazon is just one company. Its evaluation is pushing closer to what the evaluation is for 500 companies. Amazing! That is when I learned growth stocks can make you rich.

9) Invest in index funds

I invest with Vanguard because they have the lowest expense ratios I have seen. You can invest in the VITSX or VTSAX and get a low expense ration of around 0.003% and 0.04%, respectively.

The goal is to keep maintenance costs low as this will eat into your money later when you take those required monthly distributions (RMD) .

That is a good reason open up a Roth.

10) Have a Roth IRA

The Roth has no RMDs. You can let it ride forever or whenever you do take money out it is tax-free. Instead of paying interest on distributions with your 401(k), you could get access to them for free with a Roth.

If you are unable to do a Roth due to income limitations, then you can do a backdoor Roth. This allows you to convert your 401(k) into a Roth with a conversion ladder. Due to the Roth allowing you to make after-tax contributions, this is the superior investment vehicle.

Find a way to get one and watch that money go in after-tax and come out tax-free because you have already paid taxes on it.

And there you have it folks.

As of this writing, I have continued to watch my investments go up and continue to invest regularly. It has been awesome to watch my money grow. It has been very rewarding making those early sacrifices in exchange for building more wealth.

I have more money and freedom than I have ever had. All the sacrifice was worth it in the end.

My next money goal is 401(k) millionaire.

Keeping track of my net worth, investment portfolio, spending habits and increasing my savings have all helped me get here.

So my advice to you all is to keep stacking that dough.