As I sit down and meet with new clients or review my existing clients’ net worth, inevitably one of their largest assets is their 401k. In fact, other than business owners who may have earned most of their wealth perhaps from the sale of a business, at least 50% of most client assets are held in 401k’s or IRAs that resulted from old 401k’s rolled over into those IRAs.

Why do 401k’s work so well, and how much more wealth would clients enjoy if they applied those same principles to their other investment accounts?
Here are 4 principles that apply to 401k’s that investors should apply to all their investment accounts:

  1. Contributions to 401k’s are automated.
    • Clients are adding to their wealth with each and every paycheck.
    • Instead of investing what’s left over, clients are investing first, then living off what’s left over.
  2. Trading in 401k’s is typically limited.
    • Unlike other investment accounts, there are restrictions against “trading” within the account.
    • Instead of attempting to “beat” the market by picking individual stocks and/or through timing the markets, clients work with the long term upward trend of equity markets through a more disciplined and  appropriate allocation strategy.
  3. 401k’s are designated for a specific purpose.
    • It is easier for clients to visualize and allocated specific accounts for specific needs.
    • By definition, 401k’s are clearly designated for their future retirement.
  4. There are penalties for distributions from 401k’s.
    • In an effort to restrict and discourage using 401k assets for anything other than retirement, with a few exceptions, early withdrawal penalties apply to distributions prior to 59 ½.

Our clients who take a similar approach with their taxable investment accounts as those principles highlighted above associated with 401k’s are able to enjoy a more balanced net worth of non-qualified and qualified assets which in turn provides them more tax efficient and tax flexible retirement income strategies.

Imagine how much more wealth you can create and enjoy if you applied the principles above to your taxable investment/brokerage accounts in addition to your 401k.