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401(k) Accounts - How We Invested in Them To Achieve Financial Independence & Retire Early

The Best Ways To Invest In Your 401k

Today we’re going to talk about the most effective ways to invest in your retirement accounts. And by doing that I’m going to share how Amon and I invest in our 401k, to give you some food for thought and hopefully help you improve how you are investing your retirement funds.

Do You Have An Employee-Sponsored Retirement Account?

This is the first question we pose when someone asks us for investing advice. Do you have a 401k, or a 401B, or a 457 account? And if so, does your employer match your contributions?

The 401k is a retirement account established in 1978 and is often called an employer-sponsored plan. That’s because only your employer can decide who contributes to a 401k, how much the employer contributes, investment options, and the brokerage company holding the account. Sometimes, they even decide if and when you can borrow or withdraw money from your account.

Basically, your employer has the most control over your account and its investments. Sadly, this could mean you end up with a “bad” 401k. It all depends.

Amon and I have been fortunate enough to work for the federal government, so we have the TSP or Thrift Savings Plan. This is essentially a 401k for federal employees.

Why The 401k Is A Great Place To Start

Your 401k is a great place to start investing for a number of reasons.

1. Employer Contributions

When you start contributing to a 402k, your employer agrees to “match” a certain percentage of your own contributions. For us, our employer matched our first 5% of contributions. Not all employers will, but for those who do, it’s guaranteed free money.

2. Tax Advantages

Placing pre-tax money in your 401k reduces your taxable income, and it continues to grow in your 401k tax-free. The capital gains and dividends in your account are untaxed, and instead, the money in your 401k is simply taxed at your normal income tax rate.

When it’s time to withdraw money from your account, you are in control of how much you can withdraw, thereby controlling how much of your money will be taxed.

3. The Ultimate Long-Term Investing Account

With a 401k, you can be aggressive with your contributions - after all, you have decades to grow your investments. You won’t need the money for a long time, so we always choose to invest aggressively.

This means that your portfolio can fluctuate, but with a 401k your money is automatically taken from your paycheck and put in your account. Regardless of fluctuations, those deductions result in dollar-cost averaging.

Dollar-cost averaging is great for investing because it means the deductions from your paycheck are instantly being invested into the stock market. This is automated investing, which means you’re capturing the average return of the market, which has always been positive if you look at any stock market chart.

Different Types Of Investments With 401k

With a 401k, people typically invest in actively managed mutual funds, index funds, and target-date funds. But some employment plans allow you to invest in individual stocks and EFTs.

And because your employer chooses the brokerage company that manages your 401k, which will change how you invest. A 401k account with Vanguard, for example, means you’ll have low fees and low expense ratios tied to your investments.

Fees can really affect the growth of your investments. You should always be aware of the brokerage account your account is associated with, and the fees they charge.

Index Funds

Though there are many investment options, I want to talk about index funds. A 401k allows you to invest in low-cost index funds, which is exactly what we did with our 401k.

With a 401k you can typically invest in:

● Bond index fund

● SP 500 index fund

● A small-cap index fund

● International index fund

● Target date funds, which is a combination of the above

We had all of these options, but how did we invest?

Because we took an aggressive approach with our 401k, we did not invest in bonds or bond index funds. Most people like to invest in bonds as a means of diversification and protection against market fluctuation, but we knew we would keep our funds in the 401k for the long term.

That leaves us with three options - SP 500, small-cap and international. And with a 401k you can allocate investments between all three, or you can do what we did.

Amon and I chose to invest in the SP 500 index fund only. We usually want to invest in a total stock market index fund, but we already do that in our brokerage account and Roth IRA. So we decided to keep it simple by investing in one fund.

This may differ from how people traditionally invest, as we do consider our separate brokerage accounts when investing in our 401k. Obviously, if you’re only investing in a 401k then your investments will likely look very different from ours.

But the main point is to make sure your 401k investments align with your overall financial goals, and that you are investing consistently.

Target-Date Funds

This is going to be short. Because personally, we aren’t fans of target-date funds. Even the most aggressive target-date funds have you investing in bonds. And as I mentioned, bonds are not a part of our 401k investing plan. If you’d like to learn more about target-date funds, you can read/watch more here: Target Date Funds | Are They A Good Investment?

How Much Should You Invest?

The year that we retired, 2019, we contributed as much as we could to our 401k. And that has been our goal every year, to contribute as much as possible.

I understand that this may not be possible for everyone, especially if your resources are limited. It simply isn’t always possible to max out your 401k as well as investing in other brokerage accounts.

If that is the case, this is when you should start looking at ways to produce income outside of your 9-to-5 job. That means extra cash flow to push into your 401k.

All in all, maxing out your 401k is one of the best things you can do to ensure a bright future in your 60s. Because at 59, you are finally able to take your money out of your 401k without a 10% penalty. There are exceptions of course - if you become disabled, have urgent medical expenses, court-ordered child support, or spousal support. Under these conditions, you can withdraw your money without paying a penalty fee.

There are a number of other situations where you can withdraw your 401k too, but we recommend leaving that money to grow for as long as possible. At its core, the 401k is a brilliant tool for growing your wealth significantly, and the best way to do it is by maxing out your contributions.

Final Thoughts

Investing in your 401k is important because it’s an easy way to grow your wealth and prepare for retirement. If you have the time, consider learning more about the investment plans that your employers offer, and the different investments you can make. I promise you it will pay off in the long run.


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Hello, We’re Amon & Christina

We’re former federal government employees that focused on saving, making, and investing money so that we could grow enough wealth in our investments to never have to work again.

And, guess what? We did it! At the age of 39, we reached financial independence, quit our jobs, and . . . we retired!

So, if you’re interested in learning how to save, make and invest money on the road to financial independence and retiring early (i.e., F.I.R.E.) - this site is for you!

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