Ignore Dave Ramsey's Advice for Your 401k Plan

Should we continue to completely fund our 401ks, or should we shut that off until we finish out this last 105,000 in debt? I tell people to stop their retirement temporarily.

So you don't want to lose compound interest. That means faster growth. If you delay that savings by just 10 years, that monthly cost just went up by almost $1,500 a month. Your employer gives you, say, a dollar-for-dollar match up to 6% of your salary. Why would you leave that on the table? That is free money.

Hey everyone, welcome to another edition of We're Talking Money. I'm Phil Clark, wealth advisor here at OmniStar Financial Group. We're going to head back into some of Dave Ramsey's advice. We're talking specifically about pausing retirement savings to pay off debt.

Are you putting money into your 401k or into retirement? I am, yes. Stop. Okay. While you get out of debt, temporarily.

Now, Dave is a big figure. He's been doing financial planning work for people for the last 30 plus years, and so the last thing we want you to do is think that he's a hack. We don't think that, but we do believe that there are instances where he gives bad advice. This might be one of those.

So what is the first weakness when it comes to pausing your retirement to pay off all of your debt? So if you have a 401k through your employer and they match what you put into the plan, you would be missing a 100% return on your money. There's no other investment that gives you that. Your employer gives you, say, a dollar-for-dollar match up to 6% of your salary. Why would you leave that on the table? That would be a foolish move.

And if you add to that the return that Dave says you can get in mutual funds that easily beat the S&P 500, I am referring to his assertion of a 12% annual return. Find a mutual fund that has outperformed the S&P in the growth stock mutual fund category, and if you can't, you're an idiot. A blindfolded monkey could half the time hit a mutual fund that outperform the S&P. Think about the effect on your money going into that plan, your employer's money going into that plan, and it's compounding at 12%. That is a huge mistake.

Now, what's the next weakness? Well, naturally, it's saving taxes, deferring taxes. Should we continue to completely fund our 401ks, or should we shut that off until we finish out this last 105,000 in debt? I tell people to stop their retirement temporarily.

When you're saving in that retirement plan through your employer, if you're doing it in the traditional way, you're saving taxes. All of that money goes in pre-tax. That means you're paying less in ordinary income tax, and if you treat that savings of ordinary income tax the right way, that means invest it, then you're going to add to your nest egg. So saving taxes is not just about giving you more take-home pay, it's about giving you more money to invest, which is going to grow your net worth in a much shorter period.

Now, the third and final point in today's show is compound interest. Now, I just mentioned it, but let's take that a step further. It's a tremendous benefit for investors because your money begins to work on top of itself. So your money earns money, and that means faster growth. Some call that the eighth wonder of the world. So you don't want to lose compound interest, and I'm going to show you why.

Let's take a look at an example. Let's say that you want to retire with a $2 million nest egg. If you had 30 years till retirement, you'll need to save about $572 a month, assuming a 12% rate of return.

Well, Dave, you can't make 12%. You can't. Your portfolio doesn't outperform. There's my mutual funds, performed at 13.04.

If you delay that savings by just 10 years, meaning you'll only have 20 years to save before retirement, that monthly cost just went up by almost $1,500 a month. In other words, you'd need to save, at the same rate of return, 12%, about $2,025 per month. That is a huge increase, and it's all because you lost 10 years of compounding interest.

I don't think it makes sense for anyone to stop saving for retirement, particularly if they're going to miss a 100% match from their employer. The rest of your money, make sure you're allocating that to start paying off debt. Those highest interest rate cards have to come first, and then you can take care of things like your home.

This alternative to Dave Ramsey's idea of stopping retirement to pay off debt first offers you a better way to accumulate wealth and pay off debt. You can actually do both. It's all about making decisions that are best for your situation. Everyone's different. Everyone needs a personalized plan.

I hope this video has inspired you to dig a little deeper when it comes to paying off debt, saving for retirement and building greater wealth. Don't forget to subscribe to our channel. Don't forget to hit that thumbs up button and ring the bell so that you get a notification every time we release videos just like this one. They're all designed to help you make better financial decisions. I'll see you next time on We're Talking Money.