How a 401k Actually Works – From One Millennial to Another
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How a 401k Actually Works – From One Millennial to Another

All the financial books I’m reading (Such as The Automatic Millionaire and Rich Dad, Poor Dad) always tell people to invest in a 401k because it offers tax deductions, employee matching, investment growth, blah blah blah. That’s great and all but they don’t actually ever tell you why a 401k is a good idea besides that your money grows and that it’s good for retirement.

They are not telling people that the companies that handle your 401k, whether you work for a private company, university, or nonprofit, all use a financial company to handle your money in your 401k.

A lot of companies use Fidelity investments to process employees’ 401k. Starbucks has their employees use that. Tesla gives their workers Tesla stock through Etrade. You get the idea?

I’m 25 and I feel like most, if not all of these financial self-help books, are written by men over the age of 40 for men over the age of 40.

I feel like the way the 401k is presented in books is misleading because people think it’s safe and that their money just grows there until they are ready to retire and pull it out.

It depends on your plan and how the financial companies invest your money in the stock market, mutual funds, bonds, treasuries from the government, etc.

A 401k is NOT a thing where you can just put money into it and it grows willy nilly until you’re 65 and you can pull money out of it.

So just to clarify.

Your employer puts your 401k money into a Financial Company. The Financial company then invests your money in stocks, bonds, mutual funds, treasury bonds etc.

They realize that the average American will not have enough saved for retirement so they opt to put your money in super safe, predictable investments for all those decades and guarantee you some sort of income.

That is how the 401k works. Plain and simple. Whether you should opt into one at your job is a whole other matter and I advocate against it if you’re trying to live the financially independent lifestyle and travel around the world indefinitely.

You can read about why I advocate against 401k’s for people trying to live the financially independent lifestyle here.

Thanks for reading,

Jack The Dreamer, over and out!

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