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In this post, we’ll discuss how you can maximize the positives and plan around the negatives when it comes to the Walmart 401k.
Pro: Low-Cost Funds
Your investment returns are intimately tied to your investment fees. If portfolio A invests in nearly the same stocks as portfolio B, you would expect their returns to be very similar. But if portfolio A charges 1.5% and portfolio B charges .25%, the returns will reflect this.
When you operate with compound interest, a slight percentage difference becomes a massive deal over time. A 25-year-old investing $24,000 every year for the next 30 years sees incredible results if they earn 8% per year–nearly $3 Million. But if they aren’t mindful of investment fees and pay 1% more, they have less than $2.5 Million.
Note: This idea is also the reason we do not purely index our client portfolios. Earning an extra 50-100 bps can become a huge number over time. So, we slightly tilt our portfolios toward factors that have historically outperformed–while still being vigilant to keep portfolio costs low.
Pro: Enough Funds to Build Custom Portfolios
MyRetirement single fund solutions are a good choice. But the downside is similar to most target date funds–overexposure to large US stocks.
Most funds offered to US investors do the same thing asset managers in other countries do: overweight their portfolio to stocks based in their home country.
Building a portfolio with 60% U.S. and 40% International is much closer to current market capitalization of the global universe of stocks. If you maintain that small caps will likely outperform large caps over long periods of time, building your own portfolio allows you to tilt more toward small caps.
So, if you want more exposure to small caps and international stocks, you can build a portfolio doing exactly that in the Walmart 401k. For example, compare the allocation below with the 2050 MyRetirement fund.
These are two very different portfolios.
Using MyRetirement Funds Near Retirement
I want to make a quick point for anyone using the MyRetirement funds in the Walmart 401k if you are nearing your actual retirement date. These funds reach a very conservative allocation as you approach retirement. For many retirees, it becomes too safe (specifically: do not put too much of your portfolio in bonds).
Why? It’s similar to a pass-heavy football team playing with the lead and only running the ball with 8:00 left in the game. Yes, taking up time matters, but the other team is likely getting the ball multiple times before the game ends.
If it’s the Chiefs and you have Patrick Mahomes, they shouldn’t focus entirely on the clock. Just score another touchdown. In fact, the opposing team is likely on their sideline praying that the Chiefs play conservatively to run the clock.
Your retirement portfolio is very similar. Let me explain.
Yes, you do need to safeguard your next five-ish years of income. Or in the Chiefs’ analogy, you do need to be mindful of the clock. But it’s not overly hard to build an income plan and ensure that you have your next five years of income safeguarded.
Past that, you need to focus on the threat that poses far more danger to you. That threat is inflation eroding your purchasing power–or let’s speak in blunt terms: Your most significant threat is running out of money. As long as you avoid catastrophic investment mistakes, a market crash will not cause you to run out of money. A slow 20-year drip with way too much exposure to bonds (bonds earning 2%/year because of low-interest rates) very well may put you at risk for running out of money.
Just like the Chiefs should continue to play to their strengths (while being mindful of using the clock), you should maintain a similar mindset. Don’t play it too safe. The vast majority of retirees with seven figures saved should not have 50%+ in fixed income (bonds). That is putting a massive chunk of your portfolio in a vehicle that may only return 2% per year. We have to plan for a scenario where everything in your life is at least twice as expensive in 20 years. Your portfolio needs to grow to keep up with that.
Con: No After-Tax (Mega Backdoor Roth) Contributions
This is a really big con.
It’s such a big con that I would be shocked if Walmart doesn’t change 401k providers in the next 2-3 years.
I wrote about the mega backdoor Roth here. I’ll describe it briefly below.
You’re allowed to contribute $19,500 (plus $6,500 over age 50) either pre-tax or Roth to a 401k. But that is not the full IRS limit–that is the 402(g) IRS limit.
The IRS has a second limit–the 415(c) limit of $58,000 (+$6,500 over age 50) per year. You can reach $58,000 in three ways.
But the Walmart 401k does not currently allow the third point above. Most companies of Walmart’s size have changed this in the last several years. I expect Walmart to follow suit soon. As I stated earlier, I will be surprised if Fidelity doesn’t win the Walmart 401k contract in the next 2-3 years.
If this changes, you could effectively double the amount going into your 401k each year.
But it gets better. You can then convert the after-tax contribution to the Roth 401k every year. So, you’re not just investing $58,000 per year. You’re investing $58,000 in an extremely tax-friendly way.
This is how you reach age 60 with $5M+ in investable assets even if you never make an ultra-high income. Or, it’s how you retire much younger than most.
What Should You Do Without the Mega Backdoor Roth?
It’s not the end of the world that you do not have after-tax 401k contributions yet. But it does amplify how critical regular backdoor Roth IRA contributions are. Or, if you’re not over the IRS limit, simply make normal Roth IRA contributions each year.
You can contribute $6,000 per year (+$1,000 over age 50). If you’re married, you can do this for you and your spouse.
Doing this in a single year isn’t going to transform your financial life. But diligently doing this over the next decade puts six figures into a tax-free growth vehicle.
Beyond Roth IRAs, investing in a brokerage account can be excellent as long as you do it in a tax-efficient way. I realize this may not make sense for many, but the tax benefits and potential opportunities in real estate also become more attractive.
If you’re looking for places to invest above and beyond retirement accounts: HSA accounts, Roth IRAs, real estate, and brokerage accounts can all make a lot of sense.
Understand Your NUA opportunity
If you have old Walmart stock shares inside your 401k with an ultra-low cost basis, tread very carefully with any distributions you’re planning to take from the Walmart 401k. Low basis shares pose an excellent tax planning opportunity. At retirement, you can rollover your 401k to an IRA and elect NUA on stock shares–moving them out of the IRA and into a brokerage account. NUA has very delicate rules and should likely be reviewed by an advisor with significant NUA experience.
That wraps it up. If you have further questions about the backdoor Roth or any other topics, reach out to us!
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