Welcome to Q & A Wednesday on Millionaire Habits, where I answer one of your weekly questions for everyone’s benefit. Have a question?
💡 Question: “I have a 150K HYSA. Net worth of $400,000. I want to retire abroad at 35. Should I pull my 401(k) out and put it in my HYSA?”
Whoa, stop right there.
I’ll answer your question quickly and then dive deeper into the answer.
No, you should absolutely NOT pull money out of your 401(k) and put it in a HYSA (I’ll define what HYSA means in a bit). That’s a one-way street to underachieving in your later years.
There’s a lot going on here, so let’s figure this all out.
But for now, don’t you dare touch your 401(k).
Should I ditch my 401(k) if I want to retire at 35?
Before we begin, a couple of quick housekeeping details.
If you don’t live in the U.S., the 401(k) is a tax-advantaged retirement account built for long-term investments. It’s similar to the EPFO in India, RRSP in Canada, and iDeCo pension system in Japan. The 401(k) is pre-tax, which reduces your taxable income, but you can’t withdraw money from your 401(k) before age 59 and 1/2 without penalties.
Also, HYSA = High-Yield Savings Account. In other words, it’s a savings account that offers interest. HYSAs are great for emergency funds, but absolutely not a solution for long-term wealth generation.
Okay, back to the question.
With a net worth of $400,000 and dreams of retiring by 35 abroad, your #1 priority needs to be wealth creation, not gutting your tax-advantaged investment account. Don’t do this!
You incur penalties if you withdraw from your 401(k) before 59 and 1/2. While your HYSA offers interest, stock market history has clearly shown you’ll likely build wealth by investing your money in the stock market. In other words, don’t touch your 401(k).
Let it grow.
Better solution: Combine long-term and short-term investments.
Funnel money into your 401(k) while you’re still working for long-term growth. By the time you’re 59 and 1/2, you’ll be on Easy Street.
Also, use other investment vehicles without age-related penalties to build wealth that can be used earlier in life (I’ll talk about this below).
And boom! You’ll have money to live on now AND a growing nest egg to be used later. The best of both worlds.
Here’s what to do if you want to retire by 35:
1: Maximize income. This means switching jobs often (statistically, this works better than staying at one company), asking for raises, saying yes to opportunities, and being the hardest worker that you know.
2: Open a brokerage account. Give Vanguard a call and open an investment account. Invest > 20% of your paycheck. No age-related restrictions apply to brokerage accounts. You have full control.
3: Make it automatic. Use your employer’s payroll to contribute to your 401(k) automatically. Then, set up automatic bank transfers to send money from your primary checking account into your brokerage account you set up in step #2. This should happen every month.
Here’s how financial automation works.
4: Keep your HYSA for your E-fund. A high-yield savings account is perfect for your emergency fund. Keep 3 to 6 month’s worth of living expenses in your HYSA. Put any remaining funds in your brokerage.
Don’t have an emergency fund? Here’s how to fix that problem.
Congratulations, you’ve just set up the foundation virtually every early retiree uses to build wealth quickly.
I quit my job at 35 using this exact formula.
By retiring abroad, you’ll likely need less money than you would if you retired in the United States, Canada, or many European countries where the cost of living is high. Enjoy your life of freedom and adventure.
See you in your inbox on Saturday,
– Steve
