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The "Toddler's Secret" For Building a 401K

How my 5 year old taught me a simple secret for building a fat 401k.

Dear Hard Working Parent,

Okay, folks. This may seem nuts, but it's true. When you think of a five year old, what comes to mind? I personally get visions of Play Do, a messy room and mounds of Lego's. My five year old boy is as normal as they come. But he recently taught me a secret on how to build a 401K.

His secret is so simple I missed it till recently. I realized that if I used it I could start building a 401K for my retirement. In fact I could start small and grow it over time. The Toddler's Secret doesn't require financial expertise or years of mutual fund experience.

The Missing Ingredient

One day I was writing a book and he walked out of his room.
"Dad, can I play on the computer?"
He plays this skateboard video game on our desktop. I told him he had to wait. I needed to finish my first writing session in peace. Seven to ten minutes later he came back. After asking the same question he returned to his room disappointed. But he didn't give up. Four tries later he was sitting in front of the computer having a blast! What does this have to do with building your 401K?

When a child wants something they use the power of persistence. Adults allow this powerful gift to die over time. We easily give up on what we want most, because it's too hard. But not toddlers! They'll persist until they get what they want. How bad do you want a financially secure retirement? I've got some news for you. The missing ingredient in building a rich 401K is not smarts, financial expertise or being wealthy. The key ingredient is persistence!

Four Reasons Persistence Dies

Why do we start building a 401K and then stop? What keeps getting in our way? I did some digging. And yes, I took a hard look at myself. I'm as guilty as anybody. Here are four reasons I had stopped building my own 401K.

Reason #1: Changing Jobs

When I had my first 401K life was easy. I made the money and every two weeks, money went into my 401K. I didn't have to do a thing. A Fund Manager took care of my problems for me. All I had to do was view my financial statement once a month. Each time I saw the numbers rise. I thought, "Wow! All I have to do is open the mail and more money appears!" There's a terrible price for this. I never took real ownership of my 401K. Once I left my job, I literally lost track of it. The financial statement would show up and I'd read it every so often. As a result it hadn't grown for years.

Reason #2: Moving

Moving away makes it easy to lose track of financial paperwork. At one point I thought I'd lost my 401K financial statements. Fortunately, that didn't happen. If you keep it tucked away in a box somewhere, being persistent will never happen.

Reason #3: Early Withdrawals

Things are more expensive than ever before. When the bills pile up it's easy to dig into your 401K to cover the losses. The heat, mortgage and car payments have to be made. But over time this forces you to step away from building your retirement. And that 10% tax penalty for early withdrawals doesn't help either.

Reason #4: Buying "Big Ticket" Items

It's so easy to talk yourself into using your 401K for a new boat, car or down payment on a house. But boats rust, cars break down and houses can lose value. None of these will secure a fat retirement.

How to Stay Persistent

First, you have to understand what your 401K is for. Its purpose is to provide you income for retirement. This means it's built for the long haul. Don't look at is as piggy bank. That's something you can reach into at any time. A 401K is a true retirement savings account. It allows you to pay yourself and reap the rewards when you retire. An old friend of mine says it like this: "Clyde, saving money is like paying a bill. Once you do it the money is gone." When money goes into your 401K, it's gone. You can't take back what you've lost.

Second, plan for the long haul. My own 401K is built to last another forty years. This means my investment strategies and goals will be based on this number. Withdrawing money early will hurt my long-term strategy. If you treat it like a short-term piggy bank, that's how long your money will last.

Third, start with a small percentage. In past articles I've talked about the "10% Rule." But let's back track. Persistence has nothing to do with big chunks of time or money. It's a step by step process. What's the old saying? "Yard by yard it's just too hard, but inch by inch anything is a cinch!" Start building your 401K, by contributing 3-6% of your salary.

Let's say you have an annual salary of $40,000 with a 3% increase each year. We'll toss in a 401K balance of $1,000 and 50% employer match. Times are tough, so you can only invest 3% monthly toward your 401K. We'll only look fifteen years down the road. Here's what can happen on the slow track.

1st Year: $2,938.73
2nd Year: $5,107.41
3rd Year: $7,528.39
4th Year: $10,226.10
5th Year: $13,227.21

And by the fifteenth year you'll have a solid $67,870.90 socked away for retirement! Going the slow track with a monthly 3-6% contribution isn't chicken feed. As you get more bonuses and raises, you can easily increase your contributions and retirement nest egg.

Let's see what these numbers look like once you move up to a 6% contribution.

1st Year: $4,787.46
2nd Year: $9,026.71
3rd Year: $13,761.75
4th Year: $19,040.63
5th Year: 24,915.81

By year fifteen you'll pocket $132,099.32 for retirement!

Using the Toddler's Secret for building a 401K can bring you steady income for your retirement years. The tortoise beat the hair, because of persistence not speed!

Clyde McDade is a Financial Copywriter. He's the author of the upcoming e-book, "How to Grow More Money for Your Retirement and Child's College Fund." He can be reached at

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