Two executives, same $200K salary, same $30K annual 401k contributions. After 10 years, one has $150,000 more than the other.
The difference? A 15-minute quarterly calculation that 90% of high earners never do. I call this “contribution camouflage” – when your large contributions hide the fact that your investments are underperforming.
It's costing high-earners a fortune, and most don't even realize it's happening.
In the video below, I show you how to spot this problem in under 5 minutes. But in this post, we're going beyond the basics.
I'll give you the exact optimization strategies that can add six figures to your wealth – most taking less than 20 minutes to implement.
The Contribution Camouflage Problem
Two executives, both earning $200,000, both maxing out their 401ks at $30,000 annually. Let's call them Sarah and Mike.
Sarah's investments are actually performing really well – she's getting about 12% annual returns, consistently beating the S&P 500 like I talked about in the video. Mike? His investments are only returning about 7%, underperforming the market.
But here's the kicker – both of them look at their account balances each quarter and feel pretty good. Both accounts are growing by tens of thousands of dollars each year. The contribution camouflage is real.
Fast forward 10 years. Both have contributed the same $300,000. But Sarah's account is sitting at around $580,000, while Mike's is at about $430,000. That's a $150,000 difference that got completely masked by all those contributions.
This is exactly why I keep hammering on rate of return versus account balance. When you're a high earner making substantial contributions, your account balance can look fantastic even when your investments are mediocre.
And mediocre investments cost you serious money over time.
The Math I Want You to Know
Here's the calculation you need to master. Take your current account value, subtract all the money you've put in (your cost basis), and divide that difference by your total contributions. Then annualize it based on how long you've been investing.
Most 401k platforms don't make this easy for you, which is frankly ridiculous. But if you're making these kinds of contributions, you need to demand this information from your provider or calculate it yourself.
Beyond Basic S&P 500 Comparison
Now, I still stand by what I said in the video – the S&P 500 should be your primary benchmark. If you're not beating it consistently, you should seriously consider just investing in an S&P 500 index fund and calling it a day.
But here's something I didn't cover in the video that matters if you're in a high tax bracket. You need to look at tax-adjusted returns, not just gross returns.
If you're in the 32% or 37% tax bracket, a fund that generates a lot of taxable distributions might show good gross returns but terrible after-tax performance. Meanwhile, tax-efficient index funds start looking even better than they already did.
This is one area where your high income actually works against you in taxable accounts, but works for you in your 401k where everything grows tax-deferred.
The 15-Minute Quarterly Audit
Look, I know you're busy. You didn't get to a six-figure income by spending hours every week tinkering with investments. So let's make this efficient.
The 5-Minute Formula
Every quarter, I want you to spend exactly 5 minutes on this calculation:
- Current account value minus total contributions equals investment gains
- Divide investment gains by total contributions
- Annualize based on your investment timeline
- Compare to S&P 500 performance for the same period
If you're consistently underperforming the S&P 500, you have a problem. If you're consistently beating it, you're doing something right.
Vanguard and Fidelity have clean interfaces for this kind of analysis. Some of the newer platforms like Personal Capital can aggregate this across multiple accounts, which is helpful if you're managing complex finances.
Red Flag Thresholds
Here's when you need to take immediate action: if you're underperforming the S&P 500 by more than 2% annually for more than two consecutive years, something's wrong. Either your fund selection is poor, your fees are too high, or both.
Don't let inertia cost you hundreds of thousands of dollars over your career.
Advanced Optimization: When You've Mastered My Basics
If you've mastered the fundamentals – you understand rate of return versus account balance, you're consistently comparing to the S&P 500, and you're maxing out your contributions to low-cost index funds – then we can talk about some advanced strategies.
Beyond Basic Index Funds (For High-Balance Accounts)
First, let me be clear: if you have less than $500,000 in your 401k, stick with the basics. S&P 500 index funds, max out your contributions, and focus on your career growth. Don't overcomplicate it.
But if you've built substantial wealth and you're looking at a seven-figure 401k balance, there are some additional strategies worth considering.
Some 401k plans – particularly if you're self-employed or work for a company with a self-directed option – allow you to invest in alternative assets. We're talking private real estate, private debt, even some private equity opportunities.
Now, here's the thing about alternatives – they can be great for diversification and potentially higher yields, but they come with complexity. You need to understand liquidity constraints, you need to be an accredited investor for many of them, and you absolutely need to understand the tax implications.
For example, certain real estate investments can trigger something called UBIT – Unrelated Business Taxable Income – which can create tax headaches even in your 401k. But other real estate debt funds are perfectly fine from a tax perspective and can actually be very tax-efficient in a 401k environment.
The key principle here is asset location. You want to put your most tax-inefficient investments in your tax-advantaged accounts like your 401k. High-turnover funds, certain bond strategies, REITs that throw off a lot of taxable income – these belong in your 401k, not your taxable accounts.
The Fee Magnification Effect
In the video, I touched on how fees can really hurt your returns. But when you're dealing with large balances, this becomes even more critical.
Let's say you have a $1 million 401k balance. A 1% difference in fees costs you $10,000 every single year. Over 20 years, with compounding, that's potentially $300,000 or more in lost wealth.
Here's what most people don't realize: when you have a large 401k balance, you actually have negotiating power. Some providers will reduce fees for high-balance participants. Some will give you access to institutional share classes with lower expense ratios.
You need to ask these questions. Don't just accept whatever fee structure your plan offers by default.
Also, watch out for hidden fees. Revenue sharing arrangements where your fund companies are paying your plan administrator can create conflicts of interest that cost you money. Your plan is required to disclose this, but it's often buried in documents nobody reads.
Tax Optimization
Here's where things get interesting for high earners. The strategies I covered in the video are great for most people, but when you're making serious money, you face some unique challenges and opportunities.
The “Supersaver Dilemma”
This is something I see with a lot of high earners – they max out their 401ks year after year, which is generally great advice. But then they start worrying: “Am I putting too much in tax-deferred accounts? What if tax rates go up? What if my RMDs push me into higher tax brackets in retirement?”
These are actually good problems to have, but they're real concerns when you're looking at potentially having $3 million, $5 million, or more in traditional 401k accounts.
Required Minimum Distributions start at age 73, and they're calculated as a percentage of your account balance. If you have $3 million in traditional 401k money, your RMDs could easily be $100,000+ annually, potentially pushing you into higher tax brackets than you want.
This is where Roth conversions become really valuable. During years when your income is lower – maybe you're between jobs, or you have a down year in business income – you can convert some traditional 401k money to Roth, paying taxes at today's rates to avoid potentially higher rates later.
There's also something called the mega backdoor Roth for high earners. If your plan allows after-tax contributions beyond the normal $23,000 limit (up to $70,000 total in 2024), you can potentially convert those to Roth money. This is advanced stuff, but it can be incredibly powerful for wealth building.
Early Access Strategies (For FIRE-Pursuing High Earners)
In the video, I warned about early withdrawal penalties, and that's still good advice for most people. But some of you are thinking about financial independence and early retirement, and there are legal ways to access your 401k money before age 59½.
Rule 72(t) allows you to take substantially equal periodic payments from your 401k without penalties. The calculations are complex, but for large account balances, this can provide meaningful income.
There's also the age 55 rule – if you separate from service (quit or get fired) in the year you turn 55 or later, you can access that employer's 401k without penalties.
These strategies require careful planning, but they're legitimate tools for high earners pursuing early retirement.
Behavioral Finance for Affluent Investors
Here's something I didn't cover in the video but see all the time with high-earning clients: unique psychological challenges that come with managing substantial wealth.
“Over-investing” Anxiety
I've had clients ask me, “Joe, am I putting too much in my 401k? Should I dial back my contributions?” This usually happens when they're looking at account balances in the hundreds of thousands or millions and they start getting nervous about having “too much” in tax-deferred accounts.
Look, this is a high-class problem, but it's a real psychological barrier. The fear of over-saving can actually lead to suboptimal decisions, like stopping 401k contributions prematurely.
Here's my take: if you're maxing out your 401k, getting your full employer match, and you have emergency savings plus additional investments outside retirement accounts, you're probably doing fine. The bigger risk is under-saving, not over-saving.
Compounding Impatience with Large Sums
Here's something counterintuitive: when you're making large contributions, the early years can actually feel slow. You're putting in $30,000 or $40,000 a year, but the investment gains might only be $20,000 or $30,000 initially.
It's only when you get to larger balances that compounding really starts to feel powerful. A 10% return on $50,000 is $5,000. A 10% return on $500,000 is $50,000. That's when you start seeing investment gains that dwarf your contributions.
The key is maintaining discipline during those early years when contributions dominate returns. Trust the process, stick with low-cost index funds, and let time work in your favor.
I saw a great example of this in an online community where someone shared their 30-year 401k journey. Despite making some allocation mistakes along the way, despite living through multiple market crashes, they ended up with a seven-figure balance averaging around 12% returns over three decades.
The lesson? Consistent large contributions and long-term discipline beat perfect market timing. Every time.
Estate Planning Integration
Here's an advanced topic that most 401k content completely ignores: what happens to your 401k when you die?
If you're building substantial wealth in your 401k, these accounts can become a significant part of your estate. And there are important decisions to make about beneficiary designations that can save your heirs a lot of money in taxes.
For example, if you're married and your spouse inherits your 401k, they can roll it into their own retirement account and defer taxes until their own RMDs begin. But if your kids inherit it, they generally have to withdraw all the money within 10 years, potentially creating big tax bills.
There are strategies around this – like life insurance to pay estate taxes, or Roth conversions to leave tax-free money to heirs. But this stuff gets complex quickly, and you need proper estate planning advice.
The point is, when your 401k becomes a substantial asset, it needs to be integrated into your broader financial and estate planning, not managed in isolation.
The Automation Blueprint for Executive Schedules
Let me bring this back to my core philosophy: keep it simple and automated.
Set-and-Forget Systems
Your primary automation should still be straightforward: max out your 401k contributions to low-cost S&P 500 index funds. Get your employer match. This should happen automatically through payroll deduction.
For more complex portfolios, you might want automatic rebalancing quarterly or annually. Most good providers offer this.
Set up alerts for performance deviations. If your returns fall more than 3% below the S&P 500 for two consecutive quarters, you want to know about it immediately.
Annual 20-Minute Review
Once a year, spend 20 minutes on this:
- Calculate your true investment returns versus contributions (5 minutes)
- Compare to S&P 500 performance (2 minutes)
- Review fees and consider if you can negotiate better terms (10 minutes)
- Assess any tax strategy adjustments needed (3 minutes)
That's it. Don't overthink it.
Implementation Roadmap: From My Basics to Advanced Optimization
Here's how I'd recommend you approach this:
Phase 1 (Months 1-12): Master My Core Approach
- Learn to isolate investment returns from contribution growth
- Benchmark against the S&P 500 consistently
- Max out employer match and contributions to index funds
- Get comfortable with the quarterly 15-minute review
Phase 2 (Year 2+): High-Earner Optimization
- Optimize fees for your large balance
- Start looking at tax-adjusted returns
- Consider asset location strategies across multiple account types
Phase 3 (For $1M+ Accounts): Sophisticated Strategies
- Explore alternative asset integration if available
- Coordinate with comprehensive estate planning
- Implement advanced tax optimization strategies
The key insight from all the research I've done is this: the fundamentals I covered in the video – understanding rate of return versus account balance, benchmarking against the S&P 500, keeping costs low – these remain the foundation even for sophisticated investors.
Everything else is optimization around the margins. Important optimization that can save or make you hundreds of thousands of dollars, but optimization nonetheless.
Don't skip the basics to get to the advanced stuff. Master the fundamentals first, then layer on complexity only where it adds real value.
Next Steps
If this resonates with you – if you feel like you should be doing more with your money, or if you're already wealthy but want to make sure you're optimizing everything properly – then you might be interested in diving deeper.
Everything we've talked about today falls into what I call the five key areas that really matter for building serious wealth:
- tracking (which is what we've been focused on here)
- planning (making business-style projections for your financial future)
- investing (multiplying your money strategically)
- earning (understanding how to optimize your income over time), and…
- retaining (keeping more of what you make through smart tax planning)
These aren't get-rich-quick schemes or trendy investment strategies. This is about systematically understanding and managing your finances to go from a six-figure salary or net worth to seven figures and beyond.
If you want to learn how all five of these areas work together – and get the step-by-step framework I use with my most successful clients – check out my Personal Finance Mastery course.
It'll walk you through exactly how to build a complete financial system that grows with you as your income and wealth increase.