Financial Fridays: Why Your 401K Is A Scam!

I hate writing about finance. The most violent, ugly people in the world work in the traditional finance industry.

I write something and instead of responding with a well-reasoned argument, they write things like “James Altucher is a wacko” or “James Altucher is a scumbag”.

I’ve written for or appeared on the Wall St Journal, the Financial Times, CNBC, Fox Business, ABC, and many other finance sites. I’ve run hedge funds, funds of hedge funds, I’ve day traded, i’ve run a VC fund.

I see what happens inside the system. It’s ugly. And they don’t like you.

Almost 100% of financial journalism is BS, written by people who don’t know anything about finance.

Almost everyone writing in the finance world has an agenda.

For instance, the last time I wrote about why a house is a bad thing to buy, someone wrote an article, “James must be an idiot.”

I looked him up. He was a VP at the “National Association of Realtors” or some organization like that.

And when I wrote that kids shouldn’t pay $200,000 on an education, another group wrote an article saying I was completely wrong and gave “proof” (they made every statistics mistake possible).

The authors: a research team at Georgetown University.

And when I recently wrote that 401k plans (retirement plans set up by corporations for their employees) were a scam, MANY people wrote very nice emails to me saying I verified their own private concerns.

But then a surprising thing happened. A lot of people, many I considered friends in the finance industry, wrote again that I was totally off the deep end this time.

They never disclosed that their businesses depend on investing 401k funds or somehow obtain fees because of 401k plans.

So maybe every Friday I’m going to write a little about finance if you think this is a good idea.

I stopped writing about it over five years ago because A) finance is boring and B) it has nothing to do with increasing someone’s power over their own lives (in most cases).

People want more out of life than knowing what direction Apple stock is going. They want to fulfill their dreams and their passions, not just survive in the drudgery of a cubicle.

I have no agenda. I am not pushing any 401k product, or house, or fund, or anything.

But I just want to light up the facts about things people are lying to you about. Then you can decide.

Next Friday, if I continue doing this, I’m going to write about why and when you should stop paying back your credit card debt.

But I still feel an itch to address 401ks.

Listen: they are scams. This is another trillion dollar industry that has a lot of money at stake if people stop believing in the mythology bolted to the scam.

Let’s go over the pros and then the cons:

The PROS of a 401k

  • You put money away before it is taxed. This has the benefit of encouraging you to save starting at a young age.
  • Often your employer will match what you put in your 401k. So it’s “free money” (ask yourself: why is this the only example of free money in the entire world?).
  • When you are 59.5 years old you are allowed (like a parent allows a child) to take money out. It’s taxed then but now you’ve benefited from the 7% per year that, by law (kidding) the stock market goes up.

I can’t really think of any other pros. If you can think of some, please put in comments and I will try to address.

CONS of 401Ks

Let’s look at it conceptually for a second and then I will look at the cons.

You are paid money by an employer. You have that money in your hands for five seconds, and then it is whisked away into this account and you can’t look at it again for another 20-35 years unless you want to pay a massive penalty.

Will you be alive in 30 years? Hopefully! Else you will never see that money again.

Ok, that’s my first problem with 401k. I like to have total control over money that is called mine.

Ok, let’s look at the cons:

1) You can’t predict your tax rate 30 years from now.

This completely destroys the whole “tax-deferred” argument.

Let’s say you put money in your 401k at the age of 29. You are making much less money than you probably will be at the age of 59.

So your tax rate is less than your tax rate at 59, forgetting completely that taxes might be raised also (we just don’t know) between now and then.

So we don’t really know if you are saving money on taxes or not. You are simply having your money taken from you for 30 years.

Also, when you take money out of your 401k, you are taking out more than you put in (chances are, because your expenses are higher). So your tax rate will almost certainly be higher. Again, ruining the entire point of putting in pre-tax income.

2) The Employer Match

Do you think companies really pay you free money?

Companies that don’t have an employer-match pay higher salaries. The Center for Retirement Research did a study based on tax data and showed that for every dollar an employer (on average) contributes to a 401k match, they pay 99 cents less in salary.

Big savings!

Also employers don’t give you all the money at once. They spread it out over 4-6 years (six years is the regulated max or they would spread it out longer is my guess).

If you leave before the six years, you often don’t get the match. So employers actually save money in the long run by installing a 401k plan.

How many employees stay at their jobs for six years? Not that many. The average is 4.6 years according to the Bureau of Labor Statistic.

Goodbye employer match.

3) Fees

People don’t manage 401k plans for free. There is a cost. Then there is a cost in the mutual funds they put their money in.

Then there is revenue-sharing between employers and 401k plan managers. Is this legal? Yes. It might not always be but it is now and it is how employers make some of the money back on matching what you put in.

Is this transparent? Of course.

Does the average person look at all the fine print detailing fees? Of course not. I don’t. (I have a 20 year old 401k account).

Then there is the fine print on each mutual fund the 401k manager has allocated the money to. Do I look at that fine print? No.

Many mutual funds charge extra marketing fees. Do yours? I have no idea. Most people don’t. Which is how they get away with it on a trillion dollars.

Which is part of the reasons 86% (!) of mutual fund managers underperform the market.

Now, in many cases you can say, “I want to put in a low-fee exchange traded fund” but a) will you do that? and b) they still have some fees.

4) Assumption on market returns.

The market has returned somewhere between 7-10% per year depending on what time period you look at, what index, etc.

The average investor has returned 1.8% per year over the past 40 years. The psychology of investing is very difficult. In 2009, many investors pulled out of the market, right before a 100% upward move.

And when I say, “many investors”, I’m not talking about you – I’m talking about the best mutual fund managers in the business.

5) More on taxes.

Yes, you save tiny amounts on taxes when you are young. But this is also the period when you have the biggest tax write-offs relative to your income (dependents, business expenses, etc).

So you don’t really need the extra minor savings on taxes. Trust me, you will be fully taxed at the highest rate when you pull money out 30 years from now.

So why not use that “extra” money to invest in yourself right now. Invest in skills that can benefit you or experiences that you can enjoy and make you happier.


 

401k plans have been around for decades. And yet the average retiree does not have enough savings for retirement.

So the evidence is fully in. 401k plans did not help.

So how does one save?

The average multi-millionaire, according to tax data, has at least 7 different sources of income.

You can keep your job. But think about how to make money on side jobs. It doesn’t have to be tomorrow. Just think about it and start coming up with ideas.

Or take a job where you financial success is more in tune with the financial success of the company.

With industry being outsourced and knowledge being outsourced, the best investment is in yourself.

This might mean take courses that you can later monetize (photography, wordpress development, copywriting, freelance writing, etc).

Or it might mean studying investments. The best investors are usually the top hedge fund managers. Study their investments. Copy what they do (but don’t invest in them. Ugh!).

Anyway, I don’t like writing about finance. But I can assure you I have no agenda on 401k plans.

I get emails every day from people who are scared and frustrated.

They have reached their retirement page and everyone up until now has lied to them about the benefits of 401ks. So they are worried about how they will survive.

My agenda is to try and help. A few weeks ago, a good friend of mine says I was a waste of flesh because I was against 401ks. Guess what he does for a living? He manages 401k plans!

Perhaps the main point of this article is that one way to choose yourself is to look at the agendas of people selling you something.

It’s ok for them to make money. I don’t blame these people. Maybe some of them are good. But get all the facts so YOU can choose instead of THEM.

Question ALWAYS the trillion dollar industries that are paying millions to fool you (finance industry, housing industry, college industry, etc).

Next Friday (if you want this series): The Great Credit Card Scam

  • Duane

    I think this is a good piece, with lots of sound advice in it.

    Taken to it’s logical conclusion, James, if somehow your point of view spreads like wildfire, and people all over the US start taking your advice; What would you suggest all of those people who depend on income from the 401k “industry” do with their time instead?

    • Paul Franceus

      I don’t think that’s James’ concern. They are smart people and will find something else to do with their time.

      • Correct. I think there are many options. I can probably start writing about them but one thing at a time.

    • John StackDecker

      I was an ERISA attorney for 15 years. It’s bullshit. The employers prosper and the rank and file workers have to ‘get lucky’ to make ends meet in retirement. Let me restate my opinion, the entire financial services industry devoted to retirement plans is a scam: from the overpaid dumbass financial advisers to the profiteering TPA firms, to the crooked investment platforms, the entire industry exists today to take your money and put it in Wall Street’s hands for a fee. Middle class America is not the investor class. Never has been. Some dolts trade a few shares and believe they are JP Morgan winning the cash cow. I work with kids now. I sleep at night and still make ends meet.

  • Travis_D

    Doesn’t seem to be “one size fits all” advice. E.g. my current employer does a 50% match up to the contribution limit (ie. $9k on $18k individual contribution) with no “vesting period” — it’s immediately yours. The funds are in Vanguard and can be in any of their top-of-class funds (lowest fees of any). And when you leave the company — which as you say, is often less than 6 years — then you can transfer to an IRA of your own arbitrary allocation. Under these conditions, even if you take an early-withdrawal penalty, you still come out ahead.

    (Also, you forgot one positive: 401k’s help ensure that people w/o discipline save *something* rather than nothing. But that argument is for the weak of fortitude.)

    The real problem w/ 401k’s is that *most* employers malign incentives. Employees should be educated (you’re helping with that!) and fight tooth and nail against bad company policies.

    TL;DR: You’re mostly right, but you need to evaluate all those attributes on a case-by-case basis.

  • HydroCabron

    > A lot of people, many I considered friends in the finance industry, wrote again that I was totally off the deep end this time.

    “It is difficult to get a man to understand something, when his salary depends upon his not understanding it” is like a law of physics.

  • Scott Michael

    While I agree with what you wrote I still do not think (if you are already working at a company that offers a match) that putting just enough in to maximize the match (“free” money) is a bad idea. You also omitted the benefit of “forced savings” – whereas most folks do not have the discipline to actually save / invest after the money hits their bank account.

    • Scott Michael

      Also on the CONS, you left out that there are usually limited investment options.

  • Red_Stater

    “I write something and instead of responding with a well-reasoned argument, they write things like “James Altucher is a wacko” or “James Altucher is a scumbag”.”

    I get that all the time. But I’m a dirt-bagger libertarian, so I guess I should be used to it by now.

    • John StackDecker

      If you’re a modern day libertarian free market fundamentalist anti-government hero, maybe you should get used to the abuse b/c you roundly deserve it.

      • Red_Stater

        Yes, cuz we create economic disasters like, Italy, Greece, Portugal, Ireland…. or California, Illinois or Michigan and we go to war with no winning strategy and advocate ineffective nation building on top of it.

        A day of reckoning will occur for you progressives and ya’ll will deserve the abuse hurled in your direction. In fact, I think progressive roundly deserve abuse for creating the political climate where a Fascist like Trump actually has a shot at the white house. GFYS!

  • Mr Creosote

    Anyone that seems to be promoting the idea that you should piss it away on trips and not save… will tend to be called out as a nutter: when you say

    So why not use that “extra” money to invest in yourself right now.
    Invest in skills that can benefit you or experiences that you can enjoy
    and make you happier.

    You haven’t really made a case for what should be done, and while you say Multimillionaires have 7 sources of income.
    One is definitely from investments.. and they are paying fees to money managers.

  • Poseidon

    Who controls when to use your money to invest? Can they not time the use to their or someone’s advantage? If $100 is deducted from my paycheck on Friday, when is that money actually used? On the best day or worst day?

  • Good article James. I would really appreciate you continuing to write on finance. I have a 401k myself, and it is stagnant. Beyone that, I have a degree in Finance, which was a huge was of resources and I still can’t sort out investment info.

    Got any advice on massive student loan debt? (Good reason to avoid college, but I didn’t!)

    • Chris

      Could U give me advice since U know the finance business so well

  • James

    I will come down on the Pro side. I think there are some valid points in James’ arguments, but the conclusion ends up being wrong.

    First, lets take taxes. He is correct that we don’t know what the income tax rate will be in 50 years (are we really doing tax arbitrage or not?), but we also don’t know what the capital gains rate will be – so investing via taxable accounts has tax risk too. If you are worried about taxes, you can fund a ROTH 401k (pay taxes now, no taxes on withdraws). I do a pre-tax 401k and a ROTH IRA.

    Secondly, lets take the comment “The average investor has returned 1.8% per year over the past 40 years.” I didn’t see a source, but even assuming this is true, what difference does it make if the investor is making poor decisions in a 401k or a taxable account? I would educate investors (as John Bogle has done) that the goal is to own the entire market (Index funds) using dollar cost averaging over a long period. The market has averaged 7% over the long term with dividends reinvested.

    I have worked at 3 different companies in 10-years, so the dream of a company provided pension is over. Most new workers will switch jobs more than workers in the past, so having a portable retirement account is needed.

    Fix the behavior of 401k investors (better options, like low fee index funds) and the system will work better.

    • Methinks1776

      There is no tax arbitrage because the definition of arbitrage is that it’s riskless. You’re always at risk that tax rates will rise or you will enter a new, higher tax bracket at the time of distribution. Whether such a possible increase will be countered by an untaxed return for decades is a question.

      James is likely referring to Dalbar research. Here’s a link to a blurb about it:http://cathypareto.blogspot.com/2010/02/individual-investors-continue-to.html

      The difference even if you underperform, it’s important whether it’s in a taxed or untaxed account. In a taxed account you would underperform even more, specifically, by the amount the tax rate.

      Finally, Bogle doesn’t advocate DCA. He advocates dumping your money into index funds (which is not a bad idea). But, that’s not what DCA is and DCA has been proven over and over again to be a complete failure (the claim of DCA is that you can outperform the market using DCA. Even without empirical evidence the reason this is BS should be obvious).

  • Deirdre

    As Maslow so rightly pointed out security is very fundamental to human survival. I believe most financial advisors believe they are giving sound advice, they are educated to sell a belief, some do that from a place of profound integrity, others have their eye on the commission. There are Capitalists and Consumers, there are those who pedal religion. Big Pharma, he is the one to watch, and this medium. Seven. The Minister for finance in my country has just off loaded all his European tracker shares in favour of gold. I think he would have been wiser to consider silver. Beetroot is still on offer!

  • 4 WIW

    Despite the “cons” mentioned here, my 401K helped me retire with over $330,000 in savings I would never have accomplished without it. The employer match and tax deferment were great savings motivators.
    PS I’m just an ordinary guy with no stake in financial advice etc.

    • dajhilton

      Tax deferment is one good thing, true, but it does not make up for the much more disastrous tax INCREASES you will have to pay on your capital gains if they are realized through a 401(k) plan. Those gains are no longer taxed at the low capital gains rates but instead are viewed by the IRS as regular income, and your entire tax deferment benefit will be eaten up by this chicanery.

      • David Liu

        Say income tax rates are 25%, capital gains rates are 15%, and any investment you do will double over the next 10 years.

        If you use a 401(k) plan, with $1000 from your paycheck, you get to invest directly without initially paying taxes, so you get to invest that $1000. That doubles to $2000 after ten years. You then withdraw that $2000, having to pay 25% taxes, so you are left with $1500 at the end.

        If you use a regular taxable account, with $1000 from your paycheck, you first have to pay 25% income taxes on that $1000, so you only have $750 to invest with. After ten years, that $750 becomes $1500. $750 of that was capital gains, so you have to pay another 15% tax on that, so you’re left with $1387.50 at the end.

        You come out ahead with a 401(k) plan.

  • slotowner

    s one large Mutual Fund organization to deal with our accounts (it was set up in the 90’s) but if anyone wanted to direct their personal funds to another set of investments, I’d do it for them (I’ve had one 15 years ago). I also know exactly what returns any of my employees could have received & they were not stagnant by any means even with the initial 5.65% front load that’s now dwindled as the fund grew.

    While people love freedom, many do need a tool, system, trainer, or guide to help them get past their short term temptations. A 401k is not perfect, but it does a decent job at stopping current consumption for LT rewards.

  • dajhilton

    Excellent article, but you STILL missed the biggest ‘con’ about 401(k)’s, one which always surprises people at the moment they begin to make withdrawals from their plans: this is the fact that all of the capital gains realized by the investment, even over 25-30 years, is taxed not at the normal capital gains rates but as REGULAR INCOME. At current rates that is almost a doubling of the taxes that would otherwise have been due to the IRS if you had simply invested the money yourself in a normal stock brokerage account and not in a 401(k) account. Far better NOT to invest any new money in your 401(k), but to just buy shares in Apple, or GE, or Disney yourself. After 10 years those will have doubled in value (plus dividends) and your gains will be taxed at low capital gains rates. But if your 401(k) funds had made the very same investments on your behalf, you would have had to pay annual fees, plus TWICE the tax on your capital gains over the whole time, because the IRS will transform your capital gains into regular income if they are made through a 401(k) plan. Rip-off to be sure.

    • MarkW99

      I never even thought about that.

    • AC

      I stated this in a comment below, but it warrants repeating here because I see statements like these often that are not thought out completely. What you state is only a half truth that makes many assumptions. What’s “best” is very different for each individual/family. Take a look at historical captial gains rates (or have a look at where some European countries are today). Absurd is it may sound, there were many, many decades where the capital gains rates were higher than regular income rates. Do you think you can assume things will stay as they are today? Your point depends heavily on each individuals situation and how tax laws change over time. Again, I give this example (http://www.gocurrycracker.com/never-pay-taxes-again ). He has plenty socked away in pre-tax accounts that he’ll “never” pay a penny of taxes on. No doubt there are many examples of the exact opposite situation where avoiding pre-tax accounts would work out better. That is my point…there are no steadfast rules for investment vehicles when nobody knows what will happen with tax laws in the future and everybody has different investing horizons and retirement scenarios. This is why a diverse portfolio that contains pre-tax and post-tax savings is the best way to prepare IMO…you can later make decisions based on your situation or current tax laws that benefit you the most. It’s not a “con” or a “rip-off”. There isn’t a 401k plan in existence that doesn’t explain that you pay taxes on withdrawals as regular income. This information is readily available. We must stop and educate ourselves to make a true assessment for our personal situation. This is not the job of brokerage houses, employers, or finance blogs. It’s up to YOU, the investor. Wall Street supplies the option, YOU supply the judgement.

      • John StackDecker

        401ks are ripoffs exactly for that reason. Who cares if a robber tells you the terms of the theft? Where are workers supposed to save for retirement? IRAs? hahahahha sure. The other option is the tax qualified retirement plan. Christ, even ted benna has called it a failure. You know him? The creator of the 401k.

      • Neil Tana

        But wall street is run by a bunch of immoral crooks. Bernie Madoff was part of the system that is why he got away with his scam. The rich cannot be trusted because they have no morals and worship money as their god. It’s all about consumption and who has the most ‘stuff’.

    • mary

      But, having cap gains being taken out all along the way reduces the amount of money you can invest, especially if you tend to trade. The best, of course, is to pay tax at the beginning–roth 401k–not at the end, but that’s not open to everyone.

      Another negative is you’re still paying payroll taxes, which are the biggest taxes for most working people.

      He missed what I think is THE BIGGEST PROBLEM: The gov’t will change the rules. You can plan all you want, but you have no idea what the rules and restrictions will be in the future. They can prohibit balances over a certain amount, force you to invest in areas and not others, means test distributions… we can go on and on.

      They also know exactly how much you have and where it is. It’s a spy account.

      They can audit your plan any time and find all kinds of “violations” including totally bogus ones, and you have to defend yourself, paying an accountant and/or tax attorney.

      On the positive side, (ja, ja, ja)
      1. if you have your own business and a solo 401k, you can sock away a lot and invest in things other than stocks and mutual funds.
      2. The asset protection is sound, although there are other ways to protect yourself.
      3. You can use your contributions to lower your tax rate.
      4. You can adjust your withdrawals to lower your tax rate.
      5. You can borrow and pay yourself the interest (this is sort of a goofy positive, I know, but…)

      Yeah, James, write every week about finance industry scams. As you well know, there’s an embarrassment of riches.

    • David Liu

      This is a non-issue, as you weren’t taxed at income rates in the first place. This belies a misunderstanding of basic math principles.

      Investing through a regular taxable account will have both income taxes taken out of the principal, and capital gains taxes on the gains. Investing through a Traditional 401K will have just income taxes taken out on the principal and gains. The Traditional 401K can be represented as the formula:

      FV = P * G * (1 – T)

      Where:

      FV = Future Value
      P = Principal (your contributions)
      G = Growth Factor (i.e. the percentage by which your investment grows by)
      T = Your tax rate

      That is, your future value is equal to your principal growing for 30 years, and then getting taxed.

      Through the commutative property of multiplication, we can move around the order and receive the same result. That is:

      P * G * (1 – T) = P * (1 – T) * G

      In this new order, we have the principal getting taxed first and then growing for 30 years, equivalent to being taxed later instead.

      QED, the traditional 401K is at least as good as a taxable account in terms of taxation. However, we’ve left out capital gains taxes, which is an additional extra tax on top of the income taxes, making the Traditional 401K better than a normal taxable account with respect to taxes.

    • Neil Tana

      Yes, but they reserve the right to change the rules on taxation and you know it will not be to the benefit to the average citizen, so the detriment will be worse that you state. The only thing to do is stay out of their elite system and get physical assets like paying off your house and such.

  • James, I’m a fan of your writing, but this seems a bit odd. You say you have no agenda, yet you promote a paid “investing strategy” report at the end of your blog. I believe you, but it doesn’t look good.

    • John StackDecker

      Do you disagree with his arguments? B/c whining like yours looks absolutely childish. Oh look, James is just trying to sell his stuff by badmouthing tqrplans. You’re such an amateur.

      • Red_Stater

        You’re an amateur heckler, probably laughed at hysterically in high school and I’ll bet your first girl friend made fun of your pecker size in front of the entire gym class.

  • Paul

    America has a difficult time saving and most American’s can’t retire when they want. If one’s salary is low it’s probably better to invest in a Roth 401k (many companies have this).

    I only invest in index funds in my 401k and the ongoing fees are all 25 basis points or less.

    Personally, since my income is higher this is a great strategy for me to defer my income. I have rolled 401ks into self directed IRAs w/o leaving my company (it’s called an in-service withdraw). I then used this money to buy real estate.

    I have more pros but if you can’t tell i’m a big fan of the 401ks. and have been since I graduated from college over 20 years ago.

    • Chris

      Hey im 23 I wanna get a 401k not with a company should I get a Roth? Im young I just want tips for next year when im capable of putting money into my 401k

      • Wout

        Absolutely! Get a Roth IRA. It is the best vehicle to save with. You will need to figure out your own investment strategy, or follow a good newsletter. But nothing is guaranteed in terms of return. Never is, because nobody knows the future.

        A start would be the free report at investmenttimer.com it has good info and the editor answers questions.

      • Paul

        There’s very little downside to getting a Roth so go for it!

  • Lea

    James, money is also a scam. K bye.

    • John StackDecker

      Get back in the kitchen where you belong.

      • Red_Stater

        Go take a short walk off a long pier, please.

  • Joe

    No mention of the legal protection of 401 ie. passes through bankruptcy and judgments. Yes there are other ways to accomplish that, but those options are not available to the average person. This article will hurt people.

  • Excellent. E.g. I certainly didn’t know your con-point #2, the “golden handcuff” of time-deferred employer contribution matching. And surely you’re right when you urge people to think about their life direction rather than monetizing their existence.

  • Jonathan Ivins

    I think you bring up some valid points regarding the pros and cons of the 401k. I think that the hidden fees, management hullabaloo and employer vesting periods are very strong cons. Probably the most important is the last section where you mention that it is
    more important to create multiple income streams and invest in yourself in
    order to truly build wealth. I think that if you use the 401k as temporary tax protection and are able to minimize the fees that it can serve as a vehicle to help boost your net worth in the short term to allow to take on additional risk. For example, you might be able to put more tax deferred money into your 401k and borrow against to as leverage which would allow paying the
    interest back to your account which allows you to tap into more of your capital and have a 401k balance grow simultaneously. Utilization of a low cost
    index fund of ETF would help reduce the expenses and help streamline your
    returns over time however (which is one of your cons) you might not have any of those options in which case it does not help very much. In addition to this there are some work around where you can pull out you 401k money that you contributed while maximizing you returns and not be hit with a penalty (Roth IRA conversion).

    Another great point that you made it to no just look at the 401k as you only
    tax saving system but rather all of your income and expenses as a potential tax deduction or credit. If you are clever in your utilization of these tax
    elimination vehicles then using the 401k does not make much sense. This
    is a unique perspective on a very saturated topic. Nicely done.

    I would be interested to hear you view of other tax protected account like an HSA or 529 plan. Do you view these in the same manner?

  • Wout

    Yep, when I was 27 I closed out my 401k of 32000 dollars, that was in 1995. Now I would not mind still having it, even if it did not grow at all. It would have been about 100k actually.

    So do yourself a favor, at least roll it over to a traditional IRA, you’ll have control and then you can just blame yourself for your own investing brilliance or mistakes. Or sign up for a really good investment timing newsletter….

  • Deann

    Loved this – yes please write about the credit card scam thing. I didn’t know you 25 years ago, but felt the same way about the 401K issue and took mine out at age 26 against everyone’s advice. I “invested” it in myself, got my degree in asian medicine and consequently have enjoyed many years of what I love and am gifted to do. I now wish to know how to climb out of debt, largely from my HUGE education loans and the credit card debt I have also acquired. (I have just signed up and am waiting for the recent awesome book offer that you sent out…) Thank you for your continued efforts to inspire us all wince, laugh and move through this life FREE from the societal brainwashing agendas…:)

  • I watched a 401K disaster unfold where I work. The available plans all had a fine print clause that even if you were 59 and1/2 you still couldn’t pull the money out without something like 6 months advance notice.

    When the 2008 crash became obvious everyone scrambled to pull their money out but got the big surprise.
    They had to sit there and watch thousands of their money evaporate into nothing.

    I got lucky, I always was suspicious of the 401Ks due to the hard sell they used on us. I also like to have my money in something that will liquidate quickly, so I wasn’t involved.

    Please do continue to discuss financial things on Friday.

    • David Liu

      You should also note that if people left their money invested through the 2008 crash, they have almost doubled their money since the highs from just before the crash.

      Taking your money out at the first sign of a crash is a surefire way to lose money.

      • If they had been able to get all their money out in the beginning of the crash and then re-invested it after the bottom of the downturn they would have made a lot more than riding the losses
        through the bottom.

        • theta1

          Yes, and if they then sold before the 2010 flash crash and bought immediately after, then sold prior to the August 2011 crash and bought after, and so on, they would be millionaires. If they were so talented to be able to predict market moves they could just do that for a living. The discussion is for the rest of us who don’t have magic powers and therefore are unable to do so.

      • @ David Liu – “You should also note that if people left their money invested through the 2008 crash, they have almost doubled their money…”

        I think you are conflating math with finances. The adjusted close on November 09, 2007 was 1,565.15. To double ones money, the market would need to close at 4,695 at some point in the future. As it stands, the S&P 500 in October 10, 2016 closed at 2,163.33.

        • David Liu

          What. 4695 is 3x 1,565. I said double. You’re also ignoring dividends, which generally reduces share prices. Thankfully, most fund trackers handle this for you.

          http://www.morningstar.com/funds/xnas/vtsax/quote.html

          VTSAX (a total stock market index fund) has almost exactly doubled in the last 10 years. Maybe a bit less than that if you want to cherry-pick and choose the high right before the crash, but then you’re just splitting hairs.

          • David – A common misconception for many is to conflate math with investing/finances. To wit: To double in math is not the same as in investing. In order for an investor to double her money as an investor, she wants to recover her capital expenditure (break even), then generate positive cash flow (earnings) to equal 100% of her original investment, and then generate enough earnings to exceed her capital outlay by 200% in order to “double” her money.

            Also, when considering the peak to trough to peak period of the 2007 stock market crash, it took 5.6 years for the stock market to reach its new high or recover from the crash. To wit: The S&P 500 (SPX) hit its peak with an adjusted close of 1,565.15 on October 9, 2007. The SPX did not exceed this point until March 28, 2013 with an adjusted closing price of 1,569.19. If an investor invested her money on October 9, 2007, she would be right where she started in 2013. And, if she wanted to double her money, the SPX would need to reach a closing price of 4,695. This includes dividends, and assumes there were not trading costs or taxes incurred by the fund manager, which is highly unlikely to occur.

            As of today, the SPX is trading at 2,097.94.

            SPX numbers were obtained from Yahoo Finance.

            And finally, If an investor started with $100k in 2007, her account balance would only be worth approximately $152k at the end of 2015. This means that she has yet to recover her capital outlay. She is only half way there. And bye-the-way, the average rate of return between these two periods was 8.30%.

          • David Liu

            1. I think you’re the only one here who conflated “doubling your money” with the “finance” definition.

            I would also contend that the idea that one would need to “recover their capital expenditure” first in order to “double their money”, when stocks are liquid enough to be treated no differently as cash, is completely bunk, but again, you’re just splitting hairs when it honestly doesn’t matter (see above point).

            2. I don’t quite see the point of measuring peak-trough-current prices, except to make an intellectually dishonest argument filled with cherry-picked data. Additionally, none of these people who would be desperate to sell during the crash would actually want to sell during the peaks, so starting from the peak isn’t relevant in the first place.

            3. The closing price of S&P500 does not include dividends. I don’t know why you keep on referring to the closing price, when the S&P500 index does not include distributions. It is solely calculated based on the closing price of its constituent stocks. More talk of closing prices that don’t include distributions when I’ve already pointed this fact out again reeks of intellectual dishonesty and a waste of everybody’s time.

            4. http://www.morningstar.com/funds/XNAS/VTSAX/quote.html

            Using an actual fund, rather than index prices, holding from 1/1/2007 to 1/1/2016, you would’ve seen an end growth of 78%. More or less doubling, depending on actual start dates, etc. If you want to quibble on what percent range actually constitutes “doubling” and/or “almost doubling”, you can do that with a mirror.

          • David – I noticed that you did not quibble with my comment: “If an investor started with $100k in 2007, her account balance would only be worth approximately $152k at the end of 2015. This means that she has yet to recover her capital outlay. She is only half way there.” I take it that you agree that she has not doubled her money as you previously contended? Looking in the mirror, I see an investor that has even recovered her capital outlay. What do you see in your mirror?

          • David Liu

            I did reply to it. But you skipped over it, intentionally I presume, so now I’m skipping over this conversation.

          • spordlaw

            You motherf@ckers are too smart, you’re making my head hurt.

          • Barry C

            Yea, but as David say, good that we have our investor take care of this for you… Amazing the math people cant compute….
            If I have 100$ and lose 50 of it or 50% and then gain 50% back I only have 75$… Thank God I had Mrs. Emerick in 4th grade…

          • David Liu

            I’m not even sure of what the point you’re trying to make.

            A person who invested in the S&P 500 from 2007 who held through today would have well more than the original $100 they invested. Additionally, nowhere did I state that a person doubled their investment from the bottom of the recession. I instead stated that they would have doubled their investment from before the recession. You should bone up on your own 4th grade reading comprehension before trying to assert that my 4th grade math skills are lacking.

      • Barry C

        That isn’t true… If you had 1M in a 401K in 2007, it most likely fell 60% to 400K at which point a100% return would leave you 200K short of your original amount. At which point you would be petrified to leave it in mutual fund and move it to a bond…i.e. HISTORY.. woulda coulda shoulda. Old article, but most of all 401Ks and investment banks, brokerage are out to take from the WASP, not help him or her along at anything more than a MAYBE slow pace. They are always moving stocks in and out of mutual funds. They are always recategorizing them, giving them a new symbol, etc. to show GOOD performance on paper. Up 15% a year for 4 years*** plus ** plus * (see note on page 12 of your plan for details) In the end, you won’t be there with that same investor and they know this, they will have since moved on and YOUR money is another hand. They now have figure out that working the economy in a hard Cycle will benefit them a lot more. Thus you have what we see now, Hard climb followed by crash. You think this market can continue up and up… On 25$ an hour for everybody with mounting bills and medical expenses ? Think again.. They know this and are buying other assets while selling you high and scaring you low..
        But you know, as Trump says, Gas is cheaper than it has ever been… spend spend spend… Refinance, build that bedroom you always wanted.. By that awesome car…. then sell it at the bottom when you are broke..

        • David Liu

          Read my post again. I specifically stated: “they have almost doubled their money since **the highs from just before the crash.**” That specifically means to take the money from before the crash, and to double that. Not to double the money from the bottom of the crash.

          Instead of relying on my language though, I welcome you to look at the actual investment return charts on a simple basic retirement fund.

          https://personal.vanguard.com/us/funds/snapshot?FundId=0699&FundIntExt=INT

          A hypothetical deposit of $10 in 2007 would have ~$17k today. Maybe not exactly doubling your money, but certainly well beyond the original amount, and a 70% ROI over 10 years is quite something to behold when a large chunk of it was spent in a recession (whose effects are still felt today!)

          —-

          There are certainly reputable brokers just as there are disreputable brokers, but that’s really beside the point I was talking about in the first place.

    • discussstuff

      Thank you for describing a common horror many had with 401Ks.
      Your money is locked up. Under control but not yours!
      Watch it go but keep making those contributions. History speaks loudly.

  • Jeremy

    Keep the series coming! Would love to read next week’s post about credit cards.

  • xrugr

    Maybe this is just too obvious, but a major benefit of tax deferred plans that is not mentioned is that you don’t pay any taxes on profits earned while investments are inside the 401k plan (to the extent you have any profits). Sure there are fees, but there will be fees in most any investment vehicle. Outside a tax deferred plan, once investment returns become meaningful taxes take a huge bite out of performance, because they come out of all profits made “each and every year”, which decimates the compounding effect. Any investment vehicle that allows compounding of profits without taxes has an advantage over investment vehicles that do not.

    • @ xrugr – Over the long term, all-in 401(k) fees can be greater than the tax deduction and/or employer match. Secondly, during the distribution phase, an after-tax retirement plan can provide greater cash flow than a pre-tax retirement plan. Additionally, if the interest one pays on his or her debt is greater than the interest earned in a 401(k), does it make sense to invest in a 401(k)?

  • Hank Putnam

    As always, you raise some interesting points. Ideas that most people are probably afraid to confront. Here’s a story that might support your efforts. Several years ago, when I worked for the Discovery Channel, I cashed my 401K in and used the money to make a personal film I always wanted to do. The subtitle to that film, is “Or How I Spent My Retirement Money and Made a Movie.” Kind of wish I had that money now, but making a short independent film did get me some gigs I never would have gotten, though. Maybe the real issue here is discipline. If people are able to make themselves keep to a savings account of some kind, they can invest their money in anything they choose. Even themselves.

  • Theresa Jay

    My CPA hubby and I are applauding this great article. And yes, please…we’re eager to read your take on credit cards!

  • Kevin

    Thank you so much for this article. The tax implications are such an overlooked part of this puzzle.
    I’ve been listening to your podcasts for about six months now and just finished reading “Choose Yourself”. Your vulnerability and sincerity is very moving. It truly helps listeners/readers identify. Keep doing what you do!
    And please continue doing the Financial Fridays series. Please.

  • Jack Hayward

    A couple of “pros” for 401ks. 1) As xrugr points out, the money that you would have paid in taxes (on the tax-deferred investment) continues to make money for you. I always thought that was the biggest reason to be in a 401k. 2) If the company match exists at your company, they are already paying you less in salary to cover the cost of the 401k match, so it makes sense to take the matching funds that you are already essentially paying for.
    In my case, (33% tax rate, 50% company match) I can choose between having $X/month in my checking account (after taxes) or $2.25X/month going into my 401k (pre-tax). It seems like a no-brainer to me.
    I’d love to see someone run some real numbers comparing a tax-deferred 401k vs self-investing and paying at the capital gains rate. Assume no change in tax rates, just for comparison purposes.
    Quick (and very crude) calc – Investing $10,000 per year, 10% return on investment, for 2 years, no company match.
    401k: After first year, Account is worth 11, 000, after 2 years, 23,100. Withdraw from 401k and pay 33% taxes -> 15,384.
    Self-Investing: 10,000 after tax is 6, 667. Invest that and make 10% -> 7333. Pay taxes on the profit (@15%) brings it down to 7233. Do that During the second year you have 7233 + 6667 = 13,900. Making 10% on that is 1390 – 15% taxes gives you profit of 1182 for a total of 15,082.
    It looks like the compounding outweighs the lower tax rate after only two years (compounding only happens once).
    And even after one year… if you self-invest, you are paying the full tax rate on the money you make, then making a profit with that money and paying the capital gains rate on the profit, leaving you with 7233 after the first year, vs 7333 for the 401k case.

  • MitchR

    I get what you are saying. Fees can be high but bottom line is it is a forced savings plan.

    If I had taken the $ that I had been putting into the 401k over the last 23 years and invested it myself,…there’s a slim…very slim chance, I would have the $ I have today. The fact that it has been invested in T Rowe Price funds and not in some shares of a Biotech or Technology company that went belly up, gives me a warm feeling. Also, if I had that extra $ each month in my pocket, it would’ve been easier to overspend on stupid stuff that would have given me some happiness for the moment, like a new car when it wasn’t needed.

    I get it….fees and locking up your $ for 30 years, sound ridiculous. I know from my own experience that watching the $ in the account go up over the course of years, make me sleep better at night. I could’ve invested in shares of some tech stock in 2000 and lost it all.

    Invest slow and steady…good times and bad.

    • John StackDecker

      No, the question is is it a good savings plan. Only libertarian fools occupy their minds with slights of force against their hothouse flower persons.

    • @ MitchR – ” it is a forced savings plan.” A 401(k) is not a “savings” plan. It is an “investment” plan. The first protects the principle from loss, the second does not.

      So to be clear, a 401(k) is a forced investment plan.

  • Esin Ozdag

    Putting in my vote for YES on Financial Fridays!

  • Brian Tague

    Interesting article. I learned a few cons about 401(k)s that I wasn’t aware of. Please continue the series. I’m looking forward to the next article

  • Ian Hamilton

    Thank you… I hope that you do continue to write about/ educate on this which is our financial system. As a practitioner, it is always an embarrassment that we have Payment for Orderflow (read: kickbacks in any other industry) and stock borrowing (ie renting out someone else’s property without paying them).

  • James,

    I like that this article goes against the main stream, and definitely made me question my own financial plan.

    I would like to add though, that I think what a 401k does right is provide a frame work for people who can’t invest in themselves or do not know how.

    I know when I got my first paychecks all I wanted to do is buy everything and not save. Now I have calmed down a bit and started saving. A lot of people don’t calm down and continue to burn through their paychecks for their entire lives.

    So I think for people that do not have the self improvement mentality, or the desire to create their own income, 401k’s still offer a rather simple vehicle for basic saving.

  • Ember Martin

    I’m writing today because I feel compelled to point out some rather obvious flaws with your post on 401k being a ‘scam’.

    To start however, I’d like to remind you that not all of your audience is as ignorant as you might assume. If you desire to maintain credibility with your advice on various matters it greatly not to be disingenuous. Lastly its a bit hypocritical of you to point out various critics’ apparent biases and venal agenda when in fact your enterprise has trended toward more money making for advice offerings in your report.

    One other thing I’d like to share with you is that with the volume of your posts increasing significantly I (and others I’ve spoken to) feel the quality posts are fewer and farther between. At some point you’ll start losing readers because of this.

    Anyway, on to my rebuttal…my comments are preceded by “>>>”

    The PROS of a 401k

    You put money away before it is taxed. This has the benefit of encouraging you to save starting at a young age.
    >>> Yes it encourages savings (early or not) because of the built in discipline of forced savings. 401ks generate savings habits far greater than normal human discipline would. Absent this almost no on would save money (a fact backed by studies galore).

    Often your employer will match what you put in your 401k. So it’s “free money” (ask yourself: why is this the only example of free money in the entire world?).
    >>> Yes it is free money. A good thing.

    When you are 59.5 years old you are allowed (like a parent allows a child) to take money out. It’s taxed then but now you’ve benefited from the 7% per year that, by law (kidding) the stock market goes up.

    >>> This is disingenuous or misleading at best. The law says you can take withdrawals prior to age 59.5 but you then lose the tax deferral and pay a 10% penalty. Being ‘allowed to withdraw funds is not the issue here. Secondly, mentioning any rate of return here is plain confusing as the issue is unrelated to the rules of withdrawals.

    I can’t really think of any other pros. If you can think of some, please put in comments and I will try to address.

    >>> Here’s a few other ‘pros’.

    A. In addition to the forced discipline resulting in many more savings than would otherwise exist, there is the fact that the most plans offer investment choices are in ‘pre-set’ portfolios that are not only well -diversified but also auto-rebalancing. Yes you can choose to pick individual funds but its obvious that the pre-set portfolios are the way to go. This keeps participants more safely invested that they surely would otherwise be (another fact backed up by studies).

    B. Recent laws now allow for auto-enrollment and auto-incremental increase of one’s percentage of salary deferred.. These two features are now allowed because numerous studies show that humans of creatures of habit who fail to either enroll or increase their savings over time. Moreover, they also fail to diversify their investments.

    C. The mere fact that 401k’s exist has resulted in many more Americans starting to save and at an earlier age. The action of saving money regularly and seeing an account balance grow over time reinforces the generally agreed as good principals of patience, discipline, responsibility and investment education.

    CONS of 401Ks

    Let’s look at it conceptually for a second and then I will look at the cons.

    You are paid money by an employer. You have that money in your hands for five seconds, and then it is whisked away into this account and you can’t look at it again for another 20-35 years unless you want to pay a massive penalty. Will you be alive in 30 years? Hopefully! Else you will never see that money again. Ok, that’s my first problem with 401k. I like to have total control over money that is called mine.

    >>> The rule penalizing early withdrawals is a choice one makes if one wants the tax deferral and other benefits of a 401k. It’s also a huge disincentive to be irresponsible with one’s retirement savings. Even if one ‘chooses oneself’ and (tries) to create multiples income sources its still good to insure some of that risky behavior with a savings account. No one says you can’t also save outside a tax deferred account, James!

    Ok, let’s look at the cons:

    1) You can’t predict your tax rate 30 years from now. This completely destroys the whole “tax-deferred” argument.

    >>> Ok lets look at the whole tax issue honestly here shall we? Yes it is true that the tax deferral concept works best for people who will have a lower tax rate in retirement (when making withdrawals) than they generally do on average during their working/savings years. Again, studies and everyday common sense will show you that except for the very affluent/rich people DO NOT have higher tax bracket in retirement than they do during their working years. So in those (most ) cases tax deferral is a straight-up benefit

    >>>Next up is the issue of the uncertainty of future tax rates. Of course we don’t know what they’ll be except to say that they’ll be proportional to today’s tax scheme. This means that whether your highest rate is 33% or 39% or 25% the system will still almost surely be ‘progressive’ meaning your first dollars are taxed at lower rates and then higher rates as you make more money. So future changes in tax rates are unlikely to have a material effect on your net effective tax for most middle class persons. Also, to say one shouldn’t do something because the rules might change is boneheaded. Rules can always change. Adaptation is key.

    2) The Employer Match

    Do you think companies really pay you free money? Companies that don’t have an employer-match pay higher salaries. The Center for Retirement Research did a study based on tax data and showed that for every dollar an employer (on average) contributes to a 401k match, they pay 99 cents less in salary.

    >>> Another example of a disingenuous argument. even if the above is true, your employer match is but one piece of the whole benefits package (the comp part) that factors in to your decision to accept a job or not. So if you do make $1 less for every $1 offered in match its still part of a larger package of benefits that are evaluated on as a whole.So it doesn’t matter whether your comp dollars arrive in the form of ‘401k match’ or extra salary or even employer stock grants or a better parking spot or cafeteria plan. Its all just employee benefits and so the ‘free’ match is not a reason to not take a job.

    Also employers don’t give you all the money at once. They spread it out over 4-6 years (six years is the regulated max or they would spread it out longer is my guess). If you leave before the six years, you often don’t get the match. So employers actually save money in the long run by installing a 401k plan. How many employees stay at their jobs for six years? Not that many. The average is 4.6 years according to the Bureau of Labor Statistic.
    >>> The reason employers spread it out is that its good company policy (and good employee policy) to encourage stability in the workforce. There’s nothing wrong with an incentive to stay a few more years than is usually normal. Its been show that companies with the best morale, productivity and employee satisfaction are all companies with longer than average worker tenure.

    3) Fees

    >>>>Bad 401ks do have revenue sharing, egregiously high administrative and investment fund costs, as well as under performing funds. To avoid 401ks because some are bad is like saying don’t get married because most human beings will eventually cheat on their spouse. No, the onus is on the 401k participant, and the fiduciaries of these plans to become better informed about the bad features of a plan and makes or demand changes. There are literally hundreds of lawsuits in progress now forcing companies to address these shortcomings.

    Here’s a tip for any company that wants to avoid these problems…install a plan with only pre-set portfolios made up of low cost index funds from Vanguard, DFA, Fidelity or almost anyone really. Such a plan cannot by its structure offer revenue sharing or marketing cost sharing since index funds don’t generate enough expense to cover those. Also gone is the issue of expensive or underperforming mutual fund choices since index funds, as they say, ‘cannot underperform’.

    >>>Many of the worst abuses in bad 401ks have or are being addressed in recent and newer legislation and even enforcement actions by the DOL, PGBC and the SEC.

    4) Assumption on market returns.

    The market has returned somewhere between 7-10% per year depending on what time period you look at, what index, etc. The average investor has returned 1.8% per year over the past 40 years. The psychology of investing is very difficult. In 2009, many investors pulled out of the market, right before a 100% upward move. And when I say, “many investors”, I’m not talking about you – I’m talking about the best mutual fund managers in the business.

    >>> Yes, I agree that one’s investment performance is usually nowhere near the actual return earned by the investment vehicles themselves. Moreover many of the professional fund managers also do miserably over time. That’s why passive or index investing is the only smart and sane way to invest.

    5) More on taxes.

    Yes, you save tiny amounts on taxes when you are young. But this is also the period when you have the biggest tax write-offs relative to your income (dependents, business expenses, etc).
    >>> But when you are in your 30’s & 40’s and can/do save $10k-$25k annually the tax deduction is meaningful

    So you don’t really need the extra minor savings on taxes. Trust me, you will be fully taxed at the highest rate when you pull money out 30 years from now.

    So why not use that “extra” money to invest in yourself right now. Invest in skills that can benefit you or experiences that you can enjoy and make you happier.

    >>> yes you should invest in yourself as you say but saving money is itself a form of choosing yourself since you are accruing capital for a future need that is certain to one day arrive.

    401k plans have been around for decades. And yet the average retiree does not have enough savings for retirement.

    >>> Actually only since 1973 but yes most people don’t save enough. The reason most don’t save enough is not because of the 401k; its because of human tendency to play now and worry about the future later. Blaming 401k is a bit of a specious argument in my opinion.

    • Noturaveragesuker

      401k explained, give me $100 to invest for you and i will match it with my$100 in that investment, but if you choose to take the money out before a certain time is over i will penalize you 30%, that equals to you only taking out $140, but not after you pay taxes on it and after i take my trade fees out for executing the buy sell orders, i forgot to mention before i chose to offer you such a great deal, i had already bought the stock you will be invested in for myself at a much lower price than you and i will invest in, and when i choose to liquidate my initial positions in that same stock, i will eventually take everything back at once, but i will blame it on the economy,…ooops, maybe next time, as we do this to everyone every 7 years,…thank you for your money.

      • Al CrushU

        Wow…make stuff up much? You don’t choose the investment, i do. 30% penalty? Just stop. It’s 10%

        • HeLeakin’

          10% + the money is taxed at your current tax rate which surely increases with a withdraw from a 401k. Just stop saying its only 10% dumbass.

          • Al CrushU

            Wow i hope you pay for investment advice cause you’re clueless. The PENALTY for early withdrawal is 10%, period. Of coarse you pay taxes on the withdrawal as it is ordinary income, if you didn’t put it in a 401k you would also pay. Withdrawing money has no bearing on your tax bracketu. How much you withdraw does. Your welcome.

    • Mario Henry

      Guess you must sell 401ks…..lol the guy did a hell of a job describing the scam of the 401k

      • Ember Martin

        Mario,

        Don’t be a dumbass who replies in generalities. Just try to address my points with informed and intelligent answers. Otherwise you sound like Fox News.

        • John StackDecker

          Dumbass? The voice of experience speaks.

    • John StackDecker

      You have no business commenting on retirement savings. You are ignorant and lying about the content of the article. You must be a financial adviser.

      • David Liu

        Not sure how he’s lying when most of these things can be either proven by use of Math (tax deferral vs. marginal tax rates) or looking things up on Google or looking at the fee documents mandated to be given to you by the 401k provider.

        All this article promotes is relieving any self-responsibility to examine your own situation and calling the 401K a scam to be avoided entirely.

    • berzelius

      You cannot pull out the money prior to 59.5 while your still working for your employer unless you meet a hardship reason. Some plans that age is 70.5. Some plans won’t even let you withdraw a rollover source. So it’s not as easy as you just pay your taxes and your penalty prior to 59.5 like you say.

      • David Liu

        If you’re still working at a company, and don’t have a hardship need, there’s really no reason to withdraw from a 401K in the first place. It’s for your retirement, not for you to blow on a vacation on a whim.

        • nogoodnews

          This is why I don’t own a 401(k) or IRA.A I don’t want someone determining what MY concept of a hardship is. When I did have one in my 20s I had to go to my employer… explain to them what my “hardship” was… All the while praying that they would approve a withdraw.

          How embarrassing demeaning and degrading. Having to explain to an employer my personal life and justifying a loan. I now invest with insurance and I absolutely love it!! Nothing will ever get me to go back to any sort of qualified retirement plan like 401(k) and IRA .
          NOTHING!!

          I determine my own hardships .. And I’m highly disciplined and pay back my loan usually around 4%. When in 2016 I had a $1500 emergency dental bill in the same month my car had a $1000 auto repair …wiping out my savings… I was able to call in and my money was transferred in three days … no justification needed and no penalty for doing so . Four months later I paid the bill back for just a few bucks.

          So what my hardship is is no ones business but mine . And this includes the time my favorite store had a huge semi annual sale and it was three weeks before my bonus paycheck . I like control over my money. I never intend to walk into a human resource office again and have to justify why I need money.

          Quite frankly it’s no one’s business what I consider to be important to spend it on. I will never ever own an IRA or 401(k) ever again. And bottom-line you’re gambling with your money.

          • David Liu

            If you don’t have enough to cover a small emergency and you’re putting away money into retirement… That’s your fault. Not the 401k/IRA’s fault. $2500 in a month is small beans. Control your finances better. 401k/IRAs have nothing to do with this. (Also, IRAs don’t have a hardship withdrawal qualification step at all.)

            401ks/IRAs provide a huge tax benefit at the cost of limiting access to your money. You do realize that right? You can get 15-30% more out of the money than if it were invested through a regular taxable account. If you prefer the freedom of your cash over extra money, go for it. I couldn’t care less. But I doubt anyone here realizes what the tax benefits are, and understands the pros and cons well enough to make a proper decision.

            Not to mention that investing through insurance results in vastly lowered growth due to internal fees and expenses. But that’s a whole other topic.

            And bottom-line, everyone’s gambling with their money. Whoop-dee-doo.

          • nogoodnews

            I appreciate you acknowledging that everyone is gambling with their money because it is true. I prefer to let the Social Security and my state pension people deal with my stock market investments. I’m not a stockmarket expert . Insurance I’m a bit more comfortable with. This Also gives me a nice range of investments and savings … broadens my portfolio.

            People like me prefer to pay our taxes upfront. Other People may choose to pay their taxes later. I don’t want to look at a big bank account and realize I haven’t paid taxes in 30 years …. And then be under the gun to make mandatory withdrawals . I don’t like sleeping with the enemy .

            Sounds like you found a system that works really well for you. I found a system that works really well for me. What’s neat is everyone saves the way they are most comfortable with. For some people that might be a savings account of $500 or 1k or in your case 2500. While I could easily choose to have that amount in liquid ( as I was left a six figure inheritance ) I just prefer not to keep that much liquid . So you shouldn’t jump to conclusions that people don’t know how to manage money maybe we just choose to manage it differently.

            I could never put another dime into my retirement over the next 18 years (thanks to inheritance) and I’ll be just fine.

            But we can always learn from someone else’s method and then we can decide if it works for us . In my case I’m really not interested in making the most … and that’s ok. I don’t need to be financially aggressive.

          • SirDukeNickRock

            nogoodnews: You have a great point.
            Years ago I had to do the exact same things, this after I found out that I could even “borrow” MY Money. Go figure.

            I’m seriously considering now as I write this reply to cancel my 401k.

    • discussstuff

      I believe we are hearing from an account manager above or someone else in this business.
      When is it wise to lock up, slow and release complete control of your money?
      How many financial “Plans” do we need to rest control of our money away from us?
      30 year mortgage, 30 year retirement plan. Money controlled, interest/fees paid.
      401Ks tell us to let go, don’t worry about your money, we have control of it for you. What?
      I am smart enough to decide for myself thank you.

      • HeLeakin’

        I would never give someone control of my money. That’s probably the worst decision you can ever make!

    • discussstuff

      Your overly long winded arguments do not help and just repeat the same stuff the financial con men use.

    • HeLeakin’

      You sound like an asshole!

    • Mike Stellino

      Hmm i love my 401k and my 457.

      I watch it grow weekly . Sometimes I see the Dow and Nasdaq had a good day the following day i will open my 401& 457 and see i made 500$ sure i lose some but over the last 18 years i averge about 7 percent.

      If my vast array of invetments continue to perform average I will have 1.9 million when i retire.

  • Mark

    Hey James,

    Strange as it may sound, I enjoy reading what you write on finance. And just about everything else!
    I would be really interested in what you have to say about credit cards. I think they’re a scam. Think about it – the ‘bank’ issues it, creates the money out of thin air to pay the people you use your credit card with, and then turns around & charges you COMPOUND INTEREST (!!!) on the money they just created out of thin air.

    If I tried that I’d probably be serving at least 15-20, maybe closer to life, in a 6’x8′ concrete resort.

    Keep in mind – this is worse than the mortgage racket. The money issues are about the same, but at least they’re only charging you SIMPLE INTEREST on the “loan” they made with money they created out of thin air.

    Anyhow, I’d really love to hear your thoughts on the credit card fiasco.

    Cheers,
    -Mark

    PS:
    I’ve been following you for the past 3-5 years. I’m a Stansberry Aliance member & was turned on to your stuff by them. I’ve got a few of your books (& purchased “Choose Yourself” for a few of my family members), follow you on Quora, your podcast, etc. I love your ideas & how you’re not afraid to tell others how things are from your perspective without coming off as an arrogant jerk. Well done!

    • Cindy

      I don’t think credit cards are a scam. As long as you pay it off monthly or weekly, you’re simply using someone else’s money for free. And if you are earning points or cash…even better. They hate me, I’m sure. I don’t pay them a dime in interest. As well, their cards act as protection for purchases, and as insurance for car rentals.

  • Fred

    I agree with your conclusion that 401k’s are scams. I also think that all mutual funds are scams. I’d like to see your financial Friday’s continue. Thanks!

  • Jennifer

    My 18-year-old son knew credit cards were a big scam as soon as he heard how they worked. Still, I would love to hear your take on that and what else is wrong with the world! It’s always illuminating.

  • AC

    James-

    I applaud your efforts to point out the pros and cons of a 401k. So many people don’t weigh these things out when making important decisions. I think your overall point is not to blindly accept what is foisted upon us by media, society, large “evil” corporations or whomever you would like to cast in the role of master mind with a plot to take over the world. We must educate ourselves…it is the most powerful weapon. Thank you for passing on this message.

    I’m shocked that you conclude from your points that 401ks are a “scam”. One might argue that the incendiary phrase, “your 401k is a scam” puts you firmly along side the “brainwashers” that you so vehemently chastise in your article. I see statements like this often, but I’m surprised to hear it from someone as educated and talented as you are. Because both parties benefit from a transaction does not make it a scam. The vesting schedule for company 401ks is really a hedge for them. They are trying to incentivise employees to remain under their employ to reduce the costs of money/time/resources that come with a high turnover rate. The amount they make off of revenue sharing and gains from unvested match funds when an employee leaves probably falls far short of what it costs to replace that employee.

    It’s important to remember something when choosing any investment vehicle; Brokerage houses perform a service and charge a fee for that service. That’s what a business does. As this is a major source of revenue, then I think it’s a reasonable expectation that they may try to convince their clients to invest in vehicles that increase the use of those services. Getting people to invest in a 401k is probably a good thing (the “forced savings” argument that many commenters have pointed out) so the client wins, but so does the business as they make money off of this idea. I seem to recall you doing a fair amount of promoting the idea of reading as many books as possible as a key to “success”. Is it fair for somebody to accuse you of scamming them with this advice because you are an author? For any decisions, financial or otherwise, the key is to be fully informed. The business supplies the option…YOU supply the judgement.

    As far as not being able to predict income taxes 30 years from now, I don’t think this should be listed as a pro OR a con. You can benefit in OR lose from this variable. There are so many life scenarios to consider that it’s impossible to make a blanket statement about how this will affect you (spending needs, tax brackets, location of retirement, marital status, length of retirement, etc.). If you don’t believe me, take a look at this post from GoCurryCracker (http://www.gocurrycracker.com/never-pay-taxes-again). He put plenty of money in tax deferred accounts and will NEVER pay taxes on it. That’s a win-win! IMO, the best preparation from a tax standpoint is to maintain BOTH “pre-tax” and “post-tax” savings so that you have the option to take best advantage of the system no matter what. As you said yourself, the key to comfortable retirement it to diversify your passive income streams. Having something in a 401k as part of that plan can be a path to success depending on the individual and their retirement needs. Relying on a 401k, or any single investment vehicle to get you through retirement is foolish, but if you are an informed investor, none of these things are “scams” per se, you just make a decision on what cost you’re willing to pay to take part.

    • discussstuff

      They are a scam because they are presented to employees as the only option for them.
      Participate or die.
      You are going to miss out!
      Free money!
      Don’t you hear the same stuff from con men?

    • GS

      They are a scam because you don’t own the account (your employer does) and you don’t own the underlying asset, the (DTTC does – it holds title to nearly everything through its subsidiary Cede & Co) and the broker just holds the trading accounts; while you sit as a beneficiary for 30 years. And meanwhile the banks hypothecate the pool of stocks selling more than really exist – making loans on more than exists and using derivatives just like they hypothecate everything else. That’s what makes it a scam!!!

  • MarkW99

    Sometime in 2016 it is estimated that the 401k system will “roll over” and more money will leave than is going in due to Boomers retiring. Should be interesting to watch.
    401k IS a scam. My plan offers a few choices, none of which have beat the market for 10 years, not even the S&P index option (fees? bad timing? dunno, but it lags the S&Pby more than a point). We had a rep come out and talk to us about retirement savings and I asked why I couldn’t take my 401k money and buy a duplex or 4- plex and have sustained rental income through my retirement and have something to leave to my kids. He literally ignored the question and moved on like he hadn’t heard me.
    I put money into it, but only because I get a generous 6% match. No other benefit that I can see.

    • @MarkW99 – “I put money into it, but only because I get a generous 6% match.”

      Over time, all-in 401(k) fees can equal or be greater than the employer match or employee tax deduction.

  • Charles Aulds

    Best financial move I ever did was cash out several “self-directed IRA’s” in 1999 which were all “rolled-over” from employers’ 401(k) plans. We used that money to pay off all our debts … and that saved thousands in interest. Plus, I never saw a decline in any of those investments, ever.

    I went against the explicit advice of two investment advisers on that.

    • Mike Stellino

      You would have 100000 thousands more now if you kept investing have you seen the dow or nasdaq numbers in 2017

      • Charles Aulds

        Wow … that’s exactly what I was told in 2008 just before, well … you know as well as I do what happened shortly after.

        Believe the hype, and be sure to sell it to others! That’s what keeps this bubble expanding!

        • Mike Stellino

          Lol what happend in 2009 2010 2011 2012? Or if you looked at the history of dow jones or nasdaq they average about 9 percent growth since its cretion in 1890 . That with the great depression in there also

  • Hp B

    “The most violent, ugly people in the world work in the traditional finance industry.”

    C’mon man, strike the root! Say it! Say who ‘they’ are! Say it!
    (‘they’ own the M$M too)

    I don’t think I’ve ever heard you say it.
    I have, however, heard you run interference for ‘them.’

    Go ahead, censor me.
    You’re good at that too.

  • Adam

    I love this idea
    i would love to see posts where you break down the financial stuff so laymen know what’s going on.
    after reading more and more of your stuff, i would slip a line in when talking with friends about housing or college, saying things like “you dont need to spend 200k on an education” or “dont buy a house unless you have a lot of extra cash and dont know what else to do with it”
    people get really upset with me and just write me off as a kook.

    but then i explain myself and they cant really answer me properly.

    Could you write more on the financial stuff that will help us build a foundation that can help us navigate the craziness today?

    for example, how the health insurance world works, why is it so confusing?
    Are IRAs good investments for retirement (you touched on these, but i would like to know more about the magical IRA everyone keeps talking about)

    there is so much confusion out there, (and in here, in my head) it would be awesome if you could help us figure it out!

    your stuff is awesome keep ’em coming!!!

  • Gee Kay

    My own experience backs up that 401k’s are a scam. While building it up, I was only paying about 6% or so in taxes, so I wasn’t saving much with the tax exemption. Then I cashed some of it before 59.5 and had to pay a 10% penalty PLUS regular income taxes. And by this time, I had a wife who made a LOT more than I did and she was paying a higher tax rate than I ever paid, or expected to. While it didn’t kill me, it sure cut back on HER refund. Then, more withdrawals after 59.5 avoided the penalty, but still got taxed at her 25% rate.

    The company also had a rule that you couldn’t get your 401k unless you left the company. It invested only in company stock. Luckily, they canned me so I cashed out as fast as I could before the stock plunged further. The poor saps who worked with me watched their value drop about 60%. and couldn’t do anything about it (remember, James said you lose control of your money for years).

    So, for tax reasons you’re probably going to be paying a HIGHER rate when you take it out…unless you think that government is going to shrink and lower taxes in future years.
    This also doesn’t consider Black Swan possibilities, such as inflation (ever heard of that?) and market crashes and government confiscation of retirement funds (the government will give you a nice anuity, instead, denominated in shrinking FRN’s of course).

    While a 401k might be psychologically good for forced savings, Altucher is mostly right about them! And like he says, other “investments” in things that don’t evaporate so quickly would be better…

  • John f

    Pros: direct deposit into
    the 401k plan from company payroll….people don’t miss the amount invested &
    the lack of impetus to change/eliminate saving is a big positive.

    Too many people spend every penny they make so this type of
    savings plan works for more people than it hurts. Most people are too daunted by the prospect
    of setting up an IRA or managing their own investments.

    The penalties to discourage willy nilly use of the 401k savings
    are reasonable in most cases. As with
    any saving program, the people that live within their means are going to be
    successful in keeping & growing a retirement savings balance.

    A 401k may not be perfect but for most people it beats the alternatives.

  • Dhhdhdh

    Is a Roth Ira also bad? Can you do an article on those or can someone in the comments tell me if they are good or bad?

  • Methinks1776

    James, I generally agree with you. However, you missed a pro: not only is the original investment in a 401K made pre-tax, the return on that investment is also untaxed – for all those years – until the withdrawals begin. Depending on one’s tax rate, that could add up to a hefty sum.

    Also, I wouldn’t call 401K a “scam”. That’s too strong a word. It’s a better idea for some and a worse idea for others (it’s a dumb idea for me, for instance. However, I can think of people who would benefit.). If an investment is not suitable for everyone it’s hardly a “scam”.

    To the extent that 401Ks are, at best, not ideal, they are this way because of government. Such deferred taxation plans are just another way to try to correct for the distortion created by taxes.

    Finally, what you know about what will happen in 30 years is irrelevant. We all make long-term decisions such as marriage, children and starting new businesses without knowing whether we will be alive 30 years later or what our tax rate will be. We make decisions probabilistically. There is something like a 98% probability that a person who has made it into his mid-twenties will live into his sixties and seventies. Also, it’s not a ridiculous assumption that one’s income may begin to fall off as one contemplates retirement in his sixties.

  • omoiyari23

    Yes on financial fridays. too much value to say no to to be honest.

  • Tom Graham

    Thanks, good piece. i suspect you’re right and it is a scam. I don’t participate in 401(k). I keep my own money in an FDIC insured bank account so I can spend it any time without asking anyone’s permission. I find it way more motivating to save real money than 401(k) Monopoly money which may turn into real money one day.

  • Lloyd Bonifide

    Commas go inside quotation marks.

  • 2waypower

    One thing people forget is at that retirement age most folks are probably not going to care as much about taxes. Only because they just would like to enjoy life and relax now. Life has dramatically slowed down and it’s probably taken its toll on you. The competitive drive of our youth is not as demanding. So if you decided to literally do nothing for a month you wouldn’t care about taxes and their effects.

  • Though if you just happen to get hired at a great company with a good matching plan, you should DEFINITELY invest in a 401k or in my case a ROTH 401k. But you should only invest the match amount, nothing more.

    You need to save the other amount you are willing to invest and put it in something else. This is called diversification. Maybe invest in real estate, your small business, buy someone else’s small business, do peer to peer lending, do inventory financing with Kickfurther, be an angel investor, store some gold, or build your own portfolio of stocks based on solid investment principles.

  • nogoodnews

    I am nearly 50 years old and there’s no way you could get me into a 401(k) or any other tax-deferred program. I take huge issues when the terms are not completely set out for me to easily understand and I’m told just keep shoving money to it and 30 years from now you can pay us what you owe us.

    I’m of the mindset I would rather see a smaller balance and have it be true and much more predictable than a bigger balance with no true understanding as to what I get to keep. I work in education and our so-called representative in retirement investment tried super hard to get me to enroll in the states 401K plan.

    I was raised with the mindset that you never owe the IRS at all costs . It did not seem like a wise investment in my opinion to bank my future on owing the IRS!! Our grandparents did not retire with 401(k)s and if you have not done so watch the 60 minutes 401K scam on YouTube.

    I intentionally chose a career where there is a state pension for the remainder of my life when I’m done working. I have my own private after-tax savings tucked away in insurance that will sustain me till I’m 120 years old starting at the age of 68. I will not owe taxes on it because I pay taxes upfront and that is totally fine with me . I also don’t pay taxes on the games and I don’t pay taxes when I withdraw the funds .And of course Social Security.

    This is how my grandmother and all of my grandparents retired . I intentionally chose a field that while it may not make me rich my income is absolutely stable including retirement. That is my trade-off for making less money.

    When I came down with $3000 in emergencies in one month ( emergency broken tooth and new car radiator ) I was able to get the 1k I was short out of my retirement account and didn’t have to ask anyone especially my employer for approval. The money was borrowed against my life insurance policy so it did not affect my retirement savings portion that just kept building.

    A year later I repaid the $1000 and my total fee was $40. This year my favorite store had a major sale that was three weeks before my bonus payment. I called up my retirement company told them to forward me $800 ….. The money was in my account the next morning . Two weeks later I put the money back in my account my cost zero because I had it less than a month . When I borrow money it comes out of my life insurance portion it does not touch the growth of my retirement account . And I never borrow against it unless I know where the money is coming from to repay it.

    While I have my own savings account I don’t always want to borrow from my liquid capital in case of an immediate an emergency like a car repair ….

    I don’t care what people think of as an emergency. What I care about is do I have access to my money and do I owe Uncle Sam down the road. A 401(k) portfolio will be bigger than mine on paper but after all the fees are deducted when you pull it out at retirement I’m willing to bet that all dollar factors being equal in the profession we chose…. we’re going to be about even..

    And most 401(k) plans that I’m aware of don’t last until you’re 120 years old and you’re forced to take it out and start shrinking it which is why many people run out of money during retirement. Two out of three of my plans and even Social Security are all designed to outlive me.

    If I were retired in today’s dollars with the modest amount I put into my personal retirement…. My education pension and Social Security I would be living on about 50,000 a year. The key to me is to know what money you’re actually going to have not hypothetically.

    401(k) is based HuGely on hypotheticals. And well investing in insurance is not as glamorous it is steady just like my career and just like my grandparents when they were retired and my parents. That’s why I chose the same field and at 50 years old I have absolutely no regrets in my decision in the career I chose and in how I structured my retirement.

    • discussstuff

      Experience speaks. Thank You!

  • Rich Keal

    1) ERISA was created to roll pensions over on Wall Street and transfer risk to investors/suckers. 2) You lose the ability to use your capital as collateral and negotiate cost of money. Multiply that times millions of account holders! 3) Your participation pays for the match via the employer reduction in FICA and your deduction is in the plan so James is dead on for most people.
    Create your own deductible “Roth” equivalent and help end the Fed at mutualbailout.com and bankingwithoutbanks.com

    • discussstuff

      Thank you Mr. Keal.

  • MTI

    The only reason people don’t have enough money at retirement is because 401ks are a scam? That is incorrect. People aren’t saving enough and there are other alternatives to the Traditional 401k.. There are Roth 401ks and IRAs that are availble. Money is taxed going in at the lower tax rate and tax free when taken out. You are leaving g a lot of facts out of your article.

  • Gman123

    All I know is I’ve been saving in a 401k for about 15 years. And, I have what I started out with. My boss has been saving in his 401k for +30 years and he has what he started with. So does his boss. The last 12 months, my 401k has returned -0.4% and it is well diversified. The last 24 months, my 401k has returned 1.1% in total over 2 years. It is a scam, there’s just not a solution for those of us that work 12 hour days and would need a money manager, accountant, and attorney to design something for us.

  • won yong jin

    whats an alternative?

    • @ won yong jin – The alternative is to run a cost-benefit analysis of your pre-tax retirement plan versus an after-tax retirement plan and chose the one that is more likely than not to deliver.

  • discussstuff

    A wonderful explanation of the real 401K system not explained to employees.
    I had so many people tag me with the same sales lines about 401Ks over my 30 plus years employed. (“free money” “tax savings” “professional management” etc.)
    Fortunately, I opened my own brokerage account when I was younger and made my own investments in solid stocks paying dividends.
    My returns have always been better than a 401K and I have control of my money.
    Thank you.

  • spiritkas

    I invested in myself with those funds rather than waiting for some hypothetical gain in taxes in some unknown future. I now live outside the USA in a totally different life than then one I would have had if I stayed and I’m far happier and have better well-being. James is right, invest in yourself. What money will you earn or life will you live when you invest in yourself now rather than when grinding away until you’re 60. Live while you’re young and invest in yourself, i.e. not the strawman version of this argument of taking out your 401K to spend on stupid and frivolous things with no payback.

  • disqus_00YDCZxqDV

    You are absolutely right James. Everything is a scam. Somebody is making money out of you whatever you do. Life is like poker, if you don’t know who the victim is, it’s you.

  • Philip Miller

    Thank you James. Finally somebody who is not shoveling the BS. I wish you were in LA I would buy you dinner. Count me in. Are you available as a personal wealth manager?

    Philip
    Founder
    hempiespaper.com

  • Zach Stocum

    You’re a dog. I work in the industry, completely agree with everything you addressed. 401k is shit, liquidity and velocity is king. If you can find true, tax free compounding and tax free withdrawls that’s the supercharger. Also the first piece I have ever read by you. Love it. I’ll stay tuned.

  • mstyff

    How about I save you all time and energy-
    When even the creators of the 401K regret it, there are no other reasons to argue…

    http://www.msn.com/en-us/money/savingandinvesting/the-champions-of-the-401-k-lament-the-revolution-they-started/ar-BBxP0GL?li=AA4Zjn&ocid=spartanntp

  • Pecunia Diva

    I don’t think 401K itself is a scam, I think there are many parties within the 401K system that tries to manipulate the 401K investors into investing and spending money in the wrong place. If done correctly, 401K is an incredibly attractive offer that saves a ton on taxes! Sure, tax rates may change but that a rising tax rate impacts any investment you may have, not just your 401K.

    It’s way better to understand what are the scams within the 401K system, and how to avoid them. My blog post here has more details:

    http://www.pecuniarydiva.com/2016/09/18/do-not-let-your-401k-scam-you-avoid-the-scam/

  • Zack Massa

    What about Roth IRA’s?
    You get taxed at the start and then assuming you earn interest you will have made that money tax free. Correct?

    Help me if I’m wrong, I’m currently contributing to a Roth and would like to know.

  • Sonia Garces

    From the Phil James, what you said is all true, I filed my retirement it took me one year to be approved and would you believed that’s it’s only 120$ per mos after 19 years of working and saving for the Social security and part of the money was even missing

    • Mike Stellino

      Whats your total balence ? And age?

  • Dave Ives

    Totally agree with your assessment James. It seems to me 401k tax law was set up to benefit gov and companies. Gov benefits by claiming, “we’re helping the little guy” translation “vote buying.” And, companies benefit because 401K plans are another profit center; another way for the company to make money and have it look like an employee benefit.

  • Mike Stellino

    Hmm i love my 401k and my 457.

    I watch it grow weekly . Sometimes I see the Dow and Nasdaq had a good day the following day i will open my 401& 457 and see i made 500$ sure i lose some but over the last 18 years i averge about 7 percent.

    If my vast array of invetments continue to perform average I will have 1.9 million when i retire.

  • MSD

    401 k is a huge scam. People fail to factor in expense and fee ratio. It is basically highly illiquid with limited assets at your disposal to justify this illiquid asset .

  • J Shysterr

    The only thing you got right is that most people will be in a higher tax bracket when they retire. That should be fixed by cutting taxes, especially the tax on 401k’s. The rest is wrong. Company’s don’t force you to deposit into a 401k. It’s your choice. If you want the money right now then don’t deposit it. Nobody is forcing you. Its not unheard of for company’s to offer extra money. Ever heard of a pension? 401k’s are not perfect. I prefer that people have the option of putting that money in a FDIC insured account, that there be no fees and a lower tax rate, but it is still better than the Ponzi scheme that is social security.

    • Rory

      I disagree even with that. I’ve worked in the retirement industry for 5 miserable years. I’d venture that 80%+ of people are reporting higher income during the years they work than they report in the years they are retired.

  • Rory

    I love your site James, and am in the process of reading every post. But I think you missed the mark on this one, at least in respect to the early retirement, Fin. Independence crowd.

    One is that you can withdraw your 401k/IRA money before 59.5 using IRS code 72(t) SEPP withdraws. They let you have almost 4% per year, which is equivalent to the Finance 101 ‘safe withdraw rate.’ So with $1MM in retirement accounts, you can pull out nearly $40k per year. That’s enough for a lot of people to either stop working completely, or at least transition to side hustles and leave the cubicle farm.

    Secondly, I’m 35. I’m making the most money I’ll ever make, as is my wife, as I’m not going to be ‘working’ at 45 or 55. As such, 401k/457/IRA contributions are saving at my high, top marginal tax bracket now. Right now we earn about $130k, contribute about $77k between the accounts mentioned above. In a few years we will withdraw around $40k, so I’ll be paying at a lower tax threshold, STARTING AT THE BOTTOM of the marginal tax brackets. A very small portion is taxed at 0%, followed by 10%, then 15%. Right now, I’m saving at hte 15% and the 25% threshold.

    As to the fees: your mileage may vary. My wife and my work both go through companies that allow us to invest using brokerage services. We can buy ETF, index funds, etc. I have a chunk of Apple Stock purchased though an IRA that was my former employers 401k, via a rollover. My point: very low expenses… if you know what ETFs and index funds are.

    Just food for thought. No one can write an article that applies to every person in every situation.

  • RobertLehrer

    Fabulous article, James. You touched on this “con” to 401k’s, but I stress to my clients the RISK they take. There are vehicles to park your money and the amount will grow without risk to principal. One vehicle is indexed universal life BUT ONLY IF IT’s PROPERLY FUNDED, not the way many insurance agents design it.
    Biggest threats to 401k participants:
    *Taxes
    *Fees
    *Risk