What is a 401k, 403b, or IRA, do you understand what it is and have one? Let’s break them down in today’s lesson.
The 401k or the 403b is the same, are old products and everyone is doing it, but it’s not the place you want to park your money if you want a safe, guaranteed growth, tax-free retirement. The 401k as I’ll call it moving forward to save time, are invested in mutual funds run by fund managers.
Between a rating of 1 meaning you know nothing at all and 10 meaning you know everything there is to know about your 401k, how would you rate your knowledge?
I usually get a pretty low answer when I ask this question and rightfully so. We were told this is a great retirement vehicle for the day we no longer want to or even worse, can’t earn income anymore because of health issues.
So the 401k goes in pre-Tax dollars of your Gross income from your paycheck. Net is the income after taxes, right? So your 401k is a taxed later fund.
Ted Benna created the 401k in 1978, has been quoted on many occasions stating that he wishes he could blow the 401k up and start the whole thing all over again. And that is what all your friends and family are invested into. I’ll add a link to his interview in the comments section here below.
The 401k grows and shrinks in variable accounts called mutual funds. Variable in the dictionary is defined as unreliable, unstable, and unpredictable.
Would you let your kids drive or would you buy a car that’s unstable, unreliable, and unpredictable?
Do you want to shoulder the burden of the risk if it’s not necessary to do so?
To take a simple example, let’s say you have $100,000 in your 401k invested in these limited option mutual funds and the next year the mutual funds it’s invested into go up 50%, how much would you have?
You would have $150,000 correct?
How much then would you have if the year after that the funds dropped 50%? If you had one dollar and 50 cents and you had to split it with your friend, you each would get 75 cents right?
So yes, you would have $75,000 after a 50% drop, so that means after 3 years of investment you would be down a significant amount after 3 years and we find those who are ready to retire end up losing way more than what they can recover from.
I got into this business after learning of these benefits, my own father at age 71 came to me upset that his 401k had gone from $278,000 down to $235,000, he lost $43,000 in a very short time and he said to me that he’s too old to shoulder that financial burden and told me to find him a solution because he was bleeding money from his nest egg, his only cash reserve.
There is nothing wrong with investing in stocks which is what a mutual fund is, a whole bunch of stocks in a big bucket. Let’s face it, for most people who invest with emotions, it’s a gamble. Feel free to gamble a portion of your money that you can afford to lose, but don’t gamble with your money that you plan on retiring with, living with, surviving with in the future.
So returning back to the tax later portion of the 401k, you have penalties to deal with if you have a life event and you need this money before you reach the age of 59 and a half, that’s a 10% penalty. Then on top of that, you have 30% federal and 10% state tax for a total of 50% of your retirement income gone. What if you had the alternative to growing that same money but pay the tax when it’s a small amount in the beginning during your making money or income generation phase. I like to compare this to the seeds a farmer buys than to pay the taxes on the farmers harvest after the seeds or money has grown. Statistics show that 92% of American’s end up pulling some, if not all of their 401k prior to the 59 and a half age, not because they want to, but because they had to, life happens.
But let’s say you forgot about the money or was a part of the 8% who didn’t touch it. The new retirement age is 72 years old and if you don’t take your distributions starting at the age of 72 then you can expect a penalty of 50%, ouch! On top of that, you have to still pay the IRS and the State the taxes of that which most people predict will go higher in the future, not lower. By the way, the penalty is called an R.M.D. or a required minimum distribution.
But let’s say you do everything right and take the distributions out at age 65, you still have to give Uncle Sam and the State between 40% and 50% or more depending on how much taxes go up. When the 401k was invented by Mr. Benna as I mentioned before in 1978, the tax rate was 70%. How does knowing all this make you feel about your 401k, knowing that whatever it’s at now you can slice it in half because you can’t avoid the tax man?
When I learned of all of this, I stopped contributing to my own 403b because I work for a non-profit and my head of the Business Office told me, “you’re missing out on free money.”
If they wanted to give me free money they would put it in my paycheck, the reality is that every penny the company contributes to your 401k matching is 100% a tax write off for your company, that’s why they like to make it sound like they are giving you free money, the government knows they will be collecting that money from you later when you are no longer earning it and need it to live off of it. If you are contributing more then what the company matching amount is, they will be taking half of that amount as well.
And if all that I just shared with you isn’t enough, every single year the fund managers of your mutual funds take out a portion as a percentage of your retirement money as an additional fee! So whatever funds that they stuck you with, because you are limited in choices, if they go up, or they go down, it doesn’t matter, the fund managers take a piece of your hard-earned money.
Would you pay someone to manage your money and they lost a whole bunch of it if you had a choice?
Knowing this, If you had a choice, would you keep investing into your 401k if you had an alternative?
I do what I do as a licensed financial professional because I share the alternatives to this madness. Every person is different as are their situations and you must qualify for many of these fund options. Don’t you owe it to yourself and your family to know how to secure their and your futures? Let’s see if we can rollover the 401k, 403b, or IRA into something that doesn’t have any of the negatives shared in this presentation. When you meet with me, you are under no obligations at all, if I don’t present you with an option that’s better than what you currently have, then the worst-case scenario is that you walk away learning something new. Let’s schedule a 30-minute zoom call to see what we can do.
Thank you for watching and please feel free to comment below or send me a message from the healthwealthandrealestate.com website on the “Get in Touch” link at the top of the page and please like and subscribe to the channel so that you don’t miss any future educational videos. I look forward to speaking with you very soon.