Do you have a 401(k) and know how it works? Do you know why the 401(k) is broken and the history behind why it’s the retirement standard that replaced the awesome pension plans people had before about 40 years ago? Let’s break it down in this video.
One of the brokers in my business shared a story about her grandparents, who had millions saved for their retirement. Because of bad financial advice, her family lost millions in 2007 and 2008 and caused a rift that eventually led to her grandparent’s divorce. She joined us in the business in 2010 and wished she had this information sooner to share with them so they wouldn’t have lost so much and have to start over in their 60’s. I don’t even have to go that far, as my father lost over 44% of his 401(k) in 2008 during the mortgage crisis at age 72, and he asked me to help stop his financial bleeding. He knew he didn’t have the time to recover from that large a loss and I wish I knew back then what I know now. I sometimes will ask the folks I meet with, do you think your company is in business to make their employees rich, or are they in business to grow their bottom line and answer to their shareholders or Board of Directors if not a publicly-traded company? Will your company offer their employees the absolute best options for their financial future, or are the companies only looking for ways to raise morale. To do the bare minimum to keep you loyal to them and dangling a carrot on a stick in front of you while at the same time implementing what makes financial sense for the companies executives and on up. The 401(k) is the most widely accepted retirement plan in corporate America and it’s broken for a few reasons; one is because of the potential to lose so much when you don’t have to lose a penny by investing in the right plans. We have not had a significant market crash for 14 years now. It’s not a matter of IF the market will crash; it’s a matter of WHEN the market will crash again. So many families’ piggybanks crumbled 14 years ago like my dad who’s literal capital amount of over 401k turned to a little over 201k. How would you feel if that happened to you? Then on top of all the loss, how would you feel about giving 40 to 50% or more of what’s left of that money in taxes? We didn’t even talk about the other issues with the 401(k) but you will hear more about those a little later in this video. I like to share investments that are predictable because you can see an investment plan with contractual guarantees built-in to protect you from both the market loss and the taxes depending on the strategy you choose. So let’s get into the history of the 401(k).
If you saw my previous videos then you would have heard of Ted Benna, who is considered the “Father of the 401(k)” and he was initially hired as a consultant by business owners in the late 70’s looking for alternatives to the expensive pension plans they offered to their loyal workers and instead have Mr. Benna come up with a plan that would allow for bigger tax breaks for the companies and pay their employees as little as possible, legally. Because Ted was a tax nerd, he found the tax code section 401(k). So the 401(k) isn’t even a plan at all; it’s a tax code that benefits the companies that deploy them. Look at the state of retirement plans today; nearly 75% of all companies that offered pension plans have vanished as of 2012. The 401(k) is a way for your company to write off every penny in matching as a write-off effectively accomplishing the goals that they hired Ted Benna to implement for them. I believe the pension plan was fantastic, guaranteed income for life, but these companies considered that a substantial financial burden; let’s instead move the responsibility off of the company and put it in the hands of our workforce, of our employees. No more responsibilities for these companies to have to manage these pensions and put that money instead towards their profits. Why is this a huge problem that now employees have control? Well, you have people like my parents where English was their second language. Even more common is people don’t have the level of financial literacy to make a financial decision, folks who struggled to balance their checkbook now have to figure out how to allocate their funds into the menu of mutual fund options, or single mom’s who are hustling to work, people who are too busy in their day to day lives just trying to maintain what they can control, they aren’t going to be managing their 401(k). Dad’s who wake up, drive to work through traffic every day, struggle to climb the corporate ladder, we, in short, have everyday people with no financial knowledge or time to do the homework and slap the responsibility of making the right decisions; for when retirement creeps upon them? People can’t thrive when they are focused on just trying to survive. Does your 401(k) mutual fund manager know you by name? Think they care how your portfolio performs? They get paid either way. Maybe they do if you contacted them and established a relationship, I didn’t do that myself until I learned more about the importance of making my retirement funds, and even then, nobody can control the volatility of the markets that are the only options that these funds can be invested into. Ted Benna said that he would blow up the existing structure of the 401(k) plan and start over if he could start over again. We don’t have to start over with a new plan because we know how the wealthy have been investing in accounts that take advantage of tax codes that benefit the private investor like me since the year 1913 and about a dozen other tax codes as well. Information that was reserved for only those in politics, the wealthy, and the elite.
So these are my 5 reasons why the 410(k) is the worst account to have.
Every distribution you take will be taxed at your highest rate and it’s 30 to 40% today, do you think taxes in the future will stay the same, go down, or will be going up? Double taxation is often the norm. Ready or not, you have to take the money out when the IRS says so, referring to the age the IRS deems people should be retiring at, not the age YOU deem best for you. It’s absolutely the worst account to leave to a surviving spouse. If you don’t have a living trust then when you pass, then a judge who has never met you or your family will end up deciding the fate of that asset. Did you know that your company can also claim back all the money they matched in your 401(k) funds upon your death? The last one is to be the scariest, your account is fully exposed to tax law changes. At any given point, the IRS can increase taxes and you will owe even more. Watch my video titled “US Debt and Tax Rates Future Prediction” for my answer to what taxes will most likely do in the future and why. Taxable retirement could end up being the largest killer of people’s retirement wealth.
Time Magazine, since 2009 has written articles on why it’s time to retire the 401(k) and promoting what to do instead. The solution: a new type of insurance. Retirement savings, it turns out, are exactly the type of asset we need insurance for. We need insurance to protect against risks we can’t predict when the market collapses and can’t afford to recover from on our own. “People tend to meld savings and insurance in their mind, but they are not substitutes,” says Nancy Altman, a former Harvard professor and the author of “The Battle for Social Security”. “It’s fine to have a savings plan as a supplement but not as the main retirement protection for everyone.” She says the best way to guarantee a replacement for people’s wages in retirement is by pooling risk, and the way to do that is through insurance. This article is a good one but I don’t agree that these are new, they have actually been around for a really long time but I agree that it’s a new idea to a lot of people who haven’t been exposed to this information. We buy insurance for our cars, our houses or rentals, medical insurance, some insure even their phones and computers, why not insure your retirement from things like the market collapsing, taxes going up, cost of living going up also know as inflation, from getting sick, medical costs rising, needing a nursing home, long term care, or even if you live too long also known as outliving your retirement money. If you are faced with any of these scenarios in your future, would you want to have to figure out a way to cover these bills, or would you like insurance to step in to do that for you to cover all of those losses?
I like to talk about the difference between the benefits your job provides versus the benefits of private investments. The average person will change jobs 8 times in their lifetime which equates to 8 different 401(k)’s, 8 different life insurance policies if your company offered it at the time, which by the way wouldn’t cover you between jobs but back to the point. I like to ask the question if millions of people in America have the same plans, does that mean they also all have the same financial needs, dreams, and goals as well? The answer is an absolute no, they, we, do not! We all have different needs, dreams, and goals so why are we all pigeonholed into the same retirement plans, the same investments? Everyone has a choice of 401(k), 403(b), Self Employed IRA or SepIRA as it’s also called, CalPERS, Tax Sheltered Annuity or TSA, Tax-Sheltered Pension or TSP, and more, and although they all sound very different, they all work exactly the same when it comes to the fees, the rules, the regulations, the age restrictions for when you can access the capital, the restrictive age range for when you can utilize the money before having to incur additional fees, the taxes you will have to pay. They all work exactly the same and yet we don’t all have the same vision for our futures. I don’t want to work to age 72; I don’t even want to work to age 55 as I am focused on being financially free and will choose the hours and type of work I will do beyond my age of 55 if I choose because I don’t see myself laying around drinking a foofy drink on the beach all the time, to me that seems like it would get boring eventually.
Would you like to learn more and see what your options are? See what you can qualify for? You have nothing to lose because I don’t even charge to meet with me, ever, and a financially free future to gain. Set up a time to meet with me using the calendar link here in the comments section or on my healthwealthandrealestate.com page on the Get in Touch link at the top right of the page. If you have a 401(k) or 403(b), then you owe it to yourself to learn more about what I shared here, I want to help and love being a resource to all I come in contact with. Thanks for watching and have the best year ahead.