The 401(k)–the gold standard of retirement plans. Or so many have thought. In reality, it is far from being a solid plan to coast you into your golden years. Started in 1981 as merely an experiment, the retirement plan has still yet to prove itself as a bedrock foundation.
The guinea pigs who took a gamble on the first offering of the 401(k) are just now starting to see their hard-earned results, but it might not be all they expected. Though it may have seemed like it was built in concrete nearly 40 years ago, the market sands have shifted and the 401(k) isn’t the holy grail its creators expected it to be.
Here are reasons 1-5 why you should consider alternative forms of retirement savings:
1. Your funds can disappear overnight
What kind of retirement plan allows millions of people to lose 30-50 percent of their life savings in one night. If you guessed 401(k) then you probably already know the following: unlike other investments that are protected from losses—your 401(k) plays roller coaster with the stock market and leaves you with absolutely no control. That sounds more like gambling and less like a savings plan. Now retirement planners will tell you that the market averages 8-11 percent returns per year. That may have been true LAST century upon its inception, but this century has seen that idea fail. From 2000-2016 the Dow Jones Industrials averaged 4.38% return each year. The actual dollar return for that period was only 3.24% each year! Do you really want to risk your future on risk based 4% returns?
2. Fees, costs, and other drains
Many people take the option of a 401(k) plan, invest money, and never think twice. But do you actually know where your money goes? With 401(k)s, there are usually more than a dozen undisclosed fees: legal fees, transaction fees, trustee fees, bookkeeping fees, and more. But that’s just the beginning. The mutual funds themselves often take a 2 percent fee right off the top.
“What happens in the fund business is that the magic of compound returns is overwhelmed by the tyranny of compound costs.” – Jack Bogle, founder of Vanguard
100 percent return? More like 100 percent of the risk, with 100 percent of your capitol—for under half of the return.
3. No cash flow in case of better opportunities
The grand theory behind 401(k)s is that you keep throwing money into it where you can’t easily touch it without risk of penalty, and it will magically compound into enough to retire on. Money left to compound unpredictably for 30 years or more is stagnant money. There’s no cash flow ready to direct to today’s best uses. Instead, it is placed inside a 30-year old bet, while newer, perhaps better opportunities could be passing you by.
4. It’s a solid brick that should be a float
Even though you could access your 401(k) money, you don’t want to. It’s essentially tied up in penalties for early withdrawal. The only exception allows you to borrow a limited amount of money for a limited amount of time. And that leads you to an even worse situation: double taxation. Borrowed money must be paid back with after tax dollars—then at retirement you are taxed again when you receive the actual withdrawals from your 401k account. Double taxation! You don’t like paying taxes once, why would you want to pay them twice?
5. Driving blindfolded
Perhaps the worst thing about a 401(k) is that it teaches you a nasty habit of unconscious investing. Think about it. How much do you really know about your own 401(k)? Do you really know the funds you’re invested in? The details of those companies? Do you even know the histories of those funds, or where your money is actually located? If you’re like most people, then probably not. You wouldn’t drive blindfolded, so why invest your money that way?
Check back next time in continuation of our 401(k) series to find out even more things you didn’t know about your 401(k)!
minimum thought. Maximum Wealth.