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The Great 401k Myth
Six Reasons Why The 401(k) May Not Be in Your Best Interest
The great 401k myth has been perpetuated over the last 30+ years from good intending radio entertainers to trusted advisors. Unfortunately this utopian, politically motivated, economic view of your financial future originates from the government and big banks, and the 401k myth has been propagated to the point of epic proportions.
“Myths which are believed in tend to become true.” ~George Orwell
What makes the 401k myth so destructive is that it is based on a scarcity mindset and it is being perpetuated from generation to generation. When we embrace the scarcity mindset we are buying into the belief that our resources are limited.
In order to achieve our maximum economic potential we must break away from the boundaries of traditional financial thinking and challenge our minds to live a life of abundance. An abundant life is developed through action and practicing our God given talents and abilities. Our actions are produced when our confidence and thoughts in our minds are based on truth and specific knowledge in that area. As we increase our specialized knowledge we increase our ability, and we are free to make our own decisions and choices.
In this blog we’ve enlisted the specialized knowledge, opinions and talents of 2 bestselling authors, financial expert Pamela Yellen and CPA, Bryan Bloom. Yellen developed Bank On Yourself® website and authored the book of the same name. Bloom authored the book series, Confessions of a CPA.
The 401k Myth
Here are Six Reasons Why 401(k)s May Not Be in The Best Interest of Your Financial Future
Reason #1: The Tax-Deferral Myth
In our immediate-gratification society, deferring your taxes by funding your 401(k) sounds so good.
But when the tax man eventually comes calling, he won’t ask you to pay what your tax liability would have been if you’d been paying taxes all along. He’ll tell you what your tax liability is at the time your taxes are due.
So we ask our clients a question: Can you tell me what your tax rate will be 30 years from now? Didn’t think so.
And 89% of the people surveyed believe tax rates can only go up over the long term, due to our country’s unsustainable debt and aging demographics. Unfortunately, if tax rates do go up and you’re successful in growing your nest-egg, you’ll only be paying higher taxes on a bigger number.
That destroys the whole “tax-deferral” argument.
Reason #2: The “Free Money” Myth
Who doesn’t love getting “free money” in the form of the 401(k) employer match? Do you really believe your employer is giving you something for nothing?
The Center for Retirement Research did a study based on tax data and found that for every dollar an employer contributes to your 401(k) match, they pay 90 to 99 cents less salary on average. Whoa! Doesn’t sound like such a good deal now, does it?
Plus, you don’t even get all of the employer match during the first 4-6 years you work for the company – you need to be “vested” first. If you leave your job before that, you typically don’t get the full match.
And according to the Bureau of Labor Statistics, the average time a person stays on the job is only 4.6 years.
If you accept the employer match, even if you have elected the Roth 401(k) option, the employer match is taxable in the future. What if that match results in your Social Security being taxed, when without it your Social Security would have been tax free? Perhaps a quarter of a million dollar mistake on top of the taxes due on the match distributions!
Oops! There goes the employer match “carrot.”
Reason #3: Fees that Devour Your Hard-Earned Money
In spite of the rules passed a few years ago requiring better 401(k) fee disclosure, surveys show most participants still have NO clue how much they’re actually paying.
But according to Brightscope, participants in small plans pay 1.9% in fees annually, and participants in large plans pay 1.08% per year. If those fees sound like “small change” to you, then here’s a wake-up call: Fees of only 1% per year can slash the value of your savings by 28% over the next 35 years, according to the Department of Labor.
Poof! There goes nearly one-third of your hard-earned dollars. I can assure you somebody is getting rich on this, but it’s not you!
Reason #4: Funding a 401(k) is Like Putting Your Money in Prison
It’s like a trade with the devil: Give me all your savings in return for tax-deferral (a scam as we’ve seen) and an employer match (another scam), and I’ll keep it under lock and key for you until you’re 59.5 years old.
You have to beg for permission to use your own money! There are all kinds of restrictions and penalties for accessing your own money.
This is one of the biggest reasons people have large credit card balances exceeding 18% interest costs. Hope those 401(k) dollars are earning at least 18% after fees!
Reason #5: The Myth of Market Returns
You’re told that over the long term, you can do well in the stock market. But over the last three decades, the average equity mutual fund investor has earned only 3.98% per year, beating inflation by only 1.3% per year, according to the DALBAR studies.
Yet Wall Street has brainwashed us into believing we have to risk our money in order to get any kind of decent returns. And so we continue to blindly fund our 401(k)s like lemmings following each other off a cliff.
Our strategies reveal you don’t have to risk your money to get a decent equivalent return. You can reach your financial goals and dreams without taking any unnecessary risk.
Reason #6: After Decades of Being Lab Rats in the Great 401(k) Experiment, Most Pre-Retirees Still Don’t Have Enough Saved
Even the “father” of the 401(k), Ted Benna, has called it an “out of control monster” that should be blown up.
How much more evidence do we need that 401(k)s are not the solution they’re touted to be? The more accurate name for a 401(k) is a hope and pray plan.
So are there any good alternatives to the 401(k)? The answer is YES, but of course you won’t hear about it from Wall Street.
Here Are 8 Reasons Why the BreakAway Approach Makes an Excellent Alternative to Conventional Retirement Plans…
1. Guaranteed, predictable growth and retirement income – with no luck, skill, or guesswork required.
2. No volatility. Your plan doesn’t go backward when the markets tumble. Your principal and growth are locked in. It’s not subject to market risks.
3. You’re in control. You have control of your money without government penalties or restrictions on how much income you can take or when you can take it.
4. Tax advantages. You can access your principal and growth with no taxes due, under current tax law.
5. Liquidity. Your cash value can easily and immediately be tapped for any purpose at all, and your plan can continue growing as though you never touched a dime of it.
6. Fees don’t compound against you. Studies show that the fees in traditional retirement plans can consume as much as one-third to one-half of your savings over time. With our plan, all fees have already been deducted from the bottom-line numbers and results you’ll get.
7. Income tax-free legacy. The death benefit is likely to be many times larger than the total amount you’ve paid into your policy. This passes to your loved ones and/or favorite charities income tax-free and without going through probate. If you die prematurely, the death benefit allows your plan to finish funding itself. That won’t happen with traditional retirement plans.
8. Peace of mind. Perhaps the best reason of all: You’ll know the minimum guaranteed value of your plan on the day you plan to tap into it – and at every point along the way!
So, there you have it, why the 401k is a scam and how it has been propagated into the great 401k myth.
Bryan S. Bloom, CPA. Adapted and Updated from the original work done by Pamela Yellen, published as an e-mail titled “Is your 401(k) a Scam?” on July 11, 2017
If you’d like to reexamine your 401k or schedule a meeting, request a financial consultation.
Until next time,
Barry Page, RFC
Barry Page is a Registered Financial Consultant, Managing General Agent and Founder of Legacy Insurance Agency, PLLC. He helps clients with tax-advantaged investment alternatives, and specializes in showing families how to protect their assets, income and lives unique financial approach to planning.
401k qualified plans are government retirement plans administered by the Internal Revenue Service (IRS).
“A qualified plan must satisfy the Internal Revenue Code in both form and operation.” https://www.irs.gov
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