Tuesday, October 9, 2012

Contribute to your 401k If You Want To Be Poor & Make Wall Street Rich

“Contribute to your 401k” is not just the wrong advice, but exactly the opposite of the RIGHT advice.

Most people will believe just about anything if they hear it enough times. 

401(k)’s are a prime example.  Most people have been effectively educated (brainwashed) through endless marketing pieces, commercials, and retread financial advice from Wall Street paid financial advisors into believe that investing in 401(k)’s will help them prepare for a long and rewarding retirement. 

This notion of 401(k)’s being a good investment is without merit because a 401(k) plan provides participants without any option to turn their nest egg into a lifetime income stream.  Isn't the whole point of a 401(k) retirement plan to eventually provide you with lifetime income?   How can a 401(k) plan accomplish this goal when it can't even guarantee your asset from loss, especially when you're no longer working?  The answer is that 401(k) plans are designed specifically for accumulation, not distribution (withdrawals for income purposes).  

And as you will learn in a few moments, Wall Street stands more to gain with your money without exposing themselves to any of the risk you unnecessarily take by investing in mutual funds!!!  Are you getting the feeling yet that this "system" was created for their benefit instead of yours?

For those with only a more recent working history of the stock market, now consider the horror stories about investors losing 40-50% in the market crashes of 2000 and 2008.  Perhaps this happened to you?  If losing 40-50% of retirement asset isn’t frightening enough, now imagine it happening when you ARE retired?!?

The point of this article isn't to scare you aware from a 401(k). It's to get you running completely in the opposite direction!!  Just kidding, sort of... 

Joking aside, I would like to educate you with real numbers why you need to re-think your 401(k) contributions.  For the sake of brevity and short attention spans (myself included), I'm going to skip the first 2 points of contention I have with 401(k) plans which are 1) future taxes at unspecified rates and 2) limited or no liquidity.

Instead, I want to take a few minutes of your time to point out what is the biggest drag on your 401(k) while you are in the accumulation phase of saving for retirement because most people THINK they know, but after years of sitting down with people, I've determined they really have no idea!!!

This is mainly because since the inception of 401(k)'s, Wall Street has been able to deceptively hide the true cost of mutual funds and 401k plans.

Here is the dirty truth coming from no other than the founder of the largest mutual fund company in the world.  Turn away now or be prepared to be enlightened...

Simplicity is the key to brilliance. It is not the daily increase but the daily decrease; hack away at the unessential. The height of cultivation always runs to simplicity.”  -Bruce Lee


PBS did an eye opening interview with John Bogle, founder of Vanguard, in February 2006, in which Bogle admitted that most mutual funds were terrible investments and that expenses and fees ate up to as much as 80% (yes, you read that correctly… 80%!) of investors' returns.

How does that work, you ask? Your expense ratio on your carefully selected equity fund is "only" 1.01%?

Let's take a look:
Frontline: So what percentage of my net growth is going to fees in a 401(k) plan?

Bogle: Well, it's awesome. Let me give you a little longer-term example. The example I use in my book is an individual who is 20 years old today starting to accumulate for retirement. That person has about 45 years to go before retirement—20-65—and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that's 65 years of investing. If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow in that 65-year period to around $140,000.

So far, so good… $1,000 into $140,000 sounds terrific! But let's look more closely…
Bogle: Now, the financial system—the mutual fund system in this case—will take about two-and-a-half percentage points out of that return, so you will have a gross return of 8%, a net return of 5.5%, and your $1,000 will grow to approximately $30,000. One hundred ten thousand dollars goes to the financial system and $30,000 to you, the investor.

Think about that. That means the financial system put up 0% of the capital and took 0% of the risk and got almost 80% of the return, and you, the investor in this long time period, an investment lifetime, put up 100% of the capital, took 100% of the risk, and got only a little bit over 20% of the return.

WOW!!!! Perhaps you’ve been wondering why you can't retire at 65! If you don't understand the math, don't worry, my brain works best when I can see exactly how the figures add up (or in this case, bottoms out!)   So how can 2.5% in expenses and fees turn into 80% of my entire return that Mr. Bogle speaks of?

Here it is, all laid out for you in black and white.  The table on the left shows the growth of $1,000 invested by an individual at age 20 until his/her death at age 85, assuming 8% annual growth.

On the right, it shows what happens to that same $1,000 over the same period assuming a 2.5% annual cost, such as a mutual fund 401(k) management fee. Over the 65 years, these annual fees eat up a staggering 79% of what the investor would have earned with no management costs:
Growth of $1000 in 401k:  No Fees vs With Fees 

Left: $1000 Before Fees; Right: $1000 After Annual Fees 

At age 85, $1000 before fees grows to $160,682.  However, after 2.5% in annual fees that same $1000 is worth only $34,250!!

Are you waking up yet?  Have I caught your attention?

And it gets even trickier, if you can believe it because mutual fund investors and the investing public have been "educated" to measure fund management fees and operating expenses as an annualized percentage of fund assets, which makes the resulting expense ratios (the tiny numbers you see like 0.92%) seem almost trivial.

This is because expense ratios represent only about HALF of the cost of owning mutual funds.  You also need to factor in hidden portfolio transaction costs and sales loads which raises your expense ratio up to a full 2.5-3%.

(Full Interview can be found here: http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html)

Are you still excited about your 401(k)?  Hopefully you are coming to the same realization I made years ago which is:  A 401(k) is a horrible place to safeguard and grow your wealth.  

How many millionaires do you think retire by living off their 401(k)?  Do you really want to have Wall Street take 80% of your nest egg ( with the IRS taking 33% or more of the rest) over your lifetime because you failed to learn about better tax-favored alternatives?

If not, I encourage you to spend some time on my site to learn more about the safest place to build a foundation for your wealth.  Go to www.CashValueBanking.com.

One last thought while I still have your attention.  If you’re not blown away by how the effects of taxes, lack of liquidity, and fees will have on your 401(k), there’s one more thing you ought to know.

Aside from the fees Wall Street is charging you, there's a 100% certainty that the money in your bank and investment account is losing value each and every day even if your account balance is going up!!  If you're wondering how that's possible, we should definitely talk.

Best Regards,

John Montoya
Founder, JLM Wealth Strategies, Inc.
(925) 386-6639