Tuesday, May 7, 2013

There's No Point In Fixing A 401k Lemon (When There's Already A Better Alternative!)

I happened to read an article on Kiplinger.com today about overhauling the 401k.  I say "happened to" because it appeared on a friends Facebook timeline.  I wouldn't normally read mainstream drivel especially when coming from a Wall Street blowhard site like Kiplinger's but the title "Bold 401(k) Overhaul" caught my attention.  I knew I'd be disappointed and in that regard the article succeeded mightily.  The proposed ideas would only exacerbate the problem 401k's create in the first place. (By the way, I do offer a better alternative rather than just criticize the 401k to pieces.)  These problems are highlighted below by yours truly who felt compelled to reply to NickV's comment:

"Wow, so many negative comments on 401k's. I thank my lucky stars that my wife and I have them. We are middle class and at age 50, we have accumulated $2M so far. To all the people who think the game is rigged, good luck living on SS in your golden years."

My reply:

"I ran some numbers using a 401k calculator (on dinkytown.net) assuming you've contributed 20% of income starting at age 22 with a $70k salary increasing at 4%/yr. I also assumed your employer has been giving you a 50% match up to 6% of your contributions. You would need an annual (not average) rate of return 3.8% to reach $1m in your 401k after 28 years. Multiply that by 2 to equal $2m that you and your wife have accumulated. 

My point is that you've taken an absurd amount of market risk to earn a paltry 3.8% annual return after expenses. As you get older, you'll have to reduce your risk exposure even further which will lower your rate of return even further. You could have paid your income taxes upfront instead of postponing that tax bill for retirement and seen your after tax contributions achieve an internal rate of return closer to 5% without any market risk in a dividend paying whole life policy structured with at least 60% of premiums in Paid Up Additions. You would have also received lifetime death benefit protection for each of you, and no penalties or taxable consequences for using your money anytime along the way. 

People are steered toward 401k plans but they lock up your money, put it at risk, and force you to pay taxes on your distributions. Tell me how your 401k option is better than the plan I use that provides me with 100% use and control of my money, guaranteed growth, tax free use of my money including retirement income, protection for my family and I get it without any luck, skill, or guesswork needed with a 401k. 

The game is rigged Nick. You could have done a lot better without all the risk. Wall Street and Kiplinger's would hate to lose you as a client though which is probably why they'll keep feeding you the same lines about maxing 401k's, dollar cost averaging, buy term and invest the difference, you'll be in a lower tax bracket when you retire... all conventional wisdom that has burned millions of people who keep doing the same thing and expecting different results. By the way, you don't have $2m in your 401k. The IRS has probably around 25% or more claim on it assuming tax brackets don't rise (big assumption for a revenue starved government) and don't forget your state income taxes, too. I do sincerely wish you the best with your plan."

The goal of sharing my reply to NickV is to educate people about options since so many people believe a 401k plan is the only retirement plan available.  As an authorized advisor with Bank on Yourself, I can assure you there is at least one other solution you probably haven't heard of and no Wall Street advisor will ever share with you.

To learn more about how I help people move away from the roller coaster ride of a 401k retirement plan and teach them about Infinite Banking, please contact me at www.IBC.guru.

Thank you,

John Montoya