This video is in response to the countless people who have asked me about 401k’s/retirement accounts. I wanted to completely explain my OPINION about the subject. I know that this may not come off as nice because many people have their life savings in their retirement account or something similar. I mean no disrespect to anyone. I am simply stating what I truly believe. I hope you can respect that. I am here to bring you the data. I did touch on what you should do instead but as I don’t get into financial advice, I hope you can understand the 4 asset classes and TRUE diversification and how important that is.
The 401k is the biggest investment most Americans have in their lives. It’s where they pour their hard earned savings into every time they get paid. If they want to save money for the long term, they put it into their 401k. This has been sold to the public as the absolute best way to save money for retirement.
A 401k might have any number of funds or other paper investments within it. The 401k simply signifies a retirement account. In Canada it’s an RRSP. Other countries refer to it as Superannuation. There are many names and rules and regulations around each one. But for the purposes of this video, I will refer to retirement accounts as 401k’s.
But what is the purpose of a 401k exactly? To save money for when you’re retired? If so, what happened to the money in the years between initial investments and the time where you start to withdraw the funds? It simply remains at the financial institution and they invest the money, hopefully netting you a return over the years, that more than keeps up with the rate of inflation.
The general selling feature of a 401k or any PAC (Pre Authorized Contribution) investment plan is that you can have your employer take off a small amount from each paycheck, $25 let’s say, and you wouldn’t even know it’s gone. But it would accumulate in your investment account and compound over time. By the end of your working career, you would have a wonderful nest egg that you could live off of when your primary income goes down.
This sounds like a wonderful plan, it’s not wise however. And that’s what I want to discuss.
Let’s go down the rabbit hole of questions briefly.
First we must analyze what is the purpose of investing? What are you investing in the first place? I want to make money you might say. Why do we want money? Because we have bills to pay. What bills do we have to pay? Car, house, food, energy, etc. How much money do we need on a per month basis?
Once you answer this question, this specific number here will tell us how much we need to have in income per month to pay off all of our expenses. Not the backwards logic of having a big pile of money sitting in investments that we cash in on a monthly basis. We want a stream of income, paying off the expenses. It’s important to have a paradigm shift about this very important factor.
Chasing appreciation in assets is risky business. There is definite reward if you sell when the asset is higher than when you began. But relying on this alone is undeniably a gamble. You expect the asset to rise in value. History shows the asset will be worth more over a period of time. But how much will it be worth when you sell? That’s the question that nobody knows. In the meantime, you don’t personally hold the asset and you achieve no benefit from it whatsoever. It’s only at the moment you sell. Any asset is only worth what someone will pay for it at the exact moment you sell.
With a 401k, there are countless hidden fees that are associated with managing these investments for you. They are not transparent. All you know is that you can find out what your current status is or how much money you have in these investments. You’re essentially locked in anyway because of the tax implications and companies know that you most likely won’t sell until you’re at least 60 years old but more likely closer to 70 these days. So like any other ponzi scheme, they just need to ensure most of the money remains with them at all times to remain solvent. If people start cashing in, the company will collapse. But that’s besides the point.
Understanding fees is crucial because while a management fee of 2% might not seem like a lot, over the course of a few decades, this could mean the difference between being able to retire or not. There are companies out there who are very clear about their fees, they charge a flat rate, and the fees are 1% or lower. I don’t have any affiliation with any of these companies and I don’t give financial advice. But please understand your fees if you have a 401k.
Retirement accounts have a specific goal which we have outlined but instead, the money which we have given to these corporations, could have been put to productive use in those decades which we gave it up to them.
As I discuss in The Money GPS, we need to follow The Money GPS Formula. Essentially having our assets, pay our expenses. That’s completely different than having a pile of cash or a 401k to cash in. Eventually the money runs out.
If you buy an income producing asset, you have a money printing machine. Every single month it brings in money. You may be able to pass it down to the next generation. You may get fantastic tax advantages from these assets. You will have orders of magnitude greater security than trusting your 401k provider. But this takes a lot of effort. This takes due diligence. Assets require maintenance. So this doesn’t come free or easy. But in my opinion, there is no other option.
If you already have a 401k and have no intention on moving your assets elsewhere, you must accept responsibility for what happens to the money. You cannot blame the financial planner. He has his best interests at heart.
Take control over your finances today. Become more financially savvy. Ask the right questions. Look into the information for yourself and become educated at least somewhat on the topic so that you’re not taken advantage of.
The financial news media, the government, your family and coworkers are not going to be there to help you in this regard. You must take the initiative today and get a hold on your financial future.