The Whole Truth About your 401(k) Plan Taxes, Fees and Depressing Returns

As you know, I was supposed to go to a Meetup by that same name by Dennis Beckman last Monday but I was sidetracked.

Even though I didn't go to the meeting, I think I have an idea of some of what Dennis talked about last week.

In simplest terms, don't do it! I know conventional wisdom says to max out your 410k, but:

According to CNBC:

But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.

"In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die," said Teresa Ghilarducci, a labor economist at the New School for Social Research who has proposed eliminating the tax breaks for 401(k)s and using the money saved to create government-run retirement plans.

Also:

"401(k)s were never designed as the nation's primary retirement system," said Anthony Webb, a research economist at the Center for Retirement Research. "They came to be that as a historical accident." 

In an article in The Huffington Post:

Why has the 401(k) been such a flop? Five reasons stand out.

First, the 401(k) system of individualized accounts is inherently inefficient. 

Second, the 401(k) system has never covered all workers. 

Third, 401(k)s expose individuals to too much risk.

Fourth, the 401(k) system depends on the financial industry acting in the best interests of investors — which, too often, it doesn’t do. 

Fifth, consumer choice does not offset the failures of the 401(k) system.

In Bank on Yourself:

A recent article in the Wall Street Journal reveals how pre-retirees at all income levels are falling short – way short – of the amount of money they need to have to be able to retire.

Fully half of those between ages 50-64 have less than one year of their income saved.

The top 10% (those making $251,000 or more annually) have an average of only two years of their income saved.

The article mentions that “financial experts recommend that people amass at least eight times their annual salary to retire.”

Those “experts” ought to have their heads examined, because even a $1 million nest-egg would provide you only $28,000 a year at the current recommended withdrawal rate of 2.8% per year.

And another article on the same website:

Here Are Six Reasons Why 401(k)s Are a Scam…

Reason #1: The Tax-Deferral Scam
Reason #2: The “Free Money” Scam
Reason #3: Fees that Devour Your Hard-Earned Money
Reason #4: Funding a 401(k) is Like Putting Your Money in Prison
Reason #5: The Myth of Market Returns
Reason #6: After Decades of Being Lab Rats in the Great 401(k) Experiment, Most Pre-Retirees Still Don’t Have Enough Saved.

Also from the same article:

Here Are 8 Reasons Bank On Yourself Makes an Excellent Alternative to Conventional Retirement Plans…

1. Guaranteed, predictable growth and retirement income.
2. No volatility.
3. You’re in control.
4. Tax advantages.
5. Liquidity.
6. Fees don’t compound against you.
7. Income tax-free legacy.
8. Peace of mind.

This is basically what Dennis offers, you really need to contact him to go over the programs he has available.

What about being in a lower tax bracket when you retire? In an article in Ulivi Wealth Management:

My income taxes today are more than twice what my SALARY was when I started teaching full time at the California State University, in 1980. My income tax rate today is higher than it ever was in my career. Thus, using the strategy of investing in tax deferred vehicles, such as 401Ks and IRAs, as a way to defer income and pay less in taxes when I withdrew the money in retirement turned out to be a big fiasco. Why? Because the assumption that I would be in a lower tax bracket when I retired has turned out to be totally erroneous–at least for those of us who have managed our finances successfully.

Why is that? The main reason is that you lose many of the deductions you used to have, such as exemptions for your children (who presumably are grown now) and the mortgage interest deduction (since you've likely paid off your house, if you have one).

In an article on Levo, you can read about the 7 Retirement Myths You Should Know Are *Totally* False:

Myth #1: I won’t need as much money when I retire as when I was working.
Myth #2: My tax bill will be lower in retirement. (We already looked at this one)
Myth #3: Medicare will take care of my health insurance.
Myth #4: Social Security will provide enough income for my retirement years.
Myth #5: Investing all of my retirement money in my 401(k) is always the best option.
Myth #6: I can just keep working if I don’t have enough money to retire.
Myth #7: Only rich people or those who are nearing retirement need a financial plan.

I highly recommend that you reach out to Dennis and learn about a better alternative to putting your money in a 401k!

Interesting days

Today - Name Yourself Day, Winston Churchill Day, Cherish An Antique Day, Unicorn Day and Experience Week

Tomorrow - Golfer’s Day, Be Kind To Lawyers Day, Sibling Day, Equal Pay Day, Library Workers Day and International Safety Pin Day

Next Monday - Eggs Benedict Day, Save The Elephant Day and Wear Your Pajamas To Work Day

May 9 - Receptionists Day, Lost Sock Memorial Day, Third Shift Workers’ Day, Donate A Day’s Wages To Charity Day and Moscato Day