By Tom Monson
I just received an email from a bank president that I thought you would like to know about. Her bold statement that “401(k)s are a scam” really caught my attention.
The essence of the letter described why the 401(k) retirement programs are falling way short of what they are supposed to do, and here’s why:
Reason #1: Tax-Deferral
It sounds like a great idea to defer taxes by funding your 401(k) until you retire. Unfortunately, no one knows what tax rates will be in 20 or 30 years. Given skyrocketing US debt, aging demographics and government “tax-and-spend” ideology, they are bound to be higher.
Some financial planners believe the government wants you to you grow your retirement fund so they can collect more taxes. On a personal note, (I have to wonder if our government can think that far ahead.)
Back to the tax-deferral argument. It looses its luster when you consider you save the taxes on a small amount of money, and end. up paying a lot more when you need your money the most.
Reason #2: “Free Money”
Now, I have to say that this one changed my thinking about the idea of getting free money from your employer.
On the surface, free money always sounds good. But when you dig deeper, you find that in fact, it may not be free after all.
A study done by the Center for Retirement Research found that on the average, employers who match employee 401(k) contributions paid their employees 90 to 99 cents less for every dollar they contributed to their employees 401(k) plans.
But wait! There’s More! In addition, it generally takes three to five years for your funds to “vest” (meaning that you can keep them if you leave your job) and the Bureau of Labor Statistics, tells us that the average time a person stays on the job is 4.2 years.
If you look at it this way, an employer pays you less to match your contribution, but if you leave early, they keep that money anyway. Something to think about.
Reason #3: Fees that Shrink Your Account
According to Brightscope, a financial information company, you will pay between 1% and 2% annual fees on the investments in your retirement account. It doesn’t sound like much, but according to the Department of Labor, a 1% annual fee can shrink the value of your retirement savings by 28%.
Ouch! That’s a big chunk of your money.
Reason #4: Your Money is Protected from You
One thing you can count on is that things happen and from time to time, we will all need money for all kinds of reasons. Buying a home, education, medical expenses, a dream vacation, etc.
They tell us if your money is in a 401(k), you can’t get to it. That’s just not true. You can get to it anytime, but if you do, you will have to pay the tax and if the withdrawal is not approved by the government, you will pay a penalty. In addition, If you take enough out early, you may jump into a higher tax bracket, causing you to pay even more taxes than you saved. Plus, you may have to pay higher taxes on the money you earn that year. Ouch!
Reason #5: Market Return Myth
According to one of the nation’s leading financial services market research firm, Dalbar, over the past 20 years, the average equity mutual fund investor has earned only 4.25% per year, beating inflation by only 2.1% per year.
We’re told that over the long term, we can do very well in the stock market, but with market volatility and if you retire at the wrong time, you could have a serious problem.
The bank president said, “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.”
Reason #6: Even with 401(k) Plans , Most Pre-Retirees Still Don’t Have Enough Saved
According to CNBC, a survey of Gen X-ers (ages 39 to 54) and baby boomers (ages 55 to 73), showed that 14% of respondents in each group say they have nothing saved for retirement.
Just 17% of respondents say they have between $1 and $74,999 earmarked for retirement. This is way short of the $1 million experts typically recommend.
The president said she investigated over 450 different financial products and strategies and found that you don’t have to risk your money to get a good return. And you can reach your financial goals and dreams without taking any unnecessary risk.
She summarized her argument with this: “How much more evidence do we need that 401(k)s are not the solution they’re touted to be?”
My personal take is this: Wall street and the huge pension fund industry are making billions on managing 401(k) plans. When you consider that they are taking as much as half the money you put into your “Golden Years Fund,” that gives me serious pause.
There is a better way.
Enter: Personal Pension Plans
Did you know that there is actually a financial instrument that can help make your retirement financially secure?
Here are a few of the benefits you will find in a Personal Pension Plan:
- Greater upside potential with no down-side risk
- Provide financial security even if you die early
- Continue growth even if you are injured and unable to work
- Provide funds in the event of a long term illness
- You can access to your cash for any reason without tax liability
- When you retire, based on current tax laws, you can receive a tax-free income for life
- No ongoing fees
You will find detailed information, exclusions, and disclaimers in a plan illustration.
If you would like to learn more, I’d be happy to get you more information on setting up your own personal pension plan and send you an illustration about the advantages of setting up your own personal pension plan.
Feel free to call or text Tom Monson at (424) 409-8996, or email me with your questions.
