I don’t know how to approach this subject without making people feel I am insensitive, but I’ve been on the rampage about the “herd mentality” taking over people’s retirement when it comes to the pressure they feel to fund it entirely using a deferred plan such as a 401(k) or IRA. I guess I will just speak my mind about what I see from my 45-year perspective in financial coaching and hope somebody will get something out of it before it’s too late.
Let’s say Thomas needs a job and income. Thomas has been looking for employment for some time, and angst is building up in him to a breaking point. Thomas gets an interview for a job, and when he gets the offer, he’s going to take it, regardless — the last thing he wants to do is toss sand into the face of his potential employer.
He is hopeful that there is a retirement plan, health insurance, and other benefits. Thomas feels a need to ask the employer during their initial interview, “Do you have a retirement plan?” The employer answers proudly, “of course.” Thomas says to himself, “This is good. I have something positive to add to my discussion about this job offer with my spouse when I get home.” Now what happens?
Thomas gets the job, but soon finds out the employer’s “retirement plan” is a simple 401(k) that offers no matching contribution. This is not a problem yet, because Thomas is just pleased to have a job, have income. He thinks to himself, “I will deal with this later.” What happens later?
Thomas and his wife do not track their income and expenses. There is no spending plan. They don’t have any surplus each month and they can’t put any money into this 401(k). Therefore, what is the cost to the employer to offer Thomas this wonderful “retirement plan”? ZERO. Did you know that only about 25 percent of all workers that can contribute to a 401(k) do so? The U.S. Department of Labor tells us that even when the employer does offer a match, no more than 50 percent of all workers take advantage.
So, on top of Thomas not even being able to contribute to the plan, potentially, even if he does, he could lose everything in it if the market bombs (like it did in 2008 where some people lost hundreds of thousands of dollars). This is discouraging, to say the least and is why so many people have stopped contributing to their 401(k).
Now what about the income tax? Thomas has two children and pays $3,800 in taxes, so when he puts money into the 401(k), he will save about 12 percent, or only $456. But when this money grows and Thomas takes it out as income, he will pay at least 28 percent tax on this larger amount of money. In addition, while this tax-deferred income appreciates in value, at retirement it also forces Thomas’ Social Security benefits to become subject to income tax, which could cause him to lose another $5,000. Before putting money in a 401(k), I suggest you meet with a CPA or tax preparer and ask how much their clients pay in taxes before and after retirement. You will be shocked.
So here’s my case against saving for retirement using a 401(k):
- Thomas already has a hard time saving money into the 401(k).
- Even if he does manage to save, market risks can lose a bunch of this money for him from time to time.
- When he takes the money out later, he loses a bunch of it on higher taxes (including the tax on Social Security, which until recently was not allowed to be taxed — no employer tells you this).
How do you think this is working for Thomas now? Terrible! Yet it is a “tradition” to save money into a 401(k) because “that’s just what everybody does.” And, if you aren’t able to save into a 401(k) you may find yourself beating yourself up emotionally because you are not doing what “everone” else is doing, so you must be a loser who’s not preparing well for the future.
Well, let me tell you something — not “everyone” else is doing this. Some people are beginning to see what a 401(k) is — a technical term for “forced savings” (since the government assumes you’re too stupid to figure anything else out for yourself financially) and nothing much better. If you knew what I knew, you would not put money into a 401(k).
Instead, consider these options:
- Create a spending plan that allows you to get your spending under control so you can create surplus money.
- Create a debt plan that helps you get our of debt quickly by using Power Down principles.
- Use the money you were paying on debt and wasting in poor spending habits to fund your own tax-free retirement, separate from an employer (especially an employer that does not offer matching contributions).
- Learn how to maximize a cash surplus through alternative methods of retirement funds including real estate, life insurance annuities, and resource maximization.
For more information on these alternative ideas, please contact me at no charge. I would be happy to introduce you to other options that work better and bring much greater peace of mind: firstname.lastname@example.org.