One of the crazier things that happens in the American retirement system is that we turn over our money to investment firms, who then turn around and put the risk back onto us, but they still stand to gain as they make their money anyway. In the meantime, if we put that money into qualified retirement plans (like a 401(k), 403(b), traditional IRA, TSP, etc.), and we try to access it, we then usually pay taxes, an early withdrawal penalty, and/or we pay interest on our own money! We lose the use, control, and liquidity of our funds. If we had control of
our money, we could do things like: pay off debt; acquire cash flow positive assets; make our own choices with our own money.
With all the debt that most Americans deal with, why are we locking up all our money in 401(k), IRA, and savings accounts that make us pay a penalty if we need to access them to pay off this debt? The debt levels of many Americans are continuing to climb. Here are some debt statistics to chew on from Tim Chen at Nerd Wallet (2015):
U.S. household consumer debt profile:
- Average credit card debt: $15,863
- Average mortgage debt: $156,584
- Average student loan debt: $33,090
In total, American consumers owe:
- $11.86 trillion in debt, an increase of 1.9% from 2014
- $901. billion in credit card debt
- $8.17 trillion in mortgages
- $1.21 trillion in student loans, an increase of 8.5% from 2014
Let’s think about a credit card with a 15 percent interest rate and a $5,000 balance. If you are carrying that, but you have $50,000 in a 401(k) earning a 3.8 percent cash-on-cash rate of return, you are still going into the hole -11.2 percent each year on that money! Let me put it another way, if you simply had access to those funds to pay off that credit card without a penalty, you could give yourself a 15 percent rate of return hike because you would stop paying interest!
Now, those on the other side of the argument, like the lawmakers and politicians, will say that if we allow the public to use their retirement money to pay off debt, no one will have enough money to retire! This is crazy in my opinion. Imagine being told you don’t know enough to use your own money in the best way possible? How can we when we know this money is trapped? This keeps us more in debt, so that even if we have been lucky enough to save up some money for retirement, Americans are still retiring in debt, which means they don’t have enough income to provide for their needs. This is partly because they don’t have the use of their own funds during their lifetime; they are either penalized or taxed for using it, or both.
If Americans had control of their own money, they could live without any debt, and redirect all the interest they are paying to banks back into their own families’ estates, and then create a rich legacy for themselves and their families. Since we have turned over our retirement money to Wall Street, we lose control over our future.
Losing the use, control, and liquidity of your money is another major risk to your retirement. Stay tuned for additional posts on risks you face with retirement funds and go to www.moneymastery.com for more information on debt and retirement planning.