Why I’d Never Do a 401(k)—& What I Do Instead

The 401(k) is a government-qualified plan.

Let me repeat one word: government.

Most believe this is a tax savings plan. Yet it is merely a tax-delaying tactic, at least in most cases.

What would it actually take to reduce taxes? Well, you would have to pull the money out when the government lowers taxes, or you have less income.

Is the government likely to lower taxes?
Are you hoping to have less money in the future?

The notion of living great off less income in retirement years is a myth–more accurately, an excuse.

These plans rarely, if ever, have the ability to replace one’s income. If your fee-based planner cannot fully replace your income, living off 70 percent seems like a sales tactic to prepare you for disappointment.

Reducing your retirement income limits your lifestyle. Is that really your goal for your retirement years?

These advisors give reasons to reduce your income during retirement. For example, your mortgage will be paid off, your kids will be gone (hopefully), you don’t need to save money anymore, etc.

These are good points, but they miss one major issue. They neglect to consider one of the greatest confiscators of lifestyle and purchasing power: INFLATION.

When you started your 401(k), you thought about how much money would be great to have in the future. Since then, things have drastically changed. Over the last three years, inflation has been exponential.

Oops.

It is a different time. In the past, companies took care of retirement for people. People needed to retire from assembly lines and monotonous and dangerous work. People didn’t live as long.

The planning hasn’t evolved enough to address longevity and inflation.

401(k) plans make a promise that simply cannot be kept. Let’s examine their origin.

The popularity of these programs came as a way to transfer risk to the employee and away from the employer.

In the past, employers offered pensions as a part of their recruitment and benefits package.

This was initially to entice executives to leave one company and join another. Eventually, these became more popular and were offered to all employees. And at first, they worked.

The problem was that volatile performance and economic downturns created turmoil for these companies. This led to reorganization, as they were required to make payments and suffocate funds required for the operation of the business.

Millions of people who were expecting a pension were hurt and surprised when companies defaulted and went bankrupt. Companies learned the issue of disinvesting during the distribution phase of these pensions. And these companies had access to the brightest minds and managers.

Enter the 401(k).

Now companies can offer a match rather than a future obligation predicated upon an unknown future and market they have little to no control over. They have a great story and plenty of people to peddle it to.

The story? These plans are sold as a tax advantage.

But paying less tax simply means that you haven’t taken constructive receipt of the income because it is in the plan and not your pocket.

Yes, it lowers your tax today. But it set you up for an immediate disadvantage if you are 59-and-a-half years old.

People hate paying taxes today, and they’ll still hate paying them tomorrow. So they hold onto the money longer that they don’t want to touch in the future.

Let me repeat: The money is in the plan and not your pocket.

I would argue the fee-based advisors benefit most from the plan and not you.

Not only does the advisor get fees on your money, but they also get fees on the money owed to the government while the money accumulates.

If you were a financial institution or fee-based advisor, what would you want from people?
MONEY.

How often would you want deposits?

AS FREQUENTLY AS POSSIBLE.

How long would you want to hold onto the money?

AS LONG AS POSSIBLE.

How much would you want to give back when someone wants to take a withdrawal?

AS LITTLE AS POSSIBLE.

The 401(k) checks all these boxes:

  • Contributions are automatically pulled from your paycheck.
  • There are restrictions and penalties on your money for withdrawal.
  • You are taught to live only off the interest after 59.5.
  • And if you take it all out at once, you are likely to be in the highest possible tax bracket if it has any level of success.

Are 401(k)s all bad?

No. They are easy to set up. They force people to save and invest. And for many, the company matches their contribution.

However, it is concerning that people have double-digit interest rate loans while funding plans earning single-digit interest.

From a macroeconomic perspective, this is moving backward.

If great opportunities come along, you have limitations on how much you can access through a loan. These are mostly fueled by mutual funds, and even worse, loaded, expensive mutual funds.

My biggest issues with 401(k)s are:
Where is the cash flow?
What does this have to do with your Investor DNA?

This often creates a false sense of security, as people don’t have enough to retire with these plans.

In a YouTube video, I read a Yahoo Finance article bragging about how many 401(k) millionaires there were.

The reason: they started early and funded them heavily. It was less about performance and more about contribution.

Another major concern is, when do you know if it worked? And what is the solution and contingency plan if it isn’t working?

People often lose the time value of money and find out it would take monumental contributions to make up for losses along the way.

These are definitely great for advisors and institutions. They keep clients for a very long time, and can eventually sell their book of business for twelve to fifteen times EBITDA.

Let’s review the main issues of 401(k)s:

  1. Government control.
  2. Tax deferral, which increases your taxes in the long term.
  3. Lack of cash flow.
  4. Limited choice of investments.
  5. Lack of transparency for the first decades on legal, administrative, and accounting fees.
  6. The myth of being adequate, while not providing much of anything when it counts.
  7. Three future confiscation factors:
    • Inflation, robbing your purchasing power.
    • Interest, which can fluctuation during retirement.
    • Tax, which will likely increase, as the government is $33 trillion in debt.
  8. Opportunity cost. Where else can the money go that will be a more effective long-term investment?

To see my full list of issues with the 401(k) plan, download my book Killing Sacred Cows for free.

The Three Big Alternatives to a 401(k)

So what are your alternatives to a 401(k)?

I like to invest into what I call the Big Three Investments below, where I have influence, can create cash flow, can learn along the way, and can benefit along the way as well.

These investments include:

I have written books, created courses, developed this blog, produced a YouTube channel, delivered keynote speeches, and more.

I have even licensed my content to other financial planners and insurance advisors.

Where do you have unique insight that could be leveraged in the form of intellectual property?

Real Estate

Real estate isn’t for everyone. Is it aligned with your Investor DNA? And what type of real estate would you like to learn and focus on?

I only invest in real estate used by my business or that supports the creation of my intellectual property.

For example, my cabin serves not only as a family retreat, but also as a video and podcast recording studio, and a place to host Cash Cabin immersion events to support people in living their richest lives.

Business

There are plenty of businesses available with a similar down payment to a new home.

Or those who already own a business can build infrastructure, allocate money to marketing, or even hire a coach or mentor and grow their profits. Maybe hire a CFO to assess margins or create financial models that lead to more money.

Before Investing in a 401(k)…

At a minimum, here are some key suggestions for anyone to consider as an alternative to a 401(k):

  1. Focus on plugging financial leaks, freeing up more cash flow, and creating economic independence now.
  2. Pay yourself first. If you stop the contribution, make sure you still automatically save. As you build those savings up, then deliberately invest.
  3. Choose investments aligned with your Investor DNA.
  4. Stay liquid with cash value and pounce on opportunities when the markets and 401(k)s are losing.
  5. Focus on making more money by investing in skills, improving your quality of life, and building cash-flowing assets.
  6. If you are a business owner, you could use the funds to improve your business, or in a good tax strategist to provide real tax benefits.
  7. A Roth 401k is an improvement and alternative as well. You can create more certainty as tax hikes could happen in the future. Also, inflation can require you to have more money to live the same lifestyle, therefore potentially putting you in a higher tax bracket.

The idea of living on less money in the future is a misinformed and dangerous philosophy.

Automating investing, rather than savings, creates risk. Instead, consider paying off loans, building up savings accounts, and investing in yourself or the big three (Intellectual Property, Business, and Real Estate).

Know anyone else who could benefit from this?

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