If You Want To Be Rich And Happy, Dump Your 401k
“You need to invest 30% of your income in your 401k if you plan to ever retire” advised Jerry. Jerry is a 55-year-old corporate slave whose net worth temporarily creeped past $2MM right before the financial recession of 2021. Half of Jerry’s retirement account was knocked out, along with his fanciful dreams of that house perched atop a bluff overlooking hole 18. Good job Boomer.
Let’s get the simple stuff out of the way. If your company offers to match a portion of your 401k contribution, contribute enough to collect that money. I don’t care how shitty your plan is. That’s free money you can’t afford not to take.
The 401k can be a valuable tool if incorporated into your retirement plan properly. However, there are some glaring issues with the 401k that are being simply ignored by Americans. The 401k has only been around for about 40 years. We are just now having the chance to watch the first generation attempt to retire solely on their 401k’s. And hey, it’s worked out pretty darn nicely for them! Other than the dotcom bubble and that little 2007 snafu, stocks have had a great climb over the past 40 years. But you know what they say, “past results are not indicative of future performance.” Don’t let those fools convince you to gamble on your retirement and financial independence.
Here are three reasons you need to dump your 401k:
1. You are taking on too much risk in your 401k
“Don’t put all your eggs in one basket.” I’m pretty sure more than one Boomer told me that growing up.
The key to investing is risk management. If you are not managing your risk, you are not investing. That would be gambling. My company sponsored 401k plan encourages me to put 90% of my savings in the stock market. They feel I should be “aggressively” investing at this point in my career. To add to the madness, they want me to put all of that in the United States stock market. There are stock markets all over the globe, America is not the only option. Would you walk into a casino and drop 90% of your life savings on red? Nah you wouldn’t. So then why the fuck would you put 90% of your savings in American stocks. The U.S. stock market is a single asset class. Correlation between stocks in bear markets has historically been higher than that in bull markets. In other words, when bubbles pop, all stocks drop.
Jerry would say, “well then, why don’t you balance your portfolio with a 60/40 split. 60% stocks and 40% bonds. That will surely allow you to better manage your risk.” Two asset classes? Jerry, do you really consider this to be a bulletproof plan?
There are hundreds of uncorrelated asset classes around the world. Stocks and bonds are not the only options. To name a few markets, we’ve got: oil, lumber, cattle, gold, natural gas, real estate, coffee, wheat, and (dare I say) bitcoin. All these markets can be invested in. So, why then do our 401k’s limit us to stocks and bonds?
I guess what the Boomers meant to say was, “Don’t put all your eggs in one basket. Put them in two.”
2. The fees charged by many 401k’s are criminal
My sister brought me her 401k enrollment documents requesting advice on how she should allocate her contributions. I was flabbergasted. There was not a single investment option with a fee below 2%. If you contributed $5k/year for 40 years, fees alone would eat away over $500k. There are plenty of high quality 0% fee index funds out there. There is no excuse for any fund to be charging you 2% in fees.
This tends to be an issue with smaller employers, as they don’t have the volume needed to access higher quality 401k plans. Big corporations are able to negotiate better plans for their employees, which often include low cost index funds.
3. Maybe locking all that money up until you’re old isn’t the best option
I’m not a fan of being told what I can and can’t do with my money. You have to leave that shit in there until you’re 59 and half. I can’t help but to think they’re trying to enslave our money until we’re too old and feeble to do something truly impactful in this world. I’ll save that sheeple conspiracy theory for another time. On a serious note, consider the opportunity costs that you may be missing out on tying up all your savings until you’re that old. What if you come across a lucrative niche business you want to get involved in? What if you find your dream home and you need those funds for a down payment? What if your friend gives you an insider tip on a new crypto that is about to soar 10x? Yes, there are ways to take a loan out against your 401k, but that is not all butterflies and rainbows.
The point I’ll drive home is that life will offer you thousands of opportunities over the next 40 years. Don’t put so much money in your 401k that you box yourself in.
And a few closing thoughts:
· An IRA is a great option. Within an IRA, you have a greater investment universe at your fingertips. You can contribute up to $6k for 2020. If you’re exceeding your employer’s contribution match in your 401k, you need to open an IRA.
· Some 401k plans allow you to do in-service withdrawals. Look into whether this is an option with your provider. This allows you to regularly roll your 401k balance into your IRA. You’re freeing your money from the restrictive, expensive company sponsored plan.
· High fee 401k plans may offer a low fee money market fund. This is similar to a high yield savings account. Consider using an IRA to invest in stocks, bonds, and other assets. The money market in your 401k could function as the “conservative” leg of your investment portfolio.
I’ve made many generalizations. There are exceptions to everything stated above. If you appreciated this post, please subscribe. I plan to offer you my thoughts on navigating around the investment universe in my next post.
Disclaimer: This post serves to provoke your thoughts and encourage you to free your mind. The decisions you make are yours alone. I am in no way responsible for your actions.