Still Believe Your 401k Is a Main Cog In Your Retirement Income Plan? Think Again


Let’s just get down to brass tacks. Your 401K/IRA is virtually guaranteed to let you down when it comes to the income on which you’re relying for retirement. You’ve been lead down the garden path. Ironically, these so-called ‘qualified plans’ are in reality very well designed future streams of income — for the Treasury Department — not you. This is especially true, often painfully so, for Boomers. It’s a classic bait ‘n switch play.

The taxpayer, that’s us, is attracted to the bait of some cheap, but helpful (not much) tax savings — now. Let’s say you’re contributing $10,000 a year to your company’s 401k qualified plan. You’re pleased with the 20-30% or so in tax savings each year. (Depending upon your marginal rate and the state in which you reside.) We’ll say it’s the top of the range, 30%, or $3,000. This means from age 35 when you began, ’til 65 when you retired to make it work. During that 30 year period you saved (rounded up), $100,000 in taxes. If you made about 7.33% average annual return, you won’t, but we’ll say you did, your balance at 65 would be $1 million. Again you won’t do that, but we’ll say you did.

For as long as I can remember, Wall Street types have been tellin’ us to expect to live on a yield of around 4% of what we have at retirement. One wonders what they’re tellin’ those who retired recently? They’re not makin’ 4%. In fact, given that the yield on the 30 year bond is now at 3.04%, there is much disappointment out there. Imagine spending 30 years diligently putting in your $10,000, for the truly enviable privilege of making just over $30,000 a year upon retiring — before taxes that is. Oops. Wasn’t that $100,000 in tax savings over the last 30 years worth it?! Gimme a break.

Before you begin thinkin’ you’re the exception, and you may be, here’s what the average 58 year old American man has in his 401k: Less than $70,000. MegaOops.

But what if . . .

I speak to many in this situation, week in and week out. Let’s say they’re mid-40s and have been contributing to a 401k(s) since their mid-late 20s. So far, they’ve amassed around $385,000 in total 401k funds. If they were to take half out this year and half next month, the net after taxes/penalty(s) would probably be in the neighborhood of about $200,000. (But don’t believe me, believe your CPA.) Experience says it could be less, but unlikely to be much more. Add to that their savings in excess of cash reserves, and maybe some home equity, and they will have gathered roughly $280-295,000.

Yes, the tax/penalty hit was brutal.  You wept. Better tears now, than at retirement, right? You bet.

You also ended up with four little income properties in a great region. You locked in historically low interest rates on all of ‘em. Around 5%, maybe a tic less. Long before you retired, you’d combined the properties’ cash flow with disposable after tax income from your job(s).

20 years pass and you’re 65 — ready to retire

It took you about 15 years to pay them off. It could’ve been a lot sooner, but you were pretty conservative with your income. In the immediate five years before retiring, the cash flow from properties now debt free, accumulated at approximately $75,000 annually. Much of that was tax sheltered. In other words, in the immediate five years prior to retiring, you stockpiled $250-300,000 in cash — after tax.

Oh, and that income? It was projected to be the same in year 5, 10, 15, 20, and beyond as it was the day you acquired the units. The NOI is the same $75,000 it was 20 years earlier. They’re free ‘n clear of debt, so your net worth in these properties is a cool million bucks. We also assumed they’d never go up in value.

Let’s Review

In order to equal that in your 401k, you’d first have to get your invested cash in the stock market up to $1 million or so. You can’t afford many, if any losing years. Good luck with that. Then you’d hafta earn 7.5% — year in and year out. Not freakin’ likely in both cases. You simply aren’t gonna get there.

OR . . .

You gather your available capital, follow the above real estate investment scenario, and make retirement income of $75,000 a year, while sporting $1 million in equity. If you think the projection of flat rents for two decades along with no appreciation in value for the same 20 years isn’t conservative enough, I don’t know what to tell ya. In no 20 year period in our lifetimes has real estate values failed to go up, net. Nor have rents been anything but higher over the same stretch.

Either way, the guy/gal who goes for the real estate is almost guaranteed to retire with a relatively highly secure income — with a million dollar equity available if life makes it necessary. Leave your 401k in the rearview mirror and give your retirement a fighting chance. Remaining in the qualified plan will doom you to a life sentence, not a retirement. 

The numbers are against you. It was planned that way. Don’t take the bait. Do what they don’t want you to do.

Think again.

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About Author

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Jeff,
    Great article, the hard part about this is unbrainwashing the masses. I work with engineers all day, many of them know I have properties, rehab loans, construction loans, etc. I offer referrals, show a lot of my numbers but in years I have only had two nibbles. One purchased a condo for his kids for college instead of paying for the dorm, the other tried to purchase a rental but the deal fell thru.

    I understand the numbers of real-estate investing. I’m guessing your recommending 4 properties using about 50K down each? Also, why not self-direct the IRA/rollover money? No tax penalty there, the down payment may be higher, you would get to free and clear faster and have some money left in the “brainwash” investments. This would be an easier sale to the uninitiated budding RE investor.

    Thanks for all of your contributions and great ideas!


  2. Hi Jeff – Nice article as always. Instead of taking the tax hit today why not do a self-directed IRA in real estate investments?

    Yes, taxes would be owed later on the income but clearly the dollar invested today is worth more than the dollar paid in tax 20 years from now.

    I am in the situation you describe so just trying to clarify, thanks again,


  3. Great Article !! I have been directing many of my investors to a firm here in Central Florida that specializes in helping investors turn their 401K into a money making machine. If they meet the criteria, they transfer their 401K into a Roth IRA. Within a few days they are able to invest in real estate and start letting their money make much more for them than their traditional 401K could only imagine. The tax savings these investors see is also very appealing for real estate investment as well.

  4. Jeff Brown

    Hey guys — I understand the points you’re making, but they won’t work nearly as well. Let me explain. When investing with a self-directed qualified plan, the down payment is almost always around 40%. In some states the lenders require half down. The interest rates are significantly higher. Today I can get 5% 30/yr/fixed for my investors. Down payments — SFRs/20%, 2-4/25%.
    The rate for an IRA loan would be in the 6’s. Also, most folks simply don’t have the money in their IRAs to make it happen. An example are the properties in the post.

    First, the down payment is around $100,000. Then there are closing costs. Then there’s a requirement by lenders for an additional minimum of 10% reserves. So the investor would need roughly $115-120,000 to buy one high quality property in an equally high quality location. By definition, the average American at 58 has barely over half that amount. As far as payin’ it off earlier than the post’s example, I disagree, at least in most cases.

    Sure, the loan starts out lower. But my experience shows a couple real life practical problems.

    1. If they barely have enough to close the purchase + reserves, there’s not enough to add to the monthly payments to pay the loan off as early as they might desire.

    2. That problem is magnified due to annual contribution limitations. They can’t get around this by adding their own money, as the rules frown on this.

    3. The biggest problem though is the ability to take the cash out once it’s free ‘n clear. It’ll be taxed like crazy. However, if they’d bought it on their own account, there are many options simply unavailable to IRAs. I have many clients who will be able to sell one or even two of their debt free properties while paying little, often no cap gain or recapture taxes. They then apply the sizable lump sum to their existing EIUL. This results in a $2-6,000 increase, 10-15 years later, of TAX FREE income for the remainder of their retirement. No can do with their IRA.

    4. Do we all trust the feds to keep their hands of qualified plans? Really?

    5. By gutting their plan and investing the net proceeds on their own account, they get the same exact property. They’re not restricted by IRA rules. They’re better off tax wise. They have a far larger menu of options.

    It’s a no-brainer, guys. I’ve tried to make it work equally, and it just never computes.

  5. Jeff,

    This is my simple plan that I’ve been following….

    Borrow money, invest in Real Estate, each month take the rental income and pay down debt, save some for reserves and contribute to a Roth IRA.

    I take the some of the rental income proceeds (cashflow) and buy more properties and invest in a Roth IRA.

    The reality is Real Estate isn’t everything. You need a portfolio of assets that produce multiple sources of income.


  6. Jeff Brown

    Hey Frank — “The reality is Real Estate isn’t everything.” Couldn’t agree more, and say that often and in rich detail on this site. For the record an EIUL will run circles around a Roth. Don’t be a stranger, OK? Thanks

  7. Chris Clothier

    Jeff –

    Great article and I appreciate your no punches pulled style of telling it like it is. Doesn’t mean everyone has to follow the same plan, but there is no fluff in the way you explain things. I wanted to ask one question. When I read the post, are you advocating taking a 401k, cashing out now, paying the penalty but reaching a much richer reward when it comes time to retire?

  8. Jeff Brown

    That’s exactly what I’m sayin’, Chris — at least for most folks. Frankly, if advised by a real estate investment expert, they should be able to easily out perform their qualified plan over the long haul, and with significantly reduced risk. Also, their control goes up tremendously. Bottom line, in my experience they end up with higher net worth, and way higher retirement income investing in real estate with 50-65% of their original 401/IRA balance. It’s virtually always a no-brainer.

    Make sense?

    • Chris Clothier

      Makes absolute sense to me, for most investors, depending on the length of time to retirement. I am a firm believer in rental real estate as a vehicle to build wealth and provide a passive income at retirement. Thanks again for the blog article.


  9. Great article and I really appreciate your take on self-directed qualified plans. I’ve been thinking about this off and on for the past six months, but I can’t get over the machinations required to stay legal. I quit contributing to my 401k at the beginning of this year in order to save for more down payments. At this point we haven’t cached anything in, but we’ve been able to fund a few purchases without going that far. I’ll have to go over the implications with our accountant. Best Regards,

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