You Should NOT Bank on Your 401k For Retirement. Here’s the Superior Alternative.

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Put nine investors in a room, and you’ll generate 10 opinions on the most reliable investment strategy as it relates to creating wealth and/or retirement income. Let’s begin with the strategy providing the most heartache for Americans β€” the employer sponsored 401k. There are different reactions when I make that statement during speaking engagements. Some roll their eyes back, some nod their heads in agreement, but most haven’t heard that statement before. Also, most are somewhat skeptical of my belief concerning the employer sponsored 401k as such a spectacular loser.

I then ask the audience some questions.

  1. How many of you know someone personally who has retired with more than $10/hr worth of 401k retirement income? That’s $20,000 based upon a 2,000 hour work year. Usually a very few scattered hands go up.
  2. How many of you know of anyone who retired with a balance of $1,000,000 or more in their work related 401k? I’ve asked dozens of audiences this question, and to date, roughly 4-6 hands have gone up.
  3. How’d your 401k fare in the 2000 NASDAQ and 2008 DOW “corrections”? Crickets.

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How 401k Plans Have Performed

Boomers were the first generation to get a lifetime to test 401k plans, as they became available during the Carter administration. At nearly 40 years old, it’s more than fair to say we’ve had a long enough test to draw some credible conclusions as to their ultimate efficacy as vehicles designed to create retirement income. Wouldn’t you agree?

Today, as happens every day since 1/1/2010, continuing ’til 12/31/2030, 10,000 Boomers are “celebrating” their 65th birthdays. Though professional analysts’ opinions vary, the most generous analytical conclusions say the average Boomer blows out the candles on that cake with less than a $100,000 balance in their 401k at work.

Woohoo!! Let’s party!! NOT.

Real estate investors seem to be a somewhat different breed of cat in that they appear to pay more attention to what’s what with their 401k. My clients, for example, whose demographic profile is all over the map (pun intended, I think), have more in their 401ks at work by 45 than the average American does at 65. ‘Course, all that usually means is they can become susceptible to feeling OK about how things are rollin’ out. When you’re 50 with $250,000 in your account, do you really think you’ll reach a million bucks in the next 15 years or so?

Related: How Much Do I Need to Retire?

Those who say they will can make a credible case, though they require a relatively dubious assumption to be in place. They’ll point out that at an annual contribution level of $18,000 for 15 more years, they’ll build that $250,000 to a million bucks with a mere 5.84% annual yield. Add to that any employer match, and the needed yield goes down even further. So, let’s visit the implausible assumption:

They would never have a losing year.

Furthermore, if they had a low yield year, say 2%, the next years would necessarily have to make up for it with yields above 5.84%. In the last 15 years we’ve had two rather onerous downward corrections, both of which did major portfolio damage to most Americans’ 401k. It took most investors multiple years to merely get back to “go,” much less make up for lost yield. Meanwhile, those pesky birthdays kept showin’ up year in and year out.

The Takeaway

If you were 50 in 2000, you’ve seen a couple stock market crashes of significance. One of the most compelling factors leading to low average yields for Americans in their work-related 401k accounts is their own behavior. They tend to allow the alternating emotions of fear and greed rule their investment decisions. Dalbar Corp. has shown that the average annual return in the employer sponsored 401k has been well under 4%/yr the last 20 years! It coulda been higher, but when folks sell stocks/mutual funds as they’re goin’ down and buy them back again on the upswing, they tend to sabotage themselves. Know what I mean, Verne?

So, what’s a superior alternative?

First off, let’s agree on a couple of known facts we can all empirically document.

  1. The 401k menu from which you choose in what you’d prefer to invest is made up of what the Wall Street firm your company hired to run it has on their shelves to sell you. If they can’t make money selling it, it won’t be on your menu. No real estate. No notes.
  2. As mentioned earlier, all those Boomers are hittin’ their 65th birthday with an average of under six figures in their 401k accounts. VIRTUALLY ALL OF ‘EM HAD MATCHES. Matches are akin to the worm we put on the hook when fishing. The problem is that in this instance, we’re the trout. In other words, if it wasn’t for employer matches, the numbers would be even more embarrassingly pathetic.
  3. The least one can do to help themselves outta this potential retirement nightmare is to stop contributing good money after bad. Sure, that’s merely my own professional opinion. But I ask you again: Whom do you know who retired with more than $2,000/mo. from their work related 401k?

Real Estate and Notes and . . . ?

News bulletin: Real estate goes down in value, too. However, it separates itself from the pack when it still delivers cash flow after losing 10-40% of its value. When the stocks in your 401k got kneecapped in 2000 and 2008, did the “handsome” dividends keep on truckin’? The same with notes. Values are sensitive to both supply ‘n demand and market yield. If you paid $40,000 for a note giving you $400/mo and the market yield goes up, your note will tend to lose some of its value. Yet your $400/mo keeps on keepin’ on. ‘Course, that begs the question that you bought the dang thing at a discount in the first place, right? πŸ™‚

Real estate and note investing have been creating impressive retirement income and wealth for the “common folk” since the beginning of the 20th century. I know, I know, long before that. But I’m talkin’ about regular folk, like you ‘n me. The grand experiment with the employer sponsored 401k is an abject failure. Almost 40 years, and it’s considered a success if it ends up providing more retirement income than Social Insecurity.

Furthermore, in retirement the typical American finds themselves in a situation for which they didn’t bargain. Even if they created a somewhat relatively impressive income from their work related account, it’s 100% taxable. But wait, it gets worse. They’re also virtually naked tax-wise every April 15th. Their home is generally paid off, so no interest deduction. Their kids are gone, too. Pretty much every buck that comes in is naked to both state and federal income taxes. But wait, it again gets worse. Once they reach 70.5, the government looks at their handy dandy actuarial tables to find out your life expectancy. At that point, you’ll be introduced to the concept of RMDs β€” Required Minimum Distribution.

Related: Case Study: How to Create $350k+ in Annual Retirement Income Through Real Estate

All that means is that you’ll likely be forced to take out more each year than you planned or need. All of it, of course, taxable. You will then be in a race: Do you run outta money first, or die first? Welcome to your relaxing, carefree retirement, sponsored by your friendly work-related 401k. πŸ™‚


Does this mean all 401k/IRA accounts are bad? Not even. Does it mean that real estate and note investing is all good? That’s a bad joke. What it means, when all the smoke clears, is that the vast majority of Americans are being hosed when it comes to their ultimate retirement lifestyle and income. We’re akin to farm trout being trained to bite at the nearest worm. In the end, that’s not funny at all. Just ask the 50-something man or woman who just realized having a couple hundred grand in their 401k isn’t gonna get ’em even close to what they’ll need in a precious few years.

Take a step or two back to reassess your strategies for creating retirement income. The key to your success will be finding the answers to the questions you haven’t known to ask.

Investors: Weigh in! Are you happy with your 401k’s performance? Do you think real estate investments win, hands down?

Let me know with a comment, and let’s discuss!

About Author

Jeff Brown

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


  1. jeffrey gordon

    I can only imagine what the next dip is going to do to the boomers as they watch their 401k’s get whacked once again so close to retirement and no other place to go–like bonds–perhaps they will finally consider the virtues of investing in discounted RE notes? have a great weekend Guns~!


  2. Gregory Hiban

    Having all of your wealth in any one asset class, regardless of the asset class, is a terrible idea. In retirement you should be pulling from as many different income sources as possible. 401Ks tend to be terrible due to the high fees and limited investment options; however, most people change jobs half a dozen times throughout the course of their career. As long as they rollover old Traditional/Roth 401Ks into Roth IRAs, their retirement assets will be theirs to control, have minimal fees, no income taxes and no RMD.

    There are many companies out there who have been growing their dividends consistently for decades and they continued growing their dividend throughout the recession. There is also plenty of real estate which not only lost significant value during the recession, but also saw the income from the real estate plummet as well.

    I could build a stock portfolio of dividend champions that yields 5% using around 20 companies like HCP, O, T, VZ, MSFT, XOM, WMB, ED and others to spread out the risk. Combine that with a few rental properties, maybe a long term corporate bond ETF and some international equity exposure and you will have a great retirement.

  3. Travis Fisher

    I like the balanced approach so I see 401Ks has having their place. I agree with the others who said that using a Roth 401K is key, as well as choosing the right investments. $1M in retirement would give you $40K of income by living off 4%. That plus a decent real estate portfolio should do OK for retirement.

    Here’s a really cool spreadsheet to see what your 401K should be worth at retirement:

    It amazed me to see how much a 0.5% difference in return made!! Also it has a cool random interest option.

  4. Andrey Y.

    That’s sad. I was just asking myself why I started a traditional 401k putting in nearly $1k a month when my RE stuff is doing way better than this 401k ever hopes to do. Maybe “diversification” is overrated. Thanks for the article!

    • Jarred Sleeth

      I’ve been thinking this same thing. Part of me just wants to cash out of it and invest it in RE but I’m afraid of losing some diversification. Though I think that money would do better in real estate over the next 25 years than sitting there until I can touch it.

      Maybe I should pull the trigger…

    • Greg Turnquist

      “Diversification is for those who don’t know what they are doing.” –Warren Buffett

      If your RE is outdoing your 401K, why continue to fund the 401K? Diversification in RE is when you own multiple properties, generating multiple streams of revenue. Anyone vacant? The others got you covered

      • Gregory Hiban

        Different parts of your portfolio outperform at different times, no one asset class always outperforms the others.

        You quote Warren Buffett on diversification, but do not consider that Berkshire Hathaway owns dozens of private companies in various industries as well as dozens of individual stocks. Berkshire Hathaway is basically the definition of diversification.

  5. Jiri Vetyska

    Jeff, great article, but missing a key point! There is no comparison of potential income from notes? You talk about what folks can expect with 401k, but it would be interesting for everyone to see what you could achieve with the same portfolio invested in notes.

  6. Joe C.

    I’m 49 and have no 401k and no retirement savings. Time to push the panic button! A year and a half ago I constructed my first single family residence. It is cash flowing almost 9000 a year. Divide that by 4% and it’s equivalent to having 225k in retirement savings. I just completed my 2nd house and rented it with same cashflow. Construction is underway for #3 and land is purchased for #4. In 3 years total I will have 900k retirement savings equivalence. Try that with a 401k!

    • Gregory Hiban

      Well, given your lack of saving over the past three decades … high risk, high reward is really the only option you have to be able to retire at all. Developers in Florida are not immune to market downturns as we all saw what happened to the market there during the most recent recession. Once you hit a half dozen properties or so I would throttle back on the build rate and focus on mortgage pay down so you have some properties paid off cash by the time you approach those retirement years.

      • Joe C.

        Haha, no course needed Gregory. Formulating a plan and seeing it through is all that was necessary. I only wish I had started years ago. I had analysis paralysis for a long time and would always find a reason not to move forward but glad I finally jump in.

  7. Joe C.

    I had some decent savings before the recession, but like a lot of people, it was depleted with reduced earnings. My LTV on these properties is around 55%, so equity wise I’m in pretty good shape. But I agree that pay down in the medium term will be a priority. My only point was that even late in the game it is possible to build yourself a small nest egg with real estate investment.

  8. Cynthia Ortiz

    This blog is so true Jeff! I work for a federal facility, and I have a couple co-workers that are getting ready to retire that have the TSP retirement. They state they have always contributed the max allowed to their TSP. What’s the result of 25 back breaking years as a Registered Nurse in California making more than $100K most of their careers? A measly $350K more or less. Who can survive in California on that retirement? What an eye opener for sure! Thanks for the great articles!

  9. Chi Cheung

    Most pro 401k articles that I read says your spending will go down when you retire. That may be true, but probably not by choice.

    I work 40 hours a week. I don’t have time to spend money. If I am not working, I would have a lot more time to think about what I want to do and how to spend money.

  10. Leonid Sapronov

    My company just switched 401k providers and we got a presentation from one of the financial planners that my company is working with. They went over the 401k investment options, gave us pretty booklets and suggested we all get disability and life insurance. The fund options in the booklet look great on paper, some of them advertising >10% annual yield. There is even one real estate fund.

    However, I’m still going with notes. It’s hard for me to compare the risks, but I think there is more value in notes, especially if you buy them at a discount. Plus, like Jeff said, if the market drops, you still get those monthly payments. There’s other things that can go wrong, like the note becoming non-performing, but if you find an experienced note broker to work with, your downside and risk will be limited.

  11. Greg Turnquist

    Once again, Jeff Brown knocks it out of the park. It’s sad but true. This message about the failure of 401K funds must be put out there constantly, because the Wall Street Army of Salesmen has trillions of $$$ invested in selling this rotgut.

    It also ails me everytime I listen to Dave Ramsey helping people get out of debt (good), but following it up with stuffing money into a mutual fund (bad). Mutual funds are way too risky and much too volatile.

    Ever since I caught on all the flaws they carry along with their miserable rate of return, I have blown up my old wealth building plan and replaced it with something that is actually working. Heck, I go to a software conference, and find myself answering other people’s financial questions!

    Best of luck everyone.

    • Susan Maneck

      But let’s keep in mind why people’s 401Ks are doing so badly. They aren’t managing them well. They buy high and sell low. During this last recession I watched my retirement funds go down nearly by half, but I didn’t panic. Instead, I started pouring every extra dime I could get a hold of into mutual funds. The result is that I now have four or five times what I did at the start of the recession. Once the market recovered, then I started pumping every extra dime I could get into real estate which had not even begun to recover where I live. When interest rates and inflation start going up, I’ll begin to buy bonds. Even now at 59 1/2 I have an adequate source of passive income, plus an adequate amount in my retirement that I can choose my retirement date and it doesn’t need to coincide with when I decide to take my Social Security. When will I take Social Security? Either in the next down turn of the economy after I retire or when I turn 70, whichever comes first.
      One thing that has to be kept in mind. Real Estate investment is not exactly retiring, in fact it can be pretty hard work. This ‘passive income’ isn’t all that passive. There is no telling how long into retirement I would be able to keep that up. That’s one reason I’ll postpone collecting Social Security as long as possible.

    • So what is it that is actually working for u? I’m 30 with a 401k and don’t want all my eggs in one basket. I invest in the stock market with my liquid savings. I want to buy my first home and also want to own an investment property, but I’m unsure which I should do first. Can I get a loan for both within a few years of each other? I have about 15-20k saved up currently. Any advice or guidance would be appreciated! Thx.

    • Eric Bradeis

      So what is it that is actually working for u? I’m 30 with a 401k and don’t want all my eggs in one basket. I invest in the stock market with my liquid savings. I want to buy my first home and also want to own an investment property, but I’m unsure which I should do first. Can I get a loan for both within a few years of each other? I have about 15-20k saved up currently. Any advice or guidance would be appreciated! Thx

      • Jeff Brown

        Hey Eric β€” I’m not a fan of the stock market. In fact, I think we’re so overdue for a downside correction it’s scary. Your questions are all on the A-List for sure. Please reach out to me so we can get into the deep end of the pool with the actual facts. There’s no formula and no cookie cutter outline by which we lay out investment plans for retirement. I will tell you that you’re likely better off than you might be anticipating.

  12. Lauren w.

    Hi Jeff,

    Could you recommend how I can educate myself on notes. I don’t know the first thing about them and would like to further investigate. I find your article intriguing but I am too ignorant to begin to ask questions.


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