“ Blow Up the 401k ”
Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes“ Blow Up the 401k ”
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Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8yThe employer match is both (1) the best return (by far) of any investment in my personal savings portfolio and (2) the easiest investment. Worst case scenario...take the 100% match and then take a hardship withdrawal down the road and pay the 10% penalty. And many of us are in index funds with minuscule fund fees (mine is 0.17%).
79 Replies
- Rental Property Investor · Westport, CT · Member since 2017 · 176 posts · 183 votes8y@Bryan Clement This arguement about size hurting returns only applies to “active” funds. Passive index funds by definition perform at the index return no matter the size. Active funds have underperformed since the crash in ‘08, I wouldn’t invest in these active funds until they prove themselves again. Active funds are also the ones with high fees. I also agree with Warren Buffett on many things. He recently said he would instruct his wife to invest almost entirely in an S&P index when he dies.
- San Francisco, CA · Member since 2014 · 345 posts · 281 votes8y
Originally posted by @Bryan Clement:
it's interesting to me that so many people think the 401k is still viable. I could see a solo-401k or self-directed IRA being profitable, but by and large the 401k doesn't work anymore, simply because of the sheer numbers of people that are doing it. Large, above average profits are possible in a fund at first, but as a fund gets too big and buys up all the good stock or bonds, naturally the fund becomes either overinvested in one niche, or has to take the excess money and apply it into other stocks that aren't as profitable. Thus, the bigger the fund, or the bigger the amount of money placed in a fund, the faster the fund's returns regress to the norm. Warren Buffett cited this as the reason he closed his investment fund. With Real Estate, the opposite is true, the larger the scale, the bigger the profit potential. Thus, the 401k is dead, as is any stock market fund in general at this point.
Is there any inconsistency between your statement "Thus the 401k is dead, as is any stock market fund in general at this point." and the staggering returns that stock market investors have enjoyed over the past 10 years? Do you think the dynamic of "money rushing in crowds out opportunity" in the real estate marketplace as well? Have you compared the actual costs of running a self directed retirement account to running a traditional brokerage retirement account?
- Fairfield, CA · Member since 2015 · 79 posts · 26 votes8y
I love my 401k.. I take loans at a small interest rate.. pay back.. do it again .. all while paying back to myself - even the interest.. You can borrow 50% of your balance.. got 100k in there.. there's 50k you can tap into to pursue rentals.. Just be smart, but.. it's another avenue..
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes8y
@Michael M. actually what you did should be the rule. When you leave a company you have the power to reallocate your 401k investments. Consumers allocating their own monies rather than being held captive to their company’s investment options will add competition and eliminate a lot of fee obsefucation and sweetheart kickback deals. Companies should not be involved in choosing captive and limited investment options for employees rather employees should be allowed a qualified investment vehicle in which they can seek out their own low fee provider, like Vangaurd.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes8y@Shiloh Lundahl I got rid of my 401k
- 8yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
Originally posted by @Jesse Kerr:
I love my 401k.. I take loans at a small interest rate.. pay back.. do it again .. all while paying back to myself - even the interest.. You can borrow 50% of your balance.. got 100k in there.. there's 50k you can tap into to pursue rentals.. Just be smart, but.. it's another avenue..
I believe you can borrow up to 50% of the balance OR $50k, whichever is lower.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes8y
Originally posted by @Shiloh Lundahl:
I recently listened to the podcast GRE (Get Rich Education with Keith Weinhold) and his guest was Ted Benna, who has been credited to being the father of the 401K. (Here is the link to the episode for any who are interested: https://itunes.apple.com/us/podcast/get-rich-educa...)
In the interview Benna stated that the 401K has veered from what it’s intended purpose was and that the mortgage fund brokers are the ones getting rich through the fees that they charge rather than the actual participant. He shared that it’s benefit has been that it can be a forced savings plan for most people, especially for those who have a hard time saving.
Benna then shared that he is a real estate investor.
I think it is so sad that the majority of people think that the 401K is the way to go for retirement. It is definitely a cultural belief now and, in my opinion, it makes people lazy investors. Ultimately the 401K makes the brokers and managers rich while the investors get what’s left over, if anything. I agree with Benna. I think we should blow it up. What do you think?
All of the funds in my 401k have fees of about 0.034%. I doubt anyone is getting rich off me.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes8y
My company has a plan whereby we are able to take a portion of our year-end bonuses in the form of an employer contribution to your 401K. This enabled us to put in 55,000 (combined employer and employee contribution) in our 401K. Over a period of two decades or so, I can see how this can really set someone up for a comfortable retirement. Unfortunately, most companies do not offer something like this. And a lot of people aren't eligible for a solo 401K or whatever the other plans are that allow for higher annual contributions. If you're limited to 18K or whatever the amount is in a typical 401K, along with the very limited type of investments that can be made, I would limit my contribution in an amount that would maximize the company match. That is, of course, if your goal is for financial independence as soon as possible.....not when you're 59 1/2 years old. This is exactly what I've done my entire life and I've also emptied my 401K twice (this part, I would not give my wholesale recommendation. Only do it if you're sure you've got a great opportunity). I basically double my money thanks to the company match and once I'm vested, I withdraw everything and use that toward RE purchases.
- Appraiser · Brooklyn, NY · Member since 2018 · 106 posts · 118 votes8y
Originally posted by @Tom V.:
@Josane Cumandala What did you hold in your 401K account that produced such meager returns? Who was the plan sponsor? The 401K account itself is not an investment. It is a kind of account (as in, a checking account, a savings account, a 401K account).
Were you prohibited from moving your funds to a standard IRA where you could choose any listed equity product?
Was you employer matching any of your contributions? I have never seen an employer offer an employee either to match contributions or pay the employee more. It isn't as if employees get to choose in my experience.
I am aware. I was invested in all solid low-cost Vanguard funds and yet the returns were garbage. I also have an account with Vanguard with after-tax money so I figured it had to be the 401k provider. I get a 4% match if I contribute 5% or more of my pay so yes the money adds up quickly but like I said this is a benefit that ultimately comes out of the money my company would otherwise spend on my salary, it's not free money.
I prefer to have more control over my money. I am a saver and am consistently saving 20-25% of my pay in order to achieve my goal of investing in real estate. The tax benefits of doing that far outweigh the temporary benefit of the 401k so I'm taking the hit. If you have systems in place that deliver consistent cashflow I don't see why you need a 401k.
Not sure if I can roll it over to an IRA, probably can but I'm not interested in equities at this time. I mean, I'm on BP lol.
- Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes8yThe 401k is only good for the upper-lower and middle class and some entry level millionaires. Wealthy individuals, in the multi millions tier, have much more exotic investments at their disposal. We also need to look at the 401K from a more practical perspective. For example, employer match does not constitute a "return". It is no different, really, than additional income except it's forced into that account for your benefit. So it's not as if you get a 100% return on a 5% contribution if your employer matches it. Also, 401K balances can be very misleading. Let's say you have $100,000 in your 401k. In reality (assuming you are eligible to withdrawal penalty free) only about $65,000 of that is yours. The rest belongs to Uncle Sam. Of course financial advisors will sell you on the whole "you can retire with $1,000,000, withdraw only $30,000 a year to live off of and avoid paying high taxes." But seriously, who wants to live like that? Not me. And also, taxes have historically always gone up and so the Deferred tax benefit of a 401k may end up being a negative and another 20 or 30 years whenever retirement comes around.
- Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes8yHere is the best comparison i've found between a 401k and real estate: https://www.tentomillion.com/rental-property-vs-401k-smackdown-how-to-beat-99-9-of-wall-street-money/
- San Francisco, CA · Member since 2014 · 345 posts · 281 votes8y
"I was invested in all solid low-cost Vanguard funds and yet the returns were garbage."
I don't believe that Vanguard low cost funds underperformed the market for any meaningful time.
"I also have an account with Vanguard with after-tax money so I figured it had to be the 401k provider. I get a 4% match if I contribute 5% or more of my pay so yes the money adds up quickly but like I said this is a benefit that ultimately comes out of the money my company would otherwise spend on my salary, it's not free money."
Unless you are running your own company, it IS free money - free to you. That's the whole point of a match.
"I prefer to have more control over my money. I am a saver and am consistently saving 20-25% of my pay in order to achieve my goal of investing in real estate. The tax benefits of doing that far outweigh the temporary benefit of the 401k so I'm taking the hit. If you have systems in place that deliver consistent cashflow I don't see why you need a 401k."
How many real estate investments have you made? What is the most you have ever paid in taxes?
"Not sure if I can roll it over to an IRA, probably can but I'm not interested in equities at this time. I mean, I'm on BP lol."
There are lots of ways to get Bigger Pockets (have more money. 401k's just happen to be one of the best, easiest. No real estate deal will get you 80% instantaneously with 0 risk, which is what a 4% match on a 5% contribution does. Up to you, but I would take the free money.
- San Francisco, CA · Member since 2014 · 345 posts · 281 votes8y
Originally posted by @Account Closed:
"So it's not as if you get a 100% return on a 5% contribution if your employer matches it."Actually, that's exactly how it works. You put $5k into a 401K and keep it in cash, your employer does the same, you have $10K. You double your money.
Also, 401K balances can be very misleading. Let's say you have $100,000 in your 401k. In reality (assuming you are eligible to withdrawal penalty free) only about $65,000 of that is yours. The rest belongs to Uncle Sam. Of course financial advisors will sell you on the whole "you can retire with $1,000,000, withdraw only $30,000 a year to live off of and avoid paying high taxes." But seriously, who wants to live like that? Not me."
Systematic 401K savings is the way the vast majority of American millionaires are created. Who wants to live like that? You mean retired with $1mm in liquid savings? I would say a lot of people want to live like that.
"And also, taxes have historically always gone up and so the Deferred tax benefit of a 401k may end up being a negative and another 20 or 30 years whenever retirement comes around."
Your statement is uninformed. Tax policy has varied widely over the past 75-100 years.
We happen to be at a fairly low point historically, so you may be right that taxes will be higher in 20 years, but the idea that taxes "always go up" is false. If anything, taxes have trended sharply lower since the 1960's.
- Specialist · Member since 2018 · 4 posts · 0 votes8y@Mike Dymski Maybe if think you think taxes will be lower in the future. Plus it’s counted as income so can effect social security if that’ll even be a thing. Check out Whole life insurance with a mutual dividend paying company. Become your own bank.
- Rental Property Investor · Midland, TX · Member since 2017 · 9 posts · 0 votes8y@Shiloh Lundahl great read! I stopped investing in my 401K beginning of 2017. I think it is another way to keep people down instead of help them grow and teach them financial education.
- All Over, USA · Member since 2017 · 689 posts · 756 votes8y@Mike Dymski Or even better yet...a 401k company funded auto-contribution. My company pays 5% worth of my annual salary into my 401k even if I don’t invest a dime (not a match). Best of both worlds.
- Rental Property Investor · Robins, IA · Member since 2015 · 45 posts · 18 votes8y
@Account Closed Thanks so much for that link. That is what i have been looking for.
- Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes8y
@Account Closed - Thanks for posting the link.
We should also consider how active one wants to be with their investments, how well they want to sleep at night, etc.
Personally, I like a mix of paper assets, real estate and business. I'll work with all three instead of focusing on just one. For example, I'm using side-hustle money to purchase real estate and W-2 money to purchase paper assets. Rinse and repeat.
- 8yErnesto CorreaPro MemberVacaville, CA · Member since 2014 · 20 posts · 8 votes
Originally posted by @Bernard Reisz:
@Shiloh Lundahl @Mike Dymski @Rich Lopes @Bud Evans @Omar Khan @Anthony Wick @Alpesh Parmar @Tom V. @Account Closed
Excellent point!
- Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes8y
Well, everyone thought the stock market was amazing in 2007 too, right? Even Buffett's net worth comes and goes with the stock market. Multi-family investors? Not so much. As for fees, I'm sure there are places you can get cheaper fees no matter what type of account you run, but I still think that for the passive investor, stocks as a single, ultimate investment is dead.
Originally posted by @Tom V.:
Originally posted by @Bryan Clement:
it's interesting to me that so many people think the 401k is still viable. I could see a solo-401k or self-directed IRA being profitable, but by and large the 401k doesn't work anymore, simply because of the sheer numbers of people that are doing it. Large, above average profits are possible in a fund at first, but as a fund gets too big and buys up all the good stock or bonds, naturally the fund becomes either overinvested in one niche, or has to take the excess money and apply it into other stocks that aren't as profitable. Thus, the bigger the fund, or the bigger the amount of money placed in a fund, the faster the fund's returns regress to the norm. Warren Buffett cited this as the reason he closed his investment fund. With Real Estate, the opposite is true, the larger the scale, the bigger the profit potential. Thus, the 401k is dead, as is any stock market fund in general at this point.
Is there any inconsistency between your statement "Thus the 401k is dead, as is any stock market fund in general at this point." and the staggering returns that stock market investors have enjoyed over the past 10 years? Do you think the dynamic of "money rushing in crowds out opportunity" in the real estate marketplace as well? Have you compared the actual costs of running a self directed retirement account to running a traditional brokerage retirement account?
- Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes8y
Well, I would say that Buffett is ok authorizing his wife to invest solely in the S&P 500, that's ok. He's Warren Buffett. He also has so much money, that pretty much every single company in the S&P 500 would have to go broke for his wife to no longer be able to make a living off of his investment portfolio. I doubt any of the rest of us have that kind of money to hedge risk with.
Originally posted by @Michael Masters:
@Bryan ClementThis arguement about size hurting returns only applies to “active” funds. Passive index funds by definition perform at the index return no matter the size.
Active funds have underperformed since the crash in ‘08, I wouldn’t invest in these active funds until they prove themselves again. Active funds are also the ones with high fees.
I also agree with Warren Buffett on many things. He recently said he would instruct his wife to invest almost entirely in an S&P index when he dies.
- Flipper/Rehabber · Lakeland FL · Member since 2018 · 18 posts · 11 votes8y
I feel like 401k's are a sham for the most part. I've always invested 10% of my income 60/40 in the traditional IRA and the Roth. My company matches up to 6%. I was looking through our vesting and fee's and I couldn't believe how much I was paying just to have the 401k. WHAT A JOKE! I now currently only do the 6% because its matched. Everything else I am now using to continue my journey to financial freedom through Real Estate.
- Rental Property Investor · Westport, CT · Member since 2017 · 176 posts · 183 votes8y
Originally posted by @Bryan Clement:
Any response to my real comment, which was that your argument for why 401k's are dead only applies to active mutual funds and not passive mutual funds?
I'm not saying 401k's are the best investment for everyone, but certainly saying they are not viable and should be considered dead is a drastic overstatement.
- Appraiser · Brooklyn, NY · Member since 2018 · 106 posts · 118 votes8y
Originally posted by @Tom V.:
"I was invested in all solid low-cost Vanguard funds and yet the returns were garbage."
I don't believe that Vanguard low cost funds underperformed the market for any meaningful time.
They didn't. Hence why I'm not using my company's 401k plan. I don't blame Vanguard, I blame my company and their poor taste in financial planners. :)
- Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes8y
@Tom V. Don't get me wrong, the 401(k) has its place, and yes there are some millionaires who have become so through their 401(k). However, that tends to be near the end of their career when the compounding effect really starts to hockey stick.
And Tom, ultimately there is no right/wrong answer. There will always be those against the 401(k) and those for the 401(k). I contribute to my 401(k) and did so for years. Only recently have I cut back so I can funnel extra cash to purchase buy and hold real estate. Most people do not want to actually put forth the sweat, energy, and worry that comes along with actual investing. Instead, they would rather passive invest and just 'feel smart.'
IMHO the best way to view the two is one is a basket of golden eggs and the other is the goose that lays the golden eggs. Why not just own a bunch of geese today that lay golden eggs NOW and into retirement? Also, straight-line depreciation all but totally eliminates capital gains on most income generated from rental properties. To summarize the article I linked before, there are many more benefits to active real estate investing. These include:
- Income
- Depreciation
- Equity build up
- Appreciation
- Leverage
- Value add
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