Turns out, the 401k is not a scam.
Something I used to believe whole heartedly, several years ago was that the 401k is a scam. Tons of books on Real Estate preach that to the masses, which can unfortunately be terrible advice for those in the middle.
But I’ve recently had a change of heart. It’s not a scam and you should definitely being doing it if you have a 9-5. (And as a real estate investor).
There’s so many benefits as long as you are in a good low fee index portfolio. Even deploying 401k loans to buy real estate, which I think is one of the best kept secrets in getting started real estate investing.
Heres one of my personal favorites. Imagine one day (very unlikely but possible) you have to file bankruptcy due to a terrible life situation, or rough economic times, ETC. You've built a big real estate portfolio and then BAM. You're wiped out. ****Except your 401k and IRA's. They are federally protected during bankruptcy. Creditors can't touch that money, that is insane. it's like having a backup, real cash insurance policy and you wouldn't have to start from zero. Why would anyone pass up on that?
I max mine out, along with all the the other tax advantaged accounts and I also invest heavily in Rental Real Estate as well. So why not JUST DO IT ALL? I’ve yet to meet anyone who regretted money they put away in a retirement account, when they are older.
What about you, Do you like the 401k? Is it a “Scam”?
@Heath M. I love that, betting on one of your tools not being there. Smart!
@Jess White Agreed. 401k's are not a scam, just high cost mutual funds are. But if you invest in low cost index funds, they're great. Only problem is that some employers don't offer place with low cost funds. Still a good idea to at least contribute up to the max employees match, otherwise you're turning down free money.
If you open a Roth IRA you can take any money you contributed out, penalty free if you need it in a pinch. You just can't take out any gains without paying penalty and capital gains tax.
Any opportunity to invest in a way that defers taxes should be considered.
@Jess White my 401k is how Ive bought the last two properties, and without it I’d be much further behind. Love it. Can’t stress enough to contribute, especially if your employer matches.
I wish High schools taught about retirement funds. I bet it would be better than investing in Social Security.
@Heath M. Definitely the best answer so far.
@Todd Fithian The 401k loan is very underrated and a great way to go. Little downside to it.
@Logan Graham Yep. There’s not a lot of financial education in schools. However, I’m not sure that’s really the problem. I think most people know to avoid bad debt and to invest their money. Most don’t want to make the sacrifice and give up the ephemeral pleasures for long term gain.
However you are most definitely right. Schools could do much better on financial education.
@Matt Carey There are people here on BP who preach that you should not put your money in a 401k - call it a mistake to not put everything in real estate. I do question how much real life experience they have.
@Jess White 401k is the best long term investment other that RE. If your company matches certain percentage, not investing at least up to the match is like leaving income on the table. If you are over 50yrs you can invest catchup up to the Federal max. Best part is the money comes out pretax and eventually you won’t even feel the difference. But you can go to sleep at night knowing that even if you spend all you net income every month at least you are saving via 401k. It’s foolish to pass on that,
IMO. If you are in it long enough you can amass 500k to a 1MM. Based on your age.
@Jess White it is even better if you have a 457 (government) and the employer matches up to 4% of salary.
Two big negatives about 401k's:
You're deferring money that you can use now and later. If you had 40k in your 401k, you are deferring taxes and hoping taxes go down in the future. When have taxes ever gone down? I think most investors would agree that taxes are most likely to be higher in the future.
Take that 40k and buy a rental property or invest in a syndication and you have cash flow NOW and LATER when you retire. I'm sure I don't have to post all the tax benefits of real estate. Why only invest for the future when you can create cash flow now and later.
Lastly, the 401k doesn't create cash flow now. It all depends on your goals of course, but I want cash flow now and forever, and I don't want to put away money now to benefit ONLY in the future.
My two cents anyway...
@Jess White
Cant wait to see where this goes. Great topic and post title!
I remember a conversation with a business owner who said “why would you put any money in the stock market”....but with a tone that left me thinking they probably had a lot in a workplace investment.
I don’t know the answer but a 401k is relatively headache free and leaving the match on the table is hard to think about....especially when savings rates are so low in traditional banking. Even a target date fund will typically net 4-6 percent over the entire run—after taxes
Had one and cashed it in...then I didn’t have one....and now I do. It just feels better knowing there is something there that is increasing vs stagnating as cash.
@Greg Junge I think just about everyone on here knows that real estate is likely to produce more cash than a 401k. I don’t think that’s really the issue we are getting at though. It’s another tool in the tool belt so we can have as many different streams of income as possible in the future - not just one asset class.
If you are scrimping to get by and can hardly save any extra money outside of your 401k, sure, it’s probably more lucrative and smart to spent that little bit of extra cash on cash flowing real estate vs the 401, initially. However, as cash surplus starts coming in, the 401k is just one more avenue to target that extra money for future gains and save a little in taxes in the mean time.
@Kevin Wolfe Thanks. I couldn’t agree more.
I had a 401k from my first job that I cashed out at 22, big mistake. It would’ve been worth significantly more today.
@Matt Carey high fees and lack of fund selection. As well as your money is tied up until you reach 59.5, although there are ways around it.
Looking at the pictures of the posters so far, albeit some are blank, there is a bridge, a room and a cat, there is not a lot of GRAY HAIR. My $0.02 follows, but realize it is complex as taxes are non-linear, so I will meander a bit.
As one approaches retirement age, one is invited to all manner of meeting about retirement planning. Planners used to lead with Social Security (SS), but the confusing rules that allowed huge benefits are now gone, so the concentration seems to be safe money, various annuities, etc. (As an aside, there is an interesting over funded insurance product that you borrow from for the rest of your life to attain tax free income.) Most planners seem to only know about mundane Wall St. investments and annuities. Any real estate other than REITs is foreign and they can't make any money. I attended one class where they teach how to be on the edge of broke so that you pay no taxes; it didn't seem like a desired target to me. Note: there are penalties for being successful: more of SS is taxed and you get to pay more for Medicare as income increases. And be aware there are RMD (Required Minimum Distributions) to cause your income to go up.
As to 401Ks and the like. I suggest getting the match and looking closely looking at the available options (looked at mine, my wife's and my kids', only a few of the mutual funds in each were any good). Take a good look at the Roth 401K if it is available. If you change jobs, roll it out as fast as you can. At age 59.5 do that in-service roll-over.
Participation (any or additional) should be a conscience decision. A major part of that decision should be based on whether or not you expect to be in a lower tax bracket in retirement than you are now. There is nothing you can do in a qualified plan that you can't do outside the plan, except delay taxes, either on the money in (traditional) or the gain (Roth). If you analyze the three choices (traditional, Roth, or none), you win if you lower taxes and lose if you don't. Lower taxes are dependent on GMVT and your income. I bet GMVT will raise taxes in the future. As for income, if you do well in RE (unless you can hide it all) your income will likely go up. And remember RMDs, SS (0%, 50%, 85%), annuities, and pensions (if anyone has one) are are all income and taxed as such.
Given that the tax rates are LOW at this time, contributing to a traditional plan, except for the match, seems really wrong to me. When rates increase, reevaluate.
Personally, I dropped back to match only around 2005 and put my contribution in the Roth as soon as I "woke up". That choice gave me funds to invest in MF. The MF investment has done much better that my Wall St (but I'm still there for diversity).
Apologies for rambling...
Regards,
Charles LeMaire
401k are actually scams.. America runs on fake printed money. Gold and silver are the real retirement wealth of a 65 year old. Not printed money the government uses to make wealth out of you.
@Henry Escobar🤦♂️
@Jess White
Who told you it was a scam and what led you to even believe it was? Seems like someone was playing an April FOOLs joke on you.
I'm a terrible saver and my 401k have saved me in rough situations. I only wish I could manage it and still work at the same firm. I should quit my job, find another so that I can self-direct it on the LP side of a deal.
It's not just how much money you make it's how much you keep. If you think a 401k is a good investment consider this - you are effectively saying that tax rates will be less when you retire (ain't gonna happen) or that you will be in a lower tax bracket - meaning you'll be poorer. Who is planning to retire on less income? Not me. If you are putting your 401k/IRA funds in Roth accounts then sure that's good. If not you have an il-liquid investment with potential tax consequences (not benefits).
My first job I received a pension contribution that was converted to a 401k before I left. I rolled it over to an IRA and converted it to a Roth. I was only been able to invest in their funds until I left the company. Now, 15 years later my investments there have recovered from the crash and are up ~30%. However in the last 8 years I've bought rental property, a couple small multis took the same investment as the balance in my IRA. I sold one of them this year received 4x my initial investment plus I received cashflow along the way and paid almost no tax on it because of depreciation. Yes I bought a good deal and I sold at an opportune time but even if the result was half as good I like that a whole lot more than what my 'retirement' funds have done for me. Now I'm 1031 into a couple other properties that will provide more than 3x the cashflow as the one I sold which will be mostly sheltered from income tax by the stepped up depreciation. If I need funds for something I can pull a line of credit or refinance and get equity out (tax free).
@Dan B. I think you might be missing the point. The post is not about getting a “better return”. We all know real estate is king, or else we wouldn’t be on BP. It’s about diversity of income streams throughout life and different stages of life.
401k will never get the returns of leveraged real estate. It’s an alternative stream of income that shouldn’t be ignored if you have the opportunity. It’s an added layer of protection for our future selves.
It ideally should never be the sole source of retirement income. You’re very right, tax rates definitely could, and may likely go up.