Turns out, the 401k is not a scam.

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Turns out, the 401k is not a scam.

Jess White
Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes

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”?

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Matt Carey
Investor · Brandon, FL · Member since 2017 · 178 posts · 67 votes
7y

@Jess White

Who told you a 401k is a scam? Why did you believe them? That's the dumbest thing I've read here in awhile.

7Reply
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  • Joel Johnson
    CFA · Sanibel, FL · Member since 2016 · 31 posts · 52 votes
    7y

    I love my 401k! I do agree with a lot of the points that they make when they call it a "scam," but I am a traditional investor first and foremost. I love the stock market and think it's just a different option to the same solution. Also, this isn't a zero sum game! Couldn't agree more, why not do both.

    2Reply
  • Monica P.
    Accountant · TX · Member since 2019 · 13 posts · 3 votes
    7y

    @Jess White

    I’ve never heard that a 401k was a scam. What are the qualities that make people deem it as such?

    0Reply
  • Keith A.
    Rental Property Investor · TX · Member since 2019 · 236 posts · 392 votes
    7y

    Definitely use REI and 401k and low low risk investments. Cant put all eggs in one basket.

    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Jess White:

    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”?

    yup, but IRA has less bankruptcy protection compared to 401k.

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    0Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y

    @Keith A. Very true.

    0Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y

    @Joel Johnson Nailed it. There’s nothing wrong with the traditional way. I’m glad we can agree!

    0Reply
  • Matt Carey
    Investor · Brandon, FL · Member since 2017 · 178 posts · 67 votes
    7y

    @Jess White

    Who told you a 401k is a scam? Why did you believe them? That's the dumbest thing I've read here in awhile.

    7Reply
  • Karen O.
    NYC, NY · Member since 2016 · 619 posts · 456 votes
    7y

    Agreed.

    The 401k, and it's nonprofit counterpart 403b and their non-employer based friend IRA, are excellent tools for a host of reasons. The first two should be utilized whenever and as much as possible and especially when employer matching funds are made available.

    2Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y

    @Karen O. Gotta love that free matching money.

    3Reply
  • Aaron Bonne
    Rental Property Investor · Cincinnati, OH · Member since 2014 · 40 posts · 55 votes
    7y

    I don't believe it's a scam by any means. In fact, for most people who work 9-5 and likely will for 40+ years, it's probably the wisest thing for them to invest in their 401k as early and often as possible. At a minimum, you should at least contribute up to your company match given it's a 100% return on your investment assuming you're vested.

    However, if you're someone who is looking to quit your day job and go into real estate full time as soon as you can, maybe you don't invest in your 401k. Certainly depends on your situation and personal goals.

    I believe the argument these books/podcasts/gurus are making is that once the money is in the 401k, it's harder to get out without penalties, etc. The idea is the 401k limits what you can invest in based on what funds/indexes your employer allows you too. For many employees, our options are limited to target date funds. We don't have total control of our money if options are limited as to what we can invest in.

    Yes, you can borrow from your 401k and pay yourself back. I've done this to buy real estate and assuming you aren't over leveraging yourself, know what you're doing when purchasing investment property, and are OK with a smaller paycheck for the next 1-5 years as you pay yourself back, then it can be a phenomenal strategy.

    What I am doing is investing up to the company match, then saving as much money as I can to passively invest in real estate syndications where returns are far in excess of what my 401K has done over the last 8 years and what stock market has done historically.

    Yes, you can and should do both.

    2Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @Monica Pogue many gurus tell newbies 401k’s are a scam because they want access to those liquidated funds to sell coaching or just pawn off some pocket listings. Most people talking bad about 401ks are new folks who drank some gurus koolaid.

    3Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    Try pulling the money out now ..then report back if you still think that way

    1Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y

    @Dennis M. Why would I pull out money?

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    Originally posted by @Jess White:

    @Dennis M. Why would I pull out money?

    why do  things come up in our lives  that we have no control over ? why do bad things happen to good people ? 

    My point is your money is basically tied up till your old and the penalty if you need it is enormous then of coarse you will pay dearly on the capital gains on whatever you pull . Much better to be taxed on passive income and have more options and liquidity. I’m not any expert but I know There are no guarantees in life . Lack of control in many ways on the 401k plans . 

    That being said my wife has a good 403B plan we invest in but it’s only a part of our plans 

    1Reply
  • Will C.
    Rental Property Investor · Richmond, VA · Member since 2016 · 279 posts · 133 votes
    7y

    @Jess White

    Diversity never hurts. Some of the easiest money I have generated.

    0Reply
  • David BarnettPro Member
    Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
    7y

    @Jess White I disagree with one point in particular about your initial post (outside of the scam part - which I understand was click bait to get people into the thread - good work).  I think that 401k loans are a really terrible idea.  I think that 401k's should be plugged in and not unplugged for really any reason.  I view it as a distinct pot of money that shouldn't be unplugged, and loans against a 401k are bad news, especially if one gets fired, laid off, etc.  All sorts of bad things can happen in those scenarios...

    1Reply
  • David BarnettPro Member
    Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
    7y

    @Aaron Bonne One note to add to your post about 401k.  If you are looking to retire early, I would still recommend 401k investments (especially up to the match, as you mentioned), and building up other pots of money to hold one over to retirement.  For example, real estate investments (direct), LP in syndications, or perhaps even taxable mutual funds that are outside retirement.  If one has a goal of retiring early, I don't see any harm in putting in 401k funds, and using it almost like the Ronco grill (set it and forget it!).  That way, you have time on your side.  As I'm sure you know, it isn't as important of how much money you put in, it's when you put it in and how long you let it sit and compound and grow.

    1Reply
  • Patrick Dempsey
    Longview, TX · Member since 2018 · 3 posts · 1 vote
    7y

    I think the "scam" issue most are referring to are the minimum option, high fee mutual funds they push on the mostly investment-ignorant employees. But it's hard not to take advantage of the employer match which more than makes up for any fees you pay. Also, 401k loans don't actually seem like loans to me since your balance decreases. All investors know that time is our best asset and periodically taking a large chunk off the snowball can set compounding back significantly. My $0.02.

    0Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y

    @David Barnett. You have a good point on the loans. My take has always been, just to make sure you are able to pay it back in case of job loss.

    It’s one of those issues that everyone has their own beliefs on, which is great.

    1Reply
  • Jess White
    OP
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y

    @Patrick Dempsey Maybe so. However you are typically paying yourself back (with interest) to counteract that reverse compound effect.

    0Reply
  • David BarnettPro Member
    Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
    7y

    @Jess White There's quite a bit of difference (or delta) between the interest that you pay yourself back at on the 401k loan and the normal rate of return on well invested 401k options.  Due to the delta, folks that take out a 401k loan lose quite a bit of ground on their financial goals.

    0Reply
  • Son D.
    Rental Property Investor · boston, MA · Member since 2017 · 202 posts · 222 votes
    7y

    I've never heard of 401k being a scam. My biggest financial mistake was only contributing up to company match and nothing else. I told myself I'll max it once I pay off my student loans. Of course I didn't until years later. Now I max out 401k, ira, and hsa.

    0Reply
  • Nick Rutkowski
    Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Jess White

    Yeah...definitely not a scam and a great way to save for retirement. I don't have a 401k and I most likely never will. My brother who is a CPA bugs me about it all the time about getting a Roth IRA. However, I don't have a 9-5 salary job to contribute to my retirement and my monthly rentals go back into the business. So real estate will have to do for now.

    0Reply
  • Heath M.
    Rental Property Investor · Chattanooga, TN · Member since 2017 · 203 posts · 188 votes
    7y

    It's a tool in your financial future tool box, and a good one! I believe you should diversify, that's the whole reason I got into real estate. What has made me laugh is the people I've met in real estate that don't believe in a 401k, IRA or stocks/mutual funds/etc. That's what blows me away. I'm betting on one of my tools not being there for me when I retire so that has made me even more determined to fine tune them all so that hopefully each of them will provide me the retirement I'm looking for. Having multiple streams is just icing on the cake!

    2Reply
  • Aaron Bonne
    Rental Property Investor · Cincinnati, OH · Member since 2014 · 40 posts · 55 votes
    7y

    @David Barnett David, you are 100% correct. I should have specified more. I was trying to say if you plan to quit your job to pursue real estate full time, whether that's investing in rentals, flipping, etc. then maybe no real reason to throw money into a 401K. I'm talking like planning to quit in 12 months or less. IMO I'd rather have that capital easily accessible than tied in a 401K.

    If we're just talking retire early, say 40 years old, then yes put money into 401K as soon as you start your job at 22 and let it ride.

    I think we're on same page, maybe just didn't clarify my thoughts enough above :)

    2Reply
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