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

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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.

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. 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,

  10. Nathaniel S.

    How many 58 year old’s have been contributing to retirement accounts since their 20’s? You also didn’t contribute an employee match at all. You also seem to oversimplify costs but I understand you did this for purpose of illustration. If you don’t look at real estate investing, the advantage of letting 1 dollar grow tax free until retirement compared to letting 67 cents in my case grow while getting taxed on dividends and whenever I switch funds is HUGE (this is strictly comparing a 401k/roth) to taxable stock/mutual fund/etf investing. Lets just assume I contribute 10k, my employer contributes 5k, since age 27 to age 62. This is my actual amount from employer and is actually pretty typical. Using a basic calculator I will have 2.89 million at age 62 after working 35 years putting 10k a year away assuming I never get a raise and a salary of 100k with average 8% returns. I contributed 350k and my employer 175k. At the 7.33% rate you used I would be at 2.45 million. You don’t have to return 7.33% year in an out it is an average, one year you may lose and another you gain 30% like happened a year or two ago. You also fail to mention the repair costs that are going to happen in real estate and are very real. Real estate is a great tool, but saving money to at least employee match in a 401k is a no brainer. The biggest problem with your stats you use is it is taking the average of every worker including those that make less then 40k a year and have less then that in their 401k (personally know people like this).

    • Jeff Brown

      Hey Nathaniel — All good points, so I’ll take ’em in the order listed.

      How many 58 year old’s have been contributing to retirement accounts since their 20’s?

      I have no idea, but experience tells me at least a large minority. The tax sheltered contributions were immediately popular. Since it’s first full year was around 1980, a 58 year old today woulda been about 23 or so.

      You also didn’t contribute an employee match at all.

      I didn’t mention it for one very solid reason, Nathaniel. Since the average American on their 65th birthday blows out their candles with less than six figures in their employer sponsored 401k, the match was clearly a non-factor. All the older Boomers welcoming us to Wal.Mart had matches too.

      Using a basic calculator I will have 2.89 million at age 62 after working 35 years putting 10k a year away assuming I never get a raise and a salary of 100k with average 8% returns.

      No, you most likely won’t, but I hope you will for sure. That would put you in a very tiny minority. Thing is, even if you do, what income will you receive? You’ll be risk aversive, right? That’s 4%, at least according to the financial advisors at work. Given that number, and today’s 10 treasury yielding just 2%, please tell me the ‘risk aversive’ investment on Wall Street that gives us TWICE that yield?

      The biggest problem with your stats you use is it is taking the average of every worker including those that make less then 40k a year and have less then that in their 401k (personally know people like this).

      I talk to Americans of all kinds Mon-Fri for most of the day, Nathaniel. The ones over 50 with more than $250k in their 401k are in a small minority. Also, since I talk to those who want to be/are investors, they typically fall into the income range of $75-300k/yr, not lower.

      Here’s my bottom line answer to your excellent and thought provoking comment.

      My clients, throw out the high and the low, will retire with as much or more income than they made in the best year of their earning lives. Many will retire at 50-60 years old, not later, and with $10-40k MONTHLY, much of it either tax free or tax sheltered. The real bottom line in all this? RESULTS. I’ll stake my results against almost anyone’s 401k. 🙂

  11. Lou Ellen Ginther

    Great article Jeff. I have been investing in my 401K for 30 years. I have no where near a million dollars. And I lost half of my 401K money at least twice during those years. Last year I got laid off after 35 years working for the same company. No way I have enough money to retire on. I’d love to talk to you sometime about how to proceed with my plans for real estate investing to fund my retirement.

  12. What is your opinion on the best approach toward my 401k that is still with my previous employer. I resigned from my job in Oct 2016. Have over $133k in the 401K. I was thinking of taking it out and paying the 10% penalty and pay off at least 2 of duplex with the remaining and use some of my saving. My situation Im 53, I have 5 duplexes 2 of them paid off already. I manage them myself. I have a military pension of $3400 month plus the rental income which is a little over $7k a month. My only debt is my 3 mortgages from my duplex $1650 total and my home Mortage $940. I hate the amount I would lose paying the 10% penalty but if you calculated 6 years from now (Ill be 59yrs old) just the interest I would have paid up to that point is going to be extremely higher. I don’t think the 401K is going to get me a greater return than the interest I’m going to be saving on by paying off the properties. Im at the point I want to be completely debt free of my mortgages.I know its a great feeling after paying off the other 2 in less than 16 years.. Any suggestions. I really enjoy reading everyones comments on the subject.

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