The 401(k) Program is A Failure
Time Magazine recently said:
“The ugly truth is, the 401(k) is a lousy idea, a financial flop, and a rotten repository for our retirement reserves.”
Problems with the IRA/401K approach to Saving For Retirement
Success in Saving For Retirement depends upon where you put your money and how reliable will it be there for you when you want to and need to withdraw it to use it. Saving for retirement is a long-term situation. You do not do that over a short period of time. Therefore, it is important to look at long term results and history when deciding how to “Reliably Save For Retirement.”
There are basically 3 places that people save their money for their retirement:
Bank, Money Market, Credit Unions, CDs etc.
This is a great way to go broke safely since interest rates are extremely low and inflation will eat away your purchasing power. If you are planning to retire in approximately 30 years, you will need twice as much money then to purchase what you can today. Where is going to come from?
This is a great place to accumulate a lot of money if you are lucky. You can gain 25% and more in the market if you are lucky. You can also lose all or most of your money if you are not. Here are some facts:
► Over 80% of advisors lose money for their clients. They make all of the money.
► The actual return received if you invested in the stock market from 2000 to 2012 was 1.67%. In other words, if you invested $100 in the market in 2000, it would be worth $124 in 2012. This return would have been approximately 7% if you used our strategy which limits the upside to a cap and protects your principal and interest from decline due to market conditions.
► The actual return received if you invested in the stock market from 1929 to 2012 was 4.5%. In other words, if you invested $100 in the market in 2000, it would be worth $43.67 in 2012.
Yes, there are periods where you can make a lot of money. The question is do you know when they will occur, and will you have the discipline to take advantage of them, or will greed take over, which usually happens?
Remember, IRAs and 401(k)s are not investment or savings vehicles. They are the names of the laws that dictate the rules. IRAs and 401(k)s usually use either banks, money markets, etc. or Mutual Funds (Stock Market) to “grow” your money. Unfortunately, history says that they do not work very well. They have lots of fees and little results over the long haul.
John Bogle, President, Vanguard Funds, said in a recent interview:
“……That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return. And you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return…..”
Summarizing what Bogle is saying, if you invest in mutual funds for a long period of time, this is a simplified picture of how the return is split over the long term — and who takes the risk.
Mutual-Fund (401k) Company
80% of the return
20% of the return
0% of the capital
100% of the capital
0%of the risk
100% of the risk
So, What are the problems?
1. Generally, you are not able to access your money if you need it until you reach 59 ½ years of age. And if you can, you will not only pay the taxes, but also a 10% penalty.
2. When you reach the age of 70 ½, you are forced to take a portion of your savings, defined by the IRS, and pay the taxes even if you don’t want to.
The Big Question is,
What will the tax rate be when it comes time to pay the taxes?
Someone will pay them, either you or your beneficiaries if there is anything left when you pass away.
3. Money in these plans count toward your family assets when determining eligibility for government assistance programs such as student loans
Conversion to Cash at Retirement
How do you convert the money accumulated into an income stream?
When you are retired, it is not cash accumulation, but rather cash flow that counts so that you can pay your bills and expenses.
So, What do you do?
► Contribute an amount to your 401k equal to what your employer matches. – No More, No Less.
► Contact Statewide Retirement Planning Co. for a no-cost, no-obligation customized retirement plan.
The Key is to Save for a Reliable Cash Flow, not necessarily cash accumulation. Although many times, they do go together.