The Biggest Robbery In 40 Years
When I ask people, “Is your retirement plan an asset?” most people will say yes. After all, they may have several hundred thousands of dollars or even millions of dollars in it. This is not surprising to me. With the promotion of the 401(k) plans, the U.S. government, and other governments throughout the world offering similar plans required millions of people to invest without first requiring them to become investors. As non-investors entered the market, most were simply told that on average the stock market goes up. With that assumption, the boom in mutual funds was on.
The truth is that real-world investors know that all markets—regardless of whether they are stocks, bonds, real estate, heating oil, pork bellies, crude oil, mutual funds, or interest rates—move up, down, and sideways. A real-world investor would not invest in an asset that only did well in one direction, or in a program that did not allow you to exit when necessary.
But that is just what the 401(k) plan does. It pushes people into assets that they have no control over and doesn’t allow them to exit without some sort of penalty. That is like handcuffing a swimmer and throwing him into the deep end of the pool.
Real-world investors know that each market is made up of both bulls and bears. For those of you who want to take greater control over your financial destiny, you may want to go beyond just being a bull or a bear. If you want to be a real-world investor, you may want to develop your financial education, experience, and instincts in order to become a person who can see beyond the ups and downs of any market and always see the brighter future that lies ahead.
Being a real-world investor means being in tune with the real world. Optimists love the idea of buying, holding, diversifying, and praying. But if you plan on taking control of your future, you need to have real-world skills to see the better world beyond the storm clouds. If you become a real-world investor, you will not care if markets go up or markets go down because you will do well in all markets.
September 2, 1974, ERISA—the Employee Retirement Income Security Act—was signed into law by President Gerald Ford, who had just replaced Nixon. ERISA morphed into the popular 401(k) plans that many U.S. employees now subscribe to.
This meant that businesses no longer had to care for their employees after they retired. It also meant that there would forever be money flowing into Wall Street from the middle-class. This benefited the controlling rich in two ways:
- The rich no longer had to pay for their retired employees. The elderly were left to fend for themselves.
- The middle-class was now sending all of their money to the ultra-rich through the 401(k) mechanism.
If you look at the 401(k) plans, you wonder how anyone can retire on it. It’s a very simple machine: it takes money from the working class and funnels it to the financial institutions (also known as the controlling rich). They legally keep a huge chunk of the accounts’ earnings and don’t hide it. Why would they?
What Other Choices Does The Public Have?
ERISA made promises of a good life after retirement. The reality is that the majority of people will not have enough money to retire on with the standard of living that they are used to.
Look closely at the titles of many government “acts,” such as the Affordable Care Act. Oftentimes they are exactly the opposite of what the title implies. Specifically, we’re learning that the Affordable Care Act actually made health insurance more expensive for many workers. And with ERISA, the security of an employee’s retirement income became much less secure.
A typical 401(k) plan takes 80 percent of the profits. The investor may receive 20 percent if they are lucky. The investor puts up 100 percent of the money and takes 100 percent of the risk. The 401(k) plan puts up 0 percent of the money and takes 0 percent of the risk. The 401(k) company makes money, even if you lose money.
Long-term capital gains are taxed at a lower rate of around 15%. But the 401(k) gains are taxed at the ordinary earned income-tax rate of around 35%, taxes work against you with a 401(k). If you want to take the money out of your 401(k) early, you’ll have to pay an additional 10% penalty tax.
To drive a car, I must have insurance in case there is a crash. You have no insurance if there is a stock-market crash. When I invest in real estate, I have insurance in case of fire or other losses. Yet the 401(k) investor has no insurance to prevent losses from market crashes.
The 401(k) is for people who are planning to be poor when they retire. That is why financial planners often say, “When you retire, you’ll be taxed at a lower tax rate.” They assume your income will go down in retirement into a lower tax bracket. If, on the other hand, you are rich when you retire and you have a 401(k), you could pay even higher taxes at retirement. Smart investors understand taxes before investing.
The Sad Truth
Most financial advisors and pension-fund managers is that they are not investors. Most are employees in the E quadrant. One reason why so many government pensions and union pensions are in trouble is that these employees are not trained to be investors. Most do not have any real-life financial education.
To make matters worse, most financial “experts” advise uneducated investors to “invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.”
Why do these financial “experts,” employees in the E quadrant or salespeople in the S quadrant masquerading as investors in the I quadrant, advise you to do that? It’s because they get paid, not by how much money they make for you, but by how much money you turn over to them for the long term. The longer your money is parked with them, the more they get paid.
The reality is that real investors do not park their money. They move their money. It is a strategy known as the “velocity of money.” A true investor’s money is always moving, acquiring new assets, and then moving on to acquire even more assets. Only amateurs park their money.
I am not saying 401(k)-type plans are bad, although I would never have one. For me, they are too expensive, too risky, too tax-inefficient, and unfair to the investor.
Editor, Rich Dad Poor Dad Daily