One of the WORST Investments in America
Working Americans have been told it’s essential.
In fact, it’s the only thing many people know about retirement…
Sock all your money away into a 401(k) and when you retire, you’ll magically have enough money to live on.
It’s a lie.
I’ve said it once and I’ll say it again: the 401(k) is the single worst way to invest your retirement savings.
56% of Americans rely on employer-sponsored retirement plans, but they have no idea what they’re paying for or where their money is going. They sign away control over their retirement, and don’t think about trying to get it back until it’s too late.
The 401(k) has become less of a retirement “plan” and more of a retirement “cross your fingers” recipe, with lots of unhealthy ingredients thrown in.
It all boils down to a lack of financial education.
Here’s why a 401(k) is so bad… and what you can do about it.
Asset or Liability?
I’ve bashed the idea of a 401(k) a lot over the past 20 years.
One of the first lessons I teach is that in order to find financial success, you need to learn the difference between an asset and a liability.
An asset puts money into your pocket (cash flow), while a liability takes money out of your pocket. Buy assets, not liabilities and you will be successful…
Doesn’t a 401(k) make money and put it into your pocket? Isn’t a 401(k) an asset?
If all we have to do is buy assets that put money in our pocket, why the hate?
Generally speaking in a bull market, a 401(k) does put money in your pocket…
But we have to understand that taxes work against you with a 401(k).
Long-term capital gains are taxed at a lower rate of around 15%. Great! The only problem is the 401(k) treats any gains as ordinary income. Ordinary income is taxed at the highest rate, sometimes as high as 35%. And if you want to take the money out early, you’ll have to pay an additional 10% penalty tax.
In real investment assets, tax law is written to your advantage, not taxing you at every turn.
It gets worse. It’s likely that inflation will increase faster than any 401(k). That means money is leaving your pocket!
It’s difficult to really call a 401(k) an asset.
If you look at a 401(k) using my rich dad’s definition of an asset — something that continually puts money in your pocket whether you work or not — then it’s downright laughable.
That’s not even factoring you can’t touch that money until you’re 59 ½-years-old without an additional 10% penalty.
Finally, with a 401(k), you have no insurance if there is a stock-market crash. To drive a car, you must have insurance in case there is a crash. When one invests in real estate, one has insurance in case of fire or other losses. Yet with a 401(k), you have no insurance to prevent losses from market crashes.
Only These People Should Invest in a 401(k)
Control is an important aspect of investing. As I mentioned, with a 401(k), you have no control over your investments as you generally invest in funds and indexes controlled by brokers, who are controlled by bankers, who invest in companies that are controlled by boards — all of which you have no control over.
Of course, doing what I do takes high financial intelligence to invest in things where you have control because you have to make a lot of important decisions. This is why being forced into a 401(k) probably isn’t a bad thing for some. Most people have little-to-no financial education and wouldn’t know what to do with the extra money other than save it or spend it.
But I expect Rich Dad readers to be head and shoulders above the average person in terms of financial intelligence. The reality is that if you’re investing in a 401(k), you’re not making a return on your employer’s match. You’re simply getting what is owed you by your employer.
There are certainly better investments than 401(k)s. But for people who have little financial education, a 401(k) may be the best investment.
I don’t advise people to get out of their 401(k) if they don’t have the financial education needed to find and wisely manage a good investment.
Alternative to the 401(k)
Investing outside a 401(k) can bring much better returns, but it also requires greater financial knowledge. And if you have a 401(k) and after reading this are wondering, Should I stop contributing to my 401(k)? Should I take money out of my 401(k) and invest it in something else, despite the tax penalties for doing so?
Only you can answer those questions. What I can tell you is that before you do anything, you have to get a financial education.
If you want to be rich, you must have a financial education and control over your money and your investments.
This is why I like to invest in my own business, purchase real estate, and create products. I have a lot of control over those investments. Generally, a good matrix is the more control you have, the higher your potential return. The less control you have, the lower your potential return.
Play it smart,
Editor, Rich Dad Poor Dad Daily