Your 401(k) Is a Financial Prison

Dear Reader, 

With the promotion of the 401(k) plans, the U.S. government 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. 

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’s like handcuffing a swimmer and throwing him into the deep end of the pool.

Due to their lack of education, most investors in defined contribution pension plans like the 401(k) in the United States, have had to buy into the optimistic, Pollyanna point of view, the point of view of an eternal bull market.

After the 2008 financial crisis, a friend of mine told me that his 401(k) lost over $350,000. At 53 years old, he is now concerned that he can never retire. 

When he asked me for some advice, I said, “Why don’t you take what’s left and buy three rental houses for $100,000 each, and let your tenants pay down your mortgage as well as give you income? By the time you’re 65, you should have a steady stream of income, if you have invested wisely.”

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.

The problem with the 401(k)

“We weren’t social visionaries.”

Those are the words of Herbert Whitehouse, a former human resources executive at Johnson & Johnson who was one of the first to usher in the 401(k).

“It was oversold.”

Those are the words of Gerald Facciani, the former head of the American Society of Pension Actuaries. He helped defeat an effort by the Reagan administration to kill the 401(k) in 1986.

According to Time magazine writer Steven Gandel in an article called “How 401(k)s Make Many Americans Poorer,” a study issued by the Center for Retirement Research in 2012 indicated that, “All else being equal…workers at companies that contributed to their employees’ 401(k) accounts tended to have lower salaries than those at companies that gave no retirement contribution…In fact, for many employees, the salary dip was roughly equal to the size of their employer’s potential contribution.”

In translation, companies that don’t offer 401(k)s must pay a higher salary to compete with companies that do. Those company’s employees simply get their money as part of their salary rather than having to match it and save it in a tax-deferred retirement plan where they have no control and have high fees.

Speaking of high fees, a typical 401(k) plan takes 80% of the profits. The investor may receive 20% of the profits if they are lucky. Don’t believe me? Ask John Bogle. Yes. John Bogle, Founder of Vanguard Investments.

The investor puts up 100% of the money and takes 100% of the risk. The 401(k) plan puts up 0% of the money and takes 0% of the risk. The fund makes money through fees, even if you lose money.

Generally speaking in a bull market, a 401(k) does put money in your pocket – but only 20%. So if you had $10,000 in your 401(k) and it made 5%, then your 401(k) made a profit of $500 – you only get $100 (before taxes).

Now 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 turns out that when it’s calculated correctly, without government creativity, inflation increases faster than any 401(k). That means money is leaving your pocket!

Multifamily Investing, the Better Retirement Investment

A number of years ago (2011), I read an article in The Wall Street Journal by Tom Lauricella called “Want a Job? Become a Landlord”.

In summary, Lauricella wrote that for those facing retirement, a valid option is buying a small multi-family building, living in it, and managing it.

He cited low-interest rates and depressed pricing as reasons that it was a good time to jump into apartment investing. He also pointed out that rents were on the upswing in most states and that the long-term trend in the US looks to be one of renting vs. ownership. All of this boded well for landlords.

Fast forward over ten years later, and much of Lauricella’s justifications still exist today. Interest rates are at all-time lows. Rents are rising aggressively in many cities. And the 401(k), as we just established, is still stealing from most people’s retirement.

I was happy to see an article like Lauricella’s in the mainstream media because I’ve been preaching for years that cash-flowing real estate is one of the ultimate investments due to the ability to leverage, receive cash in your pocket each month, and the tax benefits.

In a blog titled “Why Real Estate?” Rich Dad Advisor Ken McElroy’s wrote,

Using Other People’s Money – leveraging other people’s money to create a cash flow opportunity is always ideal. In the realm of real estate investing, this is very common. You might only pay down 10% on a property, have a private party or bank provide the rest of the funding, and be bringing in money! Just think about this; you can own a $500,000 property for just $50,000 and it brings in over $5,000 a month in cash flow!

Appreciation– this is the increase in value of the property over time. If you can manage your property well, take care of your tenants and strategize, you can increase your rental rates. When the rent increases, your expenses go down. This causes the property to increase in value.

Control –when you own the property, you have control over the income and expenses of your property. So, if you’re able to have your property cash flow, it is not subject to the ups and downs of the market.

Tax Advantages –there are some tax advantages to owning real estate properties. Depreciation is something that you can write off as an expense against your revenue. Not to mention the tax credits available if you offer low-income housing or if you restore a historical building. When you’re looking at a tax credit, it is directly deducted from the taxes you owe at the end of the year. And lastly, capital gains deferral. If you wanted to sell your property to reinvest in a different property, the capital gains will be deferred.

Everything you don’t have with a 401(k), you do with multifamily investing.

That being said, there are a few things I’d say differently than Lauricella did in the WSJ article.

Hire a property manager

If you’re buying an apartment building, why spend the time and energy renting, managing, and maintaining the building—especially if you don’t know what you’re doing? Who wants to spend their retirement years fixing toilets and changing locks?

One of the great things about multifamily investing is that you can factor property management into your calculations when buying an investment property. Find a deal that can provide income while supporting professional property management.

Make investing your “job”, not management

To me, it’s short-sided to find only one building and make managing it your job. Instead, become an investor and find more great deals that you can purchase and have professionally managed. Spend your spare time educating yourself on the market, rounding up investors, finding better deals, and building the value of your portfolio so that you can leverage it into even more deals. That will give you a purpose in retirement and build your wealth.

Start now, no matter your age

While I think it would be smart for those nearing retirement to consider multi-family investing, it would be even smarter for the young people reading this post to begin investing.

As the old saying goes, “Youth is wasted on the young.” Don’t let your youth be wasted. Rather begin planning for your future by investing in your financial education and building a portfolio of assets that will provide for you and your family when you’re ready to retire.

Play it smart,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

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