I hate writing about finance. The most violent, ugly people in the world work in the traditional finance industry.
I write something and instead of responding with a well-reasoned argument, they write things like "James Altucher is a wacko" or "James Altucher is a scumbag".
I've written for or appeared on the Wall St Journal, the Financial Times, CNBC, Fox Business, ABC, and many other finance sites. I've run hedge funds, funds of hedge funds, I've day traded, i've run a VC fund.
I see what happens inside the system. It's ugly. And they don't like you.
Almost 100% of financial journalism is BS, written by people who don't know anything about finance.
Almost everyone writing in the finance world has an agenda.
For instance, the last time I wrote about why a house is a bad thing to buy, someone wrote an article, "James must be an idiot."
I looked him up. He was a VP at the "National Association of Realtors" or some organization like that.
And when I wrote that kids shouldn't pay $200,000 on an education, another group wrote an article saying I was completely wrong and gave "proof" (they made every statistics mistake possible).
The authors: a research team at Georgetown University.
And when I recently wrote that 401k plans (retirement plans set up by corporations for their employees) were a scam, MANY people wrote very nice emails to me saying I verified their own private concerns. Fortunately, for many of us, it's not too late to get on with financing your retirement, you can find out more about that by clicking on the link. Those concerned about their funds in later life should rest easy in the knowledge that there are solutions available to them which allow them to access the value tied up in their homes; compare equity release plans to find how much you could obtain as a result.
But then a surprising thing happened. A lot of people, many I considered friends in the finance industry, wrote again that I was totally off the deep end this time.
They never disclosed that their businesses depend on investing 401k funds or somehow obtain fees because of 401k plans.
So maybe every Friday I'm going to write a little about finance if you think this is a good idea.
I stopped writing about it over five years ago because A) finance is boring and B) it has nothing to do with increasing someone's power over their own lives (in most cases).
People want more out of life than knowing what direction Apple stock is going. They want to fulfill their dreams and their passions, not just survive in the drudgery of a cubicle.
I have no agenda. I am not pushing any 401k product, or house, or fund, or anything.
But I just want to light up the facts about things people are lying to you about. Then you can decide.
If I continue doing this, I'm going to write about why and when you should stop paying back your credit card debt.
But I still feel an itch to address 401ks.
Listen: they are scams. This is another trillion dollar industry that has a lot of money at stake if people stop believing in the mythology bolted to the scam.
Let's go over the pros and then the cons:
The PROS of a 401k
- You put money away before it is taxed. This has the benefit of encouraging you to save starting at a young age.
- Often your employer will match what you put in your 401k. So it's "free money" (ask yourself: why is this the only example of free money in the entire world?).
- When you are 59.5 years old you are allowed (like a parent allows a child) to take money out. It's taxed then but now you've benefited from the 7% per year that, by law (kidding) the stock market goes up.
I can't really think of any other pros. If you can think of some, please put in comments and I will try to address.
CONS of 401Ks
Let's look at it conceptually for a second and then I will look at the cons.
You are paid money by an employer. You have that money in your hands for five seconds, and then it is whisked away into this account and you can't look at it again for another 20-35 years unless you want to pay a massive penalty.
Will you be alive in 30 years? Hopefully! Else you will never see that money again.
Ok, that's my first problem with 401k. I like to have total control over money that is called mine.
Ok, let's look at the cons:
1) You can't predict your tax rate 30 years from now.
This completely destroys the whole "tax-deferred" argument.
Let's say you put money in your 401k at the age of 29. You are making much less money than you probably will be at the age of 59.
So your tax rate is less than your tax rate at 59, forgetting completely that taxes might be raised also (we just don't know) between now and then.
So we don't really know if you are saving money on taxes or not. You are simply having your money taken from you for 30 years.
Also, when you take money out of your 401k, you are taking out more than you put in (chances are, because your expenses are higher). So your tax rate will almost certainly be higher. Again, ruining the entire point of putting in pre-tax income.
2) The Employer Match
Do you think companies really pay you free money?
Companies that don't have an employer-match pay higher salaries. The Center for Retirement Research did a study based on tax data and showed that for every dollar an employer (on average) contributes to a 401k match, they pay 99 cents less in salary.
Big savings!
Also employers don't give you all the money at once. They spread it out over 4-6 years (six years is the regulated max or they would spread it out longer is my guess).
If you leave before the six years, you often don't get the match. So employers actually save money in the long run by installing a 401k plan.
How many employees stay at their jobs for six years? Not that many. The average is 4.6 years according to the Bureau of Labor Statistic.
Goodbye employer match.
3) Fees
People don't manage 401k plans for free. There is a cost. Then there is a cost in the mutual funds they put their money in.
Then there is revenue-sharing between employers and 401k plan managers. Is this legal? Yes. It might not always be but it is now and it is how employers make some of the money back on matching what you put in.
Is this transparent? Of course.
Does the average person look at all the fine print detailing fees? Of course not. I don't. (I have a 20 year old 401k account).
Then there is the fine print on each mutual fund the 401k manager has allocated the money to. Do I look at that fine print? No.
Many mutual funds charge extra marketing fees. Do yours? I have no idea. Most people don't. Which is how they get away with it on a trillion dollars.
Which is part of the reasons 86% (!) of mutual fund managers underperform the market
Now, in many cases you can say, "I want to put in a low-fee exchange traded fund" but a) will you do that? and b) they still have some fees.
4) Assumption on market returns.
The market has returned somewhere between 7-10% per year depending on what time period you look at, what index, etc.
The average investor has returned 1.8% per year over the past 40 years. The psychology of investing is very difficult. In 2009, many investors pulled out of the market, right before a 100% upward move.
And when I say, "many investors", I'm not talking about you - I'm talking about the best mutual fund managers in the business.
5) More on taxes.
Yes, you save tiny amounts on taxes when you are young. But this is also the period when you have the biggest tax write-offs relative to your income (dependents, business expenses, etc).
So you don't really need the extra minor savings on taxes. Trust me, you will be fully taxed at the highest rate when you pull money out 30 years from now. If you are a freelancer or self-employed you may want to look into how taxes will affect you. You might even want to look into a company similar to Dave Burton that may be able to help you keep track of your taxes and keep you ahead of the curb.
So why not use that "extra" money to invest in yourself right now. Invest in skills that can benefit you or experiences that you can enjoy and make you happier.
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401k plans have been around for decades. And yet the average retiree does not have enough savings for retirement.
So the evidence is fully in. 401k plans did not help.
So how does one save?
The average multi-millionaire, according to tax data, has at least 7 different sources of income.
You can keep your job. But think about how to make money on side jobs. It doesn't have to be tomorrow. Just think about it and start coming up with ideas.
Or take a job where you financial success is more in tune with the financial success of the company.
With industry being outsourced and knowledge being outsourced, the best investment is in yourself.
This might mean take courses that you can later monetize (photography, wordpress development, copywriting, freelance writing, etc).
Or it might mean studying investments. The best investors are usually the top hedge fund managers. Study their investments. Copy what they do (but don't invest in them. Ugh!).
Anyway, I don't like writing about finance. But I can assure you I have no agenda on 401k plans.
I get emails every day from people who are scared and frustrated.
They have reached their retirement page and everyone up until now has lied to them about the benefits of 401ks. So they are worried about how they will survive.
My agenda is to try and help. A few weeks ago, a good friend of mine says I was a waste of flesh because I was against 401ks. Guess what he does for a living? He manages 401k plans!
Perhaps the main point of this article is that one way to choose yourself is to look at the agendas of people selling you something.
It's ok for them to make money. I don't blame these people. Maybe some of them are good. But get all the facts so YOU can choose instead of THEM.
Question ALWAYS the trillion dollar industries that are paying millions to fool you (finance industry, housing industry, college industry, etc).
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