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Editor’s Note: Back in June, we shared a short video from our longtime friend, best-selling author, and “serial entrepreneur,” James Altucher. In it, he detailed how investing in a 401(k) is a complete waste of money. It struck a nerve… we received a boatload of letters railing against the idea. That tells us he may be on to something…
Today, James shares his view that 401(k)s aren’t just a waste of money, but actually a scam… |
Why Your 401(k) Is a Scam!
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From James Altucher, editor, The Altucher Report: 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 Street Journal, Financial Times, CNBC, Fox Business, ABC, and many other finance sites. I’ve run hedge funds (and 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 world of finance 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 401(k) 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.
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.
They never disclosed that their businesses depend on investing 401(k) funds, or that they somehow obtain fees because of 401(k) plans.
So maybe every week, I’ll write a little about finance if you think this is a good idea.
I stopped writing about finance 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’s stock is going. They want to fulfill their dreams and their passions, not just survive in the drudgery of their cubicles.
I have no agenda. I am not pushing any 401(k) product, or house, or fund, or anything.
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 401(k)s.
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 the cons.
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The PROS of a 401(k)
- 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 401(k). 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 send in comments and I will try to address them.
The CONS of a 401(k)
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. 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.
That’s my first problem with the 401(k). I like to have total control over money that is called mine.
Okay, now let’s look at the cons:
1. You can’t predict your tax rate 30 years from now.
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This completely destroys the whole “tax-deferred” argument. Let’s say you put money in your 401(k) at the age of 29. You are probably making much less money than you will be making at the age of 59. So, your tax rate at 29 is less than your tax rate at 59, forgetting completely that taxes might also be raised between now and then (we just don’t know). 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 401(k), 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 pretax income. |
2. The employer match.
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Do you think companies really give 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 401(k) 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 four to six 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 401(k) plan. How many employees stay at their jobs for six years? Not many. The average is 4.6 years, according to the Bureau of Labor Statistics. Goodbye, employer match. |
3. Fees.
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People don’t manage 401(k) 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 401(k) plan managers. Is this legal? Yes. It might not always be, but it is now. It’s how employers make some of their 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 401(k) account.) Then, there is the fine print on each mutual fund the 401(k) 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 reason 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) it still has some fees. |
4. Assumption on market returns.
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The market has returned somewhere between 7% and 10% per year, depending on what index/time period you look at, 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.
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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 your money out 30 years from now. So, why not use that “extra” money to invest in yourself right now? Invest in skills that can benefit you, or experiences you can enjoy that make you happier. |
401(k) plans have been around for decades. And yet, the average retiree does not have enough savings for retirement.
So, the evidence is fully in. 401(k) plans did not help.
So, how does one save?
The average multimillionaire, according to tax data, has at least seven 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 your financial success is more in tune with the financial success of the company.
With industries and knowledge being outsourced, the best investment is in yourself.
This might mean taking courses 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 401(k) plans.
I get emails every day from people who are scared and frustrated.
They have reached their retirement age, and up until now, everyone has lied to them about the benefits of 401(k)s. 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 said I was a waste of flesh because I am against 401(k)s.
Guess what he does for a living? He manages 401(k) plans!
Perhaps the main point of this article is this: One way to choose for yourself is to look at the agendas of people selling you things.
It’s okay 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.
ALWAYS question the trillion-dollar industries that are paying millions to fool you (the finance industry, the housing industry, the college industry, etc.).
Reeves’ Note: James pinpoints the defining difference between the rich and everyone else: Wealthy people have multiple streams of income. The middle class and the poor rely only on salaries. You’ll never achieve lasting wealth—and enjoy a comfortable retirement—if you don’t learn to adopt a “rich” mentality.
In his latest book, James reveals simple ways to start a business… find a retirement career… publish a book… make extra money in your spare time… and more. These are the routes to wealth the rich employ. Click here to learn more about them.