In relation to retirement, never before has the old adage, “you can’t get something for nothing,” been more poignant than when referring to the seemingly “too good to be true” perks of the 401k.
Since the early 1980s, the government has sold Americans on why relinquishing control over their money and taking huge risks in the stock market are essential for retirement. And why, now that we know the truth about how 401ks really work, do we continue to invest blindly into an unforeseeable financial future?
I’ll tell you why…
First, they woo you with the words tax deferment. “Put your money into our sanctioned retirement plan and pay no taxes till you’re 59 and a half.” To a young individual with no real grasp of fees involved and the fact that they are merely postponing the inevitable, “tax free” sounds like a really good option.
Second, employers often match participating employees’ 401k contributions—sold to would-be participants as “free money.” And why are employers so willing to contribute to their employees’ retirement accounts? Because 401ks have greatly benefitted employers by replacing the once guaranteed pension that my grandfather and many in his generation enjoyed. The 401k takes the financial responsibility of funding your retirement out of your employer’s hands and turns it over to Wall Street’s.
The government knows how to market. They call it a tax-savings plan. I affectionately call the it a Government Controlled Tax-Postponement plan with no guarantees. Let me rephrase that, your money isn’t guaranteed, the governments is!
(On originating the 401k) “The biggest benefit of the 401(k) is it converts them from spenders to savers. It enables them to do something they wouldn’t do on their own.”
Finally, once you have reached the distinguished age of 59 ½ , the government allows you to access your own money without paying a hefty penalty. Of course, taxable income. But hey! You’ve benefited substantially from all the gains (hopefully) your 401k has earned since its funding so paying those taxes shouldn’t be too painful. Right? Well…not exactly. What your 401k hasn’t prepared you for is the possible change in income tax rate. Don’t think taxes are going up? The Former Comptroller General of the Federal Government David M. Walker has even suggested that tax rates have to double to keep our country solvent. Take a look at the USDebtClock.org and decide for yourself if taxes are going to go up in the future.
“Hey, if I were starting over from scratch today with what we know, I’d blow up the existing structure and start over,” he says. “What I’m talking about isn’t 401 (k). I’m talking about the way investing is done.”
Many people are not aware that there are options available, other than a 401k, that allow for both accumulating savings and spending tax-free. That’s why it is so important to have a clear vision of what your 401k will and won’t be doing for you at retirement.
It’s imperative to work with someone who understands retirement income planning and how to deal with the inevitable tax-tumor buried in your 401k and other similar tax-postponement plans.
Quotes from the Ted Benna interview, Father of modern 401(k) Says It Fails Many Americans, via Marketplace.org.
If you would like some direction with your 401k, contact David Lukas Financial at: 501-218-8880 or email me at: David@DavidLukasFinancial.com
You may also enjoy this recent episode of The David Lukas Show, where David talks extensively about 401ks.