401(k) plans have been in place since 1978, and most of us grew up believing they will keep our future secure and allow us to retire comfortably. But the truth is the 401(k) is a lousy way to build wealth! So if you’re wondering if a 401(k) can make money, know that it will most likely not help you produce a lovely nest egg for you to retire on. In fact, it can actually destroy your retirement dream.
According to Fidelity’s 2018 quarterly analysis, the average 401(k) balance is $106,500. This figure is what some individuals make a year in salary. How could someone possibly live off this amount for the rest of their lives! So if all your eggs are in one 401(k) basket, then you may want to rethink your wealth building strategy.
If Investing in a 401(k) is a Bad Idea Then Why is it So Popular?
We grew up believing that the 401(k) should be part of our life plan – go to college, get a reliable job, invest in a 401(k), and happily retire without a care in the world. That’s why no one questions it.
Here are a few reasons why so many individuals contribute to a 401(k):
- Stuck in an old way of thinking – The 401(k) may be all they know when it comes to saving for their retirement. They learn from a young age that it’s the ultimate retirement plan.
- Lack of financial education – Many people don’t have the proper knowledge of investments or building wealth. Because of this, they blindly hand over control of their funds to financial advisers and stock brokers.
- Attractive employer contributions – In theory, this sounds perfect, but in reality, it’s an illusion. Think about it; companies are in business to make money, not give it away. What’s really going on is they offer a lower salary and place the difference in your 401(k). So they are, in a sense, giving you money that belongs to you in the first place. Here is the proof – In a study conducted by the Center for Retirement Research, they found that employees at companies that matched their employee’s 4o1(k) contributions, made a lower salary than employees working at companies that don’t contribute.
As you can see, investing in a 401(k) is more about following tradition, lack of knowledge, and false perks/benefits. It’s time to change your mindset! Stop thinking of the 401(k) as the ultimate retirement plan or a safe way to build wealth.
3 Reasons Why the 401(k) is the Wrong Way to Build Wealth?
Now that you are starting to see the light, we want to get more specific about why the 401(k) is a lousy way to build wealth and how it can be preventing you from reaching your full potential financially.
1. A 401(K) Causes You to Lose Control of Your Own Money
Your money is blindly handed over to brokers you have never met, with the hopes that they will grow your funds. Additionally, by investing in a 401(k), you are handing over control of your money to the government.
The government controls the following aspects of your 401(k) funds:
- Access to your money – You will have to wait until you are 59 1/2 to access your funds.
- Penalty for early access – If you access your 401(k) funds before the designated age, you will pay a 10% penalty of the total amount.
- How much you can invest – If you want to invest extra money towards your future, it’s not allowed! The government caps the amount at $18,500 a year.
A 401(k) plan doesn’t sound as glamours now, does it? The bottom line is, the more control you have over your funds, the greater the chances are of building wealth that will provide a comfortable retirement.
2. You Could End Up Paying Higher Taxes with a 401(k)
A 401(k) is tax-deferred until you withdraw from those funds. This may somehow sound appealing if the assumption is that you will have a much lower tax bracket at the time of withdrawal. In reality, most retirees actually have a higher tax bracket when it’s time to cash in on their 401(k). For this reason, if you do have this retirement plan, you should never max out your 401(k).
Retirees may not have the significant tax deductions they once had when they were younger, such as child tax exemptions or a home interest deduction, to name a few. Furthermore, determining your tax bracket 30 years from now can be difficult. A 401(k) can end up putting you in a position to be taxed at the highest tax rate possible!
It may not be wise to place all your funds in one tax-deferred bag. It would be to your advantage to place your funds in a mix of tax-deferred, taxable, and tax-free accounts. This will allow you to fine-tune your retirement funds, giving you more control over your taxes, and ultimately enabling you to build the wealth you desire.
3. A 401(k) is Risky and Vulnerable to Stock Market Crashes
Many 401(k) holders lost hundreds of thousands of dollars in the stock market crash of 2008. This scenario may happen again, and you could lose your life’s savings. With no control over your money, and no insurance to prevent loss, you would be at the mercy of any major adverse stock market fluctuations.
Essentially, others control your money, but you take on all the investment risk. Blindly sitting by while your money is subjected to a risky stock market is not a wise decision if building wealth is your goal.
Stop Relying on Your 401(k) and Start Building Wealth Now!
If you have been contemplating whether or not your 401(k) is right for you, we hope that this article has cleared up some of the confusion! It’s time to take control of your finances, invest wisely, and build great wealth! Educate yourself to find the best possible investment vehicle that will work for you and your wealth building goals. Invest in real estate, or commodities, start a self-directed IRA, or research other avenues of building wealth. Give it a try! You might find that your choice to ditch the 401(k) to build wealth the right way could be the best financial decision you have ever made.