Why is a 401(k) a bad idea? Why don’t rich people use them? And seriously, are they worthy of being called a scam?
There’s more than a few reasons that I think 401(k)s are a bad idea, including that you give up control of your money, have extremely limited investment options, can’t access your funds until you’re 59.5 or older, are not paid income distributions on your investments, and don’t benefit from them during the most expensive period of your life (child-rearing years).
Did I also mention that your 401k account value may plummet—it happened in 2008 and could happen again.
Oh, and you won’t be able to deploy funds into high return investments like real estate.
Plus, you’ll have to pay hefty fees to the folks on Wall Street. Yes, they’ll collect between 1-3% in fees from you every single year. That will be an estimated $138,336 over your lifetime. Yikes.
Don’t forget to add inflation on top of that too. Inflation will eat away another 2-3% of your gains every single year. So, until you make at least a 6% return, you sadly haven’t made much headway beyond paying off your 401k management fees and keeping pace with inflation.
Then, there’s the dire fact that your 401k withdrawals will get taxed as ordinary income, making them subject to state and federal taxes at the time of your retirement.
Today, the highest federal tax rate is only 37%, but it has floated as high as 94% (1944). There were also three decades (1950s, 1960s, and 1970s) where the federal tax rate never dipped below 70%.
Do you really want to roll the dice on what tax rate you’ll pay at retirement when today’s rates are some of the lowest in the past 100 years?
That list is just the tip of the iceberg for why 401(k)’s are a terrible tool for wealth building and almost never used by the wealthy as a strategy for financial expansion. [Read more…] about Why 401K’s Are A Bad Idea