Investing in a 401(k)? You Have WAY Less Money Than You Think

Investing in a 401(k)? You Have WAY Less Money Than You Think

Do you know how much money you’ll need to retire comfortably? Let’s do the math. Say that you want to retire at 65 and you want $5,000 monthly for the rest of your life. Your house and car are paid off, you don’t have a lot of debt, so the $5,000 goes towards utilities, food and the occasional indulgence. $5,000 is not a ton, but it’s enough to be comfortable. So let’s do the math: Let’s say you’ll live in retirement for 20 years. 

$5,000 x 12 = $60,000 per year x 20 years = $1,200,000. 

You’ll need $1,200,000 to retire comfortably. How much do you have now? Are you even saving? 

If you are saving, in any way, that’s good news. But, did you know that there are different financial vehicles you can use to save money for retirement? They all have their advantages and disadvantages. And some, of course, are better than others. 

One of the most popular retirement vehicles is the 401(k), an employer-sponsored retirement plan that helps you save for retirement. The money is deducted from your paycheck pre-tax and deposited into your investment account in the stock market. According to SmartAssets.com, “the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions.”

What’s not to love, right? Well, a few things… 

Dangers of Investing in a 401(k)

You’ll Pay Taxes When you Take Out the Money

For starters, a 401(k) is a tax-deferred plan. This means that you will pay taxes when you TAKE OUT THE MONEY. So, you won’t be paying today’s tax rates, you’ll be paying whatever the tax rate is in the future. 

Let me ask you a question: Do you think taxes are going to go down, stay the same, or go up in the future? They’re probably going to go up. I don’t know about you, but I’d rather pay taxes NOW than in the future. 

You’re Exposed to Market Volatility

In a 401(k), your money is invested in the stock market. And we all know how that can go… only on the first quarter of 2020, the stock market fell by 23.2%, making it the worst first quarter EVER.

Expert investors such as Warren Buffett and Tony Robbins have said it numerous times: Nobody beats the market. Why should you expose yourself to it? 

Check this out: Years of magnificent growth are often preceded by years of immense losses. Let’s take the years 2000-2003 as an example. In 2000, the market fell by 12.2%, in 2001 by 13.4% and in 2002 by a whooping 24.1%. 2003 was a great year, the market grew by 26.3%!! So, if you had a million dollars invested in the market in 2000, how much did you end up with after the magnificent year that was 2003? $728,000. You actually LOST over a quarter of a million dollars. Let’s say that again: YOU LOST $272,000. 

Original Investment $1,000,000

YearPerformanceYour Money
2000-12.2%$878,000
2001-13.4%$760,000
2002-24.1%$577,000
2003+26.3%$728,000
TOTAL LOSS– $272,000

The market continued to grow in the next few years, yes, but then it plummeted again in 2008. How much money do you think you would have lost then? They say the market always bounces back, but how long would it have taken you to recuperate that money? This is time you could be making money, not trying to get back to your original investment. 

Your Money Isn’t Easily Accessible Until You Are 59 ½ 

A retirement plan should be for retirement, of course, but sometimes life happens. You can spend 10 years at a company and lose your job all of a sudden. You can fall sick (we all know medical insurance won’t cover all your expenses). Your house might need significant repairs. You never know what life might throw at you. And while you’re scrambling to figure things out, your money is imprisoned in a 401(k) plan in which you have to pay a hefty penalty (10%) to access before you are 59 ½. There’s no liquidity. 

Fees

How much are you paying for your 401(k)? Do you know? There are three types of fees in your 401 (k). These are investment fees, plan administration fees and individual service fees. These fees average about 2.22% of your assets (but these can go up to 5%!!). That might not seem like a lot, but let’s put that into perspective. With the same $1,000,000 investment, that means that you’ll pay $22,000 in fees. And then you’ll pay taxes on top of that. 

So, if you started out with $1,000,000 

– $22,000 in fees = $978,000

Let’s say you’re going to take out those $5,000 we talked about in the beginning, $60,000 a year. But, you see, you’re not going to get $60,000 a year. With the current tax rate of 22% (that will most likely go up, right?) that would be $46,800 or $3,900 a month. 

If we add it up, that means that Uncle Sam will have taken $215,160 out of your million dollars! That leaves you (after taxes and fees) with $762,840. You’ll have lost nearly a quarter of a million dollars… That is, if you don’t lose much of your investment in the market before you even touch it. 

Do you think that’s good business? Why should you lose so much of your hard-earned retirement savings? There are better ways to save for retirement.

Invest in a Money-Making Machine

Now that you know about the dangers of keeping your hard-earned money in a 401(k), you might be thinking: What am I going to do about this? Get in touch with me right away, that’s the first move. Here’s why: 

What if I told you there was a way that you could make your money grow TAX FREE with an average annual return of 8% without EVER losing money? 

Let’s break that down: 

  • Tax free – You invest money you’ve already paid taxes on (at today’s rate) and you don’t have to pay taxes when you take it out. Nothing. Nada. If you have $1,000,000 in your account, you’ll get $1,000,000. 
  • You don’t lose money, EVER – Your money isn’t directly invested in the stock market. It is in an index fund that mimics the performance of the stock market, with one important difference: When the stock market goes down, you get a 0% (up to a .75%) return. You don’t earn much, but you don’t lose. 
  • Up to 15% annual return – Because you don’t lose, you also have a cap on how much you can earn. 

Let’s illustrate this with the same example we used previously. 

Original Investment $1,000,000

401 (k)Money Making Machine 
YearPerformance Your MoneyPerformance Your Money
2000-12.2%$878,0000%*$1,000,000
2001-13.4%$760,0000%*$1,000,000
2002-24.1%$577,0000%*$1,000,000
2003+26.3%$728,000+15%$1,150,000
* Different products have different floors (from 0% to .75%)

Instead of ending up with $728,000 that will STILL BE TAXED when you take it out, you’ll have $1,150,000 TAX-FREE money. 

This is all possible, you just have to know where to invest. Want more info? Contact me today. 

Surprised about all this information on 401(k)? Don’t take our word for it. Check out these articles on how a 401(k) works:  

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