Is a 401k Even Worth it AnyMore for Retirement?

Estimated reading time: 10 minutes

The topic of retirement comes up occasionally in my conversations with Investors. And we all know that “Hindsight is 20/20.” We also know that the most tried, accurate, and trusted retirement method is the company-sponsored 401(k) plan. But, in our discussions, I question whether the 401(k) is even worth it. 

Consider, for example, the 401k or any other type of employer-sponsored retirement plan that we’ve been led to believe is the ultimate strategy for retirement investment.

Suppose this is the only choice you’re offered. Isn’t that it, then?

When we go out to eat, my kids as what they can drink; they are allowed to have water or water. No sodas, or “Cokes,” as we say, in the South. Why? One reason is that restaurants charge around $2-3 per drink, and I have five kids, so this adds another $15 every time we eat. But also, and more importantly, long-term health. They need water, and they do not need more refined sugar, which has no benefits and only negative health consequences. 

Do we have choices other than 401k?

What retirement planning choices were you offered when you started your career? When I first started in the global logistics business, my company offered me the standard 401k and a company stock purchase plan. 

I wasn’t given any other choices.

We are cattle in a herd, in a line. We will work until  70 (or until I can’t keep up with the pace anymore). In the brokerage company’s mind, they have a 40-year plan for charging setup fees and then “managing” these accounts for my entire career.

Sounds like a sweet deal, like those “set and forget” commercials. But again, no other options were presented, not even a Roth IRA.

There should have been mention of retiring early, investing in real estate, or starting a side hustle. Why do you suppose that is? Is it because they do not benefit from it, or could it be that because it’s what everyone else does, that’s what he recommends?

Let’s delve deeper into this.

Before we continue, let’s understand how a 401k works…..

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Understanding the 401K Plan

A 401k is one of the most popular investment options. This is a tax-deferred option reducing your taxable income while you are earning. 

It allows employees to save and invest part of each paycheck without first deducting tax dollars. This tax-deductible contribution reduces the amount you’re taxed on in each paycheck, partially offsetting the amount you deduct.

To illustrate, if you contribute $100 from each paycheck, your paycheck will be less than $100 lower than if you didn’t (because you’re not paying taxes on the $100 you contribute to the 401k).

Taxes are deferred until the money is withdrawn from the account when you reach age 59.5 years or older. This puts the tax break on the front side, while you are younger and likely need it (theoretically). 

The Birth of the 401k In 1978

Congress passed the Revenue Act of 1978, which included Section 401(k) provision that allowed employees a tax-deferred, easy way to receive compensation from bonuses or stock options.

It was in the early 1980s that the IRS began allowing employees to contribute to a 401k via salary deductions. 

This change shifted the retirement strategy landscape from pension plans to 401k plans.

The Pension Protection Act In 2006, President George W. Bush passed the Pension Protection Act to ensure that workers would receive the pensions they were promised and to improve options for funding their retirement.

According to Investopedia, the act expanded the protections provided by the Employee Retirement Income Security Act of 1974 (ERISA). It requires plans to keep participants informed, making it harder for bad actors to exploit people trying to save for retirement or earn a pension.

A significant component of this legislation was to move employees away from defined benefit pension plans and toward 401k plans or another individual retirement account. 

This act aimed to prevent existing pension plans from failing, partly by nudging people into 401ks. As the Pension Protection Act of 2006 permitted companies to enroll their employees into 401k plans automatically, it further popularized their use.

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Let’s see what some millionaire influencers have to say about 401ks…..

Grant Cardone
Grant Cardone believes saving $100k cash then investing this is a much better option

The Perspective of Grant Cardone – The 10X Guy 

Grant Cardone’s ideas about 401k are worth noting as a unique perspective and a good option for retirement planning. 

For those who might not know him, Cardone is a self-made billionaire who, much like Robert Kiyosaki, refuses to play by anyone else’s rules regarding money.

One of his books, “Be Obsessed Or Be Average,” highlights this concept.

He’s quoted as saying he would never invest money in a 401k. He argues, “Why would it make sense to have my employer give me an extra $6,000 of “free money” a year and then send it to Wall Street, where I can’t touch it for another 30 years?

Cardone perceives retirement plans as just financial products that are “pushed” on us as traps that keep us from amassing significant wealth.

He argues against the shared wisdom of save, save, save, asserting that one cannot save their way to millionaire status.

Being Obsessed

In “Be Obsessed Or Be Average,” he writes, “Wall Street tells you to invest early in small increments. They don’t believe in your ability to earn money. They have no faith in you. Instead of investing first, people must demonstrate their ability to generate more revenue. Why? People get rich because they produce revenue, not because they make small investments over time.”

Cardone’s Retirement Strategy, unsurprisingly, diverges from the norm and is not working with his advisor on target-date funds. 

His first step is for us to save $100,000 in readily accessible savings accounts. Why? Because of the liquidity that this provides. Having this amount in readily accessible savings accounts allows individuals the flexibility to handle any unexpected financial emergencies or to seize upon investment opportunities as they arise quickly. It’s a step that bolsters one’s financial security while establishing a solid wealth accumulation foundation.

Once you’ve reached the $100k threshold, he suggests you start investing in building tangible wealth now rather than later.

One of his ventures, Cardone Capital, is known for acquiring upscale multifamily properties. At one point, he’d just purchased a nearly $300 million property in Fort Lauderdale.

Robert Kiyosaki’s Perspective on 401ks

Robert Kiyosaki, the author of “Rich Dad Poor Dad,” much like Grant Cardone, advises against investing in a 401k or other Traditional IRAs. He asserts that most Americans lack adequate financial education.

As a result of this lack, they tend to unthinkingly hand their money over to individuals claiming to be financial experts. He believes this to be a dangerous practice.

Highlighting a personal experience: I think about my first tenant from my first rental. Everything was checked out with this couple and their son. He was a Senior Financial Advisor at a major banking institution. He passed his Series 7. People saw this guy for advice on managing their finances, investing in exchange-traded funds, IRAs, opening a Roth account, etc. In the years that I rented to this family, I can count how often he was on time with rent. Every month, he paid late fees, and in the end, I had to evict him and his family for non-payment. Is there not a background check for financial counselors in this industry? What regulation is there in the financial advising industry? 

Robert Kiyosaki
Robert Kiyosaki does not believe 401k is a good option

Here are four reasons Kiyosaki believes 401ks are a terrible choice for retirement:

#1. Taxes work against you. Usually, long-term capital gains are taxed at a rate of 15-20%. But with a 401k, you’re taxed at the significantly higher ordinary income tax rate. For many, that’s 37%+. You lose your tax benefit. 

#2. The early withdrawal penalty. Want access to your 401k money before age 59.5? Be prepared to pay a 10% penalty. Our government doesn’t trust us enough to manage our money without having a pay-to-play scheme.

#3. You can’t insure against a market crash. In Texas, having car insurance is a legal requirement. The same goes for real estate investing. When I invest in a property, I must have insurance in case of damage. Yet, the 401k investor has no insurance to safeguard against losses from market crashes.

#4. 401ks are for people who plan to retire poor. Ever wondered why financial advisors often say, “When you retire, you’ll be taxed at a lower tax rate.”? Plan sponsors assume you’ll make less money when you retire, thus placing you in a lower tax bracket.

Is a 401k Worth It Anymore? 

Pros of 401k plans

#1. Easy to use Most of the time, your employer can automatically enroll you.

#2. Potential company match. The majority of companies offer some matching contribution, averaging 4.3% of a person’s pay. The most common match is 50 cents on the dollar.

#3. Decrease your tax liability. Each time you invest in a 401k, you may receive a slight reduction in your tax liability, which lowers what you owe to the IRS.

#4. Tax deferral If, throughout your career, the value of your 401k increases, then you’ll be able to defer the taxes on those gains until making withdrawals.

Remember, this is one of the primary selling points of a 401k. Tax deferral can benefit people who anticipate being in a lower tax bracket during retirement than during their working years.

Cons of 401k plans 

#1. Limited investment options Unlike an IRA, a 401k offers a limited menu of investments, limiting your ability to diversify your retirement savings. The selection is often limited to mutual funds.

#2. 401k plans often have management fees. these high fees can affect investment returns. Always keep a close eye on the expense ratios of the mutual funds offered by your 401k.

#3. Early withdrawal penalties If you withdraw from your 401k before the age of 59.5, you’ll face a 10% penalty on top of the income tax you’ll owe on the withdrawn amount.

#4. Mandatory distributions Once you reach age 72, you must take mandatory distributions from your 401k, regardless of whether you need the money.

#5. Lack of liquidity While a 401k is designed as a long-term investment, there are situations where you need access to your money before retirement. Unless you want to pay hefty penalties, your money is locked away until retirement.

Look for more options in your retirement portfolio

Retirement Options outside of 401k plans

  • A rollover IRA is a strategy used to transfer assets from a former employer-sponsored retirement plan, such as a 401(k) or 403(b), into an individual retirement account (IRA). This can include any IRA account such as direct rollover, Roth, Sep IRAs, and other Investment accounts.
    • the employee can choose which financial institution to move his / her retirement funds to as long as it is a traditional account holder/ custodian for retirement accounts. 

Final Thoughts

Whether to invest in a 401k depends on individual circumstances. For some people, particularly those whose employers offer a substantial match, a 401k can be an effective way to save for retirement. It’s also a great way to get in the habit of saving, particularly for those who need help setting aside money.

However, better options may be available for those seeking to build substantial wealth and have a more significant say in their investment choices. Alternative strategies like investing in real estate or starting a business may yield higher returns and provide more flexibility.

Please speak with a financial advisor if you need help with the best strategy. Please make sure they have the qualifications and expertise to help you in your situation. Also, remember to consider the advice of Grant Cardone and Robert Kiyosaki. They offer an alternative perspective, but like all advice, it should be evaluated carefully considering your circumstances and goals.

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Always consult with a financial advisor, CPA, or CFP to make sure your financial plans align with your goals, risk tolerance and financial situation.