Why I Would NEVER Invest in a 401k

If you're like most Americans, you've probably been conditioned to believe that the 401k is the ultimate retirement plan. But the truth is, the 401k is not a smart way to save for retirement or build wealth. In this video, you're going to find out why I would never invest in a 401k plan.

You'll learn why saving your way to retirement doesn't work, and why the 401k is setting you up for failure. We're going to run some numbers on saving for retirement, discuss inflation, employers matches, and tax implications. If you're ready to challenge the messages you've been taught about the 401k plan, this one is for you!

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DISCLAIMER: I am not a financial adviser. I only express my opinion based on my experience. Your experience may be different. These videos are for educational and inspirational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. There is no guarantee of gains or losses on investments.

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[terrykrall]

My wife and I started saving at 26 for our retirement. We started with $2, 000 per year, started investing the savings in 2008. Mostly saving in tech funds and index funds. Over 30 years between the savings and the investing we have a combined net worth of 3.4Million mostly savings and deferred retirement funds. If you start early and do it gradually you WILL become a millionaire in 20-30 years.

[evangelinespade]

I always thought 401k was the ultimate retirement plan till I learnt about stock investing. I have less than 25 years before I retire. I began investing in stocks last year in 5 years or less I could become a millionaire says my referee

[BuckChoklitt]

This video is not about 401k's. It's a stock vs real estate investing argument.

[dondelillo]

First: Making short focused videos get you more viewers.


Second: Most people retire on social security income of $2, 000 per month. Their tax brackets are much lower. They pay fewer taxes.


Third: The yearly compound profit from 401 K is nontaxable. The yearly compound profit from real estate is taxable. You pay tax every year.


Fourth: Inflation adjustment applies to both scenarios ( 401 K & real estate cash flow). So, it was unfair to criticize 401 K based on inflation.


Fifth: The overall average annual return from 401 K over 30 years is 10%. This takes into account all recession episodes. So, it wasn't fair to criticize 401 K based on the most recent brief recession of 2008.


Moreover, the recession affects real estate cash flow too. When a recession occurs, wages decline and therefore rent cash flow declines as well ( vacancies, evictions etc..).


Sixth: The only reason real estate cash flow beats 401 K is not because of 401 K crashes during recessions, And not because 401 K is inflation-adjusted. But because real estate is a faster way to build wealth (Use of leverage) and their cash flow doesn't decline as you age.

[atdower]

Just max out your 401K and put it in a fund that has a low ER and follows the S&P500. That's all you have to do.

[jamesbuie]

My company matches 6%. I think it's a no brainer to put 6% into my 401k. I also invest in real estate.

[timpemberto]

Your math is somewhat decpetive because you accounted for inflation twice. You said S&P rate of return historically is 10% then you reduced it to 7% because of inflation. So after 32 years you would have $1M then you reduced it again because of inflation. Inflation was already account for in the begining. I'm not saying that passive income isn't smart but your math is wrong.

[tb]

Your math is killing me!

15% of $61, 000= $9150
$9150 x 10 years is $91, 500 that is not $83k.

Now let's account for 7% increase per year and saving 15% of $61k for 10 years and it comes to $126, 420 also not $83k.

On a side not some how you did get the correct number of years being 32 year to reach $1M but that does account for the 3% inflation, that's why we're only using 7% instead of the full 10%.

[antmydude]

your point about the stock market crash is a little flawed. if the invester kept investing during those 10 years it took to recover, they would have made significant gains. They would've bought stocks super cheaper during that crash. You assume the investor just stopped investing until the stock market corrected itself and they made no gains in 10 years. That is just not how it works.

[utahgflyer]

I guess my biggest issue is that this guy says you should invest in real estate or businesses. Guess what stocks They are businesses that produce cash flow ( dividends). I own rental real estate and it is fine but there are advantages to both approaches and I would recommend being diversified into a lot of different assets including real estate and stocks. It shouldn't be either or.

[JasonBuckman]

An employer match isn't you "partnering with the government". Turning that down is turning down money you worked for because you don't want to pay taxes on it later.

[LGABC]

You kind of glossed over the company match part. My employer matches 50% of my 401k contribution up to 5% so I contribute 5% to get the full match. I don't know of too many investments that give you an automatic 50% return on your money. I invest in a S&P 500 index fund so the fees are really low. Any growth in value is just icing on the cake.


That said, my goal is to add rental property to my portfolio. I'm still saving up to buy that first rental. Now I have to figure out if I should listen to Dave Ramsey -- who says to pay cash for rental property or everyone else that says it's better to use leverage. It never ends.

[whywoulditellyou]

I agree somewhat. However I think you should invest the amount required for your employer to give you their maximum match(free money) no more.

Even though your house dropped in value if you don't sell you didn't loose anything is true, same is true with stocks. Rental rates can also fall in a bad economy.

[MrDonny]

I think passive income is better cause all need like one 4 Plex and charge 800 a month. That 3200 a month and that excellent especially living in Louisiana. That all need but most are in hood. Im trying buy one buy college.. That all I need..

[JuanDavid-kexq]

I still don't understand why he views a 401k as bad? Is it because he advocates for depending more on real estate vs 401k.

[kenzsagrado]

You have a problem in your calculation and because of that, you are giving incorrect (and even dangerous) advice.

You said the annual market return is 10%, with 3 % inflation, (and assuming that is correct), the 7% discount rate is a real return. That means, after 32 years, the future value as you have said is approximately $1m ($1, 095, 591 to be exact). That number will be your future value net of inflation, not $388k.

If you want to incorporate inflation in the calculation, you use 10%, and in 32 years you would have a future value of $2.1 million.

Btw, the cash flow from real estate is not guaranteed, and the returns are cyclical. The market is interdependent. If economy is weakening, the rental properties faced downward pressure in prices to avoid vacancies.

Stocks and bonds are traditional asset classes, and real estate is a diversifier that can be added in our portfolio, not should be our exclusive investment otherwise we faced concentrated risk.

My suggestion would be to invest in 401k up to the matched employer offering, then maximize the ROTH IRA. People can invest in MREITS if they want real estate exposure, Roth allows active management . Once the ROTH IRA is maximized, then invest again in 401k.

[denaedwards]

This is so true! I know people retiring broke with a 401(K).Do you speak at events?

[mecheckraise]

Here is one story for you that proves the power of rentals and the stock market that happened to me 3 years ago. I got a buyout from a past IT job I left in mid 90s for their retirement plan that would pay me $316 a month or I could take $38, 100 lump sum rolled into an IRA. I took the buyout and quickly more than doubled it. I bought a foreclosure paying about $23k for it on 1.5 acres which I thought could be developed further. I took out $36k of the funds and paid the penalty and taxes. It might have been a stupid move BUT I thought F it. It took me past the $10k monthly gross rental income mark and at the time I figured that was the brass ring and all else did not matter. Yes a bit obsessed to meet my goal.

I get $670 a month for the rental NOW instead of at 65 and I still have area that maybe two more rentals could be added.I still have $60k left at the end of the next year and this year I more than DOUBLED the funds so I have a house and $120k from the original $38, 100. Sweet. That is a heck of a lot more than $316 at 65.

Last year I left a company after 6.5 years and this year I took out $32k without penalty since 55 but paid the taxes before rolling the rest into the same IRA. I used this to buy a 6-plex for $26k. Last month we finished the remodel of the last unit and now it generates $2050 gross but I pay water and sewer which runs $200.

From the same company I took out a $34k loan against the 401k about 4 years ago to buy a house with mobile for $8k, a triplex for $12k, and mobile for $4k on half acre. i also added 3 mobiles to my 23.5 acre farm using part of these funds plus a bit more. These rentals account for $3860 of my passive rental income and the mobile on half acres has yet to be remodeled.

As you can see I have used retirement funds several different times to fund my real estate portfolio. I love both of them. I have $300k left in this IRA that was rolled over after I doubled it this year, $19k in my current new 401k, and wife has the other to total $445k. I had my wife take out $50k from her 401k as a loan so we have funds if we see a sweet rental and we can also take a 4.5% home equity loan on our primary residence for $75k the banks says. I am trading her $50k and now $55k after 20 days.

[steveelling]

Great stuff. Another smaller, tangential point about property values during an economic downturn that helps validate Clayton's premise: In Florida, rental homes are taxed based on the reassessed, current market value each year. If the perceived value of the property drops, so do your taxes. If you are a buy-and-hold landlord, who cares what the county says your property is worth, since you are not likely selling it anytime soon. As long as the rent doesn't drop a lot, you're paying less in taxes, lowering your overhead. Meanwhile, somebody who is 70 and looking to retire is quite possibly getting killed by his declining 401K valuation, and he won't have the luxury of waiting out the recession for the value to return.

[Jimsac]

People may not have pension plans however, people can buy insurance products that can help them prepare for retirement.