The cover story on this week’s TIME magazine covers a topic that I covered with Robert Kiyosaki two years ago in his Yahoo! Finance column. In that column, I wrote a “Why the Lottery is a Better Investment than a 401(k).” Robert and I were piloried by 750 respondents within 3 hours of this article being posted. Now comes this TIME article underscoring how right we were two years ago.
The TIME article begins with the story of Robert Shively, a retiree who has to work as a mechanic at a golf course because he never saved enough in his 401(k) to retire properly. Proponents of the 401(k) say that he simply didn’t put enough away. The author, however, is more to the point. Stephen Gandel says, “The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves.”
I like the article because it does underscore the problem. Unfortunately, it suggests that perhaps if we give the 401(k) a little longer (30 years of saving/investing according to the article), then maybe it’s okay.
The reality, is that a 401(k) is NEVER okay. It has three fundamental problems that cannot be solved with any guaranteed plan or saving for a lifetime.
1. Contrary to what the article suggests, you do NOT have control of your investments in a 401(k). You are severely limited in what you can do with your investment dollars.
2. You have no control over when you can use your money. While some 401(k)’s allow you to borrow up to 50% of your funds, none of them allow you to use all of them unless you leave the company (and then you pay a tax penalty) or you retire.
3. You pay the highest tax rate on your earnings. Dividends, capital gains and passive income, while outside of a 401(k) taxed at a preferential rate, are taxed at ordinary income rates when you withdraw your funds.
4. I know I said there are three reasons – this one’s a bonus. Your 401(k) will NEVER KEEP UP WITH INFLATION.
So stop contributing to your 401(k) and learn how to invest like a business owner. Take control of your financial life. The big myth perpetrated by the financial institutions and the government is that finance is difficult to understand. Money is easy. I will be explaining how money works over the next several days in my blog. Stay tuned.