Wall Street still has Main Street Scammed
April 1st, 2009What I am about to say may certainly generate some backlash from a few of my readers, but here I go…
I believe that Wall Street has purposely brainwashed Americans for at least the past 20 years into investing money in retirement plans – 401k plans, IRAs, etc… Now your first reaction is naturally, “Well, what’s wrong with that?” And my answer to you is nothing, unless you look at the whole equasion.
First off, lets go back to when I was young. I had no money, could hardly pay the rent, but I was strongly encouraged to put money away in a 401k. The company matched up to 50% of my investment, which would be vested over a 5 year period. So that’s just like an instant 50% return. You’d be dumb not to do that! I mean, a 25 year old that saves a $100 or $200 per month can be a millionaire at retirement. I know the Rule of 72. I understand it. If you don’t, Let Me Google That For You.
So what’s so bad about all of this???
- People should first be brainwashed to save an emergency fund. Maybe even more than that. Why in the world would you want teach young kids to save in a retirement plan if they have no money saved in the first place? As soon as something happens and they need money, they are going to raid their retirement plan and pay a 10% penalty. Dumb! This is not a strategy, this is a poor backup plan.
- Young people need to learn the discipline of saving. A savings account is designed for this, not mutual funds wrapped beneath a 401k.
- There are other things in life other than retirement to save for. A house, car, etc… Retirement is not the only thing to save for. You’ve got a life to live. Family, vacations, etc… You may never even make it to 59 1/2!!!
- People are conditioned to save for retirement but never encouraged to save for the short and medium term. Most people I know don’t have any money saved, other than retirement. This is a disaster waiting to happen.
- The taxable vs. non-taxable comparison. We’ve all seen the graphs. Basically, they show how investing in a retirement plan yields you more money in the end because it grows tax-deferred. And that’s it true, if you ignore reality. This is one of the biggest lies that we have all been fed! Let me explain. First of all, many people receive tax refunds. As you invest in a “taxable” investment, you do not take out of your non-retirement investments to “pay for” the tax on the dividends and appreciation you have earned. Especially if you are getting an income tax refund. In fact, this money can grow for many years before the investor will even need to withdraw money from the account to pay for taxes. And as the investor gets older, he most likely will buy a house, leading to the mortgage interest deduction. A larger refund. Still no withdraws from the taxable fund. Eventually as the money compounds and the tax-refund dwindles away, the investor may need to take money from the fund to pay taxes. But it is not at year one as the graphs imply. It more likely is many years later.
So that’s great Len, where’s the scam???
The scam is this. The mutual funds have a great interest in you locking your money up retirement plans. You will not take it all out, even if you need it! Which keeps more money under their management, which means more management fees, which means and ever increasing assets under management which leads to an enormous amount of steady income! It’s all about them! This is why they do not advertise non-retirement investments much. They want you to lock up your money with them, under duress of a 10% penalty!
The government likes this too, because they know they can get an extra 10% penalty tax from many people in Middle America, because they do not have sufficient non-retirement savings! This entire thing is a scam for Middle America and it does NOT have the regular guy’s interest at heart. You need to start thinking for yourself and not be easily convinced to do what big corporate America and the government wants you to do.
I have not saved in a 401k for years. And I have no intention to ever do so again. And I have saved more in non-retirement taxable investments than ever! And I have control.
Some may say that a 401k/IRA is good because it’s a “forced savings.” Bull. This is a BS excuse. This reminds me of the same thing insurance agents used to say to people as they sold whole-life insurance to everyone that had a pulse. A “forced investment.” Sorry folks, saving requires discipline. Regardless of whether or not it is in a retirement plan or an insurance policy. A weak or desperate person will always stop saving. It takes cold, hard discipline. Oh, and go ask your local millionaires about their 401k or IRAs. Oh wait, they don’t qualify. They make too much money. Hmmmm… If it was good for them, believe me, it would be legal.
In closing, I’m not saying that you should never to put money in retirement plans, although I will no longer. I do say this… If you are going to, make sure you have your non-retirement savings, plus your emergency fund before you invest a dime in a restricting retirement plan. Then, only invest up to the amount your employer matches. And while you are investing in retirement, do not make that your only or primary investment. You should make sure you invest or save in non-retirement monthly as well. Forget the theories and fuzzy math and fancy graphs. Believe me, I used to sell retirement plans…
Look at it this way. Most people don’t have the discipline to save the kind of money needed to fund a pleasant retirement without offering them some kind of incentive to save. Therefore I would suggest opening a Roth Ira which has a lot to like over the traditional Ira. Although I must the way things are going in this country, it might just be mute point.
Your post title had me hoping for a discussion on contrarian investing, which is the only explanation I can come up for justifying the uptrend in the stock market over the last couple of weeks.
I agree with you completely on two points you make:
1. Think for yourself.
2. It takes cold, hard discipline to be a constant saver.
You can also not be a disciplined saver for weeks or months, it must be for years.
Now that a lot of companies are killing the company match to the 401k, there is no longer any reason to put money in a 401k. Much better to put that money into a Roth under your own direct control.
I think you missed the really big lie, though. Companies came up with 401k as a replacement for pensions. Pensions were (more or less) guaranteed retirement $$$ — as a result they became very expensive. You are a responsible investor, but most people are not. My fear is that as 401k goes by the wayside most people will not put money away for retirement. Except that they won’t have a pension, or a 401k, or any savings.
I was happy with my overall 401k performance until this year. But then again, EVERYTHING is down. It’s not like their are any winners unless you bought puts on the S&P. I am seeing a few tentative signs that the economy is turning around, and I’m hopeful. But we’ll see I guess.