馃攳
Financial Freedom Friday - 401K's and Rate of Return - YouTube
Channel: Living Wealth
[0]
Hey everyone. Welcome back to Financial
Freedom Friday. It's Nate here again. Glad
[5]
to bring you tips and strategies to help
you find Financial Freedom. Today we're
[9]
going to talk about a question I get
quite often actually and it's should I
[13]
fund or should I put money into my 401k?
Happens all the time. People ask if I
[18]
think the 401k is probably the
biggest tool that's being used in
[23]
America for most partners for the
average American to try to build wealth
[27]
to retire on one day. It's probably the
most common one and so I get this
[31]
question quite a bit because almost everyone
is plugged in when they get to a new
[34]
employer. Most of us though I really do
think would agree, if we really step back
[39]
and think about it. Most of us would
agree that the 401k has many inherent
[43]
problems in it. It has things like it's
well documented that the 401k's
[49]
has incredibly exorbitant fees compared
to everything else that you could do.
[53]
With the mutual fund fees, the 401k
management fees and the things that come
[58]
into play. It's not the cheapest way to
invest. So it has high fees. I'm really
[65]
concerned for people who are doing a lot
of tax deferral strategies that they're
[69]
going to end up being this huge tax
liability in the future. We're 21
[73]
trillion dollars in debt
running a budget deficit every year.
[77]
Sooner or later we're gonna have to pay
on this stuff and it's just getting
[81]
bigger and bigger every year. I think the
only way reasonably is that they're
[85]
gonna raise taxes on all of us. When you
get older you lose deductions as kids
[90]
move away you pay off your house. So
we're putting money into this 401k
[94]
that's tax-deferred. Whereas and we're
hoping that we pay less in taxes in the
[99]
future when we pull from it. It's a
hundred percent taxable as regular
[103]
income at that point and if you're in a
higher tax brackets, which a lot of
[107]
people are finding that they're in at
this point. That could be bad it can also
[110]
cause your Social Security income to be
taxed. So we have some tax issues with
[114]
the deferral of the 401k. We've got the
penalties that early withdrawal
[120]
penalties and restrictions. Many times
you can take a loan out but has to be
[123]
repaid on terms for 60 months and if you
don't you get penalized. Some people
[129]
can't even touch the money at all if
you're still working. So a lot of
[132]
inherent problems.
liquidity all the way through and then
[136]
on top of that one more point is that
it's found that most for 401k's and
[139]
the mutual ones there that you're in
there may not be the best returns. Just
[145]
to be honest with you so the only
thing that it has going for it is this
[152]
employer match. So it has all these
inherent problems that people don't
[155]
really care for but we bring it around
and say well it has this match. The
[160]
employers gonna match 3% or 6% or some
sort of percentage of your income that
[164]
if you put that in and they'll match it.
And I hear things like it's a 100% rate
[170]
of return. Which is false. It's free
money and I'm not gonna say no to free
[175]
money. We hear these things all the time
and I'm not an absolutist by the way. I
[179]
don't think very rarely financially is
something absolutely the best way to do
[185]
it. Very subjective. I'm not here to say
that you shouldn't but I am here to say
[189]
that the 401k the match is not a 100
percent rate of return and it's not free
[196]
money. It always has to be compared to
what else you could have done with it. So
[199]
I've got an example. I've got a guy who I
know very well who was in a 403b it's
[203]
really like a 401k but for nonprofits
and he was in there from 1992 to 2012.
[209]
And during that time-frame, if you run the
numbers the sp500 if you include the
[214]
dividends that grew by like nine percent
or a little bit over nine percent on
[218]
average during that time frame. You know
what his real return and his 403b was? It
[222]
was four percent. And that's not uncommon.
Don't get me that is not uncommon to
[227]
have being a mutual fund that is not,
you know up to par you would say.
[235]
And some people say well what about the
match what I'm suddenly saying if you
[238]
were gonna put five thousand dollars a
year in yourself or if you were gonna
[243]
get a match on that and have ten
thousand dollars a year. It's not like
[245]
it's a hundred percent rate of return
because I ran the numbers and if you
[249]
were to earn a four percent rate of
return on ten thousand a year over a
[253]
30-year time frame. You would have less
money than if you did five percent or
[260]
five thousand dollars here just no match
and earned eight percent on your money
[263]
so, in other words, it's not a 100 percent
rate of return. You actually have more
[267]
money without it if you had earned what
the market was actually supposed to do
[271]
and you weren't in some crappy mutual
fund. So what I'm trying to say is the
[276]
employer match is great. I'm not saying
it's a bad thing. You have to take into
[280]
account but you have to take into
account everything else that is in the
[284]
401k just to determine is the
employer match worth doing
[288]
this. In other words you have
to take into account the looming tax
[293]
liability in the future. You have to decide am I really going to be taxed
[297]
at a lower rate in the future? Is that
really going to happen? If it's not, well
[302]
then you have to take that into account
against the employer match. Say okay I
[304]
know that I do this I may pay more taxes
than if I did something else. So that
[309]
has to be in there. The fees - there's
many hidden fees in the 401k you
[312]
don't even know what you're paying in
fees. That immediately gets taken out. I
[317]
had another guy who was his the employer
match was just large enough to pay the
[320]
exorbitant fees that were involved in is
401k so you have to take that into
[325]
account. The fact that you could probably
go somewhere else and have less fees
[328]
than in the future. It could be also
taking to account the lack of use of the
[332]
money and the penalties and the
stipulations there so you can only leave
[336]
it in there for a long time. So what I'm
saying is you have to compare all the
[339]
problems that are inherent with a 401k
and compare that to the fact that you're
[344]
getting a match and if you feel that
getting the match overcomes all of those
[350]
problems, then do it. Please do it. I think
that's great for you. If you're somebody
[354]
who says you know I'm afraid the taxes are
gonna go up and I'm gonna be a
[357]
higher and more tax liabilities the fees
are too high the returns inside the 401k
[362]
are not known to be as good as
what you might be able to get elsewhere
[364]
if you were to use it on your own but
the fact I can't invest elsewhere on my
[368]
own and real estate and other things. If
you take all of those into account then
[372]
you might say no that's not even worth
getting the match I'd rather take my
[374]
money and go use it elsewhere to produce
return. So once again, the match is the
[379]
only good redeeming thing about a 401k but that doesn't mean it's free
[384]
money 100 percent rate of return.
You always have to compare it to what
[387]
else you could have done with that money.
Make sure it's really what you believe
[391]
in and what you want to do and then go
for it
[393]
but if not then take control the money
and go use
[396]
to go produce what you feel is
what's right to do. And remember nobody's
[401]
gonna build your Financial Freedom for
you so let's get to work. We'll see you
[405]
in a couple weeks.
Most Recent Videos:
You can go back to the homepage right here: Homepage