Most people believe that a healthy retirement portfolio starts with a 401(k). This retirement strategy is typically the first investment tool that is discussed up when you meet with any traditional financial brokerage firm, such as Edward Jones, or Morgan Stanley. When people meet with me or any of my staff at A Better Financial Plan, they often go into details on how large their 401(k) is, or how they have an IRA that is about to expire.
And boy, if I had a penny for every time I have to completely blast why a 401(k) is the worst possible investment vehicle and why you should reinvest it immediately, I would have a Dean Vagnozzi lawsuit on my hands. The truth is, the 401(k) really does not work for the modern investor, especially during a time when the stock market and the economy is in such turmoil.
The fact is (and this is often hard to accept if you have gone the traditional financial planning route most of your life) that there are many flaws to the 401(k). In fact, when people first start working with me, they often want to argue about why their 401(k) is and has been successfully working for them thus far.
Unfortunately, they are not successfully working for them. And they could be a heck of a lot better off financially, if they were not so reliant on this product as their only investment vehicle.
Here is why:
Picture this. It is 2020. There is a global pandemic, major societal turmoil, unemployment sky rocketing, heck, even murder hornets are on the way… AND an extremely volatile stock market.
While this blog will speak to the topic of the financial world only, what I just described sounds like a horror movie, doesn’t it?
So here goes. I have said this before, and I’ll say it again. The most popular retirement program in the United States is no longer designed to help you reach that perfect retirement—and in fact, it could cause more problems than it prevents.
You see, the 401(k) was never intended to be what is has become today. And by that, I mean, many people’s main investment vehicle.
The 401(k), which is technically an IRS tax code, was marketed in the 1980’s by a Philadelphian by the name of Ted Benna. His original intention for the 401(k) was to serve as a compromise between the federal government’s desire to tax high-income earners and high-income earners’ desire to decrease income tax rate as much as possible. It was intended to decrease profits in a manner that would ultimately defer tax burden. Now don’t get me wrong, Ted was a good man with good intentions. He was also a very smart man. He created the 401(k) as a creative way to encourage employees to save their money and not be as reliant on social security or possibly, a pension. Which it has, in fact, accomplished.
That said, today’s 401(k) is so fraught with complications, hidden fees and opportunities for bad investments, that even Ted Benna himself has been critical of the retirement vehicle that he essentially “founded”.
On top of that, taxes in the future WILL be higher. We all know that big time tax increases are coming our way, especially given all that we have encountered (so far) during this year alone.
Your 401(k) works by deferring taxes until you withdraw those amounts. Which means, that they more than likely will be taxed at a MUCH higher rate when you are ready to retire and essentially start using your funds.
Unfortunately, what this means for most people is that all of that money they saved while working for 30-40 years will essentially be cut dramatically when they are ready to retire. One, because taxes will inevitably go up and two, because of the volatility of the stock market, which the 401(k) has so heavily relied on. In other words, that nest egg that you have accumulated so painstakingly for the past 30-40 years might be worth half, by the time you retire. Pile whatever that tax rate is, and well, I hate to burst your bubble….
So, what is the solution?
Please, don’t get me wrong, Dean Vagnozzi is not saying that the IRS is something to be avoided (IRS – if you are reading this, we really mean it!)… There are two things that are certain in life, both death and taxes, and neither of them can be avoided. However, I am saying that there is certainly a more efficient way to prepare for retirement than a 401(k).
At A Better Financial Plan, we believe that instead of gaining a huge tax burden, with assets tied up for 30+ years when a client retires, there is a way to have financial liquidity and lower taxes paid at retirement all while earning 30-50% higher retirement savings than with a traditional advisor.
While current SEC laws prohibit me from going into too much detail online about what exactly ABFP is all about or Dean Vagnozzi will have to pay a hefty fine to Pennsylvania, I do invite you to go through our website, watch our videos and read the Dean Vagnozzi reviews from dozens of clients. And then call us at (484) 425.7393.
With offices based out of King of Prussia, Pennsylvania and Marlton, New Jersey, A Better Financial Plan now has 15 employees and thousands of clients. To learn more, please visit https://www.abetterfinancialplan.com/.