Epic Real Estate Investing - This Is Why You Can’t Retire Rich With a 401(k) - do This instead | 1362

Episode Date: October 9, 2024

This episode takes a deep dive into the common belief that a 401(k) is a foolproof strategy for building wealth for retirement. It challenges this notion by exposing the significant pitfalls associated with these plans, including tax implications, hidden fees, and over-reliance on market performance. We dissect the perceived benefits of 401(k)s, revealing how often they come with hidden costs that can eat away at your savings—like reduced salaries or limited employer contributions. To illustrate these points, we share a compelling case study featuring a client named JJ. After reassessing his 401(k) strategy, JJ discovered that by investing in a diversified portfolio of assets instead of depending solely on compound interest, he was able to grow his wealth exponentially. His story serves as a powerful reminder of the importance of proactive financial planning. Throughout the episode, we advocate for exploring alternative investment strategies that can lead to true financial independence, rather than simply settling for what traditional retirement plans offer. We invite you to join a dynamic community of forward-thinking investors who are redefining their paths to early retirement. Tune in for insights, strategies, and actionable tips that can help you take control of your financial future! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Hey, strap in. It's time for the epic real estate investing show. We'll be your guides as we navigate the housing market, the landscape of creative financing strategies, and everything you need to swap that office chair for a beach chair. If you're looking for some one-on-one help, meet us at rei-aise.com. Let's go, let's go, let's go, let's go, let's go, let's go.

Let's go. Think your 401k is enough to retire rich? It's a dangerous lie that we've all been told. I didn't want to believe it. But when I dove into the inner workings and the math of a 401k, I found five reasons that proves it's a plan for people who plan to be poor when they retire. First, the tax-free growth is misleading. It's a perceived tax break while you're making your contributions.

But the taxes on the required withdrawals in retirement are not taxed as capital. gains as they would be in an investment outside the 401k, but they're taxed as ordinary income, which in most cases is double. The tax-free growth is taxed double when you finally get it. Second, the employer matches a little smoke and mirrors too, but it's still free money, right? No. The Center for Retirement Research did a study based on tax data and found that for every dollar an employer contributes to your 401k match. They pay 90 cents less salary. to men, 99 cents less salary to women on average. Translation, it's a wash.

The employer deducted money from your salary so they could contribute to your 401K. Third, there are those fees that add up to hundreds of thousands of dollars off your balance. With 401Ks, there are usually more than a dozen undisclosed fees. There are legal fees, trustee fees, transaction fees, stewardship fees, booking fees, finder fees and others. But that's just the beginning. The mutual funds inside 401ks often take a 2% fee off the top. But here's how the math works.

If a fund is up 7% for the year, they take 2%. Your net return is just 5%. Jack Bogle, the founder of Vanguard, is on record saying, what happens in the fund business is that the magic of compound returns is overwhelmed by the tyranny of compound costs. On the same subject, Bogle has asked the rhetorical question, do you really want to invest in a system where you put up 100% of the capital, you take 100% of the risk, and you get 30% of the return? I'm not happy with that deal.

Fourth thing, your money is locked up for the best years of your life. I mean, you could be enjoying it now and in a way that it will still be there to enjoy when you retire too. The fifth thing, you're in the stock market, which makes your retirement subject to the timing of the stock market. What if you were planning to retire in 2002, having just watched your fourth? 401k lose almost 50% of its value the year prior. Either you would have taken the loss and just said, oh, well, or you would have worked five years longer just to get back to zero. Same thing if 2009 was your target,

having watched your 401k lose almost 50% again the year prior. So do you take the hit or do you work four more years just to get back to either? In fact, between 2000 and 2013, there was no growth in the SMP 500, meaning for 13 years your 401k didn't grow at all aside from the money that you put into it. Wall Street refers to this period as the lost decade. They got a name for it. And when I saw that, I wasn't about to base my retirement on the timing of and the cooperation with the market. People get all broken up when I point these things out.

I mean, I was telling a group of people one time about Ted Benna and Herbert White House. You know them? Yeah, Ted invented the 401K and Herbert was one of the original advocates for enrollment into the plan. 35 years later, Ted was quoted that he created a monster and that the 401k should be blown up. His exact words, blown up. Herbert, in a Wall Street Journal article titled, The Champions of the 401k lament the revolution they started, he expressed major concerns about what he did.

You see, Herbert, good guy. He took on the role to fight the corruption that was happening inside of pensions, and he was stalled for a loop when he discovered the bigger beast, he helped create that swindles people out of their money. Yeah, the 401. A. And that day, a guy in the audience stood up and told me I didn't know what I was talking about. Like, he knew more about the 401k than the guys that created it. You see, it's easier to fool people than convince them they've been fools. So I didn't try to convince them otherwise. So I'm not trying

to convince you either. I just feel compelled to let people know that they have options. Let me tell you about someone who decided to take control of theirs. A few years ago, I got a message from a private client named JJ. He wrote Matt. Thanks to Steve. you and other mentors, I have built an $8 million portfolio in five years. As you know, five years ago, I worked 50 to 60 hours per week and had $200,000 in a 401k and my personal residence. Thank you. I received this text message from a client that came to me wanting financial independence away from his job, but the decision for he and I to work together wasn't an easy one for him. Get a little bit in savings. He was working 50 to 60 hours a week, and the $200,000 in his 401k,

That was everything to him. He was in his early 40s, almost 20 years away from being able to tap into his 401k without penalty. But he was miserable doing what he was doing. And he had the potential and ambition to go out on his own. But he was afraid to take the risk. It would have been a calculated risk. I mean, there were several things that we could do to manage the risk. And I told him two things.

I told him, one, that 401K is keeping you poor and miserable. Two, the bigger risk is not taking one. And people, they get all emotional when I say these things. There's no rule for emotion in this decision. It comes down to two things, of which I do when it comes down to any investment decision. This investment just happened to be an investment in himself, but it's still an investment. First thing, you do the math. Secondly, you calculate and manage the risk.

How you feel about it won't make a difference in the outcome unless you let your feelings get away. You'll still win some. You'll still lose some. But when staying the course is a guaranteed loser, you've got to change course. And that's the choice for a lot of people, a potential win versus a guaranteed loss. So I took JJ through the decision process. Started with how old are you? 43. What's your income?

$145,000. How much do you have in your 401k now? $206,000. Your monthly contribution? 10%. Do you get the employer match? Yes, 100%. Yes.

Up to how much of your salary? Up to 2%. What age do you want to retire as soon as possible? Okay? 60. And what's the return you'd? getting in your 401k right now. 9%.

That's pretty good. The average return in a 401k since its conception is 5 to 8%. So at 60 years, JJ, your monthly contribution will have compounded to $1.6 million. So at what age do you plan on dying? He couldn't answer. So I put in the average life expectancy, 87. To maintain his current lifestyle, he needs $9,600 a month. His 401k will cover half of it.

Oh, and this is the big hidden secret. I asked, what are the fees in your? or 401k. And he didn't know, but he said he'd check. Phoneed me later, 1.5% a year. That's pretty good, too. And it doesn't seem like much to most either, but he's the thing. Just as his contributions compound in the way the financial planner told him they would, so do the fees of which the financial planner did not tell him. If that 1.5% a year reduced his balance to $1.34 million, stealing $260,000 from his retirement. That's more than the average balance of of a 401k a retirement age. So after doing the math, and to get that, JJ, all you got to do is

continue working 50 to 60 hours a week doing something you hate for the next 17 years of your life. And he was noticeably disturbed by that. And I told him, dude, Sith, this isn't that bad. I mean, I typically seem much worse. The national average balance of a 401k is 60 years old, according to Vanguard, is $207,874. According to Fidelity, it's $175,000. So, J.H,000, is in far better shape than the vast majority of 401K holders, as only 1.4% of 401ks have a balance greater than $1 million, which means 98.6% of 401k holders don't have a million dollars at the age of retirement. So if retiring with $1.34 million has JJ disturbed about his future, how does the guy with $175,000 feel? And JJ's situation isn't unique. He's not alone and feeling unsettled

about his retirement prospects. In fact, the issue has been on people's radar for a while now. Time Magazine has run a number of articles over the years questioning the wisdom of putting so many people's retirement at risk to 401ks, such as their article, why it's time to retire the 401k. They've been predicting for years that millions won't have enough money to retire after a lifetime of handing money over to strangers. The statistics prove it. 98.6 won't reach. a million bucks. People's emotional attachment to the 401k is keeping them poor. And if they don't like what they do for a living, it's keeping them miserable too. Gorham Buffett said during a 401k discussion that full-time professionals and other fields, let's say dentists, bring a lot to the

layman. But in the aggregate, people get nothing for their money from professional money managers. Buffett's right. Trusting others with your hard-earned money, it rarely pays off. But the real issue, it goes deeper. The main reasons the 401k is keeping you poor and miserable come down to two things. It's because, one, it's founded on the antiquated principle of saving money. And most people just don't make enough to save enough to outpace inflation. And over two, it's built on the eighth wonder of the world, according to Albert Einstein, compound interests. And again, people don't make enough to save enough long enough for the magic of compounding to create wealth. I mean, if you start early enough, sacrifice for decades, and are able to dodge all of life's unexpected emergencies

and mishaps, the 401k might work for you. But the rub is, your life is over by the time it does. It's the missed opportunities along the way that are keeping you poor, that are keeping you shackled to a job you might or might not enjoy. But you're shackled nonetheless. By this time, JJ was ready for the leap. But he asked, what about the taxes and penalties for early withdrawal? all. Great question, and it's one that everyone has. And within the question alone is another reason why the 401 will keep you poor. First and foremost, I ignore the labels of taxes and penalties because they're big, scary words that stop people from taking brave actions. Once we remove the labels, all we're left with is a math equation of pluses and minuses. JJ had $206,000 in his 401K. There

will be a cost for the early withdrawal for sure. His federal income bracket is 32%. State taxes 4%, and he plans to retire in 17 years and his expected return over that 17 years inside the 401k is 8%. So if he withdraws early, he's going to pay $96,820 in taxes and penalties, 47% of the balance. And he'll receive $109,180, 53% to go out and fund his new venture. He's going to lose 47% of his 401k balance. That was a lot for him to take in. it's a lot of money. He was having second thoughts as any normal person would. So I said, JJ, it's a simple question as to whether or not you think by working together you can recoup $96,820

within 17 years. If you think he can, make the withdrawal and we'll get to work. If you think you can't, leave it there. And I remember, as we were staring at those numbers, I recognized something that I hadn't recognized before. If he withdraws now, it's a 47% hit. If he wins, because of his tax bracket, 32% for federal, 4% for state, it's a 36% hit. So it's not really a 47% hit. It's a net 11% hit in exchange for 17 years of his life. You know the outcome. JJ and I, we put together a custom plan for him based on Einstein's eighth wonder. But with a twist, instead of compounding interest, we compounded assets. And generally, that's a difference between 50 years and five years. Specifically for JJ, that was a difference between $1.34 million at the age of 60 and $8 million now at the age of 48.

I'm getting a small group of aspiring investors together next week to help them with retiring early too. I mean, the market timing, it couldn't be better. So I'm going to load them up with some working capital, some motivated seller leads, and help them close their deals. If you like to join us, go to epicapprentice.com for the details. very least, it's time to take action. Subscribe, like, and share, do all that stuff if you learn something today. I'll see you next time. Take care. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too?

There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings and success to you. I'm Matt Terrio. Living the dream. We got the cash flow.

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