Episode #51 – 401k Plans – Big Trouble!


Well, hi everyone it is Dan Thompson again with another wealthy and wise Wednesday, hope everything is going great for you? We are just about this expect some puppies around our house, I am really excited about that, we got a beautiful golden Doodle and she is going to deliver some pups in the next probably week or week and half. Somewhere there, so I will definitely bring them on the video and show you them when we have them.

[00:00:33] You know we have seen the last few podcast and video, we have talked a lot about the economy and market and so forth and I kind of wanted to follow that up with probably one of another potential disaster that we are facing. That is not talked about very often and fortunately people kind of put the blinders on and that is the 401K.

[00:00:56] Now there are several things we can talk about and I might end up having to put this on to several different videos and podcasts because there are so much. But let just see how far we get today.

[00:01:10] First thing I want to talk about is this notion that everyone should have a 401K. Now we all get told the tax deferral-tax deferral- tax deferral is the greatest thing that ever happened, it is the nicest thing our government have ever provided for us but there are some caveats to that.

[00:01:31] For instance I was just recently talking to this 26 years old young guy, young, married, couple of kids, working at a big corporation, a tech company and doing pretty good but he is 26 years old. Now, just based on what you might know out there and what you think out there. Just raise your hand if you think that these 26 years old might be making more money in the future. You think so?

[00:02:05] Yeah, there is a good chance that he is going to be making more money in the future especially if he is aggressive and he climbs the corporate ladder or maybe he decides to open up his own business or whatever. He is going to become more valuable employee as the time goes on as well.

[00:02:22] Well, my question to him is why are you doing a 401K and he really don’t know, he just said he walked in and HR grabbed him and said you should be doing a 401K. No one explained to him that he was probably in the lowest tax bracket he was ever going to be in because as he progressed up the corporate ladder, made more money, his tax bracket is going to go up with him as well.

[00:02:47] And as a result he maybe again in the lowest tax bracket that he will ever be in, so why are you deferring the tax, why defer a tax at 15% just so you can pay it later at 25 or 30%. That makes no sense but it is never talked about, it is just hey, you got a new job, 401K is part of the benefit you should do it and it is never looked at in the term of where is my tax bracket right now and where might it be in the future.

[00:03:19] So that is one thing, the next thing and this is probably going to be the most dangerous of everything. Is that they are not doing very well for us. Okay, Fidelity who happens to be one of the biggest mutual fund management companies out there which also has you know probably millions or different 401K participants in their mutual funds.

[00:03:48] So they get a pretty good statistical record and data as to what is going on out there. Well, they said that at the end of 2017, the average 401K had $97000 in it. Okay, so that was an average, so we got young and old in there. But unfortunately it wasn’t much better for those who were either a few years before retirement or a few years after.

[00:04:16] So people from age 60-69, they had an average 401K balance of %167,000. Now, I know most of you aren’t financial geniuses, maybe some of you are. Congratulations, but it does not take a financial genius to realize that if your retirement is going to be 25 or 30 years, that $167,000 is going to be plenty for you to live off.

[00:04:46] Now, of course you can say they got social security, maybe some has pensions, maybe some have a [00:04:52] benefits, who knows? But still $167,000 could be eaten up so fast in retirement. It is not even close to what we need; you will always talk in terms of a million dollars.

[00:05:07] A million dollars used to be a million dollars, it just doesn’t feel like a million dollars anymore and it just doesn’t do what a million dollar used to do in the past and so it is just not even hardly enough to retire on.

[00:05:19] So if the average out there is a $167,000, people are going to be going through their money quickly and it is going to be pretty sad. Well, fortune magazine went on to report that there are roughly thirteen million 401K managed account by Fidelity.

[00:05:44] So that is the number we are talking about little bit earlier. They are literally millions, 13 million accounts managed by Fidelity and again with that average about you know $70-90000 let’s just say. And only less than 1.06% had a bounce of more than million bucks.

[00:06:07] Okay, .06%, so out of 13 million, that means only 1100 people had balances of more than a million bucks. And out of those very few of them made less than $150,000. In other words, if you make less than a $150,000 a year and you have a million dollars in your 401K, you have done something incredible, exceptional, got lucky, something of that effect because very few accounts have a million dollars in it if you made less than a $150,000 a year.

[00:06:49] However, the other accounts that had more than a million dollars in it or at least a million. These people made $350,000 or more per year. So really the only people who had a million or more in their 401K were people who made over $350,000 in a year.

[00:07:14] So it is a very small percentage of people who really had a million dollars in their 401Ks at retirement and again a million dollar still isn’t probably going to get you the income to sustain this kind of lifestyle that you want.

[00:07:29] Wow, this seems really depressing, doesn’t it? Well, the point is that the 401K is kind of letting us down. The really unfortunate part is that there are so many people who believed that as long as they are maxing out their 401K, that is all they need to do. That they are going to have plenty of money because that is how the government set it up, that if you max out your 401K and it gives this whopping rate of return and it is managing mutual funds then you are going to be just fine and handy.

[00:07:59] well folks, I hope you are listening loud and clear because it is just not the case and if hopefully you are 25 years from retirement and you can put a breaks on and you can figure out a better way as quick as possible because if you are pushing into that 60 years range, 60-65 years, you may be faced with a host new problems that you didn’t know were coming.

[00:08:21] Now, there is not many things you can do about what is going on in the 401K, there is not many things you can do period because of the fact that lot of people are kind of maximizing their savings anyway, that the amount they are putting in 401K might be all that they can do.

[00:08:39] I am just here to tell you; it is not all you should do because it is not going get you where you want to be ultimately. So these are just a couple things going on in the 401K, now we add to that a [00:08:56] study. Now what is a [00:08:58] study

[00:09:00] analysis mutual funds, real returns and what they do is that they compare that to an index. Now what is an index? Index is like the S and P 500 or the [00:09:11] industrial average or the Russel 5000, these indexes are made up of so many different stock companies and as a whole they calculate what they have grown to dividends reinvested and so forth and we get this index average rate of return.

[00:09:28] once again has proven that not only our mutual funds support to the index but that those people who buy mutual funds tend to not be a very good investor as well and here is what happens in over 30 years. Now think about what is going on in the last 30 years.

[00:09:50] we have had a couple dips, about for instance like the last 10 years, these has been some pretty good years. Obviously they came off of substantial recession and a fairly hefty market drop of 50% but since then we have actually had some pretty good years.

[00:10:09] well in that period of time the indexes have been just under 10% but the average investor out there investing in the mutual fund has done less than 7, okay? And let me just tell you when most advisors sit down with you, they are always projecting and you hear this on a radio from this radio guy as well.

[00:10:33] they are always projecting that you are going to get 10-12%. Well, I am here to tell you and [00:10:39] is here to tell you that over this last thirty years, that is not happening. So you are not going to get your 10 or 12% that you are planning on.

[00:10:49] so don’t take out your future value calculators and calculate how much you are going to have based on 10- 12% because it is just not happening. By the way, that does not include fees, that does not include taxes, that does not include if your 401K also has administrative or fiduciary fees.

[00:11:12] On top of that, it is not uncommon to see a 401K have anywhere between 2 and 4% in fees every year. So think about that, you do 7 fees or 3, you are going to net somewhere around 4 and you still get to pay the taxes on it.

[00:11:29] Long story short folks. You can hear in my voice, you can see where we are going, 401K has not been what it was chalked up to be, it is letting us down, we have got to find better ways, we got to take more control, we have got to find investments and opportunity that are going to outpace what a 401K has been able to do.

[00:11:54] And it tells you, come to that realization there is a good chance you are going to find yourself come retirement time with a 160, 180, maybe a couple hundred thousand dollars and wondering how is this going to stretch for my life expectancy over the next 20, 25, 30-year retirement these days.

[00:12:14] Lot of people are living into their ’90s and money that runs out too soon can just make for a miserable retirement and I am not trying to disparage anybody but really I don’t think most people want to be Walmart [00:12:29] but that is where they end up if they haven’t prepared financially and put themselves in the driver seat.

[00:12:40] you know that is how we really like to talk about this, is making sure that you understand investments that you invest in opportunities that you control your ship and unfortunately just dropping the money to a 401K isn’t quite the answer.

[00:12:55] so there are better ways and of course we talk about these better ways on our podcast, on our videos, in my book, make sure you subscribe to all these so you can stay informed and make sure that you don’t fall into this category.

[00:13:12] Okay, that is it for this week, good to talk to you. Please reach out with any question and again if you don’t have our books and our podcast and our videos, get on it so that you can always be an informed and very wise investor, so that is it for this week, look forward to talking to you next wealthy and wise Wednesday until then take care.

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