Should I Invest In My 401k?
Honestly, this isn’t a question I’m asked very often. Because most people assume the 401k plan is a good idea. In fact, for most Americans, the 401k is the only type of investing they actually do and if it weren’t for the 401k they’d have no money saved.
But that’s beside the point.
The question posed here is the question of whether or not I should do my 401k.
What is a 401k?
This might sound like a dumb question. But really. What is a 401k? I know. Do you? If I’m reading this thinking “the 401k plan is the investing plan I have at work where I get a free match and it builds and grows so that I can retire” then I’d be dead wrong. Or should I say broke wrong? (Get it?)
A 401k is a deferred compensation plan created by the internal revenue code.
Alright well, what does that mean?
The internal revenue code just means that the IRS says I’m allowed to do it.
But the deeper question is what is a deferred compensation plan? Because in order to answer the question of investing in my 401k I need to understand what a deferred compensation plan is. Because a 401k is simply a type of deferred compensation plan.
Deferred: something that was put off until later.
Compensation: my pay.
So deferred compensation means that my pay is being put off until later. That’s really it.
What’s the effect of that? Well, it means the money I earned I don’t get until later. I will get it later and I will pay taxes on it later.
So the real question becomes.
Should I get paid now or later?
I know my answer. Now. I earned it. I want it. Now.
But if I take a deeper look I can see more than a few flaws with getting paid later instead of now.
First, taxes will be higher later. Don’t believe me? Since 1913, when income tax began, the annual income tax rate has increased by 1.57% each year. Which means my 25% tax bracket will actually be 40% in 30 years. Why would I want to pay 40% in taxes instead of 25%? That doesn’t make much sense, does it?
Second, things will cost more later. What do I mean? Well, inflation. The dollar buys less and less each year. So if I assume a 4% annual inflation rate, that means that the dollar I could have had today will only be worth $0.30 in 30 years.
Third, my taxes will be EVEN HIGHER. Because my dollar is only worth $0.30, I’ll need to withdraw more dollars from my deferred compensation plan. Which means my pay will be higher to offset inflation. If my pay is higher it means that I’ll be in a higher tax bracket.
So by deferring my income I’ve increased my taxes, reduced the purchasing power of my money, and because of that further increased my taxes.
Does that sound like a good idea?
I don’t think so.
But it isn’t that easy. You see, I can’t “invest” into a deferred compensation plan. I can only defer my income into it.
So what am I investing in when I defer my compensation?
That’s the magic question!
What am I investing my deferred compensation into?
Mutual funds! Ding ding ding! We have a winner!
Alright, so what is a mutual fund.
The short answer? It is a financial product created by Wall Street.
We all know who Wall Street is. The large financial institutions who are responsible for literally every single financial crash and war that’s ever happened in the last 200 years. They make money at my expense and they never get caught and if they do they never get reprimanded.
So they sell financial products that I can invest my deferred compensation into.
How do their products work?
Well, let’s look at it this way.
Let’s say I ask you to loan me some money.
Except I’m going to charge you an upfront fee to loan me your money.
Once I get your money I’m going to buy invisible objects.
These invisible objects are known for losing trillions of dollars, but that’s what I’m going to do with your money.
If I lose your money buying these invisible objects, I don’t have to give it back.
If I make money buying these invisible objects, you get any of the extra money I made.
And also you will pay me an annual fee each year to do this.
Guarantees you ask?
Yes, there is 1 thing that is guaranteed. You have to pay me my fee whether I lose your money or I make your money.
What my track record? Well over the last 20 years I’ve only paid my investors 3.8% after my fees and losses. And that’s before taxes and inflation.
Does that sound like a terribly low return for the risk I am taking?
So the title of this article was a little off.
I called it “Should I Invest In My 401k?”
I should have called it….
Should I have my wages paid later instead of today so I can give the money to Wall Street instead?
No. You should not.
By the way, if you read this, and it was eye-opening for you and you want to learn what to do instead click here so you can learn about how I use life insurance to invest in real assets instead of doing the 401k plan!
Own Your Potential,
Jerry Fetta helps create financially educated and wealthy families who navigate their economic futures with certainty and help build prosperous communities around them. If you’d like to experience this for yourself and your family, then get more information about Jerry Fetta and Wealth DynamX by going to Membership.JerryFetta.com