Crack in the Foundation 3 -
Your friends that are not broke will be broke when they retire because they accepted Incomplete Information and because they didn't plan on having to pay HUGE taxes on your 401 K/IRA/etc.
You were sold on the "tax advantages" or "deferred taxes" of your "investment" with the theme being that you'd be in a "lower tax bracket when you retire".
If you are in a lower tax bracket when you retire, you will be living a pretty horrible life...because "tax brackets" will double in the next 7-10 years.
OK...so your 401K is really a "rainy day fund" and you know what, that's how 401K's are traditionally used, and that is a GOOD THING.
Inflation kills you.
Fees stomp on you.
Taxes kick you when you are done being stomped on.
Unfortunately, that last piece, that absolute crushing blow...no one ever told you that you'd get taxed on that money, did they?
So even in a BLISTERING HOT bull market that never ends, you can't really end up with more "purchasing power" (inflated money) than you started. At least not if you are an employee earning $120,000 or less per year.
Let's be clear.
You can hope...you can aspire to get your money back that you put in your Rainy Day 401K Fund. I have a 401K just like you do. But it is a rainy day fund that when it's used will be taxed at 33 + 10 + 9.3 = 52.3%. The government will likely "secure" all 401K's "safely" into the Social Security Fund long before I retire...
You can't hope to actually make money putting it into SOMEONE ELSE's BUSINESS. You won't.
Before we go on, I want you to take one last look at the math with different inputs. It's simple.
Let's say you were making a whopping GUARANTEED 10% per year on your investment....You invested the 20,000 in this mega-magic-fund and 21.6 years later, you have 120,000 before factoring out inflation and fees. Pull out the inflation and fees and you are left with about $80,000 of buying power. Take only 1/3 of that out for taxes, and you have $50,000 left.
No wealth here and you had a best-case scenario.
And just in case you're curious: At no point in stock market history could you have invested money for some long-term period and ended up with a 10% average annual return or better ending today. Never. So WHY do I think you should consider maxing out your 401K?
Well IF the company you work for, if the company who invests for your company, and IF the mutual funds THEY invest in...all three of them - are 100% saintly and trustworthy and you trust them with your life, you will end up with the same purchasing power at a guaranteed rate of return of 7% per year....less taxes...or about 2/3 of what you started with 20 years ago.
And that's my reason?
Yep.
That's my reason.
Now, if you don't trust your company, your country, the company managing retirement at your company you work for, the market in general....then there are other avenues....
Face it...
Most people would go buy a car or a ring or a TV.
Value in 20 years?
Zero.
Value of your 401K in 20 years?
2/3 of what you start with normally, break-even in a blistering hot market.
Better than zero.
But...the fact is that after expenses and fees and inflation AND a MASSIVE WITHDRAWAL TAX, it's all pretty meaningless as a tool to BUILD WEALTH.
It's an OK RAINY DAY FUND, though.
And part of building wealth requires a rainy day fund!
But, that isn't going to take care of you for 3, 5, 10, 20, or 30 years if you retire at 65 or 70.
Let's look at the next crack...
Get the "Down and Dumb Report" over the last 18 years...
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Unfortunately, that last piece, that absolute crushing blow...no one ever told you that you'd get taxed on that money, did they?
So WHY do I think you should consider maxing out your 401K?
Most people would go buy a car or a ring or a TV.
