Is It Time to Dump Your 401(k)? 7 Reasons Why the 401(k) Has Failed Many Americans by Pamela Yellen
Retirement planning experts increasingly note that one of the biggest appeals of the 401(k) – the ability to make contributions with untaxed dollars in exchange for tax-deferred growth and withdrawals – is disappearing. The national debt was already skyrocketing before the pandemic spurred the biggest fiscal stimulus programs in history. And a surge in unemployment has lowered tax revenue for federal and state governments.
What do governments typically do to counter budget deficits? They raise taxes, of course! And as taxes rise, deferring them in a 401(k) or IRA means you’ll pay more later – potentially a lot more. Even before the pandemic, people were losing 25 to 33 percent of the value of their 401(k) to taxes.
Most people are shocked when it happens because they forget they’ll owe the IRS taxes on every penny they’ve put in and every penny of growth they’ve deferred.
Because no one knows what tax rates will be in the future, no one saving in a tax-deferred 401(k), IRA or investment account can know what their retirement account(s) will actually be worth when they want to tap into them. Here are six additional reasons the 401(k) has failed:
- The employer match turns out not to be “free money” after all. Companies that offer matches simply make up for it by paying less, the Center for Retirement Research found.
- The employer match isn’t guaranteed. Thanks to the pandemic and shutdown, many companies have reduced or suspended the match.
- Employees typically have to stay with a company four to six years to be able to keep the full match. How’s that working out for the 10s of millions of people now suddenly out of work?
- Fees in 401(k)s and IRAs compound against you and can easily devour 30-50% of your savings, according to Brightscope and the Department of Labor.
- You have little to no control over the money in your 401(k) or IRA – the government imposes numerous restrictions and penalties if you don’t follow their rules to the letter.
- The man who invented the 401(k) – Ted Benna – now says it’s a "monster that’s out of control." In recent years Benna revealed he now puts most of his own money into the savings strategy I advocate, most commonly known as the Bank On Yourself safe wealth-building strategy.
Advantages of this savings strategy include:
- Guaranteed, predictable annual growth regardless of what's happening in the markets.
- A 160-year-plus track record of positive growth that historically has been significantly greater than savings or money market accounts and CDs.
- Security and safety – it’s highly regulated, backed by a multi-layer safety net and bypasses Wall Street.
Life has plenty of uncertainties and unpredictability without adding the worry of whether your retirement savings will be there when you need them.
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