Is it possible the financial services industry puts their own interests and profits before those of the American people? Shocking!
I was chatting with a friend of mine one day and the topic of investing came up. She became very excited and exclaimed,
Oh, guess what?! I started investing in a 401(k)!
I congratulated her and then made the silly mistake of asking,
So what are you investing in?
She stared back with a blank look in her eyes,
I just told you, I’m investing in a 401(k).
Wall Street Likes that We Stay Dumb
My friend isn’t alone. Society and the media have pounded it into our heads that investing in retirement accounts is inherently good.
You know what I call that? A blue pill marketing campaign. We have lots of them in our country:
- Owning a home is the American Dream
- The 30-year mortgage is Good Debt
- Going to college will make you Successful
There are holes to poke at in every statement. When you drill down, each of these marketing campaigns have purveyors that profit from its adaption. In a word, the financial services industry and government get to look good, while the rest of us drown ourselves in debt.
Retirement accounts are no different.
No further questions, little lady. Just hand over that money every month and I promise you’ll be rich.
The Agreement We Have With Wall Street
This is the deal we have with Wall Street:
- The customer sends in money every month like clockwork
- They won’t ask questions because they won’t understand the answers
- The customer won’t try to access the money because that’s against the law and the government will penalize them for doing so
- The customer will send money for 30, 40 or 50 years in a row (!)
- When the customer retires, they will ask for the money back. They won’t ever know where it went or how much should be there, etc. If it’s less than they expected? If it’s not enough to live on? Oops!
Every trade, sale or change in the customer’s account results in commissions and fees for Wall Street. If the account is $0 at the time the customer retires, Wall Street is not held accountable.
Holy shit, what a great deal!
5 Ways Retirement Accounts are a Scam
1. It Isn’t Clear What You Purchased
Americans don’t understand the stock market or investing. So whether it’s a 401(k), 403(b) or a Traditional IRA, they will choose funds that have the word “growth” or “value” next to it.
This makes it easy for Wall Street — they put “growth” or “value” next to every fund.
With the advent of robo-advisors, you’d think there’d be more transparency as to what an investor is buying. Unfortunately, it’s just the opposite. Fintech dumbs down investing so much that the investor doesn’t even make a selection anymore! A robot does it for them…
2. The Terms Are Horrible
When a person contributes to a retirement account, they agree to fork over their earned wages and be penalized with a fee if they ever touch the money before turning 59 ½.
Have a medical emergency? Did you discover your life calling and need money to make a move? Did you come across the perfect rental property? Do you want more control over your life and finances and thus access to your retirement accounts?
What you contribute to retirement accounts is YOUR money. Yet you agreed to pay a 10% penalty fee (plus taxes) to access it even temporarily. If that’s not a red flag for a scam, I don’t know what is.
3. You’re Guaranteed Nothing
You could spend decades of your life contributing to a retirement account and have literally nothing to show for it by the time you retire.
The stock market is not a guarantee. NO ONE — not the government, Wall Street or your employer — guarantees you a dime after you’ve invested for retirement for 40 years.
People say this is absurd to consider, but I say black swans happen.
4. They’re Extremely Discriminatory
The majority of Americans invest in retirement accounts through their work. Unfortunately, this means most Americans are at the total mercy of their employers.
If you happen to work for a company that offers a great retirement plan comprised of low-cost, well-diversified funds? Good for you! You’ll be able to retire.
But what if you work for a company that was swindled by a lousy custodian that offers only expensive, terrible funds for employees to invest in? Shoot! Looks like you won’t be able to retire.
This is the math on how fees, which are completely out of the average 401(k) holder’s control, can ruin your retirement:
If you invest only $1k and earn 8%, that $1K will grow to $140K, after 65 years. If the fund charges a 2.5% fee, the net growth is not 8%, but instead 5.5%. So you as the investor get to keep $30K, and $110K goes to the fund manager!
5. The X Factor That Could Change Everything
Money invested in retirement accounts is pre-tax. There is an assumption by all that taxes will be lower by they time you’re 65 so it makes sense to put away money pre-tax.
Key word: ASSUMPTION
The world is getting crazy, ya’ll. Our debt is out of control and China and other countries are determined to kick America off our pedestal.
- What’s to stop the government from taxing all retirement accounts at 50%?
- What’s to stop the government from raising taxes in the future to levels way beyond your current tax bracket?
- What’s to stop the government from moving the age of withdrawal from 59 ½ to 65 or even 75?
Retirement accounts make sense from a policy perspective, Social Security didn’t work out, so the government needs a way to support the elderly who can no longer work.
But from a practical perspective, it’s just too risky. Too many things can go wrong, and too many Americans are so uninformed they don’t even know when things are going wrong. This isn’t democratic, especially when the financial industry profits billions each quarter from this arrangement.
How to Avoid the Retirement Scam
Retirement accounts were set up supposedly because people can’t be trusted to save on their own. Um, thanks but we aren’t morons.
There’s nothing stopping you from investing for retirement in a taxable account. In fact, you actually pay less in taxes GUARANTEED because of the 15% capital gains rate. And sure, you’re investing post-tax dollars, but I’d prefer this any day over taking the bet the government won’t raise taxes in the future.
Has anyone looked around at the financial situation here in America? Not pretty. Increasing tax revenues is the key to many politicians’ plans for the future.
Another thing to consider is your life today could be better if only you had more money. Stop contributing and live the life you envision starting now (but yes, it goes without saying that you’ll always need savings).