Last updated on August 30, 2020
Retirement Accounts are a Joke
My friend Sarah called me the other day and said, Guess what?! I started investing in a 401k!
That’s great! What are you investing in?
The phone went silent….
I just told you, I’m investing in a 401k.
They say the difference between dumb money and smart money is the amateur vs. professional investor.
For example, dumb money investors buy stocks when they are expensive; professional investors buy stocks when they are the cheap.
If Sarah were dumb money, she’d be placing bets, watching CNBC tickers, reading The Wall Street Journal and trying to “beat” the market.
But Sarah doesn’t even know what a stock is. She doesn’t understand that a 401k is a type of account through which the government allows us to buy stocks using pre-tax dollars. Sarah thinks a 401k is the investment.
Sarah’s not dumb money, she’s just actually dumb.
But it’s not her fault. The government failed to provide a safety net for elderly Americans so it partnered with Wall Street to encourage every American to invest in the stock market and fund their own retirement.
If you stop and think about it…. isn’t that weird?
There are no personal finance, investing or financial literacy courses in the American public school system. There is no How the Stock Market Works class taught in public schools to educate citizens about something they’ll be expected to do later in life.
It’s almost like they don’t want us to know how the stock market works….
Related Reading: 8 Reasons a 401k is Not Worth It
A Deal with the Devil
So why did the government do this? Is it really just because Social Security failed?
Almost all tax-sheltered retirement accounts allow you to only buy stocks and bonds. Why not land? Real estate doesn’t count? Why not private businesses or durable goods that can be re-sold in the future?
Why is the government facilitating our retirement by saying we can invest only in one asset class?
An asset class they know damn well we don’t understand!
This is how I imagine the deal was made:
Wall Street: How’s social security going?
Government: Not great, we are horrible at managing money.
Wall Street: We manage money pretty well — would you like our help?
Government: No thanks, the stock market is too risky.
Wall Street: Don’t worry, we have a great public relations firm that can put together a marketing campaign to make investing in the stock market (to fund your retirement) seem safe and responsible!
Government: Interesting…. if people fund their own retirements that would certainly take the pressure off us….
Wall Street: Exactly! And the extra flow of capital into the markets would boost our bottom line and we’ll give all the politicians a cut via “campaign donations”.
Government: Sounds good, but how will we entice people to invest? I don’t understand the stock market myself!
Wall Street: It’s easy. We’ll provide professionals the public can hire to manage their investments for them. All the government has to do is create an account that allows the public to invest pre-tax dollars. Our marketing campaign will suggest that taxes go down over time and folks will think it’s a good deal.
Government: But that’s not true! Our current spending rate and national debt guarantees taxes will be significantly higher in the future.
Wall Street: I understand but trust me, as long as we get the media to feature “experts” on air that recommend investing in the stock market for retirement, people will do it. Americans no longer think for themselves, we should know!
Government: Interesting. Let’s add a steep penalty if they try to withdrawal their money before the age of 65. Even emergencies, we’ll never let them withdrawal without first paying us, say 10%?
Wall Street: Great idea! Now you’re getting the hang of it. If people give us a portion of their paycheck for ~40 years and are never allowed to withdrawal, we will make serious dough!
Government: And since every generation going forward will be taught to invest religiously in the stock market, the markets themselves will stay afloat. Sort of like a Ponzi scheme.
Wall Street: Yup! But to protect ourselves, we’ll put all the assumed risk on the investor. If by the time he retires, and the portfolio is less than he expected, we can’t be held responsible. He should have understood the risk.
Government: I agree. And that will help get us off the hook, too.
And beyond Wall Street and the government benefiting from our retirement accounts, public companies also love the arrangement. That’s because over the last 10-20 years, the majority of retirement account fund managers stick to index investing, which is a strategy that buys every public stock available, regardless of price, industry, profitability, corporate practices, etc.
It’s crazy to think that every trade, sale or change in the investor’s retirement account translates to commissions and fees for Wall Street. If the portfolio is worth $100 by the time the person retires, Wall Street will still have made a fortune off that person and our government looks the other way.
Related Reading: The Pros and Cons of Index Investing
Five Reasons Retirement Accounts are a Joke
People complain about evil corporations all the time. So why do they send those “evil corporations” hundreds of dollars every month? Ask an average person which corporations they support through their retirement accounts and he’ll give you a blank stare. Even politically active Americans overlook this irony. In other words, how can you boycott Wal-Mart or picket outside Amazon’s headquarters while also betting your retirement on them succeeding?
You can’t withdrawal your own money from a tax-deferred retirement account. For example, I have about $50k in a retirement account that I would like to withdrawal to fund a real estate project. But if I withdrawal my own money, I have to first pay a fine of $5,000 and then pay $10,000 in taxes (30%). So I’d only get $35,000.
However, if I had been smarter in my 20’s, I would have put away the exact same amount of money, invested in the same mutual funds, but done so through a taxable account. Then now, at age 34, if I withdrawal that $50,000 for my project, I’d only pay capital gains tax (15%) and pay no fines. So I’d have been able to withdrawal $42,500.
You can spend decades contributing to a retirement account and have nothing to show for it by the time you actually retire. The stock market ebbs and flows for decades at a time. For example, you might conveniently retire in 2019, which happens to be the end of a 10-year bull market. But what if you wanted to retire in 2009? Stocks and bonds had been obliterated, and to no fault of your own! Why is it you have to be punished by mistakes made by the elite? It doesn’t make sense that we are asked to enrich Wall Street and risk our nest eggs in the stock market. Globalization is uncharted territory and our national debt has reached levels that should make any logical person want to put their money into asset classes they understand and can control.
The majority of Americans invest in retirement accounts through their employers. Do you work for a company that offers a great retirement plan comprised of low-cost, well-diversified funds? Good for you! But if you work for a company that uses a lousy custodian? What if your only investment choices through that custodian are shitty, expensive funds? What a ridiculous and unfair system!
To illustrate expensive funds — if you invest $1k and earn 8%, the principle will grow to $140k after 65 years. But if the fund charges a 2.5% fee, the net return is not 8%, but 5.5% and after 65 years, $110k will go to the fund manager, and you the investor get $30k.
As previously mentioned, tax-deferred retirement accounts sell the assumption that taxes will be lower in the future. They claim taxes will be lower in the future for all of us, but especially once you retire at 65 because you won’t have ordinary income anymore (thus you’ll be in the 10% tax bracket). Huh?
- It’s very common to work past the age 65
- It’s very likely, given our national debt and mismanaged budgets, that taxes will be higher in the future for everyone
- Nothing will stop the government from taxing all retirement accounts at 40%, 50%, etc. Laws change all the time.
Related Reading: The 30-Year Mortgage is Trash
Retirement Accounts are a Joke
Retirement accounts were set up because people can’t be trusted to save on their own. First of all, that’s bullshit. Why not stress the importance of saving and personal finance in school? How is that still not a required course for every American child in the public school system? Why is the government’s solution to pressure us to invest in the stock market?
Again, critical thinking and asking questions goes a long way. There is no sensible answer to my questions.
I recommend taking education into your own hands. You could save a ton of money on taxes if you invested in a taxable account (15% capital gains) vs a retirement account which is taxed as ordinary income. Not to mention that taxable account gives you more freedom to invest in companies you align with morally, to withdrawal your money to invest in yourself, to simply have choices.
Moreover, if you’re desperate to invest in retirement accounts, consider a Self-Directed IRA. The SDIRA, along with the Roth IRA, are the only two types of accounts I find to benefit the investor himself (instead of just Wall Street). A SDIRA allows you to invest pre-tax money into real estate, commodities, precious metals, tax liens, private businesses, etc. A Roth IRA, which you probably know, is an investment account using post-tax dollars. I’d rather settle up with Uncle Sam today than risk his terms 40 years from now.
And finally, there’s an opportunity cost to retirement accounts. The marketing campaign says investing in the stock market will “safely secure your golden years.” But what about life today? Too many people put off their dreams to travel, start a business, move across the country, etc. so they can “max out their retirement accounts.” That’s just dumb. Save for the future, yes, but don’t forget to live your best life today 🙂