Is It Time to Retire Your 401(k)?

Is it time to retire your 401(k) and come up with another strategy that will actually allow you to retire someday? This may seem like a strange question to most people. Why would anyone want to change the idea of using 401(k)s as so-called retirement vehicles? The answer is very simple: the 401(k) has been a terribly failed experiment that has left an entire generation in financial ruin.  If you think I am being dramatic, consider this; according to a 2011 AARP survey of baby boomers ranging in age from 50 to 64, over 50% of those surveyed felt that they would never be able to stop working. To say that 401(k)s are a failed experiment is an understatement. If you took a flight from New York City to California and the pilot promised to get you from one coast to the other safely and on time and during the flight 50% of the passengers fell out of the plane to their deaths, it would be hard to call that a successful landing even if the other 50% made it. That is exactly what has happened to America’s pension strategy.

Back when my parents were working, the deal was that if you worked for a company for long enough, you were not promised that you would be rich, but that you could never be poor. Basically, the pensions of the past guaranteed you a lifetime income if you were willing to stay with a company or government organization for a certain number of years. During those years all of the money that was being set aside for your eventual retirement date was being managed by experts that were in the business of making sure that there would be enough money when you retired to give you a lifetime of income.

When you retired, your company’s pension manager would set things in motion to give you an income for life, effectively making sure you could never run out of money. Now behind the scenes, the day you retired your company was really out of the picture. What would happen at that point is that your pension manager would withdraw a certain amount of money from the company pension account and give it to another company that was actually in the business of guaranteeing people financial security based on their life expectancy. They would give it to an insurance company who would put the money into an immediate annuity contract that would begin a stream of income for life. This worked beautifully for decades and decades. What happened?

Wall Street realized that a huge amount of wealth was continuing to go to the insurance industry and not to them so they started to spend tons of money lobbying Congress to give people “more control” over their money and “more choice” on how things were invested. When American corporations initially considered this idea, they saw an opportunity for some cost savings allowing their employees to “participate” in funding their own retirement. Ultimately, Wall Street saw an amazing business opportunity to take hundreds of billions of dollars away from the insurance companies and have people invest into something that Wall Street just happened to be in the business of manufacturing…MUTUAL FUNDS. Today Wall Street controls just about all of the pension money in America and they have amassed over $4 trillion in retirement assets under management since they lobbied Congress to make the change.

So what went wrong? Well, in the old days, a professionally trained expert was in charge of your money from the time you started working until the time you retired and then an insurance company stepped in guaranteed you an income for life based on your life expectancy. Today, employees manage their own 401(k) accounts with no help from anyone including their financial advisors, their CPAs or their HR departments. The proof of how badly this important asset is being managed came in a recent financial industry survey showing that less than 18% of 401(k) participants have ever changed their original assets allocation mix from day one on the job! Basically, that $4 trillion stuck in 401(k)s and making Wall Street a fortune every year is the most crucial and neglected asset on the face of the earth. Obviously, the time to start planning your retirement is while you are actively working and saving for retirement, not when you retire and roll your money to an IRA so your advisor can finally help you. No wonder more than 50% of Americans feel that they will never be able to retire. Unfortunately, the numbers show that they are correct.

Next week, I am going to share how YOU can be different not just for the sake of being different but for the sake of being better and how you can do a government and employer bypass and take REAL control of your retirement plan.


Information presented in this blog post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for all readers. A professional adviser should be consulted before implementing any of the strategies presented.

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