Matthew Owens, a well-known Real Estate investor from the Los Angeles and Southbay area, wrote this post on his blog describing some of the downfalls of traditional investing in a 401(k). Many people have been sucked into the system that financial advisors perpetuate and are therefor afraid to take control of their own financial future.  This article clearly articulates specific reasons traditional 401(k) investing is a losing proposition as well as suggests some ways to invest in retirement without missing out on retirement tax benefits. Here is the article…

“Most of the population still believes in old financial philosophies that are no longer relevant and reliable.  The vast majority of the working public thinks investing is risky and you should invest in mutual funds, diversify in stocks and bonds and hand your money over to a money manager.  That is traditionally deemed the right way to build your retirement and invest.  They believe in the social security system, in 401(k)’s, in Medicare, saving, and to work hard for your money.  Your financial advisor has probably told you your entire life that this way of investing provides the lowest risks when planning for retirement.  THIS IS THE WORST FINANCIAL ADVICE YOU CAN POSSIBLY GET.  Investing this way requires the least amount of financial education, which is actually a risk in itself.

Learning to invest is very important, and if you and your family do not invest in your financial education a few things will happen:

• You will be working your entire life.
• You will worry about money your entire life
• You will depend on others your entire life
• The boundaries of your lives will be determined based on how much money you have.
• You will never be truly financially free.

The trick to getting out of that situation is to build a pipeline of cash flow to last you through your lifetime and beyond.  You take your investable capital and invest in assets that produce monthly income for you in good or bad economies.  Once you have been able to cover all of your expenses and more with this passive monthly income, you are then truly financially free.  This is possible; it just takes a strong commitment to financially educate yourself.

401(k)’s are some of the riskiest investments you can invest in for a few reasons.

(1) The typical 401(k) you invest in through Fidelity, Charles Schwab, your job and others allow you very little risk management capabilities.  The funds can go down to zero and you have no collateral to back your investments.  You should always have collateral to counter the risk.  This is why millions of people lost 40%+ in their retirement accounts once the stock market crashed.  If it was invested in cash flow the values do not matter so much because the cash flow keeps coming in.  People invest in stock primarily for capital gains instead of cash flow which can be a huge problem.

(2) A typical 401(k) plan takes 80% of the profits from the plan in fees.  So the investor invests 100% of the money, takes 100% of the risk and gets 20% of the gains.  If any of my real estate deals were structured like this I would be out of business.  On top of that the companies that hold your money (Fidelity, Schwab, etc) get paid in fees if you make money or lose money.  Now if that is not one sided I do not know what is.  They take no risk and get paid.

(3) Taxes work against you with a 401(k).  The 401(k) treats all of the money you are taking out as ordinary income which is taxed at the highest tax rates.  If you were to invest for the long term outside of your 401(k) then it would be treated as long term capital gains which would be taxed at the lower 15% tax rate.  On top of that if you want to take money out early you are slapped with a 10% penalty.  If you are going to have a 401(k) then make it a Roth 401(k) and do the same thing with IRA’s and invest in Roth IRA’s instead of traditional IRA’s.  This is because Roth IRA’s are tax free for life.  Also, Roth IRA’s allow you to self direct your retirement accounts into investments you want to invest in, instead of investing in asset classes the company holding your money will allow you to invest in, which is crucial.  Take control of your retirement.

(4) The 401(k) is for people who are planning to be poor when they retire.  That is why financial planners tell you that you will have a lower tax rate when you retire because they assume you will be making less money.  However, taxes have slowly risen and will continue to rise as the government spending continues to grow.

The truth of the matter is that most of these so called financial advisors tell you to invest for the long term in a well diversified portfolio of stocks, bonds and mutual funds, but only tell you this because their compensation is based on how long they hold your money.  So if you invest in the long run with them then they get paid the most, whether you make money or not.”

Mathew is currently investing in Memphis, TN; one of the most stable and cash flow positive markets in the nation. In a recent article, I described some of the reasons that Memphis real estate is a great place to be investing right now. Mathew Owen’s blog can be found here.

Also, if you are interested in learning how to convert your 401(k) or Roth IRA to  a self directed account, check out FreedomGrowth or Udirect.  Both companies are active in the real estate community and will deal with you promptly.  For those of you that do not know, it is possible to invest in almost anything in a retirement account if you have the proper custodian and set up. Take control of your financial future and stop buying into philosophies that don’t yield results.

- Hunter Thompson

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