When you look around at people’s lives there seems to be 2 things that show up in most people’s financial worlds. If they aren’t there directly it’s 2 things that the people are working towards. Any guesses? They are both marketed to widely by the largest financial companies in the US. Give up? The 2 things are your 401k and your house.
Chances are you read everywhere how you should be contributing as much as possible to your 401k. Most of these messages are initiated by two groups, the financial companies and the government. Then you add in that your whole life you are told that you need to own your own house. It is instilled in us at such a young age that most people never even question it. They work to get a mortgage, in order to get their own house. I have to ask, is this a good thing?
As I was reading The Best Way to Avoid the Worst Financial Problems from @wisebread it reminded me of the 6 principles of the Evolution of Wealth. Honestly, I have put aside the principles that I originally wrote up. Why? Well I really don’t have a reason, basically because life happens and I’ve tried to let this blog go where it goes. It was the following paragraph in that post that jumped out at me:
I can give it to you in once sentence: Keep the cost structure of your household flexible. That is, arrange your life so that you can react to a fall in your income by reducing your expenses.
This screamed principle #1: the power of LUC. Did I forget the k? No. LUC stands for liquidity, use and control. These are the main features of flexibility. Now let’s look at the 2 most popular financial tools that play a major role in everyone’s financial world.
How does a 401k provide flexibility? Does it provide liquidity, use and control?
- Liquidity – Fail! When flexibility is most important, it is difficult to access the money that you put into a 401k. There are penalties and fees associated with the access as well as probably having to jump through a few hoops.
- Use – There’s only 1. It’s saving for retirement. The money is in your account doing 1 thing, or should I say hopefully doing 1 thing. People loose track of the main purpose or maybe the only purpose of a 401k. Saving for retirement.
- Control – Do you even have any? The government dictates when and how you can access the money. The employer or plan administrator dictates the rules surrounding access and investments. Might you just be a pawn?
How about your house? Any flexibility there?
- Liquidity - Is it easy to get money out of your house? I guess you might be able to convince me if and only if you have a large equity line of credit established. Oh, what did you say? Banks are taking those away? Guess this is a FAIL too.
- Use - You could make an argument for some use here. It provides shelter. It provides some tax benefits. It might provide some rate or return (emphasis on maybe).
- Control - This should be a good one…who controls your house? Let’s see, you need to ask permission and prove that you should be able to pay just to get a mortgage. Then if something bad happens, just when you need there help the most, the bank says ‘NO’. Doesn’t sound like much control to me.
Might the 2 most widely used financial tools also be the worst based on Principle #1 and wisebread.com’s “Avoiding the Worst Financial Problems”?
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I like the pic, I wish I could stretch like that.
Yes agree 100% on your statements. Don’t be part of the herd mentality. Don’t accept what’s stated by general public as gospel, even by a “guru”.
Speaking of guru’s.. It brings me to this blog post:
http://genxfinance.com/2009/12/03/robert-kiyosaki-is-off-his-rocker-again-is-the-401k-really-the-biggest-scam-ever/
Robert is obviously created his post for marketing but there is definitely truth to his statement.
With #3 and control of 401k, you forgot choice of investments can be very limited. It is determined by your employer’s plan. I worked for one company and they had NO index funds (UGH) and the fees were high. If your company does offer matching you are stupid to not at least contribute to match and it should be a portion of your retirement planning. I should be part of your asset allocation, not all of it.
Isn’t the herd mentality interesting? You are exactly right about the investment choices in 401k. I like how you ended it the best “it should be part of your asset allocation, not all of it”. So many people think a 401k is the cure-all to a happy retirement when in fact it has a better chance of being the end-all.
I think this article points out something important. The Roth IRA is such a great tool that should be utilized. It provides liquidity when needed (as opposed to a 401(k) that comes with penalties and taxes and houses which as you said, is very hard to do), use (saving for retirement AND tax free growth if you’re smart about it), and control (you dictate how it’s invested and when you can take it out and move it around). I’m a huge proponent of Roth IRA…is it sad that I don’t have one (just a Roth 401(k))?
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I’m also a big fan of the Roth IRA. I’m actually a bigger fan of either IRA than either 401k. The problem with the Roth IRA is that not everyone can contribute. Unfortunately, with the Roth 401k you give up a lot of the benefits of the Roth IRA you mentioned.
Re: Income Limits: In 2010, that is no longer is true. Take a regular IRA and convert to a Roth IRA.
http://online.wsj.com/article/SB126004888014078557.html
For the most part, I also like Roth IRAs but there is some political risk (just like 401Ks and putting all dem eggs in the same basket)
For me, at least, I look at investing at a much larger macro level. It look at it as an entrepreneur and investor in my assets. Government sponsored retirement options while not awful, shouldn’t be your only options for the more advanced investor.
Cheers!
Well said and thank you for the correction.
I loved this post for several reasons–I’m a big fan of “giving yourself options,” which is just another word for flexibility, and I love the way you’ve defined it.
Secondly, I’m always curious to see how a mantra ingrains itself in people so deeply that they don’t even question it–with the case of homes and 401(k)’s, it’s been going on for so long that no one even remembers what life was like when everyone didn’t want a house.
I think it was Wise Bread that pointed out something that has stuck with me for a few weeks–a home is not a financial decision, it’s a lifestyle decision. Based on the numbers, I couldn’t agree more (and yes, we probably WILL buy a home–when we’re good and ready, but we don’t expect it to be an investment).
Awesome, awesome post.
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Thank you for the comment and good words. Isn’t it amazing how people just believe in something they are told with no or very little real proof?
Maybe I’m naive or just an optimist but I believe that you can truly get a good, positive return off of the combination of your house and your mortgage. I believe that you need both a house and a mortgage to make this work. Having both will also give you a big advantage in regards to flexibility.
I agree with Junkie… looks like that position really hurts!
Anyways, I’m a skeptic of the 401k as well. It seems like such an average financial tool that is used for an average life. Average meaning work 30-40 years, retire, die. But what if you’re someone who doesn’t believe in retirement? Why even use a 401k then?
The house is also a horrible tool for flexibility and like to refer to the large money eating monstrosities as McPrisons. Big houses don’t really add any value and just consume time, energy, and resources. Kind of like someone on parole with an ankle bracelet, your house keeps you stuck in one location.
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