The Failure of the 401(K)

I am one of those guys who did all the “right” things.   I went to college and got a sensible degree….Accounting.   I went to work for a big accounting firm and then went to work for several large companies working my way up the corporate ladder.   All along the way, I dutifully contributed as much as I could to my 401(k).    For a long time it actually looked like I was going to hit my goals with ease.

Then the 2000’s hit.   I stayed in the market with a sensible allocation of funds and by the time the dust had settled on the decade, my portfolio had only grown as much as I and my employers had contributed.  Actually it was a little less.   The real growth after inflation of the S&P 500 for the decade was a negative 3.4%.   Sure the current decade is much improved for now, but how many lost decades can we survive as investors?

Even though my nest egg by 2010 was not as large as I wanted it to be, I was still better off than most people.   I had a successful corporate career and was able to save more than most.  But, I still did not feel secure.   We live in an amazing time where if we take care of ourselves and are genetically fortunate, we can live healthy lives for a very long time.   We are on the precipice of discoveries in human longevity that will allow people to routinely live productive lives well past 100. Maybe I will not be so fortunate, but if I am a beneficiary of these breakthroughs, I don’t want to be worried about outliving my retirement account.

I am far from alone in my concerns.  A 2014 Harris poll found that 74 percent of Americans were worried about having enough income in retirement, and in a survey published recently by the National Institute on Retirement Security, 86 percent of respondents agree that the country is facing a retirement crisis, with that opinion strongest among high earners.

Clearly, something is wrong with the current system.   If even the high income earners are feeling insecure, then we need to rethink our approach.

I think that there is a better way and it only requires a subtle change in how we think about our financial security.   The key to financial independence is not about amassing a particular nest egg in our stock portfolio.   Even most of the high earners will never grow their portfolios large enough to feel truly safe.  Real financial security comes from having a source of income that is not tied to the vagaries of market dynamics or an ability to trade hours for dollars.  There is only one way to truly achieve financial freedom:

Build assets that generate enough passive income to fund your desired lifestyle without ever needing to invade your principal.

Most people will never achieve this goal in the stock market.    The facts have proven this to us over the last three decades.   Luckily, there are other alternatives.   The two most proven paths to financial freedom have been owning a business or owning real estate.

Not only are these the most proven paths, but at least in the United States, the federal government provides enormous incentives to follow one of these paths.   Yes, the 401(k) code does allow you to accumulate tax deferred income, but these incentives pale in comparison to other opportunities in the tax code.

For high wage earners, the biggest expense is almost always taxes and there really is not a close second.   To achieve financial freedom, it is not about how much you make, but about how much you keep and how quickly you can grow income producing assets.   Quite simply, the more you can save on taxes the more you will have to invest in your own future.

I will get into more specifics on this topic in future posts so please click the link to follow my blog if you want to hear more.   Until next time, happy investing!

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