401k is a scam
Reasons why 401k is a scam:
- You don't know what you're tax rate is going to be in 30 years
- You don't know if you're going to be alive in 30 years
- You can't touch your money for the next 30 years without a penalty
- Fees regardless of performance
- "But what about muh employer match, it's free money." Ask yourself, why is this the only example of free money in the entire world? There is no such thing as free money.
Summary: It's all a scam. 401k, IRA, society.
Other example of free money would be credit card cash back. As long as you pay it down every month and don’t change your spending habits, it’s free money.
The 401k match is free money because the government pays for it. Employers get a tax incentive to match employees 401k contributions thus encouraging savings.
In the above examples, the money still isn’t free. Many credit cards lose money for their companies and merchants pay high transaction fees to support the rewards. For the 401k, the govt indirectly helps pay the match like I said.
Don’t really have a dog in the fight. Just pointing out why your logic is silly
If credit cards lost money for their companies, then these credit cards wouldn't exist. But again, there is no such thing as free money. If a company is losing money on something (I don't even think you're right about credit cards losing money, but regardless), then it is being used to lure you in and then rape you somewhere else. Similarly, take a minute and think about why the gubment would pay for something.
The Key thing here is not allowing yourself to get raped. I put my medical bills on a 0% credit card. Got the points that allowed me to convert to $400. Paid off the credit card in full while at 0% and gained $400 off of that. The medical debt I had regardless. Credit card churning is something that many online have mastered the art of. I am not that into it but you are going to have expenses anyway. If you can maneuver thought he loopholes, why not?
For what it’s worth, most of the points and rewards focused credit cards actually lose money (ex. Read the article about the Sapphire Reserve by Chase) but you’re right they use these to lure you into the bank and over time sell you other services
No, the "rewards" are a loss leader. CC companies don't even really make money on interest, they make money on transaction fees from people who pay their bills. When you give up 1% to get people to use your products that you earn 3% on, well that's just a cost of doing business.
The reasons give for why it is a scam are rather tame. No one is holding a gun to your head to have one and you can certainly decide to just never have a 401K. However, I reckon since I will still have to work for an institution (for now), I may as well get the match. The girl who sat behind me did not have a 401K and she's been at the company for five years. I reckon, I am still ahead taking the 4% match.
You lower your taxable income by investing in it so hey, why not?
Considering the poor money habits of so many Americans, I think that the 30 year gap is beneficial to many. Also, to me, I don't solely rely on the 401K. It is just one vehicle. Could be worse, could be a pension. I've seen far more regrets from older people for never investing enough.
Also, if you won't be alive in the next 30 years then so be it. Leave it to your loved ones.
It is good for people that are not financially sofisticated and not disciplined and do not have someplace to allocate that 3% and that full match.. Unless you are a profitable day trader earning 100% a year, or are building a business that will give you a 10x moic over a 5 year period, the 401k is a no brainer, at least for the matching part.
‘Sofisticated’ Jesus
why would you have to return 100% per year to outperform the 4% match?
LOL. All of these "issues" can be solved by rolling over your money into a roth IRA once you quit your job. You seem like an odd dude.
let me guess, T. Rowe?
No, and I won't tell you who I work for, but I'm going to guess that you are familiar with the T Rowe benefits package. If you tell me what they put into their 401k, I will honestly answer if ours is more or less generous.
You can also choose to invest in specific stocks for an additional small fee
I maintain that the Roth structure, while excellent in principle, is actually the worst bet you can make. The federal government reserves the right to change the rules at any point. I firmly believe that at some point in the future the government is going to change the rule and that distributions on accounts that are $x in size will be taxable. Your best bet is to defer taxes as long as possible, even if you believe you will have a higher tax rate in retirement.
This is actually a really good point. Wouldn't be surprised if SS is means-tested in the future. Really annoying that SS is going from an earned benefit into a straight-up wealth transfer.
Did you just watch Fight Club and completely give up on society?
Dude, did you just mention Fight Club?
Yeah bro. Work all your life until your 60s and just keep saving and penny pinching and working. No need to enjoy that money at all. Ty Dave Ramsey
Do what you want as long as you don’t ask me to finance your 60s
No, it isn't.
couldn't have said it better
I look forward to reading more of your posts on ZH, 4chan, and tin hat tumblr
401Ks are a good thing. Everyone's first choice for retirement contributions should be their 401K, at least up to the the point where the company matches your contributions. It is free money. The only parts of the 401K that I would describe as unfortunate, but not a scam, would be the vesting schedules and the hidden expenses. Some companies give you free money but it is not 100% your money for a certain number of years. Another issue with 401Ks today is that many companies are very frugal with the match.
Stop the madness. There is no such thing as free money
The additional contributions are not free - the price is reduced personal liquidity.
Its part of your employee compensation. If you don't take advantage you are effectively giving yourself a pay cut.
your you're your
above, the spellings of "your" are wrong 3 different times.
Dude, you just figured that out now!? Finance entirely is a scam. We do nothing other than shuffle paper while systematically routing from the customer's pocket into our pocket.
Literally used the incorrect "your/'re" in all examples... Good god, you moron, that's statistically improbable even if you didn't know which "your/'re" to use.
Allow me to introduce you to the church of our lord and savior, Mr. Roth IRA:
https://www.bogleheads.org/
Why is this on the front page @WSO
It's not a scam per say, but social engineering to ensure the American public continues to buy treasuries and all the shitty companies included in the mutual fund/ETF choices to prop up our financial system riddled with unsustainable debt.
Also - you failed to mention the most important issue. If America keeps shifting left towards Communism, we could definitely see an additional wealth tax (criminal seizure IMO) on people's 401K's. Elizabeth Warren has alluded to this idea in many speeches.
I like having control over my money personally, and cash liquidity is going to be king pretty soon when this debt super-cycle resets.
The Elizabeth Warren stuff is what prompted my saying you don't know what your tax rate is going to be in 30 years
Funny, Warren's recent rhetoric alludes to a WEALTH tax on family WEALTH over $50MM.
When you say "nobody knows what the tax rate is going to be in 30 years" you CAN'T be referring to what Warren said because 401k Withdrawals are taxed as income, not as WEALTH.
So either you are lying on the spot to make yourself sound smarter or you're so uneducated that you don't know the difference. 401k is not a scam, sorry to disappoint.
Let me first that that anything you can do, you can do either wisely or foolishly. Here are the counterpoints:
"You don't know what your tax rate is going to be"
For most of us, it will be much higher. Not only because career earnings peak around 50 yrs old on average (which would likely put you in a higher tax bracket than when you were 25), but also because the political winds have strongly suggested higher tax rates in future. Not necessarily in the next 2 years or 5 years, but in 20 years, I'd wager that they rise. Just look at the rising organized anger against inequality and the rich. Bernie Sanders opened the floodgates, and now many of his policies have become mainstream talking points for the left (free healthcare, free college, etc.), all of which are impractical without higher taxes; yes, you can take from the military budget and fund most of these initiatives, but gridlock & the right will fight it tooth and nail, leaving rising taxes as the most likely option. Beyond this, if you don't think you'll be making more 20-30 years later, then what the hell are you even doing working (beyond survival)? Or what are you doing on a site like for that matter?
"You don't know if you're going to be alive in 30 years"
Well, pretty much most of your life lies beyond 30 years if you are a young person today, so you'd probably want to make sure that happens, at least for what's within your control...if this fails, the money will go to your parents/kids/wife, etc. as the beneficiaries. Nothing is wasted
"You can't touch your money for the next 30 years without a penalty"
Yes, that's the price you pay for tax free compounding. Let's say you have 25% taxes on your income of 100k, and that you make a one time contribution of 20k to your 401k (just making this real simple for the sake of the example). That 20k, compounded at 7%, will roughly double every 10 years. In 30 years, your 20k will be 160k. Now let's assume it's taxed at 25% and then compounded (so the 20k is now 15k). In 30 years, this will only be worth 120, a full 33% less than what you would have had in the 401k. If you think you can generate a higher rate of return by yourself instead of a 401k, after-tax, go for it, but even the most talented asset managers would struggle with this.
"Fees regardless of performance"
Then pick a good manager. Pick a fund/a couple of funds with long track records and managers you've done your homework on. Or put it in a low-cost/zero-cost index fund. Either way, as it is pre-tax, it'll compound very well over time.
"But what about muh employer match, it's free money." Ask yourself, why is this the only example of free money in the entire world? There is no such thing as free money.
This is literally free money. At 4% match, your $500 will become $1000 in a day with no risk. This is unreal.
Max out your 401k (I believe it's 19k this year), and supplementary money, beyond expenses, invest yourself. With a 100k all in comp, you should be able to do both quite well, and as your salary increases (at a rate faster than the max contribution will), you'll have more and more money you can invest on your own, and touch anytime. The 401k is a fantastic safety net you can count on when things go south, and something you'll appreciate in your golden years. Don't put all your eggs in this basket, but fill up the basket first.
.
Fiat currency, fractional reserve banking, the Federal Reserve, all government entitlement programs, and the entire petrdollar system are all a scam.
If you want to really learn the truth, here is a good starting point.
You're an idiot.
Every stupid point can be refuted with a logical response.
Original post is so dumb that I wonder if it's just trolling. But I'll bite anyway. As someone who has built my WSO career on calling out the scammy elements of things . . the CFA, some parts of the MBA, and even college . . I don't think the 401k is a scam at all.
"You don't know what your tax rate will be in 30 years": true but if you're doing really well then who cares and if you're not doing so well, you can be pretty damn sure your tax rate will be lower than it is today
"You don't know if you're going to be alive in 30 years": odds?
"You can't touch your money for 30 years without a penalty": the idea is that you put away the amount you wouldn't be touching anyway.
"Fees regardless of performance": yeah just like every mutual fund
The employer match might not be free money, but it is money and if you turn it down, you're basically not taking your full salary.
On some level I don't disagree, I try to use it as a motivator to get additional cash flows anyway I can. I don't intend to rely on my 401k, I plan on working until I drop, because the hustle never stops.
I definitely won't have Warren Buffet Money but I plan to copy his i still make money lifestyle.
It's amazing to me that no one on this thread brought up Rule 72(t) and the exception to the 10% penalty. If you take substantially similar payments for 5 years then you are exempt from the 10% tax penalty.
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-su…
Can you elaborate?
Be careful about referencing SEPPs without being specific. Back when I was doing planning the rule was 'the longer of 5 years or until you turn 59.5.' Also, the distribution % was set based on government actuary tables and could be shockingly low. SEPPs are also only one of about a dozen 72(t) exemptions, but most of the others are extremely specific things, like death, disability, being a first time homebuyer, medical bills above a threshold, etc.
AGREED
There is no way that someone will EVER save enough for say, open heart surgery. That and what if you get sick before you save a lot? Like a child? There's no way that HSAs will ever replace insurance, they're a total scam.
The HSA doesn't replace insurance, it just supplements it. Payments you make from it go toward your deductible, so really it really just reduces the sting of the high deductible(basically the gov't is subsidizing it via tax credit).
Also when you retire, you can withdraw the funds from the HSA as if it were an IRA, so in a sense it can act as another account to invest with, when you've already contributed the max to your IRA for the year.
They definitely are not a scam.
lol OP
• You don't know what you're tax rate is going to be in 30 years
o That’s an argument on Roth v. Traditional. Not Tax-Deferred vs. Taxable. As long as the tax rate is greater than 0%, it makes sense.
• You don't know if you're going to be alive in 30 years
o I make my investments based on an assumed time horizon. This point contests my assumption, not anything specific to 401ks.
• You can't touch your money for the next 30 years without a penalty
o And in my financial plan, this is irrelevant.
• Fees regardless of performance
o My fees for index funds are .015%, not an issue.
• "But what about muh employer match, it's free money." Ask yourself, why is this the only example of free money in the entire world? There is no such thing as free money.
o It’s not free. It’s part of your compensation. I choose to receive my full compensation. If you want to receive less than your full compensation, so be it.
If you think not touching your money until 60 is a scam like I do, two reasons to contribute up to the match for a 401k or IRA are:
1) If your company matches you can still withdraw your funds after vest period and pay tax and the 10% penalty which will net more than if you just set it aside. That's another 3% or 6% per year for free that you'd pay taxes on anyways.
2) You can withdraw up to 10k towards a house tax free if it's your first or you haven't owned a place in two years. Not huge but good for rental property down payments every 2 years if you're into the combined income stream thing.
I'd save at least 10k for tax free home contribution and match whatever they give you. If you know the amount matched less your withdrawal expenses, penalty and tax will still be more than putting your money directly aside without the match, take it.
As for the credit card thing, HUGE fan of taking easy $500 rewards for sign up once a year. Easy money.
isn't the first time home owner exemption for IRA only? so for 401k you'll have to rollover to and IRA before distributing in order to not pay the 10% fine right?
If anything, pensions are the bigger scam. But that's a whole other topic.
I need some of Whatever youre trippin on dawg
Going to hold my money in straight cash and real estate until I die like a bawse.
If we all take a deep breadth and relax a bit, you’ll see that OP has a fair point. OP is not against saving or saving for the long term, he just sees the glaring discrepancies. The biggest contention is the 30+ year lockup.
What kind of fund does a 30yr lockup period? Will your 401K even exist in 30 years? I mean think about…the US has an ever growing budget deficit. You cannot borrow indefinitely and not pay back. There’s a lot of gold untouched that can be used. And we all know anything given by the govt can quickly be taken back (e.g., tax deferred savings accounts).
A far better savings vehicle is a fully paid-off home. No one can kick you out and if you need liquidity, you can cash out and downgrade or rent. Of course a paid off home and LT savings are better. But bring a renter with a fat 401K is risky. For all we know, the money could disappear due to fraud, inflation, war or you name it.
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