401k Notes

Russell Bateman
May 2015
last update:

Regarding a common 7% per annum gaining fund where the fees are 2%, you keep 5% and that's normal, right? Yet a compounding calculator tells the story:

You put up 100% of the capital, incur 100% of the risk, and walk away with only one-third of the gain.

Over 50 years and a gain of $100,000, the service takes 63% and leaves you with only 37% of what you could have made if the 2% skimmed off were staying in place.

--from PBS Frontline: The Retirement Gamble.

Why I don't personally participate in a 401k.

  1. Been there, done that, in fact, even in companies with superb matching.

  2. Shelter your income from today's tax rate only to pull it out at a future one? The tax rate rarely goes down, even under Republican administrations (and there won't be another Republican administration in my lifetime anyway).

  3. Risk your retirement capital in funds that can be wiped out during catastrophes like the 2008-2010 Great Recession.

  4. Set aside retirement funds who out-go in terms of rate and amount is controlled by law with a risk of losing some to tax penalties or forfeiture if you screw up as you pull it out.

  5. 401k is a paragraph in a law created to help corporations get in bed with financial institutions and set up an employment enticement of genuinely dubious value while shielding some of their own tax liability. That it became a so-called retirement vehicle was completely accidental.

  6. Guarantee of losing some 63% of potential income as compared to any program you can set up yourself through grossly over-imposed fees and other charges even accountants can't make heads or tails of. (Per 2014 PBS Frontline episode on 401k administration.)

  7. The investment funds are marketed like cars by salesmen in plaid jackets, striped pants and two-tone saddle loafers who are out for their profit and are not legally required to act as your fiduciary, that is, who are not required to put your investment interests first.

  8. Available "growth, value or balanced" funds with reassuring names have demonstrated that they generally fare less well over time than any simple indexed fund tied to the market itself. Index fund fees are tiny compared to what's paid for the privilege of putting one's money into a slick fund.

My and my wife's retirement is done through a vehicle that we don't manage, but which costs us an (admittedly substantial—more than we used to pay into our 401ks) amount per annum using post income tax dollars and purchases a product in the form of life insurance that either of us get in the event of either's demise beginning the day we opened it. Once matured, concurrent with our reaching age 65, we will begin to draw an amount far greater than our Social Security, which we might be lucky enough also to get if that system hasn't been destroyed by then, that's completely untaxable because we

  1. pay for it with post-tax dollars

  2. in effect purchase a product such that any increase in its value is not counted as capital growth.

So, in short, we're not set by any means, but we're set better (we hope and pray) than...

  1. having watched our 401k funds go down the drain back in the Great Recession,

  2. having to pay higher taxes on money we take out on the back end from our 401k,

  3. having to pay any taxes at all except on Social Security (if that's even there),

  4. having to become accounts to figure out how much to draw out from our 401ks each year so that we don't leave money on the table when it's too late to withdraw, or live longer than our resources.