For a couple decades, the very definition of retirement planning seemed to be putting money in a 401(k) or IRA.
That was the “smart” thing to do. And a booming stock market during the 1990s and early 2000s rewarded people for doing it.
Now more and more people are growing skeptical of these qualified plans — including those people who helped originate the 401(k).
So could the 401(k) be a thing of the past? Let’s take a look:
The Story
Our Chief Wealth Architect, Garrett Gunderson, took a lot of flack for the words he wrote in Killing Sacred Cows — and publicly. Fox News’s Neil Cavuto interrogated Garrett on national television.
That’s because Garrett dared to challenge the darling of middle-class retirement planners, the 401(k), as a wise investment.
But timing was on his side. The same month that Killing Sacred Cows hit the New York Times best sellers list, September of 2008, the economy crashed.
People watched as their 401(k)s and IRAs lost half their value overnight.
And while those losses have since recovered, many people saw it as a warning shot about the unreliable nature of 401(k)s.
Skepticism is growing. And just last week, The Wall Street Journal (WSJ) reported that many of the early backers of the 401(k) have regrets about popularizing the plan.
Key Details
In 1980, Ted Benna was one of the first people to shine light on the obscure IRS tax rule, 401(k).
Using the rule, employees can invest a portion of their paycheck to defer taxes on that income.
Johnson & Johnson, PepsiCo and JC Penney were a few of the early adopters. They began offering their employees a 401(k) plan in 1982. And by 1983, roughly half of large companies were following their lead.
This gave the employee the responsibility of making wise investment choices for the first time.
Before that, companies hired professionals to make investment decisions and employees simply picked up their pension check.
Benna told WSJ this was part of the 401(k)s downfall, especially after two stock market crashes in the 2000s:
“The downturns showed Mr. Benna of Johnson Companies that individual savers have too many opportunities to make mistakes, such as yanking money out during market downturns or selecting unsuitable investment mixes for their ages. He also notes that money managers can charge fees that eat away at savings.
The plans grew popular during the stock market surges of the 1980s and ‘90s. And employers were happy to switch from expensive pension plans to tax-advantaged 401(k) plans.
Another 401(k) pioneer with regrets is economist Teresa Ghilarducci.
Ghilarducci spoke to union groups and Congress to advocate for 401(k) plans in the 1980s and ‘90s. She assured them employees would have enough to retire if they just set aside 3% of their income, assuming the markets would rise by 7% a year.
But as we’ve reported, the markets haven’t cooperated this century.
Ghilarducci admits her math no longer works, and that she was wrong to paint such a rosy picture of 401(k)s, according to WSJ.
Herb Whitehouse also has misgivings. He was part of the team with Ted Benna that introduced the plan to Johnson & Johnson.
After the crash of 2008, Whitehouse’s 401(k) took a major hit. He told WSJ that he could retire if he had to, but not without lowering his standard of living.
At age 65, Whitehouse plans to work into his mid-70s to afford retirement.
For his part, Ted Benna says, “I helped open the door for Wall Street to make even more money than they were already making. That is one thing I do regret.”
Benna also said he doubts “any system currently in existence” will work for most Americans.
On that point, we agree and disagree.
Where’s the Opportunity?
We agree with Ted Benna that no system currently in existence will work for everyone.
But there is a way of investing that works for everyone, and it’s what Garrett wrote about in Killing Sacred Cows.
The answer isn’t to invest in mutual funds full of companies you don’t know, understand, or control.
The answer is to invest in your Soul Purpose — meaning your unique strengths, knowledge and skills.
For entrepreneurs, this means investing in your business first, maximizing your cash flow, and plugging cash flow leaks.
And only then — if it matches your Soul Purpose — is it wise to invest in other areas.
What To Do Next
At Wealth Factory, we teach business owners how to turn their Soul Purpose into their unfair wealth advantage.
If you’re skeptical of the 401(k) and IRA dogma, we’re probably a good match.
Do you want to learn how to invest in your Soul Purpose — and get a free copy of Killing Sacred Cows?
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So why not spend the next year building wealth with us? Click the link above to get started.
Build the life you love,
The Builders at Wealth Factory
What is Living Wealthy Weekly?
Each week we share timely trends, news stories, and current events that affect your life. We help you see the impact, personally and socially, and give you possible solutions to avoid any negative effects. We also give you additional links and resources if you want to investigate further. The purpose is not to be the last word on any topic. Rather it’s to help us all stay informed of what’s going on in the world without letting those events negatively impact your lifestyle. Our goal is to help us all live richer, fuller lives from a position of financial strength. This allows you to weather economic hard times, and seize whatever new opportunities arise in our changing world.
