Anyone who plans to retire in the future has wondered at one time or another, “Have I saved enough?”
The increasing answer for most Baby-Boomers is “probably not.” And the threat of a postponed retirement is getting worse.
Gen-Xers and Millennials could even be worse off. Read on to find new solutions to this concerning problem.
The Story
Most retiring Americans now rely on 401(k) accounts to fund their golden years.
This is a huge shift from just a few years ago when most retirees could count on predictable, constant streams of income from traditional pension plans.
This post-ERISA “make-your-own-retirement” experiment is just now showing its ugly effects in the lives of those who trusted it.
If you’ve read Garrett’s best-selling book, Killing Sacred Cows, you already know where we stand on 401(k) plans. And we’re not alone. A quick search for “401(k) failure” will yield hundreds of results from well-known publications.
But perhaps the biggest indictment comes from the inventor of the 401(k), Ted Benna, who says, “it fails many Americans.”
401(k)s are a failure for 3 main reasons:
- The account was designed to be a “savings plan” — but most plans only allow you to invest in the stock market. That adds risk and is not “saving.” Volatility and negative return years have killed the growth of most nest eggs.
- Lack of control. You have very limited access to or control of your money. Basically, the money is locked away from your use until retirement. In the meantime, other people are using that money over and over to make themselves rich (not you).
- Fees. Lots of them. And mostly hidden. John Oliver said on a recent “Last Week Tonight” TV segment that exposed 401(k) fees: “Think of fees like termites; they’re tiny, barely noticeable and can eat away your [expletive] future.”
Key Details
Here’s what that means by the numbers:
According to Investopedia, the average 401(k) fee is 1.4%.
If you dutifully tuck away $1500 per month for 30 years earning a steady 7%, the fees alone will rob you of $374,000.
It’s not that you actually pay that much in fees. The key is that fees rob you of potential compounding growth. This is what we call “opportunity cost.”
Because just like compound interest makes your money grow exponentially over time, compounding fees erode your wealth exponentially over time.
The good news? A simple 1% reduction in fees can add an additional 10 years to your retirement income.
The bad news? It may be too late for many Americans.
A study done by the U.S. Government Accountability Office (GAO) last year found that almost half of American households over 55 years old have no retirement savings at all.
And those who do? They only have enough retirement savings to give them a $310 per month retirement income.
Oops! What happened to those fancy 1980s & 1990s projections?
The Bigger Picture
The results of this dilemma are hitting new retirees hard.
In 2012, 29% of American seniors cited the fear of running out of money in retirement as their number one concern.
Earlier this month, the Journal of Accountancy reported that this number has now jumped to 41%.
Clearly, the implications are widespread.
As Baby Boomers continue to flood into retirement age, many will be forced to stay in the workforce longer. They’ll be competing for jobs normally held by entry-level workers. They’ll require more assistance, both from government and family support groups.
Winners and Losers
Losers are those who are trying to retire now under the old accumulation model.
And this may just be the start of a bigger trend.
You see, most people peg their retirement on a sequence of events related to the “accumulation game.”
The accumulation game goes like this:
- During working years, save a pile of cash and grow it in more aggressive investments.
- Then, at retirement age, convert that pile of cash into a “fixed-income stream” to provide a steady retirement income.
The problem?
It’s very difficult to find any “fixed-income” investment that yields enough to make this plan work. At least not at the current retirement fund levels.
You see, back in the 1980s, a financial planner might show how a $1M nest egg could kick off $100K per year. Because back then, you could get ten to twelve percent returns on bank CDs.
Not anymore. Not even close.
In fact, one of our researchers uncovered a study that found there’s a ZERO percent chance of earning a 5% return over the next 10 years.
So even if someone dutifully followed their 1980-era retirement plan and now has a million dollars, a traditional fixed income account may only be able to give them $15k-$20k per year in retirement income.
Yikes!
Then there’s the matter of control.
You see, the government actually controls the money in your qualified plan.That’s why if you do a 401(k) rollover, your custodian (bank or brokerage) sends you a check FBO your name. That means “For the Benefit Of” you.
It’s legalese that basically says, “we can’t make this check out to you because then it would actually be yours and we’d have to fine you for early withdrawal.” Instead, they give you 30 days to lock that money up in another qualified plan with a different custodian who must follow the same strict rules.
If you want the money back in your control? They’ll give it to you, but the government slaps you with a big fine and taxes you on the lump sum immediately. This is how the government virtually “controls” trillions of dollars locked up in qualified plans.
While we don’t anticipate an outright money grab, this kind of control is troublesome. It makes these funds far too easy a target if the government ever got desperate enough to freeze (or seize) accounts. With a deficit fast approaching $20 trillion, we’d rather not chance it.
Winners are those who read the warning signs, change their game plan, and stay in control of their money.
What To Do Next
At Wealth Factory, we want you to be in control of your money. This is especially important during times of economic uncertainty like we live in right now.
We also feel that all your liquid savings and retirement funds should be in a secure place, not invested in the stock market as if that were some kind of savings account.
We prefer using the Cash Flow Banking system. It gives you liquidity, preservation of capital, guaranteed growth, and can be used as a retirement vehicle if you want. Plus, it makes 5% returns not only possible, but guaranteed in most cases.
Important Note: Cash Flow Banking is NOT an investment. It is much safer because you aren’t risking your money to try to get a bigger return. You simply get steady, guaranteed growth. Unfortunately, since it is not an investment, the IRS does not allow you to put qualified retirement funds into a Cash Flow Banking account.
We aren’t too upset about that because it’s our firm belief that it’s better for YOU to be in control of your money than let the government control it.
Your Action Plan:
- If you have a 401(k) plan, check your fees. How? Thanks to a 2012 mandate of the U.S. Department of Labor, your 401(k) provider must now disclose all its fees in the prospectus statement that it sends you every year. Still, four years later, 67% of 401(k) owners believe they pay no fees on their retirement account. So if you don’t know what your fees are, check it out, and make any adjustments. Speak to an independent Registered Investment Advisor who’s a fiduciary to get the best advice on how to reorganize your retirement planning, if necessary.
- Consider changing your retirement gameplan from “accumulation-based” retirement to a “cash-flow” retirement plan. If you aren’t sure what that means, we recommend you read Garrett’s book, Killing Sacred Cows, especially chapter 2.
- To see how some people are creating a $30k per month retirement income stream using Cash Flow Banking, check out our Cash Flow Banking course which has open enrollment for just a couple more days at 50% off.
That’s it for this week.
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.
