Jerry Fetta- How Your 401k Could Be Costing You $3.7 Million

The 401k was invented for one purpose and is now used for something entirely different. The found of the 401k, Ted Benna, now calls it a monster and does not recommend or use it. I am going to share a real story from a real client so that you can see the truth behind your 401k and gain an understanding of the other options that are out there.

My client wants to invest in his next real estate deal. He and I are on the phone reviewing the numbers. The strategy is for him to refinance out of a current property and use his savings to get into another apartment building. It’s exciting as we go over the numbers, but something stuck out. I mentioned to him that he is saving $4000/mo right now, but if he were to stop contributing to his 401k he could get there almost 50% faster. You see, real estate is great, but you have to consider how much of your savings you’ll deplete, what the cash flow will be, and how long it will take to build back up again for the next investment.

His first retort back was “what about my match?” Great question! The 401k match is for the benefit of the employer, the IRS, and Wall Street, not the employee. We began to talk numbers. By matching, he will secure the promise of the employer to match money going into the 401k. But really, there is no match until he actually begins to cash out the money. Why? Because until then, it is just paper profits that could disappear at any moment. It’s basically like an IOU that may or may not be there when it’s time to cash in. The money would perform better outside the 401k by investing it into real estate.

He also began to talk about diversifying and how it’s kind of nice to have something set aside just in case. I saw where he was coming from, but if we were diversifying, wouldn’t we want the alternative to be less risky than the first investment? What I mean is that the 401k is almost always going to lose money. I’ve seen only a few circumstances where that isn’t the case. Let’s break it down from a numbers standpoint.

My client has $110,000 in the 401k currently. 

He has $1800/mo being contributed to it.

Between his current balance and future contributions, he will have $693,200 of “principal” and “contributions” over the next 27 years (the soonest he can use the money). 

He was told the 401k would do 11% annually, even though his statement only showed a 3% return, so I went with the S&P 500 benchmark. Which was 9.75% over the last 27 years. 

Not bad! he would have $4.3 million by the time he is 60!

Oops that doesn’t include fees. Let’s assume 1.5% annual management and administrative fees for the 401k and the underlying funds. 

Now he only has $2.9 million left! That $1.9 million in fees over the next 27 years! 

There is still 1 major issue we haven’t addressed. Taxes. Because the 401k is considered “deferred compensation”, it will be taxed as ordinary income, not long term capital gains, upon the withdrawal stage. Well my client is going to be in the 40% tax bracket when he is in his 60’s. So that means he will lose another 40% of his money.

Now he has only has $1.1 million left! 

So wait, he started with $693,200, turned it into the $4.3 million and after Wall Street and the IRS got there share he only has $1.1 million left? That’s less that 1/3 of the balance that he gets to actually keep!

But he still made money right? Not quite!

On paper he made 1.725% per year. But there is another factor that doesn’t show up on paper. Inflation.

If inflation is 4% (which it is), then he actually lost money.

The inflation adjusted value of his $2.9 million before taxes (after fees) would only be $986,559.

Then we have to pay taxes.

That leaves $591,935. 

That is a -.583% annualized return! 

Follow the money. Who benefits from the 401k? Who gets paid no matter what happens? Wall Street gets their fees and the IRS gets their taxes. You aren’t a priority. Follow the math and follow the money. If you own a 401k right now, you need to look at the numbers and find out if you’re really making any money on it. These numbers weren’t shown on my client’s statement and the only way he would have ever found out is if someone reviewed them with him. That’s what I did and I can do the same for you. Click here if you’d like to schedule a call to see how much money you can save by avoiding your 401k.

Own Your Potential,

Jerry Fetta

Grant Cardone Certified Coach

Jerry Fetta helps his clients build wealth so that they can eradicate poverty in their own lives and own their potential.

He believes scarcity and abundance cannot co-exist and that the way to end poverty is to help you build wealth.

You were not created to spend 40+ hours per week serving the 40-year-to-life sentence trading your precious time for money just to live in mediocrity.

However, the truth is that time and money must be exchanged. It just doesn’t need to be you making the exchange.

Jerry helps his clients create wealth that exchanges time and money on their behalf. The only way to do this is to make more money, keep it, and then multiply it.

His clients see a 30% increase in income, a guaranteed increase in savings rate, and 8-12% fixed annual returns on their assets in the 1st 90 days of working with him.

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