Grant Cardone offers what I think is good investment advice.
"I would never, ever invest money in a 401(k)," Cardone tells CNBC. "Why would I go to work, have my employer give me another $6,000 a year, and then take that money and send it off to Wall Street, where I can't even touch it for 30 years? I wouldn't do that."
The popular retirement plans are "traps that prevent people from ever having enough," Cardone writes on his website. "The 401(k) is merely where you kiss your money away for 40 years hoping it grows up."
Rather than focusing on saving, focus on earning — you can't save your way to millionaire status, he says.
"Wall Street is telling you to invest little bits, early. They don't believe in your ability to earn money," Cardone tells CNBC. "People need to show the ability to produce more revenue — not invest it — first. People get rich because they produce revenue, not because they make little investments over time."
And don't just focus on earning — focus on earning big, says Cardone. "Keep stacking that paper until you have a hundred grand in the bank. I know this is very unrealistic for a lot of people, but the reason it's unrealistic is because you've been conditioned to think small."
Grant is promoting saving the money you earn, but counter to most advice, he says to put the money in a good old-fashioned savings account — where your money is accessible at a moment's notice — until you have at least $100,000. Then, you can start investing.
"Put your saved money into secured, sacred (untouchable) accounts," he writes on Entrepreneur. "Never use these accounts for anything, not even an emergency. ... To this day, at least twice a year, I am broke because I always invest my surpluses into ventures I cannot access."
There's more at the link.
I think Mr. Cardone makes very good points indeed. In recent years, when ZIRP and QE have produced risible returns on investment across the board, many people have found they actually made negative returns by the time they factored in the fees they were being charged by their 401(k) management companies. If we follow Mr. Cardone's advice, there's always the risk that we can make a bad investment, but by having so much of a financial cushion to begin with, we'll be able to absorb it and continue with our other investments. We won't have all our eggs in one basket. What's more, if we choose wisely and then lock down our investments so we can't touch them, we're much more likely to see success in the longer term.
Peter
21 comments:
While that works to a point, what about those whose employers match up to X% of their pay when put into a 401k? Yes, I'm in favor of keeping money accessible, but leaving 5-10k a year on the table seems counterproductive to me
I agree. I am only in my work 401K to get the free money that my employer matches. It is better than anything I expect the stock "market" to return.
I'm more concerned that the government will decide to convert all the tax-advantaged retirement accounts into "safe" government bonds after the next big dip. They need money, and that's a good place to look.
It should be noted that this advice works for the disciplined saver. Most people find an "emergency", such as a new iphone, to spend their excess monthly earnings on. A lot of the "retirement" plans are set up to, like tax withholding, remove that money before the earner has access to it.
If you are disciplined, then you can do better having the flexibility. But if not...
In any case, your 401K should not be part of your employer's accounting and should be invested in index funds. Later you can do some gambling with individual stocks, but on your own. The incentives for fund managers and brokers is to trade as that is how they make their money even as the fees eat you alive.
In a contrarian position: I've been participating in 401Ks, both with and without employer matching (mostly without) since the late 80's. And my wife has been investing in IRAs (no 401K, since she quit full-time work to be a SAH mom).
We live in CA. Even with one income, most years we've been in a >34% marginal income tax bracket (Federal + State). Which means that every 1000 dollars we put into our retirement account costs us less than 640 dollars in take-home income.
We've invested in mostly S&P index funds and (lately) target-date funds. Even including the huge dip in 2008-2009, we're well ahead - we'd recovered from that (plus a decent growth rate) by 2011.
And we could *always* get our money out if we were willing to pay a 10% penalty on top of normal income taxes - not ideal, but reassuring. Instead, we tried to maintain a second emergency fund we could hit first, and we've been fortunate enough to never touch the IRA/401K money.
Arguably, we are fortunate - decent income, no major catastrophes - but we're not unique. We live a lifestyle well below what our income would allow - comfortably but not extravagant house, older cars, etc. Our biggest expenditures were getting our kids through college - both finished their undergraduate degrees without debt, though we couldn't fully fund graduate school (did cover living expenses) - and paying down our mortgage.
We're both 57 now. We timed our mortgage so we should pay it off next year. And at 59 (when the 10% penalty disappears) we could live a comfortable life on just our retirement savings (assuming 4%/year withdrawal of assets). At 62, if we wanted to take early Social Security, we could live essentially the same lifestyle as now.
We are *not* investment gurus - we invested primarily in index funds that track the market, and these days are in more-secure but lower-overall-return target date funds. But we were willing to:
1) Put 15-20% of our income into retirement savings (started less, but about half of each pay raise went into the retirement accounts)
2) Live comfortably, but modestly. Buying things we needed and could afford, or that we really, really, wanted and could afford - but only after thinking it over carefully.
Remember that increases in a retirement account also grow tax-free until withdrawn. And that they're only taxed as you withdraw them. Right now, just the growth on our retirement accounts is more than double the amount we put in each year. And it all goes directly to our account. Our marginal tax rate in retirement will be a lot lower than it is now - so that compounded investment growth will be taxed at 10-15% lower than our rate during our working years, and maybe 30% less than if it was withdrawn as a lump sum.
Didn't mean to write such a long screed - but if you're young, I think you're foolish NOT to be putting money into a retirement account. Doubly so if you've got employer matches - they ALSO grow tax free over the years.
And if you're within shouting distance of 59 but still working, there's even less reason not to participate - once you're 59, you *can* get it out at any time if needed. And if not needed, you can save and reduce your overall tax rate at the same time.
Company matching here too...
I've always put in whatever the company would match.
I'm one of those "undisciplined" people who will just piss away the money unless it comes out of my check before I get it.
Yes, the OP says "if you're employer gave you 6000" I took that to mean the match. I can't imagine leaving that on the table. If the government steals my money that's a separate issue (for me). At 54 I don't have enough in my 401k to fund my current lifestyle but I never planned to leave the labor market at least part time) before 65 or later.
"... you can't save your way to millionaire status, he says." I did.
Nothing is impossible, only difficult. All depends on what is worth doing the impossible for.
The stock market is a questionable long term gamble. I read an article a while ago that pointed out that 20 years ago there were about 7000 companies on US exchanges; now it is about half that number. Most from mergers and some died because of technology. But it is a sad state of affairs that there is not much growth in companies on the exchanges.
I agree with Grant, I wouldn't be eligible to withdraw anything from a 401k for 30 years. That's a lot of time for the government to change its rules. I prefer to build personal wealth and my business rather than hope the S&P continues to rise.
Some details;
You arent giving your money to wall st, you are giving it to the govt. They make the rules and more importantly, they are the enforcers.
Other than the oft-mentioned imposed discipline of saving, the 401 exists on only one premise; your tax rate/obligation will be less XX years from now than it is now. Thats it, a gamble. Sort of like offering just one drink to a drunk, not likely.
In exchange for this tax rate gamble they impose all sorts of rules on access to your money; cant take it all, cant take none. What is freedom to use your money worth?
And to those who think they can just pull it out and pay the taxes and a 10% penalty, not so fast. A coworker did just that a few years ago, said give it to me, all of it (minus tax and 10%). They wouldnt do it. Seems there are some other penalties involved they dont want to discuss.
One pitfall I feel that too many people in the prepping community fall into is that they've put all their chips onto everything going wrong.
Now I'm not trying to PollyAnna blow sunshine where in wont, but I don't think it's unreasonable to devote a certain portion of your income into things NOT going wrong.
The opportunity cost then of not investing in something that beats the rate of inflation is the lost compound interest, and if your employer is willing to match said portion then it's worthwhile.
Personally I think the gentleman's sacrosanct $100k in a bank account is at lease as much at risk to rules changes and bail-ins as corporate assets owned in the form of company shares. I also think it's far more at risk to inflation than those same fractional assets.
True, my tax rate may be higher now than when I was working, but that is not the point. The real point is saving for retirement and being self sufficient now that I am retired. I have never "needed" the latest phone, car, boat, or new house. Now I can travel or do almost whatever I want now that I have the time. And the money. If I can average 2% return per year, I should have enough money to last until I'm 105.
I invested in mutual funds in the 401(k) through work for over 20 years. No, they did not offer great investment options, but it did encourage me to save. Also, my employer contributed 3% to my first 6%, a 50% return.
No, the investment is not guaranteed. I rode the market all the way to the top in the early 2000s and then over the cliff, losing about 80% before clawing my way back up before I retired. It is a risk that I took and benefited from it.
Your mileage may vary, but I am glad I had the option.
Regarding those 401(k)'s and similar retirement programs:
Bear in mind, if the government controls access, you can be screwed. They just need to change the rules, which they have done at various times.
Had a friend who lost everything, due to them doing that.
So he says put your money where it is untouchable, even in an emergency and get the bank interest rate.
He says don't invest in a 401K, even though companies that match your investment double your money immediately, or give you some contribution.
I am not sure this is the best advice for most people.
The one about, penalty of 10%, nope it's currently a 20% tag. At least the last 10 years. All claimed to be taxes.
One CAN certainly save one's way to a million. When I retired from active duty in 1955, we had very little in the bank. We had bought our first new home for $89,000 and lived in it until selling it for $405,000 two years ago. I always invested the first 10% of my salary- usually with 5% employer matching. My policy for kids' college expenses was to 50-50 share that investment in their futures. When I retired two years ago at 71, we had a second retirement home nearly paid for worth $600K or so, plus $1.2 Million in investments, plus social security and a modest retirement from a defined-benefit plan. Frugal lifestyle and the discipline to save FIRST, plus a modicum of good luck with no disasters paid off.
TC
Sorry- that retirement from active duty date was 1985, not 1955. Fat fingers or lazy eyes I guess.
TC
And if you pull the money out before age 59-1/2, it not only has the immediate tax penalty, it's also treated as "ordinary income", and you get taxed again on it.
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