Are 401k’s The Best Way To Save For Retirement? | 641

MORI 641 | Saving For Retirement

For Americans, a 401k is the go-to for retirement savings. But has it worked? Do you really get a 50-100% return from your employer’s match? Is a 401k a big hoax? Is there something better? Chris Miles digs into the math and the myth behind the match. He also shares an alternative that could provide AT LEAST 3-5 times BETTER retirement income than a 401k despite losing the 100% match from your employer.

Chris Miles Bio

Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host that has been featured in US News, CNN Money, Bankrate, Entrepreneur on Fire, and has spoken to thousands getting them fast financial results.

Chris consistently teaches audiences how to do what no other financial advisers can or will – achieve financial prosperity, NOW AND IN THE FUTURE, while spending time doing what they love most!

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Are 401k’s The Best Way To Save For Retirement?

This show is for you. Those of you that work so hard for your money. You want your money to start working harder for you right now. You want that freedom of cashflow today, not 30 or 40 years from now but right now, so you can live that life that you love with those that you love. Most importantly, it’s not about getting rich, but creating a rich life because as you are blessed financially, you have a greater capacity to create a ripple effect and bless the lives of others.  

Thank you for allowing me to be able to create that ripple effect through you. I appreciate you guys that have been tuning in, bingeing, and sharing it with others. We’ve even had guests on this show that came here and started working with us because you said, “Listen to this podcast.” Thank you so much from the bottom of our hearts because if it weren’t for people like you, people’s lives wouldn’t change, and that includes yours and your families too. As always, remember, you can subscribe to our YouTube channel, the Money Ripples page. You can check that out. Videos going on pretty much every day. Be sure to check out the additional content we have, not to mention on MoneyRipples.com.

I want to talk about whether a 401(k) is the best place to save for retirement. If you’ve been in this show long enough, you know I’ve poo-pooed on 401(k) so much, but I want to show you and give you the perspective I have and what I’ve seen over the years, and what’s happening so that you can understand this better. The one thing I hear from people still all the time, and it might very well be that you’ve been referred to this show by somebody else saying, The 401(k) doesn’t always work. Here’s why.”

I’m going to tell you the actual reality of the 401(k). Even if you get the match, what’s the actual return you could be getting? Most importantly, what else could you be doing that could beat the 401(k), even if you get a 100% match? Is there something you can do that’s better with even less risk? That’s what I’m going to talk about. Hang in there because there’s a decent amount of information and education I got to give, but I want to make sure that you don’t fall asleep. Stay with us because this is going to be some good stuff. I promise I’m not going to kill you with tons of numbers, but for those of you that do like numbers, you’ll get a little bit of that too.

The Reality Of The 401K  

First and foremost, you have to understand what is the actual return of the 401(k). Your 401(k) is a tax code. Just like IRA, 401(k) or 403B if you have one. It’s the same thing here. These are all tax codes. They surround it creating this little tax definition of what this is. These retirement plans are no different from buying a mutual fund, but they have certain tax rules and implications that go with them.

The 401(k), you can’t touch it until you’re 59 and a half. Secondly, if you do try to touch it before you are 59 and a half, there’s a 10% penalty plus income tax on top of that. They slap your hand from touching your own money. There’s also a 72 rule. If you’re over the age of 72, at that point, if you haven’t started taking out money, you have to take out a minimum percentage each and every year from that age onward, if you don’t, the money that you should have taken out will be slapped with a 50% penalty. Half of that is in a penalty for the money you should have taken out if you didn’t.

401k doesn't win. It could potentially, but it can't win using mutual funds. Click To Tweet

Those are some of the basic rules. There are rules about how much you can put in. Most people in a 401(k) plan can’t put in more than about $20,000 a year now, plus whatever match they add to it. Many people will say, “I’m trying to get that money in but it’s tough.” I want to give you the best benefit of the doubt. I want to give 401(k) the biggest light and then give my investments the not-so-great light to play devil’s advocate here, which I love to do just to show you that 401(k) doesn’t win. It could potentially, but it can’t win using mutual funds.

Long Term Returns 

Here’s why. The S&P 500, for the last 30 years, is the index for the stock market that most people will use as their benchmark. Now, the S&B 500 is only averaged about 7.75% for the last 30 years. That’s without fees coming out. Understand that most mutual funds that you pick do not even get the average S&P 500. More than 90% of mutual funds out there underperform the stock market.

This is something that even I learned twenty years ago as a financial advisor thinking, “That’s interesting. Why are we paying additional fees for someone to get us less returns than if we could just put the money in the stock market ourselves?” This is a direct quote from what I learned as a financial advisor, “You lack the time, the training, and the temperament to do your own investing. Therefore, give your money to us. We are the experts, you’re not.”

Maybe that last little part, I threw in there, but that’s essentially what they’re implying. You don’t know what you’re doing and you have too many emotions. You’re going to make bad decisions. Let us do it for you, which means that we won’t be buying and selling. We’ll be leaving it in there. Let it sit. Don’t do anything and let it ride the waves and hopefully, you come out on the up wave when you get to retirement, not on the down wave when the market crashes.

At 7.75% is the S&P 500 return for the last 30 years. If you have a 401(k), you are also paying fees. You may not be paying the typical sales charges or what they call load charges as you do with a normal mutual fund, but you do pay what they call admin fees or 12b-1 fees and things like that. There are so many different fees that come out of a 401(k) that they can use. In most cases, these fees, even if you work for a massive mega huge company like Amazon, Google or something like that, where there are hundreds of thousands of employees, even then you’re probably paying between 0.5% to 1% in fees.

Many 401(k) plans might even charge between 1% and 2%. There are even some 401(k) plans that charge even more than 2%. It’s ridiculous. Those do not even get factored into the returns that they state when you get your little statement saying how much you made. Think about it this way, most mutual funds don’t even get 7.75% and secondly, it’s not too uncommon to have at least about a 1% charge on your 401(k).

MORI 641 | Saving For Retirement
Saving For Retirement: Why are we paying additional fees for someone to get us less returns than if we could just put the money in the stock market ourselves?

 

I run the number saying, “What would happen if you got this at 6.5%?” I want to lay the groundwork for people to know why I come up with these numbers because 6.5% for a lot of people is like, “That’s low. The stock market does 10% or 12%, doesn’t it?” No, it never has and it never will. Not over a long period of time. Short periods, yes, but you can’t trust that. That’s like taking a snapshot and it doesn’t look right. It’s not the truth. Long-term returns have always been right around 7% to 8%. That has been pretty typical for the S&P 500. That means you’re lucky to get 7% so I did this at 6.5%.

What I did is I showed first that I wanted to take someone who’s making $100,000 a year. They’re putting in 6% and they get this 6% match. They get the full 100% match. I know that’s dying out. Many people might put in 6% to get a 3% or a 4% match, sometimes a 5% match. It’s becoming more and more rare to find a 100% match anymore. I want to show you what that looks like.

At 6% of $100,000 a year, it means you’re putting in $6,000 a year. You run the numbers and what do you get? You’ve got a whopping $551,000 that you’re getting off that money. This is an interest calculator. I’m using Calculator.net. It’s almost $552,000. That’s over 30 years in 6.5%. I didn’t take out taxes because you got to pay those too. I didn’t even factor in inflation, even though I did put a 5% inflation, notice that after inflation, it’s like having $127,000 even after you’ve paid in $180,000 which is awesome. It means pretty much inflation is kicking your butt.

Let’s go to the match. That is a 6.5% return for the match. Understand that you’re not getting a 100% rate of return. Someone will always tell me, “Chris, I get a 100% rate of return. That’s a 100% return every year I’m getting.” If that’s true that means I should put in a 106.5% return to get you those numbers. What if we put in 106.5% over 30 years? How much money are we going to have?

That is $32,607,941, 000, 000 and changed dollars. I can promise you. You will not be richer than Bezos putting $6,000 a year into your 401(k) for the next 30 years. It is not a 100% return. Despite what people tell you, that is an old face lie. That is marketing at its worst. That is not true. It is not a 106% return. You’re not getting a 100% return every year.

This is why people say, “It’s a 100% return. It’s free money. It’s brainless. Shouldn’t I be doing it?” No. Here’s what it is. We got to put in the number $12,000. Remember you put in $6,000 and they put in $6,000 a year. That’s $12,000 a year. The number goes from $551,900 to $1,103,000 and change. You get exactly double at the end. You get a 100% return over time. That means the longer that you have this 401(k), the less the match becomes powerful for you. If it’s just one year, $12,000 make a little bit of interest. You went from $6,000 to $12,000 and change, you’re happy. You made more than 100%. That is absolutely correct, but once you throw in that second year, you go to $24,000. In the third year, it goes to $36,000, and so on.

We have to vet the people that we invest with because we don't want somebody who's just shown up off the street. Click To Tweet

Difference With Mutual Funds

You’re like, “This is just double, but if you do the average return, it gets less and less.” That’s correct. Rule 72 says that if it takes 40 years to double or in this case 30 years to double divided by 72 adds about an extra 2% or so. Now, I did do the numbers, in this case, it gives you about 3.5% more because of how the numbers work. Remember, it’s about $1.1 million. I put this back down at $6,000. What’s your real rate of return? It’s just over 10%. You made a 3.5% extra return, not a 100% return. Is that bad? No. That’s pretty decent. That’s assuming you get 6.5%.

Most people who have 401(k)s, because of the funds they pick and everything else, you’re lucky to get 5% or 6%. Again, I like to play devil’s advocate against my own point. That’s a 10% return, not bad. Could you get that 10% somewhere else? Yes. There’s a company we advertise on this show that has done about 10% or so on average on their own fund. It doesn’t mean it’s guaranteed, but neither is the stock market. What is guaranteed? Those are backed by some more actual collateral in those things. This one is based on 0s and 1s. This is based on stocks that have no inherent value other than what somebody might say it’s worth.

We’ve even seen crazy stuff happen with GameStop. The owner went and sold off his 12% shares in Bed, Bath and Beyond. The thing skyrocketed right before he sold his shares, now it has tanked below where it was a few weeks ago, it skyrockets like 40% and then crashed like 50%. That’s the crazy stuff that happens in the market. Imagine how many mutual funds we’re investing in that thinking, “My balance is going up. No. Never mind, it’s down.” All because of craziness. It’s all news and stuff. It was freaking people out. Some more people sold off than even the GameStop owner. That’s the crazy stuff happening. The market is completely out of control. Even you can do it.

Here’s the thing I want you to understand though. Making 10% on $6,000, you could do that on other investments or even more. Here’s a big difference. In mutual funds, that $1.1 million, you’re not supposed to pull out more than 3% a year because you’re not going to be investing this aggressively the whole time. You’re going to be going into conservative investments to preserve your capital so you don’t run out of money while you’re alive.

What do they tell you to do? Not 4% anymore. That has been disproven long ago. Anybody teaching that, teach you old crap. It’s 3% and I even think that’s high. If you’re younger, I would even say 2%, but 3%, if you’re at retirement age, is what you should be pulling out. 3% of $1.1 million is 33,000 a year because you have a 401(k), you got to pay taxes on that $33,000.

If you lose about a quarter of that, that means you’re left with roughly about $24,000 to $25,000 a year. You’re about $2,000 a month after becoming a millionaire. Congratulations, that 401(k) got you to live on $24,000 a year. That’s before inflation. Remember, I put in that 5% inflation. After inflation adjustment, that’s 255,000, so 3% of 255,000 means you’re living on roughly $7,600 a year. You got to pay taxes on that so that leaves you about $6,000 a year.

MORI 641 | Saving For Retirement
Saving For Retirement: These retirement plans are no different than just buying a neutral fund, but they have certain tax rules and implications that go with it.

 

This is why whenever I tell people and run these numbers every time, it’s pretty much, “Whatever you save in your 401(k) is what you’re going to be living on after inflation from that 401(k), maybe less, maybe more, depending on how many years you have.” If you’re saving $6,000 a year, you’re going to live on about $6,000 a year. Remember, this includes a match. I’m including a 100% match. If you’re saving $20,000 a year, it’s not nearly as good because remember, $20,000 a year, if you got only a $6,000 match on that because you’re max funding it, but they only match up to 6% of your $100,000 wages. Now, it’s even a lesser return.

I did the math on that one. It only adds about 1.38% to be exact return. Instead of 10.08%, you get 7.88% if you put in $20,000 with a $6,000 match. That’s what it gives you on your money. It only adds about a 1.38% return on your money if you max fund your 401(k). Max funding is worse to get the match. You get a lesser return than over here. Here’s the big thing. If I’m only earning 10% on my alternative investments, things that have real estate assets backing it up, I have $1.1 million. It’s paying 10% a year because it pays me cashflow. It’s not accumulated money and try not to live on it.

Again, we leave the principal alone. We don’t kill the golden goose like what happens in the traditional retirement plan. We pull out usually more than what we have and we try not to run out of money before you’re dead. Instead, you try to pull out only the interest, which is 10% of this is $110,000 a year. After inflation, that’s true, and still $25,000 a year. That’s a heck a lot better from saving $6,000 a year than saying, “I saved $6,000 to live on.” We’re living on quadruple that. Does that make sense? It allows us to be able to do more than that. Depending on where you’re invested, you even get some tax benefits too.

Property In North Carolina

The point is that even if they could possibly match up with the dollar amount, you are able to access more cashflow or passive income when you have other investments than even a 401(k) with a perfect 100% match, assuming the market does amazing stuff for you. That’s a big difference. I decided to do some real numbers too. Let’s take the last three years.

I bought a property in North Carolina back in 2019. I wanted to use this one. I’ve talked about other properties, but I wanted to use the one I haven’t used on this show before. I decided to update my numbers. I recorded it all. I put $27,000 down on this property with closing costs. Anybody who’s showing you numbers on real estate should include the total cost. Closing costs, you don’t get back. $27,000 is what I paid for that investment. I wanted to compare that to what I had done, if I put in the S&P 500 and got everything, putting into a spider fund as they call it with low commissions. I would have made a 42% rate of return on my $27,000 in the stock market over the last three years.

That means my $27,000 would have become $38,400 or a gain of $11,400. 42% over three years is pretty amazing. That’s above average returns for the stock market because 2020 includes those years where the government and the Feds pumped in more money into the economy than we’ve ever had pumped into in a short amount of time before. It’s record-breaking, throwing that money in to boost everything up, which includes some real estate and it includes the stock market. It drove it up.

Anybody showing you real estate numbers should include the total costs. Click To Tweet

The stock market would have done 42% for me. That would be around $38,400. Granted if I’m in the stock market, I’m going to pay taxes on that $11,000. On my property, we paid down $4,000 on the mortgage payment or equity is what I’ve gained from that. I’m looking at it if there’s no appreciation. I’m breaking this up. That’s $12,000 in cashflow and that’s a little bit low. I round it down again. That means I made $16,000 out of 27,000 in just three years. That is a 60% rate of return on my money, but that’s not it.

We did have an appreciation, didn’t we? Just as it drove up the stock market, which is driven up by money being pumped into the economy a lot of times, it also drove up real estate prices. Not as much as the stock market in some ways, but it drove it up. It gave me about $43,000 of extra appreciation. I round it down from what I thought it was worth. $59,000 is my total gain from $27,000. That’s a 218% return in three years. If you average that, that makes it about 70% per year.

If you look at compounding returns, it’s more like 60%. Regardless, 218% over three years beats 42%. This is with a rental property. This net of expenses. It is my actual gain to be. Those were my returns. Are those returns guaranteed? No. In fact, I wouldn’t even expect appreciation to even look like that normally in the real estate business.

Because I put 20% down on that property, even a 3% annual gain on appreciation, which is very low, gives me a 15% gain on my money because I only put 20% down. I get a five times multiplier on that. Even if it’s only 3% a year, it’s a very low appreciation for the real estate game, that would still give me 45% on top of my 60% which would still put me over 100% over three years.

When people tell you that you can make 20%, 25% and 30% in real estate, people say, “That’s too good to be true.” It’s reality. It actually happens. There are other alternative investments that we do that might pay you a certain set return. They’ll keep a lot of the gains and the appreciation, but they’ll give you an X percent. Some of those funds will give you X percent or so percentages of the profits.

In syndication, we invest in apartment buildings and self-storage. Some of them will give you growth. Some of them will just give you a certain percentage, and that’s fine too. That’s why when I say 10% for alternative investments, I’m going on the conservative low-end. Most of our investments have paid well over 10%. Most of the time, it’s at least 11%, 12%, sometimes in the 20%-plus range. As I said, in the real estate game with my turnkey rentals, it’s a lot of heck more than that.

MORI 641 | Saving For Retirement
Saving For Retirement: Cash flow is what’s really important, and not just the accumulation of money.

 

I have land. We’re buying and selling land and doing stuff on that. That is returning me about a net 60% return on my money. Those are things that we have our clients do. We have our clients look at these different investments, and see which one is the right fit for you. Are these returns guaranteed? Of course, not. Could things go wrong? Of course, absolutely.

Scenarios Where Things Go Wrong 

I’ll give you two examples of something that went wrong. I have two properties in Alabama right now. One of which, the property manager is not doing a good job. Even though I don’t manage the property, I trust the property manager. If they drop the ball, you can guarantee that I’m going to send them a pretty stern email or my wife will or both of us will. We’ll send an email saying, “We need you to step up your game. Something is going on here. We’re getting HOA sending us letters saying this needs to be cleaned up. Can you go tell the renters to clean that up?”

Ideally, HOA contacts the property manager, not us. Sometimes it doesn’t happen that way. Some of that stuff is annoying. Sometimes it’s annoying if they have to change renters and we have to get somebody. Maybe we pick up a month with no rent. That can happen. I’ve had some situations with my Alabama properties where I’m like, “I didn’t quite get my 10% or 12% desired cash on cash return.

I had another client. This is several years back when he bought a rental property. It was a duplex. It was in an HOA as well. Some things happened out of his control. HOA fees went up on him which lessened his cashflow. He had some other issues. For some reason, somebody broke into their place and stole the furniture. I don’t know how that dealt with him. It shouldn’t have dealt with him at all. It should have been the renters’ furniture, not his own, but there’s some stuff going on with that.

Either way, he sent me an email pretty mad. This is about 2019 or 2018. He said, “Chris, I’m mad because I haven’t netted a lot of gains on this property. I was hoping for this much cashflow and it’s less because these extra HOA fees and taxes went up, and I have all these other issues I’m dealing with.” I said, “Let’s look at it.” Over that one-year’s period of time that he was having his headaches, let’s say he didn’t make any rent or he made a little bit of profit or he made none. His property appreciated $60,000. I said, “If you hate it that much, sell it. Get your gains out. You made more than your money back. In fact, a higher return than what you were expecting in the first place.”

The thing is that things can go wrong, but a lot can go right. That’s the beauty of this. The thing is you can go with that 401(k). You can try to go for that match, but what I’ve found is this, 100% of the time people don’t make it. Yet on the alternative investment side, there could be some risks there too. You’ve got to be careful and you got to make sure you’re with the right people. That’s why we have to vet the people that we invest with because we don’t want somebody who’s showing up off the street that’s going to be some hooligan. We don’t want somebody who’s a fraud.

Whatever you save in your 401k is what you're going to be living on after inflation from that 401k. Click To Tweet

We want really good people and good operators that can do good investments for you, and help you get good passive income. It doesn’t mean it’s guaranteed but I’ll tell you, I would rather have that chance of success where most of our clients are very happy with that. Are there some deals that don’t always pay out exactly what they want? Yes. Most of all those deals for our clients are helping them get to financial freedom because it all evens out. They’re getting financial freedom much faster with a 100% guarantee. They can’t do with their 401(k).

We even had clients who’ve saved all those years in their 401(k)s. They came to us later when they were 60 years old. Case in point, you see the interview with Dan Marker coming out with his follow-up interview. He says, “I’m getting $11,000 a month passive income right now after getting my money out of that 401(k) plan from my work. Is it guaranteed? Results may vary and all that stuff. This game is everywhere.

Are we giving investment advice? No. All those disclaimers all apply, but it does mean that people like Dan, Tomomi, the Ostroms from Minnesota, or Louie out in California working in Hollywood, all these people that have been on our show have better hope now because they’re investing in a place that gives them a little bit more control and better returns. Most importantly, not just an accumulation of money but cashflow. That is what’s important.

You have questions about how that would work in your own life. Go fill out our passive income calculator on MoneyRipples.com and reach out to us and say, “How can this work for me?” We’re here for your success. We want a thousand of you financially independent by 2030, if not more than that. Are you going to be that person? What’s it going to take for you to make it there? Go and take action. Follow the whispering or the promptings that you’re feeling right now. What’s moving you, what’s driving you, or whatever the thing that’s speaking to you right now, go and do that.

 

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