Your 401(k) is a Sham

Do you know what seems to be just as much of a hassle as owning a boat? A pool. I’ve said this for years, every other day, something needs attention. One day it’s a new chemical, the next it’s a broken heater, or the lights stop working. At this point, I’m tempted to just fill the whole thing in with sand.

On a lighter note, AI is advancing at lightning speed. I’ve been experimenting with a music program where you can type in something like, “write me a country song making fun of my high school friends Jason and Bill.” In less than a minute, it spits out lyrics and music that sound exactly like a real song. It’s almost impossible to tell the difference. If you want to try it yourself, check out www.Suno.com. Pretty soon, being creative will be completely outdated.

As you may or may not know, the University of Florida football team lost to South Florida last weekend. Senay was at the game and absolutely heartbroken. To make matters worse, plenty of our family members went to South Florida, and they didn’t hold back their teasing. In the family group chat, her cousin even superimposed a South Florida cheerleader’s outfit onto her photo. 

It's 1980. Bill and Eleanor Gadd, recently retired, are looking forward to a new chapter in their lives.

Bill had worked in the plumbers' union for nearly thirty-five years. His union was important to him. Those were his friends, and it had taken years to accomplish their fair treatment. All that hard work had paid off in the form of a pension. The pension formula looked something like this:

Bill would receive 35 (the number of years he worked) x his final salary x 1.8%, which equaled a monthly pension of $1550 (in today’s dollars, $3100/mo). He also had the option of adding Eleanor to the pension. Therefore, he chose the “joint with survivor benefit"option. This meant she would continue getting the pension if Bill passed away first.

Bill and Eleanor weren’t great savers. They retired with about $50,000 in their bank account and no other investments. They never really trusted the stock market and were happy to see their money grow at the bank. Between Social Security and Bill’s pension, they received $7000 monthly (in today’s dollars).

Each month, the same amount of money came into their bank account. They felt very comfortable.


1.They knew that if one of them passed away prematurely, the other would not have to adjust much, as the pension would continue.
2.Even if they lived to 100, they would still not have to worry about running out of money. (It even had a cost-of-living adjustment!)

Knowing this, Bill and Eleanor felt little stress regarding their retirement finances. They spent those monthly checks on things that were important to them. Instead of worrying about money, they focused on family, relationships, and fun!

Now, let’s take a look at Jack and Dorothy. Jack and Dorothy retired last year (2024). Jack had a good-paying job as a quality control supervisor at a box factory. Over the course of thirty years, not a single box left the factory with even the slightest imperfection. He had won several prestigious awards from the Box Makers Association of America (BMAA). His most prized recognition was the "King of Boxes"in 2012.

In place of his pension, Jack utilized a 401k option offered by his employer. A traditional pension was not even an option. Having saved $700,000, Jack and Dorothy felt some real fear. Their financial advisor informed them they could safely withdraw $2900 monthly from the portfolio (the same $2900 as Bill's pension, above). Yet, their concern persisted.

What if the stock market crashes?
What if we lose all our money?
What if the money runs out before we die?
What if we end up eating cold beans from a can with a bunch of hobos under the train bridge?

“Maybe we should spend as little as possible, watch the financial news, and freak out each evening,” Jack quipped, somewhat jokingly.

Each month, Jack and Dorothy struggled over how to pay their bills. They only dipped into their investments if they had to, and when they did, it was painful. Jack and Dorothy eventually both died of heart attacks, partially attributed to worrying about their 401k.

What is my point in all of this? After twenty years in this industry, I have come to a firm belief:

Switching from a pension model to a 401(k) model is the dumbest thing that’s ever happened in the world of retirement benefits.

It is ridiculous that humans have been forced into using financial instruments they don’t understand or trust for their retirement. Not only that, but everyone around them is trying to scare them. Everyone is trying to get their money. It's big business.

From CNBC: “The Economic Policy Institute recently declared 401(k)s ‘a poor substitute’ for the defined benefit pension plans many workers primarily relied on.”

How did this happen? How did we go from a happy, relaxed pension system to this terrifying investment system?

The biggest reason? Employers wanted to shift the responsibility away from themselves. From their point of view, putting the onus of saving onto their employees takes all the risk away from the employer.

However, the largest reason is predictable: it saved the employer a ton of money. Matching 3% of someone's 401k contribution costs less than giving them $3000 monthly for life.

But this is the problem: humans are notoriously terrible at saving money. They cannot handle this kind of responsibility, and the whole system has been an abysmal failure. Wall Street is getting even richer because it can charge fees on 401(k) s. Annuity salesmen are preying on unsuspecting seniors. Everyone wants a piece of the pie. The entire thing is a complete mess.

So what’s the solution? The 401(k) model is so embedded in the system that I don’t see it changing soon. Wall Street certainly does not want it to change, and it has a lot of money to fight it.

Ultimately, your only option is to work with the hand you have been dealt. Either find a good advisor or learn how to do all of this independently. Both of those options can be challenging. I will never talk to most of you personally. I will do my best with what I have to work with now.

1. Invest your money in a diversified portfolio of stocks and bonds, with at least half of the money in stocks.

2. Take out 5% of the account value per year. Enjoy the money. You've worked hard for this. Your savings days are done.

3. Ignore all financial news. Look at your statement a couple of times a year.

4. Don't change course. Don't try to reinvent the wheel. Don't say things to yourself like, "This time is different." Sticking to this plan has worked for one hundred years, and it's your best bet for the next hundred.

5. Read my articles each week and forward them to your friends.

Now, the good news is that if you handle it correctly, you will end up far wealthier than the pensioners of the past. Considering the growth aspect of stocks, you will end up with way more. You don’t need to have a heart attack. I promise.

Be Blessed,

Dave

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