Layoff Lesson 4 – My 401K Let Me Down

For two decades I have faithfully contributed to my 401K and my Roth IRA with every paycheck and bonus that I have been paid. My reward is a significant amount of principal invested in a portfolio of assets. These nest eggs get to grow in a tax-sheltered environment for my golden years. Without a job, this method of saving for a rainy day is a challenge.

The problem with principal. When we invest in stocks or mutual funds we are generally investing in appreciation. I am placing a bet that the price of the stock in the future will be worth more than the price today. The problem with this approach is that I eat into my nest egg every time I make a withdrawal. Every withdrawal made is against the principal and erodes my future ability to grow my investment.

The solution from your average financial advisor is laughable. Their guidance is that you need to save between 20x and 30x of your anticipated annual expenses when you retire. If you are making $100,000 annually you need to have close to $3,000,000 saved away just to maintain your $100,000 annual income in retirement. God help you if you retire into a recession and your nest egg gets pummeled by a 30%.

The use of the money is dictated by the government. I get the purpose of the 401K and the IRAs. With the implosion of the private pension plan, these investment vehicles were created for individuals to take charge of their own retirement. The money is made to be inaccessible for a reason, and that is not inherently a bad thing. I also want to emphasize that I am a contributor to my IRAs and 401K.

However, as I sit in my office one week after a layoff, I know that when money gets tight, I might need to access my retirement accounts. I will be faced with deciding between supporting my wife and I in our golden years verse putting food on the table today. If I choose to put food on the table today, I will also be paying a 10% penalty in addition to income taxes.

The system has never been tested. Quick history lesson. Before the Great Depression, retirement was not an institutionalized event for the bulk of society. Social security was created in the Great Depression to encourage older elements of the work force to retire and make way for younger generations to take advantage of those vacated jobs. It was a ploy to help boost employment. After World War II the U.S. economy was booming. To attract workers many companies adopted pensions. Companies or the government took responsibility for taking care of employees in their retirement. Fast forward to the 1970s and 1980s. Pension plans became burdens and unsustainable for companies to maintain. The solution was the 401K, the IRA, and the Roth IRA. While my history lesson may be overly simplified the lesson is simple. We have yet to test this new solution with a generation of retirees. We do not know if this is going to be successful. However, all signs point to the Baby Boomer generation being woefully unprepared for retirement.

The solution. The minimum you should invest in your 401K should be your employer’s match. This is free money and no matter the details you should always work to capture free money. IRAs can be a great tax shelter and both the Roth IRA and IRAs can be placed with companies that allow for you to self-direct your investments. You can literally purchase a rental property within your IRA and generate cash flow and benefit from home values increasing. For more information on companies that allow you to self-direct your investments, click here. You can also reach out to us here. We have worked with several companies and have account reps engage us regularly.

You should also work to build up a portfolio of investments outside of the traditional 401K and IRA structure. Rental property, syndicated investments, small businesses, land, self-storage facilities, and a host of other opportunities are out there and available for you to invest in. Not only are these investments designed for some appreciation of your overall investment, but most of these investments come with cash flow today. What you do with the cash flow is up to you. In the good times you can reinvest and accelerate your progress towards financial independence. In the hard times you can fall back on it to supplement your expenses without sacrificing your principal.