The 5 IRA/401(K) Myths that are Limiting Your Wealth Creation Potential

What expectations do you have for your retirement lifestyle? 

If you’re like most Americans, you were probably fed the dream of putting in your forty-hour weeks at a corporate job until you hit your mid-60s. After that, you may be able to retire with a modest pension to supplement your hard-earned savings. 

While this process may have worked for our recent ancestors, we are here to relay a hard truth: the retirement plan that worked in those days may not work so well today. And even if it did, who wants to save financial freedom for the last 15% of their life span when health, nay, life itself, is far from guaranteed?

Several common assumptions regarding retirement planning first need to be addressed. Allow us to enumerate them:

1. Your retirement plan rate of return will continue at the same pace.
   
   For the past few decades, we have seen some significant, nauseating gyrations in the stock markets and a general decline in yield across the board. The returns are not what they used to be in any asset class. 
   
   If you’re willing to roll with the punches, you might score a 6-8% in the index funds over the long term. But that assumes that past performance indicates future performance, which is not the case. I have relatives ready to retire from high-paying, white-collar jobs when the 2008 financial crisis hit. They were forced to defer retirement for several more years.
   
   How about government bonds? As of this writing, a U.S. government bond yields 0.65%. Although they are considered the “safest” asset class, the returns as of this writing are well outpaced by inflation. If your money is in treasuries, it is losing value to inflation more quickly than it can compound.
   
2. $ 1,500,000 will be enough savings for the rest of your life. 
   
   While this may sound like a lot of money today, how far will it go twenty years from now? If the inflation rate for the next twenty years is the same as that of the past, you can expect your buying power to be around a million bucks in today’s dollars when you hit your “golden years.”
   
   Let’s imagine that you are 47 years old right now, retire at 67, and live to the ripe age of 87. If your $1.5 million gives you $1 million in purchasing power, you can budget fifty thousand per year (before taxes) for twenty years in today’s money. 
   
   How about forty years from now? You’ll have a buying power of about $478,000 when you hit 67, assuming the inflation rate is similar to that of the past forty years. 
   
   We look at the case of the 27-year-old who retires at 67 and passes into the next life at 87. His $478 thousand in purchasing power, drawn in even increments over 20 years, will amount to $23,900 per year in purchasing power. Again, that’s before taxes.
   
   How would your lifestyle be affected if your income decreased to less than $30,000 annually? Would you be taking European vacations and spending many of your golden years on a beach in the Caribbean? Would you be able to spoil your grandkids and be a support to your children as much as you had hoped?
   
   And let’s not forget about medical care. Health insurance premiums for folks over retirement could quickly eat such a sizable chunk of those savings draws that there might not even be enough left over for life’s other necessities. For those willing to roll the dice and skip insurance coverage, one medical event could deplete the entire nest egg and end in bankruptcy.
   
   We don’t mean to discourage you with these musings. There are solutions to such problems that we will expand upon later in this article. But please don’t skip ahead just yet.
   
3. Tax deferral will be helpful to you.
   
   Presumably, the main advantage attributed to qualified retirement plans is some tax-saving benefit.
   
   For conventional IRAs and 401(K) plans, the taxes you would pay on your contributions are deferred until you begin drawing on them. So your money will go into the plan without being taxed until you retire and start to use the money, at which point you will need to pay the piper his due.
   
   Do you know how this is beneficial?
   
   If tax rates have fallen by the time you are ready to retire, then super. You will pay less tax than you would have otherwise paid. But what are the odds of that happening?
   
   With so-called democratic socialism gaining more and more popularity among the younger generations, how can we expect tax rates to hold steady in the long term? Nationalized healthcare and ambitious environmental regulations cost enormous amounts of money. 
   
   Suppose we end up with a determinate number of fashionable leftists in positions of power down the road. In that case, it can be asserted with relative certainty that retirement plan tax deferral may be a disadvantage. Even if our country can maintain the status quo, politically speaking, we will likely need to raise taxes anyway. Tax rates in the USA are relatively low on a historical basis. Unless the government engages in some proverbial trimming of the fat, revenue must be raised to cover the massive spending deficits.
   
4. Your pension plan will be there to supplement your savings
   
   Many pension funds are effectively bankrupt. With yields falling too low in “safe” asset classes, pensions are forced to pursue riskier investments. Even so, many are not able to achieve their projected returns. It would be presumptuous to count on receiving a substantial pension after retirement. Even more so for Social Security.
   
5. Your retirement account manager has your best interests in mind.
   
   While this may be the case, it just as quickly may not be the case. Financial planners and retirement account managers make their income in fees that are a percentage of the account’s value annually.
   
   Suppose your retirement account is incurring investment fees, management fees, and/or individual service fees of 3%. In that case, inflation is steady at a modest 2%, and your account is compounding at a healthy 7% per year; you are only netting a lackluster 2% adjusted rate of return. If inflation rates increase, these thin gains could turn into losses.
   
   The problem here is that the incentives of your financial advisor need to be more closely aligned with your own. They get their fees no matter how well your account is doing. We have heard of people trusting their money to a financial planner who did nothing more than invest the account in an index fund (for decades!). These persons were paying exorbitant fees to the planner to do something they could have easily done themselves and with almost zero fees.

The Solution

Now that the bad news is dispensed with let’s move on to the good. You can take control of your retirement account by converting it to a self-directed IRA or 401(K). Then, you will be free to invest it as you see fit with minimal fees (although within a set of predefined rules). After finishing this article, please see our companion piece, “5 Steps to Take Control of Your IRA or 401(K)” to learn more.

To escape the volatility of the stock market, you may choose to invest your retirement money in real estate. If you want maximum control, you may buy and manage your properties. This method also comes with its share of headaches and risks, and you cannot use debt to purchase real estate if you are purchasing through your retirement account. So, you will need a sizable account to make this happen.

Another possibility is to purchase notes (mortgages), but an explanation of this method of real estate investment is beyond the scope of this article. Suffice it to say this investing type requires specialized knowledge to achieve success.

Lastly, our favorite vehicle for retirement funds (naturally) is to invest them passively in commercial real estate syndications for the absolute best risk-adjusted return. You can anticipate a cumulative 15% annual rate of return or more (after fees!) without unclogging tenants’ toilets in the middle of the night. We call that a win-win. To learn more about syndication, please see our article “What is Real Estate Syndication?”

A $100,000 investment with modest $5,000 yearly contributions into passive real estate syndications could be worth over $2,000,000 in 20 years and $30,000,000 in 40 years. 

And with two million invested in real estate syndications, you would likely have a preferred return (similar to a dividend) of $140,000 per year to live off of without ever needing to touch the principal. That way, the principal could be passed on to your successors.

Conclusion

We make several assumptions regarding our retirement that we can no longer afford to make if we would like to enjoy our golden years with a robust nest egg and enough passive income to live our dreams. The time is now to take steps to direct our retirement plans.

And if we do so successfully, who says we need to retire at 67 years old? How does 47 sound instead?

Our mission is to help as many people as possible retire with sufficient passive income to live out their lives on their terms and do so as early as possible. Please help us help you by getting in touch. Even if our services are not the perfect fit, we can point you in the right direction.

It’s not too late. And it’s certainly not too soon!

Disclaimer: The opinions conveyed in this article are provided for educational purposes only and should not be interpreted as an offer to buy or sell any securities or to make or contemplate any investment.