Five Retirement Investment Alternatives to Your 401(k) Plan

With something as vitally important as your retirement security, you need to be aware of 401(k) problems. And you have to ask yourself, “Do I really want to have to deal with all this? Are there good alternatives to 401(k)s?”

Let’s take a look at the drawbacks to 401(k)s and good alternatives to them. The 401(k) drawbacks include:

  • Unpredictable market performance, which means the very real possibility of losing a significant portion of your nest egg
  • Rules and limitations which can cripple your options and lock your money in a virtual prison
  • Fees, both visible and hidden, which can suck one-third or more of your hard-earned money in the plan
  • Tax deferral, which can siphon off another one-third or more of your income during your retirement years

Four Major Issues You Face When Planning for Retirement: Safety, Restrictions, Fees, and Taxes

Safety comes down to risk versus reward. Great potential gain brings with it great potential loss.

Investopedia sums up risk and reward this way: “Investing requires a degree of risk, and the bigger that risk, the higher the gain should be.”

The bigger that risk, the higher the potential gain should be—and the greater the potential loss will be.

What will you do if you don’t have enough to live on because of lackluster performance, restrictions, enormous fee, taxes on your income—or a major crash just before you planned to retire?

Will you work until you’re too ill to work, or you need to quit to take care of a relative, or you’re replaced by some kid one-third your age? (Nearly half of all retirees are forced to retire sooner than planned for just these reasons, according to the Employee Benefit Research Institute.)

Will you go on welfare or be shuttled back and forth between your children? Will you live under a bridge?

You can’t afford to lose your retirement nest egg, any more than you can afford to lose your next paycheck. And if you can’t afford to lose it, you can’t afford to risk it.

Yet government-controlled plans assume you want to invest your money in some endeavor with the hopes of making a profit. But investing, by its very definition, includes the concept of risk.

And the investment doesn’t need to be sketchy to involve risk! Investments in companies as “solid” as Blockbuster Video … Borders Books … Pan Am Airlines … Sharper Image … Enron … Polaroid … even Bethlehem Steel … have led to the downfall of millions of investors who thought they were being cautious, wise, and conservative.

Trillions of dollars have evaporated from 401(k) plans due to market fluctuations alone.

The U.S. Securities and Exchange Commission is blunt about the risks of investing:

All investments involve some degree of risk. If you intend to purchase securities—such as stocks, bonds, or mutual funds—it’s important that you understand before you invest that you could lose some or all of your money. Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities typically is not federally insured. You could lose your principal, which is the amount you’ve invested. That’s true even if you purchase your investments through a bank.”

Rules and Regulations That Strangle Your Access to Your 401(k) Money

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Government-approved retirement plans have more strings attached than Pinocchio before he became a real boy. It’s like your money is locked up in a maximum-security prison where someone else calls the shots—and you barely get visitation rights!

Contribute to a 401(k) plan and you’re contributing to a plan that tells you the maximum amount you can put in.

Your plan will also dictate what you can and cannot invest in.

You’ll learn that you can only borrow a relatively small amount, and you must pay it back on a strict schedule—or you can’t borrow at all.

These restrictions may seem normal, but not if you know the alternatives.

The government tells you how long you must wait to access your 401(k) plan money—your own money! You’ll pay penalties for taking virtually any distributions before you’re 59½.

Uncle Sam will tell you when you must access your money, and how much you must withdraw (and pay taxes on) each year. You’re forced to start taking distributions when you reach 70½—whether you want to or not.

Don’t get suckered into believing you control the money in your 401(k). Your plan is only tax-deferred because the government created it that way. And what the government created, the government controls.

The government can—and does!—change the rules any time it wants! The prison warden has your money under lock and key, and while your money’s in the slammer, he can impose any new restrictions or regulations he comes up with—and you have no recourse.

Do all retirement planning strategies come with those kinds of rules and restrictions? No! There are alternatives that we’ll discuss soon.

The Fees You Pay with a 401(k) Plan Compound Against You

Virtually every investment plan and most savings plans have fees or potential fees of one kind or another.

In 401(k) plans the compounding of fees works against you. It doesn’t matter whether you win or lose in the stock market, your stockbroker or the advisor managing your money will still get paid.

The impact of 401(k) fees is colossal. According to an exposé on 60 Minutes, fees “can eat up half the income in some 401(k) plans over a thirty-year span.” Yikes!

You really do need to know in advance exactly what effect fees will have on your balance. But just try to find out from your plan administrator or financial planner!

The Truth About 401(k) Plan Tax Deferral

Whoever talked you into starting your 401(k) probably told you what a great advantage tax-deferral is. “You can deduct the money you put into your 401(k), and it grows tax-deferred. You don’t have to pay taxes on your growth each year!”

If you bought into that, you’re in good company. An overwhelming number of Americans—and Canadians, with their registered retirement savings plans (RRSPs)—are in the same boat you’re in.

Many folks haven’t stopped to consider that when they retire—or when they’re forced by the government to start withdrawing from their 401(k) plan—they’ll pay income tax at the going rate on every single dollar they withdraw.

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They’ll pay tax on the money they originally contributed, because the government let them deduct that money from their taxable income. Now Uncle Sam is holding his hand out, palm up. And in his other hand, he’s holding a club.

And when folks withdraw from their 401(k) plan, they will also have to pay taxes on their earnings.

All those taxes were deferred—postponed—not cancelled!

Here’s what that could mean to you:

Let’s assume you’ve retired and you need $70,000 in retirement income annually to maintain your lifestyle and do some traveling.

If that income is from a 401(k) plan and you pay an average tax rate of 25%, your retirement plan will have to throw off $93,333—not $70,000—every year. You’ll need that extra $23,333 every year just to pay the taxes on your 401(k) income.

But tell me this: if your retirement plan could throw off $93,333 per year, wouldn’t you rather spend that extra $23,333 enjoying life more, rather than feeding Uncle Sam?

Why not pay your taxes up front while you know what they are, and then have income with no taxes due in retirement?

A Review of Some 401(K) Plan Alternatives

If you don’t like heavy-handed government-controlled plans, broaden your horizons. There are methods of saving for retirement that don’t depend on unpredictable market performance … that have very few, if any, government restrictions … that tell you in advance what your minimum account will be at retirement (and any point along the way)—after fees … and that don’t have any of the pitfalls of the tax-deferral trap.

Not every 401(k) alternative offers every one of these advantages. But there is one that does. It actually offers more advantages, as you’ll see. Let’s look at the five common 401(k) alternatives.

#1 IRAs and Roth IRAs as a 401(k) alternative

IRAs are like other government-controlled plans, with one exception: Roth IRAs. You fund a Roth with after-tax money (unlike traditional IRAs), and you can withdraw money from your plan in retirement without paying taxes, subject to various regulations and controls.

#2 Municipal Bonds as a 401(k) alternative

Municipal bonds are debt securities issued by government entities to fund day-to-day obligations and finance capital projects such as building schools and highways. Generally, the interest on municipal bonds is exempt from federal income tax.

#3 Gold, silver, and other commodities as a 401(k) alternative

Commodities are basic goods used in commerce. Examples are gold, beef, oil, lumber, natural gas, iron ore, crude oil, salt, etc.

#4 Real estate as a 401(k) alternative

Real estate may be raw land, or it may be improved with buildings, farms, homes, and so forth. You receive income from renting or leasing the property, and you may realize a gain when you sell it.

#5 Dividend-paying high cash value whole life insurance as a 401(k) alternative

Using life insurance as an alternative to a 401(k) plan may seem odd. But it’s not to the hundreds of thousands of individuals, families, and businesses, who are doing it every day. The cash value component of a dividend-paying whole life insurance policy can be used during the insured’s life to provide a guaranteed, predictable retirement income, and for other purposes.

Which 401(k) alternative is best?

What’s the best 401(k) alternative? The comparison chart below will help you decide.

Comparing 401(k) Plans with Alternatives

Does the plan …
401(k)s & 403(b)s
IRAs & Roth IRAs
Muni-cipal Bonds
Gold & Silver
Real Estate
Dividend-paying whole life insurance
Give you guaranteed, predictable growth? N N N N N Y
Lock in your principal and growth, even when the market crashes? N N N N N Y
Give you control of your money or asset without government restrictions and penalties? N N Y Y Y Y
Give you tax-free retirement income? N Only Roths Y N N Y
Let you use your money or asset without penalties or the possibility of incurring a loss, however and whenever you want? N N N N N Y
Let you use your money or asset, yet still have it grow as though you didn’t touch it? N N N N N Y
Allow you to fund your plan every year, without limits imposed by the government? N N Y Y Y Y
Finish funding itself if you die prematurely? N N N N N Y
Tell you the minimum guaranteed value of the plan or asset on the day you expect to tap into it, and at any point along the way? N N N N N Y

 

To learn more about a properly-designed dividend-paying whole life insurance strategy as a 401(k) plan alternative, and to find out what it can do for you, request a FREE Analysis. You’ll receive a referral to an Authorized Advisor (a life insurance agent with advanced training on this concept) who will prepare your Analysis and answer all your questions about the concept.

Stock Market Reaches New Highs – Do You Trust It?

When we released our Stock Market Survey a few weeks back, we were surprised so many readers responded. We were even more surprised by the results of the Survey, which we promised to share with you, so read on…

Nearly half (45%) of those who took the survey said, “I don’t trust the market with money I can’t afford to lose.” They clearly understand that the money they’re setting aside for something as important as retirement or a college education is money you really can’t afford to lose.

Fully 45% of our subscribers believe a major market crash – a plunge of 50% or more, as we had in 2000 and again in 2008 – is imminent. And another 34% expect that calamity to happen in the next 3-5 years.

But when we brought the situation closer to home and asked readers how a severe market crash would affect them personally, we found wave after wave of denial.

About 12% said that even if the market drops by 50%, “I have plenty of time to recover.” I suspect these folks don’t realize that since 1929, we’ve had three market crashes where the Dow took between 16 to 25 years to recover. What if history repeats itself? [Read more…]

What Is a 501k Plan and Is It an Alternative for Saving for Retirement?

Let me cut through the hype and give you the scoop: The 501(k) plan is just the latest name the Palm Beach Research Group has given to the concept most people know as Bank On Yourself, which is based on a high cash value dividend-paying whole life insurance policy.

The Palm Beach Group has been bombarding subscribers to various email lists about a “warning” issued by the “Father of the 401(k),” Ted Benna.

The Palm Beach Research Group wants you to watch a long video interview they did with Ted Benna, where he reveals three dangers he sees coming that could impact your 401(k) and IRA accounts. He says these dangers could slash your savings by 40%. And you’re promised that by watching this long interview you’ll learn about “a non-government sponsored 501(k) plan” that may “be the only way left for most Americans to retire today.”

This secret plan is touted as a 401(k) alternative “account,” where Benna and some prominent members of Congress have put some of their savings, to shield them from these three dangers.

Unfortunately, even after you watch the lengthy interview with Ted Benna, you still won’t know what this “account” actually is—until you fork over $75 to $149 to subscribe to the Palm Beach Letter and get your copy of their “new” book, The 501(k) Plan: How to Fully Fund Your Own Worry-Free Retirement—Starting at Any Age.

You can’t judge this book by its cover

[Read more…]

Austrian Economics—What the Heck IS It?

What is “Austrian economics”? Let’s break it down:

Economics: “A social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services.” Ooo-eee! That’s gotta be a page-turner! Thank you, Merriam-Webster.

Austrian economics: “A school of economic thought that is based on methodological individualism.” Gads! But thank you, Wikipedia.

I never studied economics in college. And I’m pretty sure I didn’t take economics in high school either. Or if I did, I slept through it.

Ron Paul, 2012 Republican Presidential Contender

But “Austrian Economics” is a phrase you hear from time to time—even if it’s said in code, like what Ron Paul said following the 2012 Iowa presidential primary. “I’m waiting for the day when we can say, ‘We’re all Austrians now!’”

That struck me as odd. As Matthew Yglesias colorfully observed in his Slate article on Austrian economics, “The average Republican presidential candidate would sooner officiate at a gay marriage than praise Europe, yet here was Paul pledging allegiance to Vienna. What did he mean? Why would we all be Austrians?”

[Read more…]

The Truth About Whole Life Insurance and Why It’s More Than a “Rich Man’s Roth”

I came across an online article by an anonymous blogger who claimed that the only good purpose for whole life insurance was as a rich man’s Roth. He was certain whole life insurance was only for individuals whose high incomes made them ineligible for the tax-saving advantages of a Roth IRA.

That’s actually pretty funny. Why restrict the incredible advantages of whole life insurance—including the tax advantages—only to the wealthy?

Let’s look at how a Roth IRA works and then compare it to a Bank On Yourself-type whole life insurance policy.

How Does a Roth IRA Work?

A Roth Individual Retirement Arrangement (Roth IRA) is an IRS-approved strategy that allows you to invest money you have earned by making contributions to a Roth IRA plan you have set up. You are not allowed to take a tax deduction for your contribution as you are with a traditional IRA. However, none of the money you take from your plan in the future is taxable. As far as the money in your Roth IRA is concerned, you will not be affected by future changes in the tax rate.

How a Roth IRA differs from a traditional IRA

Roth IRAs are quite different from traditional IRAs.

Chart Comparing Key Differences Between Traditional And Roth IRAsWith a traditional IRA, your contributions are tax-deductible. However, when you withdraw money from your traditional IRA—and you must withdraw specific percentages annually, beginning soon after your seventieth birthday—you must pay taxes on everything you withdraw—at whatever the tax rate happens to be at the time.

See the table for a summary of the key differences between a Traditional IRA and a Roth IRA. [Read more…]

Bill Williams’ AHA Moment: How Bank On Yourself Freed Him from 401(k) Loans and Mutual Funds

Bill Williams is an enthusiastic believer in the Bank On Yourself concept because of how it has helped his family financially. He wrote to me several years ago, and I included his letter on page 228 of my 2014 New York Times best-selling book, The Bank On Yourself Revolution:

Thanks for all the good things you are doing, Pamela. I am working with my Bank On Yourself Advisor to set up my third policy, and I am so appreciative of her guidance and expertise. She has been tremendously supportive.

The real “snake oil” is all of the purported advice about savings and investing we have been fed by the “experts” in the past. I get so upset by the advice to invest with before-tax dollars into 401(k)s or 403(b)s.

I’m over sixty years old and know when I turn 70½, I’m going to have to take required withdrawals from my plans and have the added burden of paying taxes on them. After all, the IRS wants to get its hands on the taxes they let me avoid paying all those years.

I wish not only that I had learned about Bank On Yourself earlier, but that the concept could be taught to the masses when they are young enough to get the maximum benefit from it.

Here’s why I say that: I think of all of the purchases I’ve made through the years where Bank On Yourself would have been a much better means to fund them. As an example, my son’s college expenses, which I paid every cent by selling stock and mutual funds and taking a loan from a 401(k).

Needless to say, my son received a great education (to his credit), but dear old dad has nothing to show for it. I had to put money into the stocks, 401(k), and mutual fund, so I had the resources—which could have been so much more powerful in a Bank On Yourself policy! It’s as simple as that. If I had done that, I would now still have the policies, which would have even more value.

I am depleting an IRA to fund my third policy and to help fund my first two Bank On Yourself-type policies. I just hope I live long enough to enjoy all the benefits.

Bill Williams writes again, about Bank On Yourself, tax-free retirement, and dividend-paying whole life insurance

[Read more…]

52% of Americans Will Have to Reduce Their Lifestyle in Retirement

52% of American households are at risk of not being able to maintain their standard of living in retirement – even when factoring in potential proceeds of a reverse mortgage.

That’s according to the Center for Retirement Research at Boston College.

Let’s take a look at three critical reasons for that… and what you must do now to protect yourself…

Problem #1: People continue to live longer, but aren’t working longer

According to the Social Security Administration, 25% of people turning 65 today will live past 90, and one out of ten will live past 95, yet most financial planners base their projections of how much money you’ll need on your living to age 85 or so.

What if you’re one of the lucky ones who hangs on until 100 or longer? And just how “lucky” will you feel if you can’t provide for yourself during those final years?

Solution: Assume you’ll live to at last age 100 when determining how long your money will need to last you.

Problem #2: Underestimating health-care and long-term care costs in retirement

The numbers are shocking, and almost no one is accurately accounting for this: A 65-year-old couple retiring now will need $245,000 just to cover out-of-pocket health-care costs during retirement, PLUS another $255,000 to cover one average stay for one person in a nursing home.

Whoa! That’s half a million dollars you’ll need just for medical care… but most people close to retirement don’t even have that much in total retirement savings. [Read more…]

Trump Tweets, Black Swan Events and Your Money

How much does your financial future depend on a 140-character Trump tweet, stroke of a pen on an Executive Order, or an off-hand comment to a reporter?

A lot, as these recent news headlines reveal:

  • “Trump Sinks Pharma Stocks on Medicare Price Negotiation”
  • “Dollar Dumps Most in 30 Years as Trump Raises Doubt Over Strong Dollar”
  • “When Trump Tweets, Wall Street Trades – Instantly”
  • “Trump, Not the Fed, Is What Moves Markets Now”
  • “Toyota Stock Drops Immediately After Trump Tweet”
  • “Trump’s Executive Orders Send S&P 500 to an All-Time High”
  • “Dow Jones Industrial Average Sells Off After Trump’s Executive Order on Immigration”

As you can see, when President Trump tweets or speaks, the markets react – in some cases violently.

Whatever your opinion of Trump is, there is one thing we can all agree on:

We are in uncharted waters. We have never had a president like Trump. We’ve never had an administration like Trump’s. There is no historical precedent for this. [Read more…]

Five Pieces of Free Financial Advice on Saving and Investing You Should Avoid

We all love free advice. Why pay for advice if someone is willing to give it to you for free?

Some advice will cost you little or nothing if it’s wrong. “You should wear these shoes with that suit.” “Try the catch-of-the-day. You’ll love it!” “I think you should turn left here.”

Other bad advice can be much more costly—both now and for the rest of your life.

This article focuses on free financial advice. We’ll tell you why five bits of so-called “wisdom” you’ve heard over and over again are wrong.

We’ll give you some tips on choosing sources of free financial advice you can trust, while avoiding all the dumb financial advice that’s out there.

Why Free Financial Advice Is Often Dumb Financial Advice

[Read more…]

SuperMoney Interviews Personal Finance Expert Pamela Yellen on Savings and Investing Strategies

Pamela Yellen, Founder of Bank On Yourself

Pamela Yellen, Founder of Bank On Yourself

I was recently interviewed by SuperMoney, a website that rates various financial products and the companies that provide them.

In this wide-ranging interview, I answered questions like these:

Why did you decide to start Bank On Yourself?

I reveal the frustrations my husband and I experienced following the conventional wisdom about investing and retirement planning. Maybe you can relate…

If someone were to say to you, “I don’t have the expertise to handle my finances. I’ll just hire some investment firm to deal with them,” how would you respond?

Here I discuss how and why 80% of all mutual funds, financial advisors and investment advisory services underperform the overall market. If the experts can’t even do it well, how can we regular folks be expected to? [Read more…]