The 401k Predicament: Inaccessibility

The 401k is often offered in many workplaces, some of which you are automatically opted-in, but is it the right direction to retirement?

Apart from the uncertain taxes, fees, and the market itself, one of the 401k’s major downfalls may not be the investment vehicle’s performance, but the predicament it creates in the overall financial equation…allow me to explain.

As we’ve previously discussed, the Average American’s finances are all but pretty, but why does that happen? There may be a reason for it all, and I believe that reason is the 401k and government sponsored plans in general.

There are 2 things that everyone needs. First is that we need capital. Capital is what allows us to live day to day. Small capital contributes to our everyday purchases at the grocery store, electric bills, and lots of other small scale items. Additionally, however, we need larger amounts of capital to cover other purchases, such as: buying a car, paying for braces, paying medical bills, adding another room to the house, and the list goes on. The second need we have is a place to put that capital. We like our capital to produce more of itself, so we attempt to place our money where that can happen. We often tend to utilize a 401k or other government sponsored plans for that particular purpose. This long term orientation may be good, but it seems to be coming with a price, and that price is becoming very expensive.

Our Average American looks like this:

• Average 401k balance of $66,900 (Miamiherald.com).
• Average credit card balance of $15,788 at an average APR of 14.48% (creditcards.com). This creates a minimum payment of about $315.76.
• Average car loan balance of $24,864, with an average monthly payment of $479 (msn.com).

Balance Sheet View:

From a balance sheet perspective it doesn’t look to bad, but let’s take a look at the annual cash flows:

The cash flows demonstrate that even with a 10% annual return on the 401k, the average American loses money every year, and a substantial amount.

The predicament is access to capital. As I’ve discussed, we need capital, and we need it often. When we contribute to these types of plans, we lock up our money into a system that detriments our financial plan. Instead of borrowing from my own funds, and paying myself back, I am required to either contribute less to my retirement, or to look for capital somewhere else. I miss out on all the money I pay to another financial institution, dollars that I could be putting right back into my own pocket. This lack of access to capital means our average American is paying someone else for the use of capital, capital that he has. This predicament is the reason that many Americans find themselves at retirement age with a small nestegg. They have fought income interest against interest expense, and have lost the battle consistently. They have a bad structure, because they base it on the unaccessible money in their 401k or government plan.

You Be the Bank is a concept that teaches how to create the correct place for wealth to be stored so that your capital is accessible. It helps you grow interest earned with interest earned. Money goes back into your pocket. Without such a basis, you are a part of a never ending struggle, with no control over your financial future.

Jake