Retirement funds...always an emotional argument. I think most people missed the point of my last blog on the value of 401(k)s. As I said in the last post, they do have their value, but they seem to carry more weight in terms of making serious retirement money that can out-earn what people will have to pay in debt interest than they deserve. As all those who commented affirmed (myself included), most people will not make 12-16% returns and will over time make a modest 6-8% return in a 401(k). Great, but that will never keep up with interest expense over time, so if you have debt (think 30-year mortgage, credit cards), a 401(k) isn't the only or best way to fund retirement. Run a Time/Value of Money calculation and the numbers will prove that out.
I'm not really sure how anyone got the idea that I think starting a furniture rental business is a better way to fund retirement than contributing to an employer-sponsored 401(k), but hey, it looks like some people missed that point as well. The point I was trying to make in the last blog is that 401(k)s and IRAs are not the ONLY way to fund retirement. There are lots of really great ways to put money in motion to make more money than just relying on the market and employer contributions ALONE. Yes, yes, yes, contribute to a 401(k), but open the mind to other ways of getting money to make more money for you AS WELL. That's how the wealthy get rich and stay rich. Most of them rent out their equipment, space, property, etc. They own real estate, they do hard money lending, and they are involved in angel investing and a host of other means that put them in control of their money rather than WHOLLY relying on the mercies of the market and their employer (besides, Danko proved in his book "The Millionaire Next Door" that most wealthy Americans don't have an employer anyway! They're self-employed! They have their own businesses, some even starting out perhaps with a stupid idea like lawn chair rental at weddings!) So yes starting your own business is another great way to fund retirement, even though several commented that they don't believe this will work. (If Sam Walton were alive, you could ask him if it works or you could just go down to Wal-Mart and pick up a few things you need tonight for dinner...and see how well it's working....)
There's just so much more out there than most people realize, and yes, I do teach that in my community ed classes.
Of course i do not advocate renting chairs in place of 401(k)s as a means to fund retirement...that would be absurd and I'm surprised that that's the only message anyone got out of the last post. Simple ideas, using resources you already have, money you already have, time you already have, etc. will end up putting more in your pocket over time than relying on employer-sponsored retirement programs alone. It's too bad that most people cannot get their minds around this.
Also, a few people commented that 401(k)s and IRAs are tax-free. They are not tax-free, they are tax-deferred, so there will be taxes owing at some point. You have to decide if you want to pay tax on the "seed" in the beginning (such as with a Roth IRA where taxes are paid up front) or on the "crop" with a 401(k) or regular IRA. Taxes will be paid on both what you deposited and what you earned over time on these programs. The only way to decide if this is a good deal or not is to run a forecasting calculation on it, all the way through retirement (not just to age 65) and see how much it's going to cost you in taxes to keep your money in such programs.
As for my friend who lost all her money in a 401(k) with Novell. No, she did not invest IN Novell stock, she works FOR Novell and had a diversified portfolio through the company's 401(k) employer-sponsored program. When the market took a dive (which it will at times), she lost a great deal of money on the stock she was invested in, which wasn't Novell. Nobody seems to believe this, quoting statistics about the stock market making a steady 9-10% for its investors over time if left alone. True, the market's 40-year history does show that kind of return over time, if left alone, but some companies do go under, some stocks do plunge, and not EVERYONE will make a guaranteed 9-10% return, even when they leave their money alone. The market is a risky place, plain and simple. It has it's value, but it is not a place where you really control how much money you do or do not make. There are no guaranteed returns, and everyone knows that, so why not place some of your money somewhere else, or get it to work for you even in small ways, such as through renting out lawn chairs you already have rather than letting them sit in your shed idle? If some piece of property, equipment, skill, or chunk of cash can be used over and over again to make a profit, why not use it? Yes, I have my Roth IRA, but I also have 50 bistro chairs sitting in my shed. I intend to add another 200 to them and rent them for a tidy little profit every summer. Some people don't live where that's possible, but they live where other means of making money is possible, so why not attempt it? There's nothing to lose if you already have the resource.
Missing the Point About Bistro Chairs
October 9th, 2007 at 08:39 pm
October 9th, 2007 at 09:28 pm 1191965288
As for your friend and her 401k with Novell, she had $355,000 and lost $345,000 of it. What the heck was she invested in? And why didn't she get out before she had lost 97% of her money? Even in a market crash, there is still the opportunity to bail out.
October 9th, 2007 at 09:36 pm 1191965767
I'll have to ask my friend what she was invested in. You make a good point about her not getting out in time. Maybe she didn't have a good investment manager, or she just didn't stay on top of it herself (dumped money in but didn't pay attention to it much after that) not sure. I'll try to find out.
October 9th, 2007 at 10:05 pm 1191967534
I think it's worth revisiting the 401k contribution again, because I fear the advantage may have been lost in the shuffle. If a typical company is willing to contribute 50 cents to the dollar, that employer contribution is equivalent to a 50% return on your money! Guaranteed, and tax-advantaged, and that's BEFORE it is invested in the stock market. If you count an average return of 10%, then what you're really looking at is 60% return on your money!
I too am very curious abour your Novell friend's portfolio looks like. Did she just leave it all on a single international fund? Despite the market drop, my own portfolio didn't lose but 5% I think.
Finally, I think people emphasize way too much on being your own small business. While it clearly has high gain potential, it also carries high risk; a point that I think way too many people fail to recognize. I don't recall the source now, but I remember reading articles that stated that as much as 80% of all businesses fail the first year, 95% will fail after 2 years, and it will take the rest roughly 5 years before breaking even and make a profit. The average entrepreneur is said to try 15 times before they end up with a successful business.
Also, most people don't start out with multiple companies under their wing. Hence a serious lack of diversification if you will; whereas you can buy a basket of stocks and end up with controlling interest, diversified into several companies, without any work on your part. To be fair, the downside is that the return may not be as big as actually owning your own business.
Now, I'm not saying all that to dissuade anyone from starting up a business. But rather, if you're going to get into it, I believe that it is important to go into it with your eyes wide open. Starting a business has to be for someone who is interested in the work itself, not just the dream of Big Money.
Finally, yeah, I suppose it could be an emotional argument for some, but for me, it's a matter of numbers. I just go with whatever the numbers make the most sense to me. That said, I also agree that they all have their place in the investment toolbox.
October 10th, 2007 at 12:05 am 1191974754
Finally, yes there are risks to starting your own business, but the risks of remaining strictly a W-2 employee may actually be worse. How much of an economic and emotional impact did your last layouff have in your life? There's no guarantees with W-2 employment any more than there are with self-employment. At least with your own jobs you are in control of how much money you make and whether you're going to work or not. Being a W-2 employee alone is like renting out a single apartment...if your renters move (or you lose your job), you're 100% exposed. But having your own small home-based business is like having an apartment house with 10 units. If you lose one of your renters (or business accounts) your exposure is only 10%. You still have your other accounts you can fall back on and if you have a W-2 job, you can count on that too.
In the end, the real issue with all this is taxes. Until they are truly understood the retirement argument is a mute point.