There are three tips in this video that are considered conventional “wisdom”. Don’t allow yourself to be led astray with these very bad pieces of financial advice. Real estate is the best way to wealth for most people, you don’t have to rely on traditional retirement plans, you can plan your own retirement, and sooner than you probably thought!
401(k) plans were called “Salary Reduction Plans” when they were new. They had to scrap the name to foster participation! But they’re still Salary Reduction Plans today.
Video Transcription
Keith – Get Rich Education:
Three common pieces of advice are killing your wealth potential and leading you to live a smaller life than you can. I would know because I used to live that way and now I don’t. The first piece of bad advice is max out your retirement plan. Oh, that’s really just bad conventional wisdom that’s been handed down. That way, you can enjoy the compounding growth on pre-tax dollars and all of those things. I mean, that’s what people say that tout 401(k)s, ah, geez. Well, the first, the new annual contribution limit to 401(k)s this year is $22,500. Well, a few you point out the risk of investing in such a plan, and it’s got nothing to do with the numbers. Let me tell you what I mean. Hi, I’m Keith Weinhold, 20-year real estate investor and active member of the Forbes Real Estate Council and former 401(k) contributor. Well, by maxing out your 401(k) plan in young age, young, you minimize your quality of life in young age in order to try to increase your standard of living in old age, when by that time you might not even have the physical mobility or worse.
Now, there is something to be said for delayed gratification. Yes, it takes some capital formation in order to invest in anything, but the risk of too much delayed gratification is denied gratification. And though conventional retirement plans, they do increase the probability that you’ll live a better life in old age, it’s a guaranteed certainty that it diminishes your quality of life now. So you’re trading away the certainty of something good in exchange, and all that you’re getting over there in the exchange is the probability of something good. You’re trading away a certainty and getting a probability. And yes, there is a psychological benefit to having something saved for the future, even if you never did get to use it. I’ll address that part in a moment, but let’s drop back and look at some numbers here. Just take stocks’ long-term historic 10% return like you get from the S&P 500, and then do what almost no one else does, adjust that 10% down for inflation and emotion and taxes and fees and volatility. And what do you have left? Almost always, it’s either about a 0% return or a negative return.
And yep, I admit I used to not only participate but max out my retirement plan back when I had a day job until I woke up. Now, first, with the best-known conventional retirement plan in the United States, the 401(k), let’s really center on that. You cannot begin making penalty-free withdrawals on it until age 59.5, and you must begin paying taxes on it at that time as well. Get the Get Rich Education mobile app, that’s where I interviewed the man that actually invented the 401(k) plan back in the 1970s. His name is Ted Benna. Even Benna told me right there in that interview that 401(k)s are not serving people the way that he had intended. Yes, that conversation is recorded on episode 197 of the Get Rich Education Podcast. That is a rare opportunity to hear about the real deal on 401(k)s straight from the horse’s mouth. So a retirement plan, that’s a deduction from your paycheck. It removes an income stream from your pocket, from your life. Today, well instead, with income property, I discovered that I can invest in something that pays me an income stream today without jeopardizing my future one bit.
In fact, I’m paid in income stream today and because I’m leveraged on prudently purchased rental property, I will get a better return than my 401(k) long term and get all the tax benefits too. I think some people get hung up on the taxes. Rate of return is more important than taxes, but taxes matter. I said earlier that with 401(k)s, you must begin paying taxes on them when you make your withdrawals later in life. Well, with investment property there is no tax, zero capital gains tax, none, because you can use a 1031 exchange to endlessly defer your taxes throughout the rest of your life. But well, what if the tax law changes actually? Let’s look at that. I mean, I guess anything is possible, but the real estate 1031 tax deferred exchange has been in existence for more than 100 years now. Roth type plans reduce your income today as well.
So most retirement plans, they’re not tax deferral plans really, even though that’s what they’re called. Their greater effect on you is that they are a life deferral plans. Investment real estate, that’s made more ordinary people wealthy than anything else. It’s capital gains tax-free, it lets you enjoy both your todays and your tomorrows. So therefore, it’s really and vehicle rather than an or vehicle. And I know some might say, “Well, hey, my dad focused on 401(k)s and he made a lot of sacrifices during his life. And he seems to be okay in retirement now.” All right, but he’ll never know what happened if he started living life full-time 20 years earlier. You can never see what didn’t happen. So you don’t have to invest deeply only in a nebulous future full of maybes. Maxing out a conventional retirement plan means that you are living a life of less and that you’re never going to get that time back. And now that’s the first of three pieces of bad advice, max out your retirement plan.
The second of three band pieces of advice I hear is something like be sure to attend your dream college if you can. In fact, I even heard a teenager say the other day, “I want to attend my dream college.” Dream college, what? What does that even mean? I mean, college is still necessary for some skilled professions, but the value of a college degree is down, and yet the price of a college degree is up. And that’s why enrollment has been steadily declining since 2012. But even worse, how do I attend my dream college? I mean, who would even posit that as a legitimate question? It could matter whether you have a degree or not, but no one cares what school you went to, no one cares what your college grades are either. The last time that you went to go see the doctor, all right, did you feel like you got a good quality of care from that doctor or not? I mean, that’s what you really care about.
All right, when you saw that doctor, did you even want to know what college or medical school your doctor graduated from before you saw them? Do you even know what college they went to? It doesn’t matter. Did you ask your medical doctor about what their college grades were? I mean, see, this stuff just does not matter. Now, I actually don’t think that college is a complete waste. I got a four-year degree, and when I did that, I learned some things. But in hindsight, it probably wasn’t the most efficient use of my four years, four years that I’ll never get back. But dream college, who cares? Not a good question, bad advice. Attend my dream school, it just doesn’t make any sense. Hey, go ahead and put a like on this video if you like how I’m breaking it down and being thought-provoking, I’d really appreciate the like. You might feel some friction, you might not agree with everything I say, sometimes it’s hard to hear something new for the first time, but I’d appreciate the like.
And here’s the third piece of advice that really sets you on the wrong trajectory throughout the balance of your financial life, and that advice is become a millionaire.
Speaker 2:
You’re going to have to pay me $1 million.
Keith – Get Rich Education:
I think that longtime followers know where I’m going with this one, but let me update it because we’ve had some substantial inflation for almost two years now. Let me tell you, you don’t want to be a mere millionaire. That is the wrong trajectory. Some people don’t realize that the definition of a millionaire is not someone that makes a million dollars a year in income, it is having a million-dollar net worth. So if you go ahead and add up the value of all of your assets and it totals $1.5 million And then you add up to sum of your debts, and that’s just one half a million dollars, well, then your net worth is $1.5 million in assets minus a half a million in debts, which equals $1 million. That is not where you want to be. Now, maybe if you’re 75 years old and you think you’ve got 10 years left to live, I guess you could live a somewhat modest life on a million dollars.
But as you can see, that’s not where most people want to be. Even then, you’d still have worries about running out of money and you might have to live in a low-cost area if you had 10 years left to live on a million dollars. You sure wouldn’t be going on any vacations when you actually have the time to enjoy it. Inflation has rendered the term millionaire nearly down to middle class now, and the middle class is getting eaten by wages that do not keep up with inflation. So a single millionaire, that’s probably going to be a poverty marker within my lifetime. Now, if you’re a millionaire that has $200,000 of cash flow each year, all right, well, that’s different, that’s better. Net worth matters, but it’s not as important of a financial measure as your residual income stream each year. That’s what you can live on. But just a millionaire, that is the wrong trajectory. Avoid, avoid, avoid. Instead, do you have durable residual income streams that meet or exceed all of your living expenses? Now, that is a better question. That is better advice.
That is a better path to follow. Your passive cash flow, that’s a really good wealth measure. So maxing out retirement plans, attending a dream college or setting out to be a millionaire are all losing financial plans in today’s world. In most cases, they are just losing overall life plans, not just financial plans. Yes, in fact, that interview with me and the father, the actual inventor of the 401(k) plan when he said that the plans aren’t serving people, he, in fact, he is a real estate investor today. The inventor of the 401(k), he wants durable income streams that are tax advantaged. A real estate income stream, it does not diminish the value of your property, but a 401(k) income stream often diminishes your principle. Now, I do think that if a person, an employee, say, is just completely an irresponsible person and they are uninterested in their money and they’re going to squander it all on gambling or something else fleeting like that, well, then I think 401(k)s could benefit that kind of person.
But that is not who you are, that’s why you’re here with me right now. And again, if you’d like to listen to the 401(k) inventor Ted Banna, talk about that with me, it is on Get Rich Education Podcast episode 197. You can also listen with the Get Rich Education mobile app. I’m Keith Weinhold. I’ll see you in the next video.
