I was recently approached (again) from a freelance writer, offering to write blog entries. I figured this would be similar. They would offer several articles, and I would find them filled with stuff and nonsense about 401K plans, which I have remarked countless times DON’T WORK. This time it was different. The articles given were even worse.
One of these articles pointed to a recent survey of Millennials and how were they doing regarding saving. All the status I could find were that Millennials were doing better by starting five years younger than Gen X, and auto-enrollment options for employer-based 401K plans has helped shift 401K participation from 81.4% to 84.6%
First of all, starting younger IS a good thing to do. When you talk about the power of compound interest and compound stuff-money-in-the-bank, every extra payment is good. In fact, if you pay off rental properties at an accelerated rate, it will make the interest rate almost irrelevant. What that links points out is that when you calculate the payment with a couple points of difference in the interest rate, you’re talking about a six month speed up of the payoff of that note. What speeds things up is making extra payments EVERY month, or EVERY year.
Hence, socking away extra cash from EVERY paycheck is the real ticket to success. Or at least, a key factor.
But something that really got my goat was how the article assumed that auto-enrollment was the reason that 401K participation had increased by 3.2%. First of all, no evidence was presented that this was the correlation at all. For such a small change in statistics, there could be a dozen factors. The slow recovery of the stock market (until a few weeks ago!) could make people more comfortable. Or watching the market rally here and there might make people start jumping in.
But the focus was on the entirely wrong points. The real question should be, “Hey Millennial, what rate of return are you getting with your savings?” and “How much cash flow do you predict you’ll have in retirement?”
When we ask these types of questions, our advisor should tell us, “You’ll make more in retirement then any year you ever worked.” Instead, the most common street advice is, “Don’t worry about taxes in retirement. You’ll be a smaller tax bracket.”
Uhh, why will I be in a smaller tax bracket? Is it because I’ll be making LESS then than I’m making now? After retirement might devalue my dollars perhaps 60%? And drive me to get ripped off by taking a reverse mortgage?
401K plans are betting on mutual funds. Mutual funds are doing horrendously. They always have. There is over 20 years of data showing that people that invest in mutual funds tend to get less than 4% a year in annualized growth. Ever since I pulled my money out of my 401K, and repurposed it with real estate and notes, my net worth has sky rocketed. My portfolio isn’t secured by shaky fishbowls of stocks that are supposed to mitigate the risk, but never do.
So I turned down this potential author, because this person didn’t seem to write in the same vein as any of my articles. No, my standards are quite high, and finding someone that shares this odd but evidence based quality of writing is hard.