A 401(k) Deep Dive with Andy Tanner

A 401(k) Deep Dive with Andy Tanner

For people age 45-54, the median 401(k) balance is just under $70,000. Assuming that the average person will live at least another 20 years after retirement. So at the max that’s just $300 per month.

Does that sound like enough to live on to you?

We’ve been taught that 401(k) savings are the key to retiring well. In response, most people immediately sign up for their company’s retirement account and faithfully contribute to it monthly… in fact, because it comes right out of your paycheck, most people don’t think about it at all.

But, we should actually be paying very close attention. This is, after all, our future.

The truth is, 401(k)s were designed to the advantage of companies. Companies that no longer have to pay pensions. Essentially, 401(k) plans remove responsibility from the company and hand it to their employees. Sure, there are benefits… companies may match contributions and the current retirement structure has been a boon to mutual funds.

But what about the individual?

Re-thinking Retirement

Andy Tanner started questioning the 401(k) setup when his own retirement fund tanked in the crash of 2000. He shared his thoughts and insights with us in Money Revealed.

In regards to his passion for the 401(k), he explains, “I don’t know that there’s anything financially that more people are involved in, that they have less knowledge about than paper assets and particularly, plans like the 401(k).”

Tanner poses a compelling question:

If the stock market is at an all-time high, why are people’s 401(k)s so low?

We’re taught over and over about the magic of compound interest, but consumers aren’t informed about the law of compound costs, meaning that fees compound as well as interest.

Tanner shared a shocking illustration: If you put $1,000 into the stock market and it earns 8% interest, in 65 years you should have a little over $140,000.

But if the fund manager takes 2.5% fees, in the same time period you would only have $30,000! This means that $110 thousand goes to the financial industry, leaving the worker with just $30k.

In other words, the worker is supplying the money and taking all the risk, while the financial industry is taking no risk, supplying no money and earning the lion’s share of the profits.

He adds, “This money belongs to Wall Street. They’re the ones who collect the fees on it. They’re the ones who get to use it. They’re the ones who get to invest it as they please and as they see fit. You think they’re just sitting on this? You know, let’s think again. They’re collecting fees.”

Plenty of Taxes, Not Enough Financial Education

And what about taxes? There’s an illusion of savings on the worker’s side, because 401(k) funds are tax-deferred. However, the government has built in a required distribution schedule where at age 70.5 you are forced to liquidate your assets on a schedule and pay taxes on them, whether you want to or not.

Imagine the looming crisis as more and more baby boomers hit 70.5 and all their stock is hitting the market… stock that there won’t be enough buyers for.

Compounding the problem is that money management is no longer taught as a life skill. Instead, consumers must pay financial advisers. Tanner contends that financial education is vital to accumulating wealth and managing your money.

Andy also suggests that each person must build a trusted financial team. The first objective is to surround yourself with people who will educate you about your finances.

With education, he explains, there are things you can do to protect your assets and grow your wealth. Education is the key to understanding where your money goes, regardless of what you choose to invest in.

What Can You Do to Protect Your Retirement?

Andy Tanner has this to say:

So, my advice isn’t to take your money out … but to say, Hey, what am I interested in? What do I want to invest in? I’m gonna be a smart investor.

Tanner goes on to say that the biggest financial risk is ignorance. The other side of the coin is education and learning about finances is easier and more achievable than most people think.

By focusing on an area of interest and passion and educating ourselves about the financial side of this passion, we are more prepared to make decisions that will lead to wealth. It’s not so much a matter of gold, stocks, or real estate, but our individual education level about these areas.

He goes on to explain financial education both as a way of managing risk and an insurance policy. He challenges us stating, “You own a home, have a fire, you’d have insurance. Well, which is more likely to burn down in the next five years, your home or your 401(k)?”

It’s time to start paying attention to that 401(k) account, instead of leaving it up to others to protect your investment. Pay attention to the fees that are coming out, the stocks that your money has been invested in and the fine print on your statement.

A last look…

Don’t hesitate to explore other options if you’re not comfortable with where your money is going… because with the demise of pensions and the rise of the 401(k), it’s up to you to make sure that your retirement is secure.

With Purpose,

Dr. Patrick Gentempo

Patrick Gentempo