I’m beginning to think that’s all hype.

By the time you lose your a$$ and finally get it all back, how are you getting ahead?
You would have been better off just to put it in a regular passbook savings. It might be slower, but what’s so bad about that?

I really sincerely regret all my 401k type investments. When the market was up, it was fun, but it’s truly a fool’s paradise. The old fashioned way of saving is really superior. My elderly mother is a lot more financially stable that I am. I should have followed her lead.

Alternative 1 (the “prime example”): Invest in dividend yielding stocks and funds. I have to assume this is to be done in a standard brokerage account since you’ve lambasted IRAs and 401(k)s. So let’s compare, shall we?
>>Considerations:
1. Income tax must be paid prior to investment in your standard brokerage account. That income is not deductible as it is with a Traditional IRA.
2. Dividend tax must then also be paid on the dividend that is distributed; that’s a second tax. That changes the game a bit. (I won’t even get started on the fact that the corporate earnings were also taxed before they were distributed…it baffles me that we can still have such a national debt.)
>>Assumptions:
1. Assume a current marginal tax rate of 25% for the individual in question. The lower the initial tax rate, the less beneficial the Traditional IRA becomes.
2. Assume you’re one of the evil “rich” by the time you retire and the ending tax bracket bumps you up into the 35% range. The higher the ending tax rate, the less beneficial the Traditional IRA becomes.
3. Assume a 10% rate of return from these dividends. For comparison purposes, it’s only reasonable to keep the rate of returns the same in both scenarios since we’re comparing accounts, not instruments, as you can invest in dividend yielding stocks and funds in your Traditional IRA as well. Let’s say the entire return from the investments is a dividend in order to use that 15% tax rate, no capital gain or loss at all. Dividends are not taxed in your Traditional IRA as long as they don’t leave the account. Just reinvest them since this is for retirement and once again you compound returns on money that would have otherwise been paid in taxes. The lower this rate of return, the less beneficial a Traditional IRA is.
>>Implications:
With the above assumptions, the only way the dividend bearing stock in a standard brokerage account is more beneficial than the Traditional IRA is if you’re older than 51. In that scenario, the benefit of investing your tax savings cannot outrun the drawback of paying taxes on the ending distributions in under 14 years. Lowering your annual rate of return will extend that 14 years out further change the benefit at an earlier age; as will a lower current tax rate and a higher ending tax rate. To whom does the author’s claim apply? If you’re old and currently poor but expect to hit it big in the next few years before retirement age, your Traditional IRA won’t be beneficial.
What’s the solution? A Roth IRA is ALWAYS, from day 1, more beneficial than the standard brokerage account. You pay taxes up front with both. But with the Roth, you don’t pay taxes on your dividends or your capital gains as long as they stay in the account until you’re eligible to withdraw them.

Alternative 2: Start a business. This is a quick one. A commenter has already hit the nail on the head. The commenter’s numbers weren’t quite accurate, but the idea is sound. According to the Small Business Administration, about 50% of small businesses fail within 5 years as determined by a business declaring bankruptcy. Now, I didn’t check the statistics, but I’m going to go out on a limb and say that 50% of stock market investors don’t lose everything they invested within 5 years. Particularly if they diversify if even just a little bit. The type of person who would be dedicated and intelligent enough to be in that top half of entrepreneurs would probably perform well in the stock market too. Also keep in mind that “not failing” does not reflect success for that other 50% of small businesses. It means the bank didn’t take your collateral to make good on the loan you couldn’t pay because your business floundered. What it DOSEN’T mean is that the other 50% of those entrepreneurs are set for retirement.

Alternative 3: Well this isn’t really an alternative, just a claim that by some figment of the author’s imagination it’s difficult to set up a self-directed IRA that can invest in anything you want. You pick the brokerage house and it will cost you about 20 minutes on the phone and a few weeks for the signature documents to change hands in the mail (measure it in hours if you’ve advanced to the technology of the fax machine/scanner). If you already have a standard IRA, you can trim that down to about 5 minutes on the phone…total. If that’s…what was it…”really difficult,” then I’m going to go out on a limb and say that you probably aren’t qualified to invest in rare wines, whiskey, art or opening a small business for that matter. You better just spend your earnings because Darwin’s theory will probably catch up with you before you retire.

Conclusion:
I can certainly respect the idea of assisting others with taking all elements into consideration when making a decision. However, it is irresponsible and inaccurate to title something that should be objective – such as advice for one’s future – in such a manner as this article has been. I don’t remember quite how I found this particular website today, but I’ve learned one thing from it. Apparently the only thing that is for suckers is reading the “Devil’s Advocate” posts.

*I can calculate this becasue I know how much I put in every year for 22 years, so using a spreadsheet, I can calculate a true internal average annual rate of return, not just a simple average technique.

When I read his jeremiad I laughed. Now, though, I don’t think it’s so funny. I just lost another 33,000 well-diversified dollars. Over the past year I’ve lost a hundred grand, and my investments are well managed. Since I’m coming up on retirement age and facing a probable layoff in the near future, I’m looking at spending my old age in poverty. Quite an interesting surprise when you thought you had it made.

Also none too pleasing is the fact that whatever I manage to leave to my son will be taxed to nonexistence unless I find a way to pull it out of those funds while I’m trying to live on $12,000 a year and then figure out how not to use it up by way of avoiding starvation. Not only did I imagine my retirement was secure, I thought I would be able to leave him enough to help send his kids to college or secure his own retirement. Now that won’t happen. You can bet taxes can only go up: the cost of the “rescues” alone will guarantee that, to say nothing of what it is going to cost to build a decent health-care system in this country.

When I started at the Great Desert University, I had a choice between investing in a 403(b) or the state pension fund. Now I’m beginning to wonder if I should have selected the pension fund! The state matches that investment, too. Your heirs don’t get any money back when you die, but at least you know you’ll have an income while you’re still living.

The stock market has its place, but you might as well realize it is a vehicle for speculation, not investment. My 401K plan has several other options, including bond funds and a stable value fund.

There are two great things about 401K plans. 1) Most employers match your contribution at some level. That’s free money, and it’s a mistake not to take it. 2) Growing in the 401K, sheltered from taxes, has a lot of value down the road. So what if you pay tax on the way out! You avoided the tax on the way in.

You will never be forced to sell in a down market, if you can time the market. I’m not convinced that it can’t be done.

That said, I think tax rates will be going up A LOT, and at least my base principal investments have already been taxed and can’t be taxed again (just the gains will be taxed). Think about it. I’m betting we will dramatically increase taxes. Even factoring the the extra money I would make by using a 401k, I think I’ll fare better because I won’t be selling in down years, which many people will be forced to do with the structured withdrawals. That, and I like having CONTROL over MY money.

Food for thought. Yes, 401k’s make plenty of sense if:
a) you think taxes won’t go up in the future,
b) you won’t be forced to sell during down markets, and
c) the compound returns on the money that would have went toward taxes outweighs any potential risk or liability for increased taxes in the future, as well as the chance of being forced to sell investments during down years where the investments have fallen way below what they are inherently worth.

If it’s your money, you should have access to it at anytime, no strings attached. I do. I’ll be paying less taxes in the future because I paid some of them now, with lower rates on capital gains and income taxes.

Go watch I.O.U.S.A.! It’s a great documentary (award winning!)!

I’d rather invest after-tax dollars, not because I’ll be further ahead in the end , but because I know I have access to MY money anytime I want it and I don’t have to completely worry about being forced to sell my investments in a regulated manner upon retirement.

Just wait until there are a lot of baby boomer’s retired and they are all selling a certain percent of their investments each year (because they are forced) and see what they think we they are selling into a depressed market… Meanwhile, I’ll sell my investments when I chose… Freedom to sell when I want, how I want, how much I want is something that I can sleep well at night knowing. Plus, I’ve already paid tax on much of this money… One less thing to worry about in a world where the US may be raising taxes, both for new social policies and just to meet financial obligations. GO watch I.O.U.S.A., the documentary… they have a 30 minute free version they just released on the internet. http://www.nabloid.com/iousa-30-minute-version/

The less you give to the power mongers and bureaucrats, the healthier our democracy will remain. All they do is waste your money, enrich their friends, undermine your values.