Everyone tells you to do it... Your friends, HR department, parents, conscience, CPA, super bowl ads...YOU NAME IT! Everywhere you turn, the Employer Sponsored Retirement Plan (a.k.a 401k, 403b, SEP IRA etc) is positioned as the end-all and be-all for your retirement. We have been led to believe the only way you can retire is by participating in this thing. Furthermore, we feel if we don't put money into it every paycheck, we may jeopardize one of the biggest reasons we get out of bed every day and go to work...the long game…Retirement.
But do you REALLY need a 401k, Pension Plan, 403b or IRA to retire? What if you simply took those contributions and saved them somewhere else? What if you still saved the money, but put it somewhere that was not in the IRA/Employer Plan/401k at work that everyone else in your office puts their money? Could you still retire?
I believe the answer is, YES!
I think it’s probably fair to assume that some of you have a desire to "quit working for the man," start your own business, purchase a piece of real estate and foster that entrepreneurial spirit. I also bet one of the things stopping you may be access to money to get the venture off the ground. Have you ever looked at your finances and noticed too little cash and a BIG Retirement Plan? What if the account balances were flipped flopped and your 401k balance was your savings account balance and your liquid savings, your 401k balance? What would you do with a sudden influx of liquidity? Start a business? Buy a piece of real estate? Or jump on some other opportunity you have been eyeing?
To begin to answer these questions above, let’s start with these two big ideas:
1. All assets on your balance sheet can be used for "retirement" (not just Retirement Plans) and your savings plan should reflect this concept.
2. The most financially successful people I know built wealth outside of a Retirement Plan.
#1 All assets on your balance sheet can be used for "retirement" (not just Retirement Plans) and your savings plan can reflect this concept.
In saving money, what is most important is the amount you save, not where it goes. And your savings plan should include many types of savings "buckets," not just your employer retirement plan. These buckets could be cash, real estate, 401ks, Joint Investment Accounts, Cash Value Life Insurance, a business, other people's businesses, etc. with different characteristics from a liquidity, tax and risk perspective.
I see time and time again people committing too much of their savings to Retirement Plans , and subjecting a high percentage of their assets to:
• Limited access and control
• A high concentration of market-based assets with volatility, like stocks and or equity-based mutual funds
• Ordinary income tax treatment forever
• Potential Early Withdrawal Penalties
I am not saying not to participate in your company's 401k, however, I am saying you need to think long and hard about what you commit to these plans. If you have an Emergency, an itch to do something on your own one day, want a beach house or come across an opportunity from a friend or family member, the Retirement Plan is not the most efficient bucket to access for these purposes. And if the Retirement Plan is the only source of Capital on your balance sheet you may forgo that opportunity because of retirement plan characteristics, and the opportunity could have been a good one.
Accumulation periods for most people last 40-50 years and it is very hard to predict what opportunities will come across your desk or be discussed over coffee or a beer over such a long period of time. Is your balance sheet positioned to pounce on the opportunity when it comes? If not, now is the time to adjust your savings plan, enhance liquidity, and make sure risk is appropriate. In my experience the opportunities will come, just be ready as you build your War Chest outside of your Retirement Plan.
#2 The most financially successful people I know built wealth outside of a 401k.
Think of someone you know who you would consider rich. I'm not talking Mark Zuckerberg here, but someone you actually know. How did they get that way? If it was inherited, how did the benefactor build their wealth? I think it is a safe assumption it was not their 401k Plan. It was more likely a business venture or something to do with real estate.
It’s also likely the person you are thinking of has a Retirement Plan. They may want to capture a match, defer taxes into the future, or protect the balance from lawsuits. However, I bet it dwarfs in comparison to their net worth derived from the stuff outside their Retirement Plan. The Retirement Plan compliments their wealth building instead of being the foundation. So why do a clear majority of people, do the opposite and champion that 401k at work? Is it the convenience, the super bowl ads, parents, or a herd mentality? Or is it they have never had a meaningful discussion about how to save outside of their Retirement Plan?
Consider this one step further... You come across an opportunity but you fall into the group of people that are low on liquidity with a BIG ol’ Retirement Plan. A friend comes to you and fills you in on a wonderful opportunity that requires cash. Do you take an early distribution from your IRA? Can you? Should you? Would your friends, work mates, CPA support your decision? Probably not, but I am here to tell you... You CAN take a distribution from a Retirement Plan.
Taking money from a Retirement Plan and funding another venture is possible. I see entrepreneurs do it all the time. I can think of one person client who cashed in their IRA years ago to start a High-End Apparel company. The rate of return that has been achieved in his business is far greater than any S&P Index Fund since the decision was made. The taxes and penalties that ensued are a drop in the bucket next to the return the business has achieved and the income it has generated. The decision was a good one so far; the risk was worth the reward.
The opposite can also be true... I have seen entrepreneurs cash in their IRAs and the opportunity did not pan out. Now, they have no business or retirement plan and the taxes and penalties on the front end hurt... and it only resulted in loss…So the risk is real!
In closing, my intent with this article was to change your paradigm about Retirement Plans and to encourage deeper thought about your savings plan. The way you are saving now may or may not align with an entrepreneurial itch or other opportunities you come across, so never forget about the importance of liquidity and access to capital. Saving the right amount is so very important over the years and so is the type of bucket you save into. Consider all of your options, risks and potential benefits. Happy Saving!