Is the 401(k) a Scam?
If there’s one thing I love about checking the Yahoo! Finance columns it’s that I know every time Robert Kiyosaki posts something I’m going to either laugh out loud or shake my head in disbelief. This past week has proved no different, and the self-proclaimed financial guru who shouldn’t be offering financial advice has done it again. This time he says that the 401(k) is the biggest scam ever.
Seriously? Kiyosaki is going to go as far as call the 401(k) the biggest scam ever, steer people away from them, and then provide no viable alternative? Sometimes I have to wonder how he’s still writing this column. So, let’s take a look at his arguments against the 401(k) and see if any of them are valid or if they are just little tidbits and stats taken out of context.
Let’s start right from the top when Kiyosaki references both a recent article out of Time Magazine and More Magazine. Time talked about some of the problems with the current 401(k) system, but Kiyosaki quickly jumps to Jean Chatzky’s More article. She wrote an article about using low-interest savings to pay off high-interest credit cards. In the article she states, “There’s no better guaranteed return on your money (except, perhaps, a 401(k) match).” Before jumping to Kiyosaki’s analysis, this is common sense, right? I mean if you take some of your money sitting in a savings account earning 1% and pay off a credit card charging 20% APR that’s a guaranteed return on your money since you’re going to be avoiding all of that costly interest.
Not so fast. Instead of taking the point of that article at face value Kiyosaki latches on to the “except, perhaps, a 401(k) match” part and blows everything out of context. He goes on to say:
Countering Jean’s wisdom of “no better guaranteed return,” the “Time” article stated, “At the end of 1998, the average 401(k) balance was $47,004. By the end of 2008, the average balance was down to $45,519.” If that is a great guaranteed return, I’m glad I don’t have a 401(k).
Huh? Jean’s point was in regards to using money earning little to no interest to pay off debt that’s charging high interest. Then she adds that getting a 401(k) match is also a guaranteed return that might be even better. So why does he jump into the fact that over the past ten years the average 401(k) balance is down slightly. Where did Jean say that the 401(k) is a guaranteed return? Nowhere. He simply picks up on a few words that don’t even relate to the underlying article and runs with it to try and prove a point.
Look, I can prove a point, too. Vanguard points out that 60% of 401(k) accounts are higher in value today than they were pre-stock market crash in 2007. People were saying it would take a decade or more to recover from this two-year market slump, but here we are just two years from the start of the meltdown and more than half of investors have recovered nicely. Hooray, look at all the good news! But I digress. My point is that anyone can cherry pick any data set they want to make their argument look good.
Riskier As You Get Older
He likes to point out one more little tidbit from the Time article that says: “The older you are the riskier a 401(k) gets.” This blanket statement is just plain dangerous if people read it without thinking about what it means. Of course, Kiyosaki doesn’t bother to explain how a 401(k) can become riskier as you age, but instead leaves it hanging so that it can strike a little fear into readers.
First of all, a 401(k) is only as risky as you make it. Period. Nobody is forcing you to put 100% of your nest egg into a small-cap fund. Nobody restricts a 60 year old from allocating their 401(k) into a no- or low-risk fund. Can a 401(k) become riskier as you age if you leave yourself completely exposed to stocks? Of course. But this has nothing to do with the 401(k) itself and has is the result of people making poor decisions. You can’t argue that the 401(k) is the biggest scam ever simply because some people take on unnecessary risk late in their life and get burned when the stock market has a drop right before they want to retire.
It doesn’t matter what type of account your money is in: 401(k), IRA, Roth IRA, taxable brokerage account, CDs at the bank, or real estate. If you don’t take the proper measures to adjust your exposure to risk as you age and your situation changes you can get burned. The 401(k) is just a few lines of tax code and there’s nothing in the code that says these accounts will get riskier as you get older.
A Few Good Points
Kiyosaki then goes on for a few paragraphs rambling about how he’s concerned for the baby boomers, predicts the economy will collapse, and points out how the Fed continues to print money. These are legitimate concerns and something we all need to consider going forward. But really, he’s just restating what he does in almost every column. He loves to point out how we’re all doomed and the rich are going to just keep getting richer without giving any actionable tips on how to do what the rich do. Sounds like a good salesman to me, lure people in so they will buy your books and attend your seminars.
One item worth pointing out was in regards to those who are counting on their home as their biggest asset. It’s true that this is going to be a huge problem going forward as many people, especially boomers, have sunk most of their wealth into their homes and are going to be faced with the prospect of having far less wealth than they expected. And as he mentioned, even if home values don’t continue to decline there’s a good chance that local municipalities are going to need to raise property taxes. This can put people in quite a bind, especially those who are already retired and now suddenly have more expenses.
So What is the Alternative to the 401(k)?
In typical Kiyosaki style, he comes out swinging with wild accusations and doesn’t provide any real answers. The 401(k) is such a scam, you shouldn’t save money in one, and we’re all doomed! So, where do we turn, Mr. Kiyosaki? He of course alludes to “the rich” many times, thus hoping to get people to buy his very own products making him even richer, but for the rest of us we’re left wondering. If the average person shouldn’t be putting money into a 401(k), how are they going to be able to afford retirement?
Kiyosaki’s primary teachings revolve around generating passive income, primarily through real estate and businesses. This is great and all, but what is your regular guy making $40,000 a year going to do? Can this person go out and pick up a few rental properties? Should they try and become an entrepreneur? Betting your retirement on income generating rental properties alone or giving up your job to start a business is just as risky as betting your retirement on the stock market, and it takes far more capital and opens you up to other risks you don’t have when simply investing your money. If you don’t have the cash to buy real estate outright what do you do? You borrow money. Now you’ve taken on debt to purchase something that is not guaranteed to go up in value and not always guaranteed to generate income. How is that less risky than a 401(k)? All of Kiyosaki’s methods for generating passive income and building wealth are good ideas and great ways to earn an income, but it isn’t feasible for 99% of the population and is not a substitute for simply saving money for retirement.
Is the 401(k) Really the Biggest Scam Ever?
I still don’t know how someone can make that assertion. The 401(k) in its current state is certainly not without faults, but calling it a scam is just plain silly. How is a tax-advantaged account that allows you to optionally enroll and then allow you to choose from various investment vehicles a scam? Sure, we have issues right now with some companies charging higher fees, not offering the best investments available, and some employers not offering the plans at all, but those things don’t make the 401(k) a scam.
It doesn’t matter if you have a 401(k) or not, but you need to plan for retirement. If you aren’t saving in a 401(k) you still need to be accumulating assets to provide for you in retirement. It doesn’t matter if you’re saving money in a savings account, dumping it into a 401(k), buying stocks in a brokerage account, or putting money into real estate. If you aren’t saving and subsequently investing that money somewhere, you will end up retiring broke and unhappy. It’s not the investment vehicle that’s the problem. It’s the simple fact that people don’t save enough, period. And even if they do, they can often still end up in bad financial shape in retirement because they made foolish investment choices. So, is the 401(k) a scam? I don’t think so. The only scam here is the one Robert Kiyosaki is operating by getting people riled up in an attempt to generate more sales of his own product so that he can laugh all the way to the bank. His underlying message that people should become more entrepreneurial and put their money to work for them is a good one, but telling people that 401(k)s are a scam is the wrong way to go about it.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I think what Kiyosaki is referring to is that even people who made ultra-safe, not foolish, investment decisions are in bad financial shape. This is due to the credit ratings agencies such as S&P giving AAA ratings to toxic risky derivatives (and who in later congressional testimony claimed that their credit ratings shouldn't be relied upon for decision making). Those same agencies are still the authorities for rating investment vehicles with their "unreliable" ratings. Of course if you meant that trusting credit rating agencies with your investment is foolish then I stand corrected.
Kiosaki's advice is usually awful, but that doesn't make Vohwinkle's any better. I cashed out my retirement accounts and paid the penalty and I am better off for doing so. Here's why I did it:
1. When the government offers you a tax break to put your money into something like a retirement account, they get something in return. With these accounts, they get control. I believe they will use that control to nationalize the accounts, convert them to treasury securities and, in effect, confiscate your wealth for a future annuity payment. You say no way? Look at what they just did with health care and tell me how it's any different?
2. By paying off my mortgage, I can now live on half the income I previously lived on. My mortgage tax break? I haven't gotten that in years. My total deductions were well under the standardized deduction already, even with the mortgage. THERE WAS NO MORTGAGE TAX BREAK FOR ME!
3. Every time you buy a financial product like a 401K or an IRA, a guy like Jeremy Vohwinkle gets a little more job security. I don't need what he's peddling. I don't want to pay for it. I don't want to pay JP Morgan or B ank of America or any of these parasitic scumbags a dime.
4. I bought some gold, silver and raw land with what was left. I keep a little in cash, but since Vohwinkle's buddies in the financial industry are hellbent on destroying the dollar, I didn't keep many.
Sorry, Jeremy, harsh...I know. But it's my money Pal, not yours. You made the rules to benefit you, not me. Cat's out of the bag. Epic fail, Dude.
Wayne said: "Whether or not you like Kiyosaki is the subject of your article. But whether you know it or not, your advice on the 401k are complete LIES. Before you speak, do the math and you will discover are dead wrong"
Actually I HAVE done the math with spreadsheets! I have compared different mortgage lengths, interest rates, etc. (also factoring in the tax write off you get for the interest you pay on the mortgage), compared investing differing % of income in a 401k vs other non-tax deferred accounts, took inflation into account, tried various scenarios with different tax rates now and later (always assuming my rate will go up over time), looked at converting a traditional IRA to Roth, etc. etc. I've done all of this over the recent years in multiple spreadsheets, and while I wouldn't sink every dime I had into a 401k, I'd certainly put enough in it to get the maximum company match. Now my situation is different from some others (I have no debt outside my mortgage), so your mileage may vary, but there's no way a 401k is a scam. I also saw a lot of misconceptions or misleading statements in Wayne's post. Time and space limits me from addressing all of them, but you will NOT be giving away 80% of your profits. Certainly the fund management will take a cut (as they do for ANY fund, and yes I'm aware that there are issues with 401k funds taking too much for that cut, but it's not like they're taking 10% of your profits or anything like that), but even if your maximum tax bracket turns out to be 50%, most of us will only have a small amount of our money being taxed at that rate, and the majority of it will be taxed at the lower brackets. Yes, you need to add state tax too. But if you don't pay the taxes now, your entire pot of money is growing, not just the amount you can put into a post-tax fund which had been depleted by taxes from the get-go. Certainly if you do well with your investments, the goverment will make more money in the long run by taxing you later, which is fine since YOU will be making more money too. I'm sorry, but the 80% number is completely pulled out of your ass and there's no way you can possibly demonstrate that to be true.
Also, the claim about taking 1% of your principle for "management fees" -- that isn't typical of most mutual funds. If you go to a financial planner, they may charge you 1% of your assets under management, but if you're smart, you go to a "fee-only" planner and let them do the work to tell you what to invest in, and then YOU make the online transactions yourself and save a boatload of money. You probably don't want a planner churning your portfolio and opening yourself up to capital gains taxes either. Just re-balance your portfolio on occasion with their guidance at ~$200/quarter or so, and if you have $1M of assets, that is only 0.08% of your portfolio.
The 401k may not be a true scam but it is a very misleading retirement plan which is a much greater advantage to the employer and much less to an employee.
The employer may match a certain amount but is not required and this is becoming more common. If your employer does not match you are better off taking that money and starting your own IRA. In the cases where an employer does match there are many requirements that may have to be met before they will match. First you may have to be vested and it will take a certain amount of years before they contribute. Also they could take these back if they eliminate you or you leave for another employer.
Then in terms of the investments and fees involved is another misleading factor of these plans. You are often limited in choosing your investments and tied to certain agents and brokers. These fees are often very high and take away for any gains that you may have. Also these investments are heavily reliant on the stocks and the stock market in general. If you have a stock market that haven’t been good, like the last 10 years you are not going to make much in these plans. You would better off starting an IRA invested in more conservative investments. The 401k is only good for very few and most would be better off investing on their own or having a traditional pension. But the traditional pension is not good for the employer.
Look at public employees and the scrutiny that pension are causing lately. Pensions are expensive to fund and public employees are funded by local and state taxes. Employers developed the 401k because it’s in their benefit, not employees. Many did not want to fund pensions anymore because they are costly. They developed the 401k to limit their contributions!
Whether or not you like Kiyosaki is the subject of your article. But whether you know it or not, your advice on the 401k are complete LIES.
Before you speak, do the math and you will discover are dead wrong. Simple math and Accounting 101 tells you the 401k is a liability to you and an asset to Wall Street, US Government, and to your banker. The 401k earns money for Wall St, Govt in future taxes, and your banker whom you pay mortgage interest to. The 401k does not work for you, it works for them. You take 100% risk in stocks, and they get 80% of the profits. What will your tax rate be when you retire? Did you know if you are diversified into mutual funds, they typically take 1% of your entire principal per year for "management fees". Plus if you have home, automobile, or credit card debt, contributing to the 401k will keep you poorer longer. For instance, I've had $20k tied up in a 401k, which I could have withdrawn 5 years ago. After taxes I would have wound up with $13k to pay down a 7% mortgage. By keeping the $20k ($13k after taxes) in the 401k it cost me $25,000 in interest on the $13k, in just 5 years! That is how a 401k keeps you poor, and I'm piping mad about it.
That eligible $20,000 in the 401k before taxes COST me $25,000 in after tax money, in just 5 years.
Also figure up, after 30 years of contributions, and mutual funds getting 1%/year of the principal, they essentially get 25% of your total money. Then what will your tax rate be when you retire? I bet my tax rate will be higher. That is how they get 80% of your profits......just do the math in an Excel spreadsheet, and run the numbers.....The 401k works for the govt, wall street, and your banker.....It NEVER works for you. What's better, to pay for a house in 15 years, and be debt free for 15 years the Dave Ramsey way, or to pay on a house 30 years AND contribute to a 401k? That house will cost you 3 nearly times as much in interest because you chose to contribute to the 401k. For me, I'd rather own 3 more houses! Do the math. Do the accounting: simple assets and simple liabilities. You can only classify 60% of the initial principal value of the 401k as an asset in your name. Remember taxes due today and in the future are classified as liabilities. Unpaid "management fees" to mutual funds are liabilities. Interest you are paying on your home, car, credit cards are liabilities you have to pay for. Why would you invest in a liability like a 401k? Plus the 401k laws change yearly (See amendments to the ERISA act), so your money is subject to the govt changing the rules and extending the retirement age. Will you be alive to withdraw from the 401k? Plus if the market goes down, wall street takes a bigger chunk of your profits (1% of your total principal). So the numbers and laws and regulations are against you getting ahead in a 401k. There are a lot of strings attached that no mutual fund salesman will tell you about (after all, it is mutual fund salesmen that persuade you to contribute), and the government loves it when you contribute because it earns income for them! Find me one person who got rich from a 401k that was "diversified an a portfolio of mutual funds"?
I will grant you some leniency on 401k for people who are bad with money and blow their money on vacations and new cars. But for people who can budget a check book, a 401k is a very baaaaaad "investment". In fact, by design, a 401k is not an investment, it is a tool to keep you poor.
Please counter my argument, but I ask you FIRST, run the numbers on an excel spreadsheet for 20 years, considering good 8%-10% stock market growth with a couple 5% down years, dollar cost averaging, using today's tax rates, mutual fund fees, and assume you have a 30 year mortgage paying interest to the banker. For simplicity, leave inflation out of the equation (if we do factor in inflation, your numbers in terms of purchasing power will be peanuts in the end). I have done this, and I have run it through my CPA (she at first told me the same old sales job language you have given, but after she discovered I knew what I was talking about, she dropped her "act" and started working FOR ME.).
Kiyosaki Event caught on hidden camera:
Tax advantaged is relative, if you plan on needing less money in retirement and tax levels staying the same or going down then yes. As for me, I plan on needing (much) more, and tax rates going up up up... I have my problems with RDPD but also think that the assertion that 401(k) is inherently tax advantaged is quite simple.
Interesting article! Robert Kiyosaki's idea of becoming wealthy might be extreme,his book offers some good points. it definitely helped me reevaluate my choice. My parents kept telling me to go to good college which put me on a huge student loan, then get a professional stable job. Then the recession started. Generating passive income is important,but most people don't have access to it right away. Meantime having a job that pays your bill while putting some money in 401K, then if you are still interested in becoming rich, you should use Kiyosaki's basic concept to increase your assets. You would have to be determined to work really hard. And not everybody wants that type of life. I guess many people don't mind enjoying thier average lifestyles.
I think Kiyosaki makes a good point in some areas. For example, you shouldn't have all your retirement funds in a 401K. Calling the 401K a scam was a PR stunt to get people talking about him.
Can someone recommend a book/author or two that would be great teachers in investing or advice on how to become financially successful?
I have read his stuff in the past on Yahoo and have yet to agree with many of his points. Writing for such a large site like Yahoo, he should be more conscious of the fact that he could be deterring people from saving for retirement all together. He probably just wrote this article to stir up controversy.
@Financial Samurai: 100% agree! Why are 401k and IRAs contributions too low?? Could it be our govt does not want too much of a tax deduction?
As someone who has read Robert's work, some of his ideas are actually not bad and (gasp) consider sound. Some of it can be looked at different strokes for different folks. I'm a business owner and investor for over 10 years, so I have some insight into these areas.
Yes his books contain a lot of fluff, yes there is no rich dad, and you can summarize his books in less than 20 pages.
Robert's issue is he assumes everyone should own a business. While I agree, I also believe not every CAN run a business. Just like investing in specific stocks over indexing, not everyone should do it
In my blog, I hope to discuss real actionable items with investing and business, unlike Kiyosaki.
To say a 401k is 100% a scam is just headline grabbing marketing, though there is some truth to the statement.
Let me give you a related example. Roth IRAs. Many consider moving money from traditional IRA to a Roth.
Read the WSJ comments. Political risk, something that is rarely mentioned, is a real risk with Roth IRAs. Who is to say our government will not tax it in the future? Chew on that.
The Truth Behind Hidden Fees in 401(k) Plans
Haha I would heartily recommend the basic principles in Rich Dad Poor Dad but I think that this ex Xerox copier salesperson is in a little over his head on even this most basic of financial knowledge.
I think Robert K. doesn't really understand the stock market, so he makes up stuff. But he really dropped the ball on the 401k match part you described above.
I read most of his books, and while they are interesting, I wouldn't take to heart what he has to say. Read John T. Reeds site about his analysis of Robert Kiyosaki's claims. It's a real eye opener: http://www.johntreed.com/Kiyosaki.html
Robert Kiyosaki is like a number of other popular authors and "gurus" who like to take a nugget of truth and wrap it in 7 layers of fluff. I read Rich Dad and all I got out of it was to start buying rental properties and start a business if I wanted to be rich. Problem is, everyone I know who had rental properties didn't make very much money and had the added headache of being responsible for the properties and worrying about their tenants. I'm surprised he's still around trying to hand out advice.
As far as 401K's go, if your employer is going to match that's like free money. I'm 40 and honestly don't expect to receive anything from SSA when I retire, so what am I supposed to do, live off my dilapidating rental properties in my old age?
Who benefits more? If this were sports it would the be players vs the owners. So who is better off with a 401k the participants or the 401k providers? There are some definite benefits of having a 401k but if the providers are the ones making all the money then maybe the benefits are being over hyped? How do participant values from a 401k and an IRA compare? Pretty similar benefits except for the match. Maybe the solution is to provide in-service transfers within all 401ks with not penalty for doing so?
Many people experience lesser 401k benefits as years pass by. And true, 401k has very low value.
I am not sure if it is intended to be a scam but I believe that it is created to also benefit the players.
But now that we know what is really happening, maybe it's time to find a better way like entrepreneurship.
It might be risky but with proper and simple planning, it promises better returns in lesser time. And it's not too late to do just that and have better results for a better lifestyle.
Thanks for this valuable information.
There's nothing wrong with getting $16,500 in free money every year from my company match, but the 401k contribution limit is WOEFULLY too low.
The gov't needs to raise the limit to $50,000/yr.
You could have invested your 401k in a gold or commodity ETF if they had allowed it and you would be ahead. Or you could have simply had it invested in cash (money market type mutual funds) and though the dollar has depreciated, you would still be ok.
But if you follow mr Kiyosaki's advice and invest in real estate (at the wrong time) or blindly joined a "network marketing company" even if you hate to "sell", then you're still screwed.
The truth is any investment, whether in paper assets, or your business requires research and some savvy to be successful.
Kiyosaki may be right; but I come to that by a different point of view.
I think that the 401K and IRA were originally created to make sure that there was sufficient workforce to grow the US economy. As productivity and wages increased it became apparent to the heads of industry that workers would be able to accumulate enough money to retire at a very early age thus causing labor shortages.
The creation of the 401K and IRA was a way to keep people in the workforce longer. 401K and IRA's are the way to save money and save on taxes, but...they may cause people to work longer than needed.
For example, take a exceptional saver who by 40 years old has saved $2 Million in their 401K and IRA. They are very likely going to be unwilling to retire and live off their nest egg because of the tax and penalties of an early withdraw. So, off to work they go when retirement is really an option.
The people who fully utilize the investment and tax benefits of the 401K and IRA are the very people trapped by the tax and penalties.
Maybe the message should not be that 401ks are a scam but instead the people need to better understand what they are investing in. Most people have blind faith in 401ks. It's easy to invest in and becomes their only means of savings. They don't understand the downfalls of a 401k and there are downfalls. People need to be educated how to properly utilize a 401k rather than rely on it. Too many people are reliant on their 401ks.
As for Trump, after 'The Apprentice' and now Trump International (MLM), I think it's quite obvious that his intentions are all about money. How to make as much as possible, any way possible. He is very good at it.
@wayne: Another GenX-er here. I don't know the specifics of your situation, but my wife and I are very fortunate in that we'll max out both our 401(k)s and IRAs. Without the 401(k)s, I don't think we would be able to defer enough income to support the type of retirement we would like. Like many aspects of life, some of us are dealt crappy cards (e.g. 401(k) plans/investments) and some are dealt great cards. I hope you can make the most of your situation.
Related to your other point (value down 50%, up 30%), no one that I know freaks out when toilet paper is on sale 25% off, but it's the end of the world when SPY is 25% down. I'm young enough that I was fist-pumping the air last October and plowing more into my accounts.
Wayne - I'm solidly Gen X and I still think 401(k)s are a good idea. Yes, if I back out my contributions over the past year I won't be that far ahead, but that's fine since I have another 30 years to go before retirement.
However, one difference between you and me is our respective employers. My company offers a pretty good 401(k) package. We have a broad range of funds to invest in, and the company matches either right away or one year after employment (I don't remember which since it's been a while since my hire date), and you're immediately vested. It sounds like your employer doesn't offer as nice a package, and that is where the holes in the system are. Not all 401(k)s are equal.
As for why Trump would hitch his cart to Kiyosaki? I don't think Trump cares as much about giving people good education about personal finance as he does about making money for himself. Kiyosaki is very popular, so being attached to him gives you a greater opportunity to make money. That, or Trump is as loonie as Kiyosaki.
Unfortunately, many people are losing some money on their 401k's but I wouldn't say that it is "The Biggest Scam" or even a scam at all. His title is an exaggeration but I did end up reading the article because I was curious.
Every commenter here sounds more like a GenY than a GenX. All praise the great corporate machine. More Kool-aid please. If your 401K fell by 50%, and you are up 30% for the year, you are not ahead. My company started matching contributions just last year, so prior to that I never used it. If yours doesn't match contributions, you should be in a Roth IRA not 401K. Ever take a look at the fees of your 401K?
If he is such a loonie, why did Trump co-author a book with him? He is right when he says high school kids graduate without the ability to balance a checkbook, and they are not taught financial education. He is right when he says your house is not an asset (until you have more equity than what you owe). If it costs you money, it's an expense. He is right when he says the most important thing is cash flow. I don't know how I made it through my college Economics classes without vomiting. Inflation is NOT good, economists merely believe this because that is what they were taught. What would the rate of inflation be today if it were calculated the same way it was during the Carter administration? Anybody? How many of you even knew they changed the way it is calculated?
Like Suze Orman, there is little likelihood he writes those columns. If he does, you're right about the rehash and he should be ashamed - so should Yahoo!. Given the opportunity, many us would treat the opportunity to reach such a large audience with great respect.
He has a huge following which makes all of us worry about his misuse of marketing. Let's face it, he's a pitchman without a very good product.
I made a stab at that article as well and decided that if it was just a few lines of tax code (originally designed for rich guys looking to stash even more money and then used by rich guys to save their businesses a few extra bucks by eliminating the pension), why not change it at the source.
A few points I made in the article suggest that saving the 401(k) might be as easy as doubling the tax deduction, forcing a minimum 5% contribution (which often has little or no effect on a person's take home pay) fixing the retirement tax bracket on draw downs and redirecting the tax refund (by sending that cash to a retirement account).
Most people have not been a 401(k) long enough to make it work. But calling it scam is not right. Should they all be purchasing vending machines instead?
You can read the full article here: http://target2025.com/401k-taxes-retirementplans/
You know I lost a lot on my 401(k) last year. But I have a good amount of time before I retire. That means that all of those additional contributions and matching funds were able to by securities cheaper than they were able to before. Now my 401(k) is up about 30% this year and I would expect that over the next 30 years it will go up more.
Kiyosaki does a great job selling and getting you to think of ways to make money, but like you remark there are no clear cut answers. These days he makes his money with his books and lectures so I'm sure his comments are about generating buzz so you think him an expert and buy his products.
You can take and statistic and blow it out of proportion. I've heard arguments that 401(k)'s aren't all that beyond the company match but a company match is still free money for retirement (free is so far as you still have to contribute to get your match). It's a great vehicle for most people who wouldn't otherwise think about retirement.
I really enjoyed Rich Dad, Poor Dad. Sure, it's full of a lot of fluff and even nonsense, but it makes a few really important points, and makes them well. Ever since then, however, Kiyosaki has gone off the ranch. He makes silly claims for attention. And comparing average 401k balances across 10 years is also ridiculous. It could reflect nothing more than the fact that more young adults have opened 401k accounts with low balances. If his point really is that the stock market is a bad investment, I suspect he'd have a hard time explaining away Warren Buffett.
You beat me to it! I was going to write this very same post on my site until I saw your headline! He is fast becoming the Ann Coulter of personal finance/investing. He just says crazy stuff to get get people's attention. And that's what pisses me off the most: he doesn't provide an alternative. OK, how are people supposed to retire then? No answer!
RDPD is a completely tout and borderline scam artist. His investment commentary does gives good fodder for discussion though! Nice writeup Jeremy.
Every time I hear someone say how much they like 'Rich Dad, Poor Dad' and how it changed their life, I want to vomit. The entire book is made up of falsehoods and vagaries. He's a huge scam artist.
I saw that article the other day. This is a pretty good critique of it.
401k's are just a tool. A 401k match is certainly an awesome benefit. Calling 401k's a scam is just pandering to people who've lost money and are looking to place blame. Painting 401k's as evil is easy right now since so many people have lost money. They want to blame the tool rather than themselves.
Kiyosaki doesn't provide a good argument for why 401k's are scams or a solution for the alleged failures of 401ks.
Thanks for sharing that article, Jeremy. I am always a little surprised when people view a 401K solely as an investment strategy. 401Ks work because they come directly out of your paycheck before those savings dollars have to compete with other expenses in a person’s life. Even if the 401K didn’t have its advantageous tax status, a variety of investment options, or even a match, I would be a fan by virtue of how much easier it is to save money through payroll deduction.
A 401(k) might not be a fool-proof strategy to option for retirement for all people, but it is a very viable option for many. I doubt that the thousands of people who have benefitted from 401(k)s over the years would agree with Mr. Kiyosaki’s assessment. But 401(k) or not, it’s generally a good idea for people who plan to retire someday to build and preserve a diversified portfolio which aligns with their long range financial objectives and risk tolerance. There are simple steps that anyone can take to select less-risky investments, if that’s their preference.
Thank you for taking the time to respond to Kiyosaki's article so thoroughly and articulately.
A few years ago, I was at a non-financial conference where Kiyosaki gave some brief remarks. The most memorable: "I am not a best-writing author, but a best-selling one." Of all his statements, that was the one I have most passionately agreed with.
Mainstream financial advice may not sell as many books, tapes, seminars, or games as Kiyosaki's antics, but it indisputably can change lives for the better. It's why I wrote Beyond Paycheck to Paycheck.
I know both you and I sleep better knowing what we do legitimately helps. But I bet Kiyosaki has much better sheets.
I clicked on his article to read it for myself to see what his points were.
I was hoping for some really poignant explanation on tax-deferral and how the government loves 401k's because they get to collect a lot of money off of them when people retire, or how the government only gives you 11 years of control over withdrawing "your" money in 401ks (ages 59 1/2 to 70 1/2).
Instead I found a totally drab article with some subtle (or not so subtle to the observant eye) overtones to his Rich Dad book!
Aside from the fact that he wasted a really great title with anemic content is the ironic fact that this guy makes a living off his whole "rich get richer" bit that just fills his pockets with more money from unsuspecting people who don't want the rich to get richer.
You gotta admit, he's a brilliant marketer!
Is it just me or are most "financial gurus" that seem to get all the attention just full of it. They make blanket statements and don't back them up with any concrete evidence. They just seem to say things that people can relate to. Kiyosaki built his career on owning your home, which has been instilled in pretty much everyone for years. Now people are feeling pain from their 401k so he'll feed off that feeling. I guess he's a genius then?
On the other side you have the investment companies like Vanguard trying to paint a picture of roses. The only reason people's accounts are higher value is because of the continual contributions not necessarily because of investment performance.
Oh, Robert. It's the usual vague statements dressed up in words of BS. It's remarkable how he has yet to prove his investing worth. We have yet to see him grossing any Forbes list, yet he's selling products left and right as if he's an investing guru. He never digs deep with anything. Seems to be working for him although some will argue that the Robert Kiyosaki empire is the "biggest scam ever".
Love your post.
Yeah, this guy's an idiot and writes shocking titles to get clicks.
Let me see...company matches, tax deduction, several investment options in most plans, paying yourself first...what a scam!
Great post! I am constantly amazed at Kiyosaki's ability to continue serving up the Kool Aid and that people are still willing to drink it.
Few things make me smile and click "Stumble" as quickly as anti-Kiyosaki rants. That guy (and a few other "gurus") gives me a reason to keep at the blogging gig every day. Somebody has to provide the sane counterpoint to his BS. :)
Kiyosaki's article sounds more like a April Fool's Day post rather than actual investment advice/commentary.
Then again, I would imagine it's fairly easy to say any mainstream retirement saving/investing vehicle is a scam when you've published dozens of $25 books (of which one or two might actually be worth reading) to fund your own retirement.
Your discussion of Kiyosaki's risk conention is 100% on! I don't even understand how a statement like that could get past an editor's desk.
I won't do it, but I'd love to take a look at Kiyosaki's earlier articles circ 2006 where he probably mentions that Real Estate 'never' decreases in value lol
Anthony, you're exactly right. In just the past few years there has been a huge surge in the number of people doing in-service withdrawals, getting laid off and cashing out some or all of their 401(k), and countless people taking loans against their retirement account. All of these things affect average balances so it's ridiculous to just point out that the average balance is slightly lower compared to ten years ago and use that as a basis for your argument.
I think it's funny how folks latch onto statistics with embedded heroic assumptions like that in the Times article pointing out the 2008 average balance is lower than the 1998. For example, how many retirements and/or roll-overs happened during that time? Too many questions let unanswered.
Take what happened to my wife. By serendipity, we started deferring much of her paycheck around the end of February 2009. As of today, her 401(k) balance is up about 20% compared to her contributions. I'm sure there are thousands of examples like these that aren't captured in meaningless sound-bite stats like above.
If someone wants to complain about 401(k)s, they should focus on the hidden fees that providers charge that aren't disclosed to contributors. There are deficiencies with 401(k)s, but it's just not meaningful to lump them in with uncontrollable market factors.