RPF0448-Mythbusting-401k_Doesnt_Make_You_Rich
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00:00:30.000 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:34.600 | skills, insight, and encouragement you need to live a rich and meaningful life now, while
00:00:39.340 | building a plan for financial freedom in 10 years or less. My name is Joshua Sheets, and
00:00:43.360 | I'm your host. And today, we continue with a myth-busting show, "Why Your 401(k) Won't
00:00:49.640 | Make You Rich."
00:00:51.840 | Information for today's show comes in via a comment that was recently posted just this
00:00:55.880 | week here in our Radical Personal Finance community Facebook group. A listener writes
00:01:00.840 | in and said this, "Joshua has expressed repeatedly that people don't get rich using 401(k)s,
00:01:07.160 | and I just heard another podcaster express similar sentiment. Am I missing something?
00:01:12.080 | I do really well working as an employee and have zero interest in running my own business
00:01:16.480 | except possibly adding real estate to my portfolio. I've been investing 100% in stocks since
00:01:21.440 | I graduated from college, and I'm happy with my personal rate of return. I understand
00:01:26.000 | that most people don't get rich with 401(k)s, but to me, it appears the problem is not with
00:01:32.200 | 401(k) or the process, but the fact that people are not saving enough money and/or choosing
00:01:37.880 | bad investments. What am I missing?"
00:01:42.520 | Various community members piped in with good contributions, but I thought this was a valuable
00:01:48.160 | topic for today's show. There are many things that I like about the structure of a 401(k)
00:01:55.560 | plan and there are many things that I don't like about the structure of a 401(k) plan.
00:02:00.080 | I thought about doing today's show 21 Things I Hate About 401(k)s. But if I do that, it'll
00:02:06.240 | take away from the central objection that I have to looking at a 401(k) as a primary
00:02:14.460 | engine of wealth building. The objection is this. It's not that you can't get rich using
00:02:26.760 | a 401(k). It's that the 401(k) is not causing you to get rich. You can put about $18,000
00:02:39.880 | into a 401(k) and defer that in as far as your personal deferment right now under the
00:02:46.420 | current tax law numbers. You can put more than that in if you're over 50 and your employer
00:02:52.780 | might put additional contributions and matches in and you could set up additional ways to
00:02:57.700 | get more money into it as well. Some accounts could be designed to be able to get as much
00:03:01.460 | of it as about $50,000 per year into the account. Obviously, if you invest $18,000 per year
00:03:12.500 | into an account and you do that over the course of 40 years and you earn say 8% interest rate
00:03:20.940 | and you start with nothing, over the course of 40 years, you can get rich using a 401(k).
00:03:28.180 | The calculation on that would come out to be about $5,036,000 if you were to contribute
00:03:34.300 | that $18,000 level over the course of 40 years. It's not that you can't get rich using a
00:03:40.980 | 401(k). It's that the 401(k) is not what's making you rich. Here, I want to just focus
00:03:47.040 | today on the question of causation versus correlation. It's my opinion that 401(k) and
00:03:58.200 | wealth that's built in 401(k) is correlated to people who are rich but there's not a causative
00:04:04.040 | relationship. Let me expand. The question of causation versus correlation is one of
00:04:09.000 | the most significant logical fallacies and areas of research that we all need to continually
00:04:15.760 | keep in mind. I never find that I can let my guard down because I often look at a factor
00:04:20.920 | and I'll think that this factor A is causing effect B and then something else will happen.
00:04:28.640 | I'll come along and say, "Wait a second. Is there something else going on?" This happens
00:04:33.360 | in a lot of areas in our own life, a lot of areas of policy, of – just everywhere throughout
00:04:42.200 | society. Let's start with an example just to make this very, very clear. It's been
00:04:47.280 | measured and observed that as ice cream sales increase, the rate of drowning deaths increase
00:04:53.800 | sharply as well. This is my favorite example because it's true and it's measurable.
00:04:59.660 | As ice cream sales increase, the rate of drowning deaths increase sharply as well. So the obvious
00:05:06.860 | conclusion is that ice cream consumption causes drowning. After all, isn't that why your
00:05:14.840 | mother and your grandmother said, "No, you can't go swimming right after you eat lunch.
00:05:18.680 | You have to wait a while for the food to settle," because ice cream consumption causes drowning.
00:05:23.640 | Is that the right conclusion? That example should immediately spark it. You're thinking,
00:05:31.400 | "Well, no. That's not the right conclusion. I can't see how ice cream causes drowning.
00:05:37.240 | Could there not be another factor going on here?"
00:05:41.240 | So the simple obvious factor between these is that you have to look at the time of year.
00:05:49.560 | What's the calendar time of year and what is the effect of the temperature on ice cream
00:05:56.620 | sales and also what's the effect of temperature on the number of people that are swimming?
00:06:01.780 | More ice cream is sold during the hot summer months than during colder times of year. It's
00:06:07.640 | also during the hot summer months that people are more likely to be engaged in activities
00:06:11.680 | around the water such as swimming. Because more people are going to be engaged in activities
00:06:17.020 | around the water, there's a good chance that more of them will drown because of their time
00:06:23.040 | in the water. So that would be the more fundamental relationship.
00:06:27.240 | Now even that, you could say that there's not necessarily a causative relationship.
00:06:32.480 | It's not that summer causes drowning deaths. But the fundamental factor that's influencing
00:06:40.260 | both of these things is the time of year, not the fact of eating ice cream. If you grasp
00:06:47.580 | that concept and you start looking into areas in your life and you start looking at areas
00:06:52.000 | in society, you find yourself questioning a lot of commonly accepted wisdom.
00:06:57.320 | I've done many shows on education, the common – the idea of government education, how
00:07:03.420 | to improve schooling, things like that. This is a common debate. I've never seen any
00:07:08.080 | evidence for example that spending more money on schooling improves the outcome and the
00:07:14.560 | results. The consistent theme that people claim is that if we spend more money on schooling,
00:07:21.880 | we tax citizens higher, spend more money on schooling, then we spend more money and we
00:07:26.880 | do that, then we'll be able to improve the outcome and the results.
00:07:30.880 | But I've never seen any evidence of that. It might exist. I'm not an education specialist.
00:07:34.560 | I've just never seen any evidence of that. I've seen lots of evidence that seemingly
00:07:38.640 | the fundamental factor or at least one of perhaps two or three fundamental factors that
00:07:44.180 | improves educational outcomes is parental involvement. The more involved that you can
00:07:50.480 | get a parent in a child's education and their schooling process, the better the outcome.
00:07:56.440 | That doesn't cost money.
00:07:58.840 | And so that's just a politically charged example to demonstrate that this exists throughout
00:08:04.280 | society. We all have areas in our lives that we're confusing the factors involved and
00:08:12.920 | we all should be – try to seek to be aware of them and search those things out.
00:08:18.560 | So to state the matter clearly and then expand and try to give some more proof for my case,
00:08:25.560 | it's my claim that high 401(k) account balances aren't causing people to be wealthy.
00:08:34.840 | It's my claim that high 401(k) balances are correlated with people who are doing other
00:08:41.660 | things to become wealthy.
00:08:45.040 | Let's talk through this by using the format of the factors needed to build wealth. If
00:08:53.520 | we're going to do a calculation using a financial calculator, there are a total of
00:08:57.920 | five possible numbers that we can use and we can only solve for one of them at a time.
00:09:05.440 | In this case, the number that we're going to solve for is going to be the FV function
00:09:10.320 | on a financial calculator, the future value. And the goal is how do we get a high future
00:09:16.280 | value. If we're starting off, we're in the beginning or middle of our careers and
00:09:19.720 | we're looking forward to retirement age and we say, "I want to have a lot of money
00:09:23.440 | in an account, high future value. How do I get there?"
00:09:26.120 | Well, there are four factors that will contribute to my reaching that high future value. Those
00:09:32.800 | four factors are N, the number of payments, specifically how long am I investing. Am I
00:09:41.400 | investing for five years, 25 years, or 50 years? I is the rate of interest. What is
00:09:48.920 | the actual realized rate of interest that I receive on my investments? For this, we
00:09:54.880 | have to take the gross interest rate, the gross gain on the portfolio and pull off our
00:10:01.240 | taxes and our fees. PV is our present value. That's what we start at. Do we start with
00:10:08.800 | a lot of money or a little money? And then payment is how much money do we put into the
00:10:14.000 | account every month or every year.
00:10:17.400 | With those four factors, we can calculate what our future value is going to be. You
00:10:25.280 | want your number of payments to be as long as possible, all things being equal. The longer
00:10:30.480 | you can invest, the more money that you'll have at the end of your investment time period.
00:10:37.120 | Whenever possible, you want that I, the interest rate, to be as high as possible. All else
00:10:40.760 | being equal, the higher the interest rate, the more money we'll have at the end of our
00:10:45.480 | investment term. We want that number of that payment to be as high as possible. All else
00:10:51.900 | being equal, the more money we can save into the account every month or every year, the
00:10:58.280 | more money we'll have at the end of the investment period.
00:11:01.360 | And finally, we want to start with as high of a beginning value as possible because all
00:11:07.160 | else being equal, the larger our portfolio is at the beginning of our investment term,
00:11:13.360 | the higher our future wealth will be. The only one of those variables that the idea
00:11:19.240 | of a 401(k) account directly impacts is possibly the interest rate because it possibly helps
00:11:31.400 | us to defer some taxation, which helps the money to grow more consistently and at a lower
00:11:39.480 | cost over time. That's the primary factor. If you have an employer match, it might affect
00:11:45.960 | your payment as well. So I guess I shouldn't say the only. Forgive me. If you have an employer
00:11:49.480 | match, it might affect your payment as well.
00:11:51.840 | But these are not the biggest factors in building wealth. Rather, in my experience and opinion,
00:12:00.240 | the biggest factors are going to be how big is the payment that's going into the account.
00:12:06.520 | That's going to be driven by your level of income and your level of expenses and how
00:12:11.520 | much money you can save and the length of time that you can contribute. Those are going
00:12:16.960 | to be bigger factors for most people than the amount of interest and a small employer
00:12:22.920 | match. Access to and participation in 401(k) plans is correlated to people who have a higher
00:12:33.960 | income and who can invest for a longer period of time than people who don't have access
00:12:39.840 | to 401(k)s.
00:12:42.160 | Let me draw this out by sake of an example. I want to stereotype here and use two stereotypes
00:12:50.480 | to illustrate the differences between possible career paths and their influence on 401(k)
00:12:58.320 | accounts. Stereotyping is always dangerous because it means that you're looking at populations
00:13:04.520 | rather than individuals. And I don't like that because I like to recognize that any
00:13:08.960 | individual can change and grow and improve. But I think here it's valuable. Let's compare
00:13:13.440 | the career trajectory between a lower class blue collar worker working in the trades versus
00:13:22.280 | an upper class college educated white collar worker who's starting off in a large corporation
00:13:30.000 | working in a corporate job. Here I'm thinking of a few friends of mine who would fit these
00:13:35.040 | stereotypes on either end very, very well.
00:13:38.520 | For our lower class blue collar worker, we're going to use the trade of working as an electrician.
00:13:44.760 | The skill of working as an electrician is a very valuable skill. And when an electrician
00:13:49.840 | advances in their career up through journeyman and master electrician level, they can earn
00:13:56.280 | an excellent wage. But the career trajectory starts with an entry level job. It starts
00:14:03.400 | with – it's not minimum wage. Construction employers can't get workers at minimum wage.
00:14:09.320 | But it starts at say in today's world, $10 to $11 an hour and it will go up from there.
00:14:15.480 | White collar worker goes to college. Let's say a son of college educated parents, dual
00:14:22.160 | income college educated parents, parents stress education, goes to a middle to upper level
00:14:26.920 | college, works his way through the college sorting mechanism and comes out the other
00:14:31.480 | side and gets a job working as an entry level or mid-level white collar worker, perhaps
00:14:38.320 | an analyst, something like that.
00:14:40.280 | Let's talk through some of these factors. First factor, starting value of the portfolio,
00:14:47.920 | the present value of the portfolio. In this case, I want to hold both of these at zero.
00:14:55.080 | Both of our workers, neither of our workers start with any money. They both start with
00:15:01.200 | zero. However, if you think of people that you may know, somebody who's just starting
00:15:08.120 | off in their career as a – coming out of a lower class and going into a blue collar
00:15:14.140 | profession, are they likely to have more of a starting point than somebody who's upper
00:15:20.620 | class and going into a white collar profession?
00:15:24.720 | In my experience, the upper class person may have something like their parents have given
00:15:29.520 | them a car or helped them to buy a car, whereas the lower class blue collar worker may have
00:15:35.760 | needed to start by saving up money for a car. Just the fact of – here we're going to
00:15:42.840 | say the upper class person has a college education, college degree. That's a tremendous asset
00:15:47.840 | that many times an upper class person's parents have paid for, for them. Whereas a
00:15:53.800 | lower class blue collar worker, if they've gotten a college degree or getting a college
00:15:57.800 | degree or pursuing something like trade school, they're going to be doing that – paying
00:16:01.560 | for that themselves oftentimes.
00:16:03.760 | So even if we start with an account value at zero, there's a good chance that an upper
00:16:09.240 | class white collar worker will start with more money as reflected in parents gave them
00:16:16.680 | a car, parents helped with a college degree, parents are helping with things to set up
00:16:21.840 | a household, independent household, buying furniture, helping with all of those basic
00:16:27.600 | expenses. That will have an impact on how much the upper class white collar worker can
00:16:36.320 | save for something like retirement.
00:16:40.280 | So for both of these examples, we're going to hold their PV, their present value, their
00:16:43.920 | starting value of their account at zero. But even if we do that, our upper class white
00:16:51.640 | collar worker stereotype is going to start with a higher embedded advantage because of
00:16:59.520 | the other factors where their parents have helped them.
00:17:02.800 | Why am I drawing a distinction here between a lower class blue collar worker and an upper
00:17:07.640 | class white collar entry level worker? Primarily, I'm drawing this distinction because the
00:17:14.520 | blue collar worker is not going to have access to a 401(k) and the white collar worker is.
00:17:21.000 | Again, my argument here is that these things are correlated. Correlated. And so people
00:17:30.800 | who have access to 401(k)s are much more likely to be this upper class white collar worker.
00:17:39.840 | My friend that I'm picturing in my head as my stereotype for the lower class electrician
00:17:47.640 | is one of the hardest working, most intelligent people that I know of and dedicated to his
00:17:54.440 | skill and to his craft. He started his career. He came out of high school, got a high school
00:17:59.280 | degree. College was not for him. But he started his career working in various trades, wandered
00:18:05.000 | around a little bit between a few different professions, tile, electrician, plumbing,
00:18:10.600 | etc. until he finally settled into a job working as an entry level electrician due to a family
00:18:16.040 | friend who gave him an opportunity.
00:18:18.240 | Started off with no knowledge but applied himself very, very diligently to his trade.
00:18:24.800 | But the structure of the companies that he was working for during the beginning of his
00:18:28.840 | career do not lend themselves to access to 401(k)s. A majority of workers in the United
00:18:38.720 | States of America do not work for large corporations with big 401(k) plans. They simply don't.
00:18:47.320 | They work for small and medium-sized businesses that are more independent. Most of these businesses
00:18:52.920 | don't provide 401(k) plans nor should they. If I were consulting with an owner of a small
00:18:59.240 | electrician – electrical company with let's say, you know, three, four, five vans on the
00:19:03.760 | road, two workers in each van going around and doing electrical work, I would never recommend
00:19:10.800 | to that particular company that they offer a 401(k) for their employees.
00:19:17.160 | The administrative fees on 401(k) plans are comparatively very high. The rate of participation
00:19:23.720 | in 401(k) plans for workers in this segment of society is very, very low. It makes it
00:19:30.800 | very difficult for the business owner to even participate himself because if he's running
00:19:39.080 | a crew with a bunch of electricians working in it, they're likely to just say, "I
00:19:44.400 | want the money," and his participation rate is going to be so low that the owner may not
00:19:46.960 | even be able to make his own contributions.
00:19:49.160 | So you have an expensive plan with low participation and most of the employees don't seem to
00:19:54.640 | value contributing to the 401(k) plan. There are a few who do, but most don't. So 401(k)
00:20:02.840 | is usually not an appropriate setup for that type of company.
00:20:07.440 | Now if we contrast that with a more corporate approach, even a company that has say 40 or
00:20:13.840 | 50 employees, now all of a sudden a 401(k) can work and people who are working in that
00:20:20.480 | more white-collar corporate environment tend to prefer something like a 401(k) as part
00:20:27.440 | of their compensation package. They participate at higher rates and so it works better in
00:20:32.640 | that situation.
00:20:34.440 | My friend who started off his career working as an electrician never had access to a 401(k)
00:20:40.960 | for the first 10 to 15 years of his career. He worked very diligently, worked his way
00:20:46.460 | up in the profession, learned his skills, went to school at night to learn electrical
00:20:52.680 | skills, worked a lot on the side. But all of his employers along the way were small
00:20:57.880 | employers that didn't even offer a 401(k) and his lifestyle, he was continually going
00:21:05.560 | from one company to the next to get a better offer.
00:21:08.440 | His lifestyle was so busy, it didn't lend itself well to being able to save into a 401(k).
00:21:17.040 | It took my friend about 15 years of hard work, moving from company to company, building skills,
00:21:22.320 | studying, going to school at night, learning to become a master electrician, passing various
00:21:26.440 | tests before he was able to transition out of residential and commercial electrical work
00:21:32.760 | and move into a position at – with a job at a local power plant working for a local
00:21:38.680 | electric company where now he's working for a large corporation that offers a 401(k)
00:21:43.400 | plan.
00:21:44.400 | If I compare that with another friend of mine that I went to college with, she started her
00:21:49.120 | career working in marketing, got a basic marketing degree, basic business degree, started her
00:21:55.520 | career with a relatively entry-level job. But on day one of her career, had access to
00:22:01.000 | a 401(k).
00:22:04.960 | Because of her time spent in college and because of the type of job that she got, on day one
00:22:09.120 | of her career, she was in a situation where she could earn more money than my friend who
00:22:15.640 | was working as an electrician, especially if only measured in 40 hours a week.
00:22:21.600 | And because of her parental support network, her expenses were lower and she was able to
00:22:27.000 | participate in her 401(k) from day one.
00:22:30.280 | So simple access to a 401(k) is going to be correlated with people who earn higher incomes
00:22:37.300 | and who have higher potential for wage growth over time.
00:22:42.600 | If you think about many white-collar jobs here, if I think about my friend, when she
00:22:48.140 | started her career, she didn't have a lot of income. She didn't have a lot of skill.
00:22:53.240 | She had a basic college degree and not a lot of skill.
00:22:56.140 | But as she's building her skills, she's becoming more valuable in the marketplace.
00:23:00.420 | As she's learning and studying the practice of effective marketing, she's also working
00:23:04.700 | in a corporate environment with other people.
00:23:07.860 | And these other people, her career has a higher growth trajectory than does the career of
00:23:14.040 | most blue-collar workers.
00:23:16.520 | Most lower-class blue-collar workers are going to reach a point in their skill where they
00:23:20.760 | are replaceable.
00:23:21.760 | If you work on a factory floor, the factory is going to train you with the basic skills.
00:23:27.080 | And then once you top out, your income is going to stagnate because there's not – unless
00:23:34.620 | you transition to management skills or unless you transition to entrepreneurship, there's
00:23:41.480 | not a lot of room for your wage to go up.
00:23:43.520 | If you start your career as an electrician, you begin your earning career with $10 or
00:23:49.120 | $20 an hour and then you go up from there with steady hourly wages as you increase your
00:23:53.240 | skills and capability.
00:23:55.380 | If you don't make the switch to management, you're going to top out at about $30 an hour,
00:24:04.440 | $60,000 per year.
00:24:06.960 | But the challenge is many people who work best in careers like the trades are not people
00:24:14.120 | who are well-suited to management.
00:24:17.000 | They're not people who are well-suited to entrepreneurship.
00:24:20.160 | Contrast that with the lifestyle and approach of a white-collar worker.
00:24:24.080 | It's a much easier transition for many white-collar workers to transition to skills of management
00:24:31.520 | or possibly entrepreneurship to where their incomes can continue to grow.
00:24:36.000 | They don't top out early in their career once they reach the height of their technical
00:24:39.640 | skill.
00:24:41.520 | Because of these fundamental characteristics of the careers, the white-collar upper-class
00:24:46.700 | worker has the ability to start saving earlier because they're starting with a higher beginning
00:24:54.320 | salary.
00:24:56.880 | They have the ability to save more in the beginning because they've invested in education.
00:25:03.360 | Their starting salary is starting stronger and their expenses are likely to be a little
00:25:07.040 | bit lower versus somebody who has been scraping along starting in the trades working on an
00:25:12.840 | hourly basis.
00:25:13.840 | So they can save more.
00:25:16.780 | Huge factor, because the career income continues to grow significantly, they can save more
00:25:25.220 | during the middle and later part of their career.
00:25:29.700 | If you compare my friend who started in marketing, relatively entry-level wages, she started
00:25:35.920 | at $35,000 per year.
00:25:38.380 | But if you compare her earnings to an average electrician also at about 45 or 50 years old,
00:25:47.160 | if she just continues to learn a little bit, to practice skills with other people, to practice
00:25:53.340 | some management, it's very likely that she could be in mid-level marketing management
00:25:57.240 | and marketing strategy for a large company.
00:26:00.180 | Her income at 45 should be much higher than somebody who is a technical worker.
00:26:08.500 | She doesn't have to be light years smarter.
00:26:10.460 | She doesn't have to be light years ahead.
00:26:12.500 | She's just got to be a little bit ahead.
00:26:14.500 | Just the fact that she's gone through the college sorting process demonstrates that
00:26:18.540 | her intellectual capacity and her cognitive ability is going to be well-suited to additional
00:26:25.540 | learning throughout her career.
00:26:27.380 | That is not necessarily the case with somebody who starts their career working as a server
00:26:33.020 | at a local restaurant and continues working as a server or starts as a customer sales
00:26:38.960 | associate at a local retail store and continues working as a customer service associate at
00:26:43.460 | a local retail store.
00:26:46.460 | Length of career makes a huge difference as well.
00:26:48.900 | With somebody who works in a lower-class blue-collar profession, there is a shortness, a shortened
00:26:54.860 | career just simply due to the physical structure of the job.
00:26:59.740 | Many workers – I want to say a majority, but I can't confirm majority.
00:27:04.940 | Many, many blue-collar workers go home from their job every single day in pain, physically
00:27:13.180 | hurting from the work that they've done, whether it's because they're standing on
00:27:17.060 | a factory floor, standing in a restaurant, standing as a service associate, working in
00:27:23.060 | a physically demanding trade such as electrician, such as plumbing, etc., working in a physically
00:27:29.060 | demanding occupation such as law enforcement or something similar to that.
00:27:34.460 | Many, many workers go home physically hurting every day.
00:27:39.100 | And this takes a toll on your body over the course of a career.
00:27:42.340 | A 55-year-old tradesman is reaching the end of his effective working career if he's
00:27:48.980 | still working in the physical trades, if he's still pulling wires, doing pipe.
00:27:57.620 | It doesn't have to be that way.
00:27:59.580 | But 30, 40, 50 years of use of your body is going to have an effect on your ability to
00:28:05.460 | be as productive.
00:28:07.100 | And if that person has not managed to transition to a management circle or to a business ownership
00:28:14.660 | circle, they're going to have a difficult time having a long career in the trades.
00:28:20.460 | Contrast that to a white-collar worker.
00:28:22.980 | A white-collar worker who's reaching 55 years old is at the height of their career
00:28:27.620 | and could very reasonably and easily continue it for another 15, 20, 25 years if their company
00:28:34.460 | will permit it without any abatement in productivity because their productivity and their career
00:28:40.020 | is not tied to their physical capacity.
00:28:42.660 | It's tied to their mental capacity, their cognitive ability, the specific skills of
00:28:49.820 | their career.
00:28:51.700 | So they can work longer, which means they can continue contributing to the 401(k) for
00:28:55.380 | longer.
00:28:57.300 | When you start factoring together these different factors, starting earlier, making more money,
00:29:06.020 | working longer, all of these things lead to a higher lifetime earnings for the white-collar
00:29:12.420 | worker who fundamentally is likely to have access to a 401(k) as compared to a lower-class
00:29:21.140 | blue-collar worker who is less likely to even have access to a 401(k).
00:29:28.180 | The amount of your income is going to be one of the biggest drivers.
00:29:36.260 | The amount of your income I believe is the biggest driver in your ability to accumulate
00:29:42.900 | wealth.
00:29:43.900 | When the listener asked the question in the thread, a few people commented.
00:29:46.900 | But we had two people pipe in with their contributions, two people who – both of whom have appeared
00:29:52.220 | on the show previously, Fritz Gilbert who writes at theretirementmanifesto.com and Rocky
00:29:57.960 | Lalvani who writes and blogs at Richersoul.com.
00:30:01.220 | Both of them contributed and said, "We are 401(k) millionaires.
00:30:05.780 | It can be done."
00:30:07.380 | But because I've interviewed both of these men on the show, I responded and said, "Both
00:30:12.340 | of you prove my point.
00:30:14.360 | Both of you are experienced career people who have earned – I don't know their exact
00:30:20.340 | salary but just due to their job descriptions, I'm sure it's in excess of $100,000 a year.
00:30:26.020 | You're six-figure income earners and if you use that high income and you apply some
00:30:31.700 | skills of thrift to that high income, you've been able to save a lot of money.
00:30:37.920 | And yes, the 401(k) has worked for you but you also would have gotten wealthy simply
00:30:43.400 | because of your income and your thriftiness if the 401(k) weren't available to you."
00:30:50.680 | The 401(k)s didn't make them rich.
00:30:53.340 | Their high income, high rate of savings and wise investment decisions made them rich.
00:31:00.660 | And the structure of the 401(k) because of their corporate jobs worked well as a useful
00:31:07.760 | tool on their way to wealth.
00:31:10.620 | Let's talk about interest finally.
00:31:15.460 | I think that the person who has access to a 401(k) meaning the structural difference,
00:31:22.420 | white-collar workers working in medium to larger corporations versus blue-collar workers
00:31:27.980 | working in smaller corporations who don't have access to 401(k)s, the person working
00:31:33.340 | in that is probably on the whole more likely to have access to better investment information.
00:31:41.580 | Wealthy people talk about money.
00:31:43.860 | Rich families talk about money.
00:31:45.700 | And if you're a white-collar, you graduated from college, your parents are working professionals,
00:31:53.700 | it's more likely that one of them is probably going to have something to do with some aspect
00:31:57.580 | of finance, whether corporate finance or in the investment business of some kind, or at
00:32:03.460 | least that the topics of money are not going to be taboo.
00:32:08.860 | There's a higher subscription rate to the Wall Street Journal among upper-class elites
00:32:15.220 | than among lower-class blue-collar families.
00:32:19.560 | And so simply being around the topics of finance are going to lead to somebody being more comfortable
00:32:25.460 | with the topic of investing, which is going to lead to somebody being more comfortable
00:32:30.180 | with actually contributing their money to an investment account held within a 401(k).
00:32:35.740 | Possibly it might also lead to making better investment decisions.
00:32:39.260 | Even somebody who's not working in finance, if they just have a cursory relationship with
00:32:43.780 | the financial literature, every now and then they glance at the Wall Street Journal, every
00:32:47.620 | now and then they pick up Money magazine.
00:32:49.660 | When they're going through an airport, they pick up a book on money.
00:32:52.020 | They tune into a podcast on money.
00:32:54.060 | They look on CNN Money and read an article about index funds.
00:32:57.460 | They're likely to recognize some simple truths such as asset allocation matters.
00:33:03.020 | But these truths are not self-evident.
00:33:06.460 | It's not self-evident that when you're sitting down filling out your 401(k) investment contributions,
00:33:11.740 | you should construct a portfolio consisting of various asset classes.
00:33:18.620 | There's a higher chance that the lower-class blue-collar worker, if they have access to
00:33:22.580 | a 401(k), is going to sit down and choose mutual funds within the 401(k) based upon
00:33:28.220 | their stated return for last year.
00:33:31.220 | There's also a higher chance that they're going to move routinely out of them.
00:33:35.820 | I've seen it so many times in giving financial advice to people.
00:33:40.860 | The information is sitting there, but if people don't seek it out, they're unlikely to make
00:33:45.100 | good decisions.
00:33:48.380 | It's hard to read anything related to money and not recognize that investment expenses
00:33:53.060 | matter.
00:33:55.820 | But who's more likely to be reading about money?
00:33:58.500 | The white-collar worker who, as they fire up their computer, just takes a quick look
00:34:03.380 | at CNN Money or Yahoo Finance?
00:34:08.220 | Or the person who's a blue-collar worker and doesn't work in front of a computer every
00:34:12.660 | day?
00:34:15.780 | You be the judge.
00:34:17.420 | There are some factors that can go against the white-collar worker, the most important
00:34:23.460 | of which is lifestyle factors.
00:34:26.020 | Living in a fancier house, spending more money on fancier vacations, buying fancier, more
00:34:30.580 | expensive cars.
00:34:32.740 | Those things can go against the white-collar worker.
00:34:35.380 | But on the whole, everything is tilted in favor of them becoming wealthy with or without
00:34:42.060 | a 401(k) plan.
00:34:44.980 | And it's my opinion that the 401(k) has a relationship more of correlation to their
00:34:54.660 | wealth than of causation.
00:34:59.240 | That statement is not rigorously researched.
00:35:02.300 | It is not verified by statistical analysis.
00:35:06.260 | It's an opinion drawn from observation.
00:35:09.720 | It could be wrong, but I have not seen any evidence that it is.
00:35:15.280 | As I close today's show, I want to make one thing very, very clear.
00:35:22.040 | None of these factors are an excuse for not becoming wealthy if a person has that as a
00:35:28.920 | goal.
00:35:31.920 | The blue-collar worker can become wealthy.
00:35:36.240 | Every day on this show, you hear me talk about the strategies, tactics, and techniques that
00:35:40.420 | lead to wealth.
00:35:42.720 | None of these are exclusively available to somebody because they come from the upper-class
00:35:48.080 | elite or because they come from the lower class.
00:35:54.120 | It's available.
00:35:55.280 | And the information is here available every day, just on my show, if nowhere else.
00:36:00.620 | There's no reason why you can't become very wealthy in a blue-collar occupation, especially
00:36:07.100 | if you have access to some of the tools.
00:36:11.620 | I think here I have a listener of the show that's corresponded with me somewhat frequently
00:36:15.240 | who works as a truck driver for one of the large packaged companies.
00:36:18.940 | And this listener is a millionaire.
00:36:21.340 | They've worked at this packaged company as a truck delivery person for a long time.
00:36:25.140 | They listen to my show and many other things while they're doing their work.
00:36:28.180 | They have access to a 401(k) and that's a blue-collar profession, but they become very
00:36:32.580 | wealthy, high income, good access to these structures, and the 401(k) has worked effectively.
00:36:40.740 | There's no reason why you can't use the tools at your disposal.
00:36:46.100 | So I don't make any excuses for where someone is.
00:36:50.540 | But this is why I discount the value of a 401(k) because it's not the fundamental cause.
00:36:58.420 | The secret is not getting people to contribute more money into a 401(k).
00:37:03.740 | What was it?
00:37:04.740 | A few years ago, President Obama lobbied for and passed the MyRA program.
00:37:09.140 | Remember that?
00:37:10.140 | I haven't kept a close eye on the program over the last couple of years.
00:37:13.660 | But it was talked about as being a way for people who don't have access to a 401(k) to
00:37:19.700 | be able to gain access to an investment account that is simple, that allows automatic contribution
00:37:24.820 | from their paychecks into this account and thus make it simpler for them to save even
00:37:30.020 | if their employer doesn't offer a 401(k).
00:37:32.020 | Is there anything wrong with that?
00:37:35.220 | Well, because the accounts are invested in government securities, that tweaks my conspiracy
00:37:41.720 | bug a little bit that one of the primary motivation may be to build and continue to build a market
00:37:47.760 | for government securities, but that's hard to prove.
00:37:50.180 | This tweaks me a little bit.
00:37:51.980 | My major complaint is it's not going to solve anything.
00:37:55.380 | I haven't seen what's the participation and what's going on with that program, but it's
00:37:59.900 | not going to solve anything.
00:38:01.600 | The reason that poor people don't contribute money to retirement accounts is not that they
00:38:06.300 | don't have access to a retirement account.
00:38:09.480 | If you had the knowledge, the income, the inclination, just because you're poor doesn't
00:38:16.860 | mean you can't go down to a computer, use a computer at your local library or use your
00:38:20.540 | phone, open an account at Vanguard.com and put money into an IRA that gets automatically
00:38:26.040 | deducted from your bank account.
00:38:29.300 | You don't need something special, a special program created, a whole new structure called
00:38:36.380 | the MyRA for you to participate.
00:38:39.200 | You don't need it.
00:38:43.640 | The MyRA program is not going to help poor people.
00:38:46.900 | What's going to help poor people is learning to make more money, increasing income, learning
00:38:53.860 | to be more thrifty, to be as frugal as possible in their circumstances so they can save more
00:38:59.660 | money and learning to invest wisely.
00:39:03.820 | If I were bulk up poor, earning a low income, I would not be buying government securities
00:39:08.940 | as my primary tool of investment.
00:39:12.500 | I think that's a dumb way to approach investing, especially when you're at the beginning of
00:39:16.340 | your career or at the lower levels of career earnings.
00:39:21.020 | I don't think my discussion here is comprehensive.
00:39:23.340 | There are other factors as well.
00:39:24.620 | For example, there's a correlation between people who have access to 401(k) accounts
00:39:28.700 | to have access to other types of benefits.
00:39:31.300 | White collar workers have much more stable financial lives than do blue collar workers.
00:39:36.820 | A white collar worker who has access to a 401(k) plan probably also has access to other
00:39:40.940 | programs of insurance.
00:39:42.500 | They have access to group health insurance.
00:39:44.820 | A white collar worker who has access to a 401(k) plan and access to group health insurance
00:39:49.140 | is going to worry less about the month-to-month needs of their household.
00:39:55.660 | If something happens that's difficult for them from a health perspective, they're going
00:39:59.860 | to be more well-covered.
00:40:01.820 | They probably have a group disability program.
00:40:04.340 | They probably have a health insurance program.
00:40:07.000 | They have vacation time, sick time, et cetera.
00:40:10.500 | So they're going to be able to get through difficult circumstances more easily than a
00:40:15.340 | blue collar worker.
00:40:17.220 | This leads to a more stable financial life.
00:40:19.480 | This leads to them being able to save more consistently over time.
00:40:23.180 | Blue collar worker generally doesn't have access to many of those programs, often doesn't
00:40:28.100 | have access to group health insurance.
00:40:30.200 | If they have health insurance, it's often going to be what they've found in the broader
00:40:35.300 | marketplace.
00:40:36.960 | Many small employers don't offer health insurance programs and so they may be going with whatever
00:40:42.060 | they can find on the Affordable Care Act, Obamacare health exchanges online, which those
00:40:47.240 | programs are not – they're not exactly Cadillac programs.
00:40:51.900 | In addition, there's a higher degree of uncertainty in the financial life.
00:40:57.000 | They generally don't have access to nor are they educated about something like disability
00:41:01.300 | income insurance.
00:41:02.540 | The white collar worker, if they get laid off, often gets laid off with a severance
00:41:06.000 | package of some kind.
00:41:07.140 | If you get laid off from a job working as an electrician, there's no severance.
00:41:10.700 | You go find another job.
00:41:13.000 | Often a white collar worker will have a much more stable flow of wages.
00:41:17.040 | Many times in the blue collar professions, wages will fluctuate significantly based upon
00:41:22.000 | the amount of work that your employer has.
00:41:24.140 | If you're working in the construction industry and your employer is struggling for work,
00:41:28.500 | you simply get furloughed without pay and you have to wait for that employer to get
00:41:32.440 | more jobs or you have to go and find a different job with a different employer.
00:41:36.400 | So there are many other factors.
00:41:39.800 | We could analyze this question forever.
00:41:43.640 | But this is the fundamental reason why I am not convinced that a 401(k) is the massive
00:41:51.920 | golden ticket to wealth.
00:41:55.320 | If you have access to a 401(k), you should very seriously consider participating.
00:42:05.120 | I have things I don't like about 401(k) plans.
00:42:09.640 | That should be evident.
00:42:11.400 | But I'm not – it's not cut and dry.
00:42:16.680 | I think in general, you always want to take advantage of the employer match.
00:42:20.440 | That's free money.
00:42:21.920 | You always want to take advantage of the employer match.
00:42:24.820 | You probably want to take advantage of additional contributions to the 401(k) because for most
00:42:30.600 | people who have access to a 401(k), the only thing they can do to improve their tax planning
00:42:37.360 | is to make contributions to the 401(k) because they're employees and they don't have other
00:42:43.360 | areas of investment.
00:42:45.600 | The only thing they can do is to make contributions to the 401(k) and so that's probably the
00:42:49.520 | best thing to do.
00:42:50.520 | In addition to that, many times, the people who are participating in a 401(k) have their
00:42:55.160 | primary career and that should be their primary focus because the earning potential of focusing
00:43:00.400 | on that career is going to be higher than just about any other activity.
00:43:04.400 | So if you have access to a 401(k), you probably should make that a primary tool of your wealth-building
00:43:12.160 | plan.
00:43:13.840 | But don't confuse that tool with being the cause of your wealth.
00:43:21.680 | Simply not.
00:43:23.000 | The cause of your wealth is going to be increasing your income to a high level.
00:43:31.320 | When you have a higher income, that makes it easier for you to live a nice lifestyle
00:43:36.200 | which when approached with an appropriate amount of thrift can leave many tens of thousands
00:43:41.440 | of dollars available for you to save and invest.
00:43:47.360 | So high income, reduce lifestyle through thrift, free up a lot of money to save and invest.
00:43:55.680 | The more money you can free up to save and invest, the richer you'll be in the future
00:43:59.520 | and then focus on investing that wisely.
00:44:03.820 | Focus on doing that within the context of the 401(k).
00:44:06.740 | That will reduce taxes, search very carefully on the fees and expenses of the program, you
00:44:12.260 | want to lower those fees and expenses as much as possible, and study carefully your asset
00:44:16.540 | allocation to maximize the potential for long-term return.
00:44:21.020 | If you do that consistently over the course of a long career, you very likely with a high
00:44:28.060 | degree of probability will wind up having a lot of money in your 401(k) and I'll rejoice
00:44:34.220 | with you about that.
00:44:36.820 | But I won't think that it was access to the 401(k) that made you rich.
00:44:40.460 | I'll repeat ad nauseum, you got rich because you earned a lot of money, you saved a lot
00:44:46.940 | of money and you invested wisely.
00:44:51.420 | That's Joshua's myth busting on 401(k)s.
00:44:54.980 | Don't confuse causation with correlation.
00:45:00.380 | Thank you for listening to today's show.
00:45:01.940 | That's it for today.
00:45:02.940 | If you'd like to support the work that I do here to help me get rich, I don't have
00:45:06.580 | a 401(k) but I'm still getting rich.
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