Debunking Money Myths – Episode 140

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Today we’re going to be attacking some more of the money myths that are out there. In particular, today we’re going to be talking about always take advantage of tax deferrals and that the government wants to help you build your wealth. And to help us talk about this today, we have my co-host and bestselling financial author Kim Butler with us today. Welcome Kim, how are you?

[00:51] Very fine, Todd. Thank you much. Did I hear you say the government wants to help you build your wealth? Is that really what you said? Yep. Because they’re our pals. I’m glad you think so. If it weren’t mid-afternoon, I might ask a question, but we’ll skip that. So okay, let’s tackle this. The government wants to help you build your wealth. So why might somebody think that? Like what’s out there that would cause them to make that statement? Well, I think that the first thing that you automatically jump to is the 401k IRA world where the government looks or at least appears to be contributing in a lot of people’s mind to our retirement when really and truthfully, they’re just allowing us to build up money so that they can have a greater portion later is what’s actually happening.

[01:48] Oh, I get it. So I know we’re playing a little devil’s advocate here, but you’re saying that since they put in this tax code, 401k or 403b, that they are actually going to help us build wealth so that we don’t have to rely on them in the future. Is that kind of what you think that tax code was put in place for? Well, I wish we could say that we would be less reliant. I think we’re going to be forced to be less reliant, but I don’t think that most people want it to be that way. I don’t see where, you know, I think most people are building part of their financial bridge on social security, and it’s a pretty insecure building, in my opinion. Yeah, boy, isn’t that’s a misnomer social security, just as much as the word securities

[02:43] is a misnomer for these investments that we have inside our 401k plans, because to me, they don’t provide any security at all. Did you know that when the 401k law first was enacted, it was actually called a 401k savings plan. And I mean, technically, that’s still what it is, the 401k savings plan. Got a question for you. Have you ever seen a savings account inside a 401k? No, me neither ever. So if we look at this issue, if the government wants to help you build your wealth, if you want some numbers behind this, in our book called Busting the Retirement Lies, I’ve actually used Todd’s Truth Concepts Calculators to crunch the numbers on how much money the government gets because they, quote, let you do a 401k plan.

[03:38] And this is a really similar discussion to the type of thinking that lets, quote unquote, the bank provide you with a 15 year mortgage. You know, they offer you a lower interest rate on a 15 year mortgage. You really got to wonder why the government offers you a tax deduction to do a 401k plan. You’ve really got to wonder why. And of course, the big money myth out there that goes along with this, the government wants to help you build your wealth, which just so we’re all clear, we believe is a myth, is that you should always take advantage of these tax deferrals and how many, many times they’re actually not listed as tax deferrals. They’re listed as tax advantages or they’re listed as tax deductions.

[04:32] And we forget that they truly, truly are a deferral. And every single person that has a 401k out there or an IRA or a 403b or a pension or a profit sharing plan or the old SEPs or money purchase plans or what are the other defined benefit plans? I’m trying to think of all the words, KEOs, remember those from long, long ago? Every single person out there that has one of those types of plans needs to be aware that about a third of it is not theirs. So you may have a statement that says, I have a hundred thousand dollars in my 401k or my IRA, but you’ll want to remember that a good third of that, just rough numbers, belongs to the IRS. And when you crunch the numbers about the dollars that are in your account

[05:30] that are tax deferral dollars, in other words, you put them in there, but the government’s going to get them. The government gets an amazing rate of return on those dollars. And if you want to see that again with numerical proof, Grab our Busting the Retirement Lies book, it’s on Amazon. And of course you can get the audio version, but if you really want to see the actual calculators, you’re going to be happier getting either the Kindle or the hard copy. It’s a paperback. So that you can see the calculators that prove that this is a myth. This myth is stated as you should always take advantage of tax deferrals. But in actuality, what you’re doing is letting the government have more money in the future by doing so.

[06:17] Now, does that make any sense? It does make sense. And I think that we want to make one clarification is that we’re pro systematic savings, but con tax deferral. So the systematic savings part of it is what the government, that’s the part that’s being sold to us is that you just set it and forget it. Wonderful idea. It’s just where the money goes. That’s the objection. Absolutely. So since you brought that up, let’s talk about what our favorite place is for not only systematic savings, but discipline, because that’s something I will hear clients say from time to time is that the 401k keeps their money from them. It takes it from their check automatically. It keeps it in an account where they can’t really get it.

[07:06] So it imposes self-discipline. I don’t know about you, but my favored approach to that is to get a life insurance premium bill every single month or every single year, depending on how my policy is set up so that I truly do have savings. 401ks, like I said, we’re supposed to be savings accounts. They’ve become 401k investing accounts. And consequently, a lot of people lose a lot of money in them, but we still want to have savings because savings provides liquidity, it provides opportunity, and yet as human beings are want to do, we often will not force ourselves to save that money into an account. But if we get a life insurance premium bill, that premium builds cash value, which we can then use as savings for emergencies and opportunities.

[08:03] And that enables us to then use other dollars for true investments. Many times true investments do have a timeframe on them, like maybe five or 10 years, whereas the other negative thing about the 401ks is the timeframe is 20 or 30 years, and that’s a long time to lock money up. And unfortunately, we have seen a lot of the money inside the 401k market is either in the bond market or it is in the stock market. So you could potentially suffer a non-tax deductible loss. So you could end up with less money than you started with, and be unable to even get a tax advantage for losing money. Yes, that’s a great point. We actually have some clients that have literally lost their entire investment because what they invested in inside their IRA was something

[09:02] that was just not sustainable and it went defunct and there is absolutely no tax benefit that they can get from that loss. No $3,000 a year tax benefit, no lump sum tax benefit, nothing. And that’s a pretty tough road to go once you realize you’ve lost the money, that’s bad enough. And then to realize there’s no value in that deduction. And additionally, most people forget this, but 401ks are not collateralizable. You cannot take your 401k or IRA statement to the bank and say, will you lend me money against this? Well, actually you can take it and they’ll say no. So there’s no good there in terms of using those dollars for anything else other than paying the tax man in the future and having the dollars

[09:57] locked up in an account that you will definitely get some of in the future. But is there for the government’s rules, which currently are 59 and a half, but those could even be changed. Another thing that always amazes me about this myth of the government wants to help you build your wealth and you should always take advantage of tax deferrals is that there’s often a match, an MATCH that your company will provide you to perpetuate this myth where they, the company wants to have you deferring this income as well. And this is often eaten up by the fees inside the 401k. And again, this is looked at numerically inside the Bust Your Retirement Lies book and it shows that the fees that the money managers

[10:54] are charging often eat up both the MATCH from the company, as well as the tax deferral from the government. So here we are thinking we’ve got this great deal with tax deferral from the government, MATCH from the company, and the 401k fees and the money managers fees are undoing all of the good that we thought was there. Just to kind of give a quick example of riskiness and the riskiness of this, the 401k, I had a 401k that I rolled into a self-directed IRA and made some rather risky investments. I was invested in General Motors, Fannie Mae, and Freddie Mac, and they all went bankrupt the same year. So when we’re talking about risky investments, these are investing in government-backed stocks and General Motors.

[11:51] That’s amazing. That’s a true story. That’s a true story. I was holding all three when they went down. Holy cow. Yes. And so back to what these were originally called 401k savings plans. Nobody does that. We don’t save the money. We invest it. And that isn’t even the right term in my mind. It’s really gambling, isn’t it? Oh, absolutely. I mean, you know, and, you know, we’re not talking about gambling on new tech or high tech or anything like that. We’re talking about traditional investments that were thought to be impenetrable. So amazing. So this function of gambling is something that you’ll want to take a look at in your own environment. So go look at your IRA and really ask yourself, am I investing or am I

[12:44] gambling? Look at your 401k. Am I investing or am I gambling? And feel free to reach out to us if you’d like some alternatives, because we really do want your 401ks and IRAs to be invested. They truly shouldn’t be, quote, saved 401k dollars because they’re so long term, they need to beat inflation. And so it’s very important that we do have a goal of these dollars earning double digits with no loss of principle. And not that we can pull that off all the time, but that second part of no loss of principle is very, very important. And here late in 2016, as we’re recording this, we all are aware. I mean, everybody that I talk to thinks that there’s going to be another stock market crash again. So be very, very careful with these dollars and see if you can get

[13:37] yourself in a position where you don’t ever lose principle again. Super. And if anybody would like to ask any additional questions or you would like to have a topic on the show, what’s the best way for them to do that? The best email for our podcast listeners is hello at partners. The number four prosperity.com. And we’ll take questions. We’ll answer them on the podcast. I’m also happy to send people information if they would like about the various alternatives that we work with and to continue to help them think through the money myths that are out there in the marketplace. We also have a book that is available called financial planning has failed and it addresses quite a few other myths that are so prevalent in

[14:25] today’s financial world. That is available at partners. The number four prosperity.com slash ebook. And there’s an audio version available as well. Again, partners, number four prosperity.com slash ebook. Super. Well, once again, thanks out there to our listeners. Keep sending in your questions. Keep asking questions. Keep educating yourself. I know it’s frustrating. I know even watching the election stuff constantly on TV is enough to make you sick, but, um, you have got to take control of your money because nobody will ever care more about your money than you do. This is the no BS money guy, Todd Strobel for the prosperity podcast. We’ll see y’all again real soon. Thank you for listening to the prosperity podcast to take control of

[15:11] your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.