Why It’s Ok to Stray From the 401(k) – Episode 102

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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, got bestselling financial author Kim Butler with us again and we’re going to be talking today about how it’s okay to stray from the 401k. Kim, I love the title, I could just say it five or six times in a row just because my tongue likes it. But how are you, Kim? I’m very fine. What is it about? Is it alliteration or rhyming that the human being just really likes to run with?

[00:46] And I have to thank Chris Drehouse is a financial advisor out of Wyoming, Michigan, wrote an article about this that I read recently. So Chris, I’ll give you credit. You came up with that. I did not make it up, but we’re going to talk about it. And it is okay to stray from the 401k. But my guess is that the typical commentary that’s out there about that subject is a little bit different from what you and I are going to come up with about it today. So this will be a fun listen for everybody that has access to it. And please, yeah, please feel free to share it. We’ve had a lot of good response to our podcasts lately and we’re so grateful for that. And if it’s something that’s meaningful to you, podcasts are a real easy

[01:31] thing to share. And I speak of speaking of rhyming and alliteration, I think we have the coolest title out there, the Prosperity Podcast. How can you get better than that? I like it, too. I can say it over and over again. So agreed. Agreed. So the arguments are going to be made immediately that if you are not investing in your 401k, that somehow or another, this is irresponsible. And I think we need to clarify that we’re not saying take the money and buy a jet ski. We’re not saying to take the money and, you know, buy jewelry or, you know, repair your house. We’re saying that the concept of savings that the 401 creates on autopilot through those check deductions is a fantastic thing. But the 401k vehicle itself has some serious problems and there are better

[02:25] alternatives for most folks. Absolutely. Really well said on your part in that we as a society have just gotten sucked in to this 401k arena as the only place to put money, especially when you’re starting out. And I highly, highly disagree with that. So let’s take a look at some words here. And they seem really basic, but they’re not. In fact, I have to admit that it was probably 10 to 15 years into my financial career that I truly understood the difference between saving and investing. And I’m sure we could look it up and maybe when we actually look it up, the differences are right there plain as day. But so many times they get lumped together or used inappropriately. And I want to hone in on them because it directly relates to the 401k,

[03:19] which I believe long ago used to be called a 401k savings plan. And I think that’s the wrong word for it. To me, savings means liquidity. Savings means control. Savings means being able to use the money for whatever you want, whenever you want, no strings attached. And we’re all well aware that a 401k has all kinds of strings attached, not only in terms of time frame, but also in terms of what you use it for. And so I agree. We are absolutely not advocating that you stop your 401k and go by jury or a jet ski. Boy, we’ve got some more alliteration going there, don’t we, today? Unless they’re mine. But instead that you create savings, liquid, controllable, usable savings. In fact, I really should throw out an acronym that we really like to

[04:19] associate with our savings, and that’s CLU. C stands for control, CLU. L stands for liquidity, CLU. U stands for use. And then E in the CLU word stands for equity, meaning that you, with your liquid savings, so I’m not talking about the 401k, I’m talking about actual controllable liquid savings that you can borrow against it and still have it keep growing. And as most of our listeners know, our favorite tool for that or our favorite product for that is cash value of whole life insurance. But back to the 401k environment and something that you said, which is how convenient the automatic contributions are from our paychecks into this, what I’m now going to be clear on is a 401k investment. And I think just to clarify, when we say 401k, in your particular world,

[05:17] if you’re a government employee or you’re a school teacher or something, there might be a few other numbers out there, aren’t there? So the other numbers you’re referring to might be a 457 plan or a 403b plan. And interestingly enough, these types of products and sometimes the 401ks have matches. And so M-A-T-C-H-E-S, that can make the 401k investment. Again, I’m clarifying that a 401k is an investment, not a savings plan. 457, sorry, 403, now I’m getting the numbers all mixed up. Any of those types of things are investments simply because they’re not controllable, liquid, usable and acting like equity. Now, I know you can borrow against your 401k, but there’s all kinds of limitations and penalties and etc. for doing that.

[06:06] So it’s not what we want to be relying on for our liquidity, for our controllable, liquid, usable act like equity savings account. And for our listeners out there, those numbers that you keep hearing so many people use actually refer to the IRS code that pertains to your particular situation. So there’s actually a section 401k of the IRS code that deals with the taxation and the tax deferment of this particular product. So that’s what those numbers mean. So if you’re ever wanting to look that up. And the other thing I would like to encourage people to do is to look at when you’re setting up these accounts and we’re talking about control, look at the envelope that comes with your statement. It actually says for the benefit of and your name.

[06:59] This technically is not an asset that you personally own. It’s a person. It’s an asset that is set up to benefit you in the future. But until you convert that over and go through the taxation process, it doesn’t even belong to you. That’s right. And as we’re well aware, when you go through the taxation process, it gets typically cut in about half. And so people are running around with these 401k statements showing say $100,000. When in actuality, that’s probably a 50 or maybe $60,000 account for them. Very, very misleading information in the 401k world. And a lot of it is coming to light of late. The people that are out there in the news are making the 401k fees better known. And that’s good. But we feel very, very strongly that you want to take

[07:49] the good aspects of the 401k, which are the consistent contributions, and split that out in a way that you can control a little bit better. So life insurance premiums can be paid monthly. That’s a great way to have consistent contributions. And then, of course, you can find other investments that are possibly going to be a little bit more lump sum oriented. But there are things out there that we can do to help you build up your lump sums so that you can go find true investments. Now, of course, our definition of a true investment is double digit, no loss of principal. And believe me, most 401ks do not fit that definition. I would like to point out to under control, and Kim, I’ll let you answer this question.

[08:38] If I take out a 401k loan, let’s just use a $100,000 account and I’m allowed to borrow $50,000. And for whatever reason, I am below the age of 59 and a half, and I either quit my job or my income is terminated or I’m laid off. What happens to that $50,000 outstanding loan? It immediately becomes due and payable. And if you don’t have the money to pay it back, then you will end up getting that contribution taxed and penalized. So there will be a penalty of 10% plus the tax on it. And it’s an environment that is just going to destroy that account. And we see that happening over and over and over to people. A 401k loan should be the absolute last resort. Now, I’ll admit, I’ve had to use them myself on occasion,

[09:35] but they are not an efficient way to get money at all. And in today’s employment environment, I think long-term job security is more like seven years than the 25 it used to be. Yeah, well said. So that’s another reason why you want to set yourself up within emergency slash opportunity fund either instead of or in addition to a 401k plan so that you truly have savings, controllable, liquid, usable, act like equity so that you can borrow against it. And it keeps growing savings. So we talked about liquidity. We talked about borrowing against a 401k. Typically, you can’t borrow against an IRA, but they do kind of fit into the same mold. What about the thing called life insurance? Is that so? I mean, what do I do?

[10:27] Do I have access to that money prior to 59 and a half? How is it different? Absolutely. So you can just withdraw if you want to from your cash value of life insurance. But it’s so much better to borrow against it because that enables it to keep growing. So let’s step back at this for a minute. Your typical saver is going to build up a certain amount of money and then maybe withdraw to buy a car or big screen TV or whatever they’re going to use them, you know, go on vacation, whatever they’re going to use the money for, essentially then starting over at zero in their savings account again. It’s so much more effective if they will borrow against that savings account. Yes, there’s an interest cost there,

[11:11] but then the asset keeps on growing while they drive the car, go on vacation, etc. The only reason life insurance works for this even better than a bank account is that the internal rate of return on life insurance is a little higher than most bank accounts always has been. And there’s the death benefit that goes with it so that if death occurs early or when death occurs late, quote unquote, you know, more normal life expectancy, then there is a principal injection into the family’s financial well-being. And that money can then be used to go on and do other things, maybe fund the bank account for the next generation, maybe provide for the payback of debt, etc. So this is why the life insurance is more effective as a savings slash opportunity account

[12:02] or emergency slash opportunity account than just a regular money market or bank savings account. One of the things you’ve brought up before that I think is relevant here is that when you do have this liquid money available, such as the cash value in life insurance, opportunities will find you. For example, in 2000, I believe it was 2008, 2009, Arizona passed that law where they were able to target anyone and make them prove that they were a U.S. citizen. And they lost a huge chunk of their population overnight. And in combination of that and the real estate market that was collapsing, we were presented with an opportunity to buy $50,000 brand new condominiums for $7,500 a piece. And we were actually able to sell those and get down payments bigger than what we purchased them for.

[12:54] But the majority of them were purchased with the cash value of life insurance. You couldn’t have done that with your 401k no matter how you had it structured. That’s right. And just on that note, a lot of people think that the 401k can go to a self-directed IRA and then it can do real estate with that. And you can, but there’s so many restrictions. In real estate, such a fabulous investment. Why on earth would you want to lock it up into a self-directed IRA box that came from the 401k box that has limits all over it? OK, so we’ve covered control, do you think? Yes. We’ve covered liquidity. What’s the U.N.? Use. And it just simply reminds us that you want to be able to use your savings, emergencies, slash opportunity money for anything you want.

[13:46] Just like what you mentioned, you want to be able to use it for an opportunity that’s a real estate deal, for a business, to make payroll, to go on vacation, to buy the big screen TV or anything else. Why put yourself in a position where somebody else, namely the government, controls your money? It just doesn’t make sense. And we get so caught up in the match or maybe the hype that’s out there that we make the mistake of putting all our money in the 401k that we miss out on opportunities where we could use the money for anything else. I would challenge our listeners to actually get out their individual 401k statements and look at them in detail, because unfortunately, since you are putting money

[14:35] in each month, you can’t really tell how well that asset is performing because your account could be worth more next year than it is now simply based on the fact that you’re putting more money in it or your employer is putting more money in it. You both are potentially contributing to this account and it’s not real growth and gain. And there’s no way without sitting down and breaking that out that you can tell which is growth and which is additional contributions. Kim, before we get in here too far, you have a book that you’re offering our listeners to help educate them on this, aren’t you? Absolutely. So we have a book called Financial Planning Has Failed. And the only place that it’s available is on the website at Partners,

[15:21] the number four Prosperity dot com slash ebook. There’s an audio version as well at the same location. That’s partners for Prosperity dot com slash ebook. And I’d really encourage you to grab it and opt in, get some of the additional resources that are there so that you can learn about the other places to store your cash that needs to be controllable, liquid, usable and act like equity, as well as some of these alternative investments that can create a better investment environment for you. Maybe it is in a self-directed IRA or maybe it’s in regular money. But let’s get those dollars earning double digits without losing principle. That’s always our goal for investments. And again, we’ve given out information here today that’s more general.

[16:10] If you’d like specific information for your financial situation, if you’re ready to stray from your 401k, we’d be glad to talk to you in person. Our contact information is available there. That’s what you can get in touch with us. And we can give more of a customized solution. Right, Kim? Very well said. We work in all 50 states, help clients of every walk and nature and are more than happy to get people going on some alternative strategies that are way more effective. Super. Well, for the Prosperity podcast, this is No BS Money Guy saying thanks again to each and every one of our listeners. Keep your questions coming. Keep learning. Keep growing. You don’t have to follow what the person next to you is doing

[16:54] unless you want what the person next to you has got. And special thanks to Kim Butler. Take care, everybody. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.