Last week we talked about decent advice in much too small doses from mainstream personal finance gurus. This week, we have a slightly different animal – horribly misguiding advice from a guru that you should ignore altogether.
I recently came across a Business Insider video with commentary from popular blogger/cereal entrepreneur/best-selling author/hedge fund manager, James Altucher. It was a short opinion piece that depicted his take on how awful 401Ks are and why millennials should avoid them altogether.
Without further ado, here is the full transcript of the video:
“I’m going to be totally blunt. Are you guys in 401Ks? OK, you’re in 401Ks. I honestly think you should take your money out of 401Ks. This is what is actually happening in a 401K: You have no idea what’s happening to your money.
And, by the way, if you want that money back before age 65, which is 45 years from now, you have to pay a huge penalty.
They’re doing whatever they want with your money. They’re investing wherever they want. They’re paying themselves salaries. In most mutual funds, they’re putting it in marketing fees.
Hold on to your money. Put your money in your bank account. The average 401K, they won’t really tell you this, probably returns, like, one-half percent per year.
You don’t really make money in a 401K. It’s just tax-deferred. When you’re in your 20s, what does tax-deferred really mean? You’re not going to see the money anyway, one way or another, for 45 years. You’re not even 45 years old.
What you should do in your 20s and 30s is invest in yourself. Building out multiple sources of income, investing in getting greater skills, and so on. That’s how you make money in your 20’s and 30’s.”
Mr. Altucher, by most measures, is a smart, successful, talented, and wealthy individual. But his commentary on 401Ks is, to be totally blunt, just plain awful. And it made me think, “Hmmm… if this successful and intelligent human being who has a large following and a lot of authoritative sway over millennials could be this misguiding in advice, what other bad advice are all of you getting about 401Ks?”. So I thought it was worth some discourse here.
401Ks have gotten a bad wrap in recent times, and some of it is deserved. There are many 401K plans out there that:
- have high management fees
- have limited investment options
- have no 401K match
If your 401K meets that rare trifecta – then yes, it might be wise to avoid your employer-sponsored 401K and opt for a self-managed IRA instead. But, Altucher does not suggest that – he’s suggesting avoiding any sort of long-term savings for retirement (or any financial goals) altogether.
You’d expect that someone who writes about finance and runs a hedge fund to understand the power of compound investment returns for millennials. But, it doesn’t seem like he does, so I’ll share it:
$1 saved in your twenties can be the equivalent of $10 saved in your fifties, if invested over time. Actually, $10.06 to be exact – at an average annual rate of return of 8% on your investments over 30 years. Even if you factor in 2% annual inflation, you’d have 556% of the buying power for every dollar you save today.
What happens if you don’t get an early start?
Even if you double-down your contributions AND save for longer periods of time, you probably won’t catch up. That alone is enough of an argument to thwart Altucher’s advice. But his biggest omission is that many 401Ks have matching funds from employers. This is FREE MONEY, with no risk attached. Why the hell would you give free money a cold shoulder?
Some of Altucher’s other assertions are off as well:
“You have no idea what’s happening to your money.“
Actually, you do, it’s called “logging in to your account” and educating yourself. And if you have a self-directed 401K option, you have free reign to invest in whatever you’d like.
“If you want that money back before age 65, which is 45 years from now, you have to pay a huge penalty.”
It’s age 59.5, and there are ways to access the funds prior to without penalty, but why let facts get in the way of proving a point?
“They’re doing whatever they want with your money.“
No, “they” aren’t. You choose what you want to invest in.
“Hold on to your money. Put your money in your bank account. The average 401K, they won’t really tell you this, probably returns, like, one-half percent per year.”
Last I checked, not many bank accounts were paying one-half percent, and the S&P500 (which most 401K’s will allow you to invest in) has averaged over 10% annually over the last 100 years – which includes the Great Depression and the Great Recession.
Now, I do agree that “investing in yourself”, Altucher’s last point, is a good strategy. But saving for future financial goals and investing in your self at the present is not an OR proposition. You can and should attempt to do both. And many of the ways you can invest in yourself (sidegigs or other entrepreneurial initiatives, getting a Harvard education online for free, or taking paid/unpaid internships) have little to no cost involved.
The reality is that in a world of disappearing defined benefit pensions, 401Ks with matching funds are the best hope that most millennials will ever have to enjoy a comfortable retirement. There is good 401K advice out there, but Mr. Altucher’s is not it. And if Mr. Altucher comes knocking for investment in his hedge fund, don’t answer.
I feel sorry for people that think because a person has money that they can guide them. We have to delve deeper and ask better questions of these people.
Well, especially in this case. Altucher is worth tens of millions of dollars, has probably never had a job with a 401K, or needed to think about saving in one. 401K’s have a negligible impact on the financial futures of the super wealthy (a rounding error, if you will), but can have a HUGE impact for everyone else.
Yikes, this actually made me cringe to read. It feels a little patronizing, too, as if people aren’t capable of educating themselves about what they’re putting their money in. His advice is akin to telling people they shouldn’t buy a car because some car dealers are sleezebags who rip you off and sell you worthless cars.
It’s a little scary that advice like this gets so much traction. You can definitely save for retirement AND invest in yourself now. Plus, there’s many avenues young people have to invest in themselves for free! Networking events, volunteering, seminars or classes at work work, auditing community college classes. Depending on your employer, you can take advantage of many great opportunities.
I don’t get a match for my 401(k) contributions but I do get charged the lowest amount of fees compared to other options available. I may even get a pension for life but it isn’t guaranteed yet so I’m reducing my risks and investing for long term retirement funds just in case I don’t get the pension.
Why would he say that it’s bad that it’s hard to withdraw early from a 401k without penalty? That’s kinda the whole point of saving for retirement… you don’t use it until you retire.
That is true – it is for retirement. Still, there are exceptions and loopholes, if you really need to access the funds: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions
I saw this advice and it makes me want to *headdesk*
To be fair, I just got access to my company’s 401k and we’re small enough that we 1) don’t have any 401k match and 2) my options are extremely limited (about 11 options). Given my income and age, I opted to save just 6% of my income wholely in a vanguard lifecycle fund through the 401K and my other 12% that I put away for retirement goes into maxing out my Roth IRA, because I like the allocation choices better. A 401k isn’t the best option for everyone. But obviously it’s a heck of a lot better than nothing.
G.E. I was wondering if you would cover this! I’m glad you did because it was so shocking (and really embarassing) that a well-respected guy like Altucher could be so…wrong. He can’t pssobly believe what he said! Maybe he was trying to be funny but who knows.
In the last year our company’s 401k finally allowed the self-directed brokerage option. In the last half year that meant a 30% increase based on some good personal choices. Remembering back to new hire/orientation when some fellow employees were saying the best way to go was just dump it all into a standard savings account. Could only shake my head, but I still passed along the 20somethingfinance.com website to a few folks who seemed interested in being more proactive. Thanks G.E. AND other users especially for so many different ways of viewing things!
Ah, yes. Timely plug for the self-directed brokerage option, which gives 401K users much more control. I’ve written about this previously, and added mention and a link to the post.
This is why HOW you educate yourself is equally as important THAT you educate yourself.
Question authority. Question authority politely. Agree with what you are taught if it makes sense. This is not one of those cases.
Your post made me log in to my 401k and check my personal rate of return….
I am 25, currently putting 10% of my paychecks into my company matched 401k. I don’t have much knowledge of investing (except I wouldn’t turn down free company money) so I have the Vanguard Retirement Target Date 2060. From July 2013 to now I have a total return of 19.09% and an annualized return of 10.07%. I believe I will leave my money right where it is! I think my Wells Fargo savings earns like 0.01%……
I have pondered these two school of thoughts on retirement a lot recently.
On one hand I get where the guy is coming from. I think the idea is to create a business and ideally create a source of passive income so that you don’t need to have a “traditional retirement”. Instead, you have a steady monthly steam of income that you can ideally “retire” off of. In my mind this aligns more with the teaching of The Millionaire Fastlane and The Four Hour Workweek. That being said, I would assume you would at least want some sort of nest egg to support you in case something happened to the business.
On the other hand, I totally understand (and love) the power of compound interest. It makes totally sense to invest your money and just let it grow over time. That being said, you can also see innumerable growth by investing in yourself or a theoretical business.
I personally like to blend the two ideas together. I read as much as I can get my hands on, but also invest as much as possible in my Roth IRA to take advantage of the power of compound interest.
I don’t think there’s a best way that will work for everyone. Both (I.e. businesses and the stock market) have factors that you cannot control, so there will always be some risk.
Anyway, just my two cents. Great article!
Your average worker knows nothing about investing and, as you pointed out a couple of weeks ago, the average fund is actively-managed. That’s very problematic and, arguably, a reason most people should not invest in their 401Ks. Consider this: my wife’s 401K offers approximately 12 investment options, only two of which are low-cost index funds. She invests in only those two funds. At least twice now she has received dire warnings from the financial advisor that administers her office’s plan that she needs to “diversify” and invest in 7 or 8 funds, as her current investment strategy is like “going to Vegas and betting it all on red.” Given that most people don’t understand investing, and this sort of advice is typical among financial advisors, I’d say yes, absent a match and some basic understanding of investing and the low-likelihood of ever beating the indices, don’t invest, whether in a 401k or otherwise.
I sort of understand where he’s coming from. If someone were savvy and ambitious enough, $50k in their hands will grow far more exponentially than $50k in some Target Date Fund with a 1% expense ratio. I agree also that if the money were used to finish a degree in a STEM field or get an MBA at a top-ranked college, it is absolutely worth it. No doubt.
Now for me personally, there’s nothing I can throw money at to advance my career.
Those of us wage earners (even well paid ones) putting money into 401ks will probably never be rich. If you want to be rich like that guy, follow his advice and take some chances.
If the risk doesn’t appeal, then don’t. Pretty simple.
I have been investing in mutual funds for 24 years (started at age 26). Initial investments were $50/month because I was scared of the market. But those initial investments encouraged me to get educated about finances/investing and now I have over $550K in mutual funds and $60K in an emergency fund. In 7 years at my new savings rate and a 7% return, I will have $1.3M in mutual funds. I am living proof that saving and investing WORKS. No question about it! I have accumulated more money than anyone in my immediate and extended family ever will (not bragging, just fact) because looking good is important to them. Over the last 6 years I have maxed out my 401Ks and damn glad I did. One of the best investments available to the “little guy.” Mr. Altucher is dead wrong.
BTW – I was an enlisted Air Force guy for 23 years and didn’t make tons of cheddar. It doesn’t take a lot to reach your financial goals. Just takes consistency, discipline, and compounding interest. Simple…
Seems like he just wanted to get on his soapbox. Like you said in a previous comment, James has probably never had to deal with a 401k in his life since he’s worth tens of millions of dollars. Nothing saying you can’t contribute to a 401k AND invest in yourself. Not everyone 20 year old who moves to Silicon Valley will become a millionaire.
Wow. Mr Altucher did give bad advice, especially considering he’s a finance guru. He didn’t offer any better options for investing.
This is Altucher for you. A narcissist who is “enlightening” us sheep with contrarian financial advice to live the type of lifestyle that HE thinks is best (spoiler: his life has always sounded pretty terrible to me). I had followed him for a while but his ego just got to be too much. His legion of blogger disciples that contribute nothing original are pretty nauseating as well. A shame he gets more exposure than you correcting this junk “advice”.
The thing is, the gurus need to sell their books/seminars, and get people involved in their money-making ventures. That’s why so many of the gurus advocate multilevel marketing and online affiliate businesses, and urge people to “invest in yourself” which means give more money to the guru right now instead of keeping it tied up in long term instruments. They would oftentimes go so far as to recommend borrowing money to pay for their seminars or coaching sessions! That’s just the nature of the business.
I’m glad G.E. is not as popular as James. Such popularity can only be achieved at the expense of integrity.
Proves my point, hear what the so called experts have to say, educate yourself and then make your own investment decisions because in the end it is you who has to live with what your money does.
I have been socking in the max into 401K for the last 10 years. I have been choosing where to put my money from the funds that my come with plans. Most of the time I choose those with low expense and I do diversify my choices. Recently I talked to a financial adviser that my employer hired to answer people questions about finance and 401K, Roth 401K and he told me that I should be in his field since I am doing great with my picks. Thirty years ago I just put 50% in stock and 50% in safe-investment. However, I have educated myself since then and I am happy that I don’t pay anyone to burn my hard earned money.
1. If you are banking your future on a 401(k), you are betting that the stock market will pretty much *always* go up. I watched my coworkers get wiped out in 2000-2002 and then again in 2008. Lesson learned: the stock market can, and does, COLLAPSE.
2. A Big Mac used to cost .65 cents (in the mid 1970s). People who invest in the U.S. Dollar are guaranteed to lose a massive amount of purchasing power over time. Good luck surviving in retirement when a loaf of bread costs $10, a gallon of gas is $10, and your car insurance is $1000 every six months. Central Banks purchase gold for a reason.
3. Fees. Fees. Fees.
The stockmarket is a real joke now. The poor work man dont stand a chance i have lost over 30000 dollars in my 401k with fidelity. If i decide by the end of the year and i am still losing money i am rooling my money over to chase bank. Because i am close to retirement. I cant take losest like this and its not 6 months gone in the year. So if i would have had it in the bank saving at chase i would probably feel better. The stockmarket is just terrible now