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 401K’s 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 401K’s? OK, you’re in 401K’s. I honestly think you should take your money out of 401K’s. 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 401K’s 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 401K’s?”. So I thought it was worth some discourse here.
401K’s 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 401K’s 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, 401K’s 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.