This article will go against most conventional wisdom floating in the financial world. When you start as an adult, the 401K is a sacred cow we must protect at all costs.
However, savings into your 401K can damage your finances for the foreseeable future because of “life.” Today, I want to explore some alternative ways to make it to retirement more comfortably than blindly saving in a 401K.
What is a 401K? A 401K is a savings account you set up through your workplace. Most businesses will perform some form of “matching” to assist the employee in the savings process.
Start a Fitness Business towards Passive Income
Let’s explore why I call this a savings account. I call this a savings account because most people don’t learn that it is actually an investment account.
I started investing in the Thrift Savings Plan (I’m military) in 2001. I didn’t know the difference between the government bond fund and the common shares fund. I was just blindly throwing money into the account.
I understand that most people are not interested in learning about the stock market. I also accept that most people want to be financially secure, at a minimum. These things are at odds.
The 401K trap. Yes, saving something is better than nothing. And getting the free matching is terrific, but it’s all a trap—here’s why.
Start a Coaching Business towards Passive Income
Your employer may match you five percent into your 401K, but you are taking on massive debt in the real world. For example, you may have to take a personal loan or credit card debt at 15% to survive the recession.
With a 401K, you lock your money away behind the threat of taxes and a 10% withdrawal penalty. You could leverage this money in times of high gas prices and inflation.
The typical scenario. Say you started working at age 18 and have stashed away $40,000 in your 401K. That’s a good deal of money and can lead to over $2 million in retirement.
However, life happens. You marry, have children, buy a home, and inflation persists. You’ll raid this money, probably taking away $25,000 cash after penalties and taxes.
The Hunt for Baby Bonds
Not only do you now not have a retirement plan, but you also know nothing about money. This scenario sucks, but it is realistic. I know it is because it happened to my wife and me.
Our 401K story. Over our 16 years of marriage, I have had to borrow against my TSP three times when buying homes and moving around the country.
My wife had to liquidate her 401K savings twice because of unemployment after moving duty stations. At age 38 and 35, we had $30,000 in our 401K plans—not good.
An amazing change. However, at age 38, I discovered passive income while sitting in a small room in Turkey. Specifically, I learned about dividends and dividend growth investing.
Investing for Interest 104: Bountiful Bond Funds
Getting current income today is a life-changing shift in mindset. I earn income from my stocks and bonds, and I can decide how I want to spend the income.
A current example. My wife and I earn about $900/month in dividends. This is money we can use to pay for inflated gas expenses, overpriced food, and luxuries.
Most of the time, we reinvest the income, but it’s nice to have the option to counteract the effects of inflation with dividends.
How is my TSP account faring today? Today, we have $200,000+ in our dividend portfolio and $8,000 in our TSP account. I have zero use for my TSP account, except as a little nest egg for our grandchildren.
Email Money: Dividends, Royalties, & Rents in Your Inbox
I can leverage my M1 finance brokerage account to take a trust-less loan against its current amount. If I have $20,000 in my M1 finance account, I can take a loan of about $8,000 without going through a long process.
I can use the loan to create an “instant emergency fund” if things start looking funny during the recession. I can repay this loan as needed or use assets to pay it back quickly.
Having options is NEVER a bad thing. I feel that a 401K gives you far fewer options than a standard brokerage dividend account. Now that inflation is rampant, we will all need multiple options to carry us through to the finish line.
What can I do today to get options? First, I am not a financial advisor, so take everything I say with a grain of salt.
Become a Bonafide Investor VI: Debt vs. Equity
I would first start reading books about dividends and emergency funds. I would then re-evaluate how much money I am throwing into my retirement fund.
Dave Ramsey alludes to the same thing. Basically, stop investing in tomorrow (401K) until you have figured it out today (emergency fund).
I would build an emergency fund of $10,000, become debt-free, and start investing in dividends (an income portfolio is ideal). Once you have a lot of current income and a safety net, you can begin investing in your 401K.
Grace & Passive Income
A quick example. Our story looks similar to the scenario above. We have about $40,000 in a high-yield emergency fund, are debt-free, and are close to $1,000/month in dividends.
Now is an excellent time to focus on retirement savings for us. However, I have a military pension and social security coming (perhaps); therefore, I can continue to grow my dividends.
The important part is that I understand money and how to become wealthy. I did the work to learn where and how to invest to achieve financial independence.
It is hard to achieve FIRE (Financial Independence Remain Employed) without learning how to invest. You must maneuver your savings and invest to meet today’s needs.
Seeing how inflation is over 8%, I may convert $2,000 from my high-yield savings account to USDC (9%). Or, I may slow down my dollar-cost averaging in my dividend growth portfolio to invest in more closed-end funds (10%).
I Live Paycheck to Paycheck 4
Conclusion. It’s all about options and education. A 401K doesn’t give you much. It should be the last step on the financial pyramid, not the first.
Your financial life will be challenging if your parents don’t give you a nice nest egg and some rental properties. 401K are a tremendous taxed-advantage account, but they are worthless in times of trouble.
We are in troubled times and marching towards the unknown. We need to learn how to save, invest, protect, and prepare our finances for any and everything.
Thus, the better option than a 401K may be an emergency fund, income portfolio, and Roth IRA. Finally, you can layer on a 401K match from your employer.
Again, I am not a financial advisor, just someone who followed standard industry advice for 16 years. In the end, I had nothing to show for it.
Now that I went rouge and against the grain, my financial, emotional, and mental health have all improved because I am out of debt and have dividends coming in 24 hours a day. Life is good!
- PDF of the Month: Don’t Gamble with Retirement 7 (Free 424-Page PDF)
- Free PDF Downloads: Download FREE PDF LIST here
- Financial Mindset: Become CEO of Yourself 2 (Free 196-Page PDF)
- Retirement Planning: Your Retirement Planning Guide 2 (Free 255-Page PDF)
- Investing: How We Plan to Retire on Dividends 2 (165-Page Free PDF)
- Cryptocurrencies: Counting on Crypto 2 (Free 159-Page PDF)
- Real Estate: Financial Independence through Real Estate 2 (Free 123-Page PDF)
- Business: Retire Rich, Retire Comfortable with a Business 2 (Free 185-Page PDF)
- Latest DGWR: Don’t Gamble with Retirement 6 (Free 409-Page PDF)
- Everything!: The Biggest Book on Passive Income Ever 2! (book)(Web Edition)(Art Edition)
- I bought a Kindle Oasis: Check it out on Amazon
- Read My Books for Free: Free Kindle Books Schedule
- Crypto Exchange: My Favorite Crypto Exchange VOYAGER (Join Voyager)
- Kindle Unlimited: Why I Finally Subscribed Kindle Unlimited (learn more)
- Book Reviews: 505 Takeaways from 101 Books (pdf)
- Writing: The Publishing Chronicles (Part 1, Part 2, Part 3, Part 4, Part 5)
- Best REIT- Fundrise: REITs vs. Homeownership (Join Fundrise)
- Follow us: On our Facebook Page and Join our Facebook Group
- Monthly Dividend Tracker (XLSX): Check it out on Etsy
- For more detailed analysis, join my Youtube: MFI YouTube Channel
Monthly Dividend Tracker Template: Buy on Etsy
Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
Leave a Reply