
Self-made millionaire: Don't put money in your 401(k) - jrs235
http://finance.yahoo.com/news/self-made-millionaire-dont-put-161146781.html
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beardicus
> Grant is promoting saving the money you earn, but counter to most advice, he
> says to put the money in a good old-fashioned savings account — where your
> money is accessible at a moment's notice — until you have at least $100,000.
> Then, you can start investing.

I get what the guy is saying, sort of, but it's also the stupidest advice ever
for most people. Saving $100,000 in a savings account is a whole lifetime of
savings for many people. Meanwhile you're earning nothing on it, and it's not
tax advantaged.

~~~
programminggeek
You don't seem to get the other half of the advice - earn more money. Get
better at making money. If you spend a lifetime to save $100,000, you won't be
a millionaire.

~~~
massysett
The advice in earning money is good. The advice on where to park it is
absolutely awful. Learn from Trump and Romney here: you must get the taxes
under control. If you put 100k into a bank account, it will earn nothing and
taxes will eat you alive.

The point of a 401k is that it is tax advantaged and the money is there when
you get old, when you need it.

I can understand piling money in a bank if there is something you plan to do
with it. But piling 100k in a bank when your only plan is "so NOW I am ready
to do something with it" is some of the dumbest financial advice I have ever
seen. Even if this guy is good at making money, he must be even better at
spending it, and the tax man is going to be his biggest payee.

~~~
zaccus
>If you put 100k into a bank account, it will earn nothing and taxes will eat
you alive.

Huh? Assuming this is all after-tax money and isn't earning anything, what
would you be paying taxes on exactly?

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massysett
You pay taxes when you earn the money as salary, pay taxes on the interest.
With a 401k, you pay no taxes when you earn the money as salary, and the
earnings compound tax-free.

A bank account is the absolute worst place to park any significant amount of
money. The only reason it's better than a mattress is you don't have to worry
about the bank catching on fire.

~~~
zaccus
You pay taxes when you withdraw from a 401k, and the IRS has minimum
distribution requirements that ensure you will pay taxes on all that money at
some point.

Personally I think a Roth IRA is the better deal from a tax standpoint -- pay
taxes on contributions and then you're done. With a long enough time horizon
and a little luck those contributions will be dwarfed by earnings, and I would
rather pay taxes on the lesser amount.

A savings account earning >=1% interest is a negligible tax burden. What you
lose from inflation is far greater than what you pay in taxes. Even so, saying
it's "the absolute worst place" to put money is beyond hyperbolic.

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riebschlager
"Put your saved money into secured, sacred (untouchable) accounts," he writes
on Entrepreneur. "Never use these accounts for anything, not even an
emergency."

A secured, sacred, untouchable account... like a 401k?

~~~
Slimbo
He specifically said accessable as well. If you access the funds in your
pension before retirement there's a hefty tax penalty.

~~~
riebschlager
I dunno, semantics I guess. But "secure, sacred and untouchable" and
"accessible" seem mutually exclusive to me.

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uw_rob
This seems like the type of advice that comes from observing that a lot of
rich people have done this. However it fails to account for the fact that the
majority of people who do this don't go on to become rich.

In my opinion, the sad truth is that not everyone can be rich. As if everyone
was able too be rich, it would be easy, and if it was easy, it wouldn't be
valuable, hence you aren't going to be making lots of money and become rich!.

As an aside, take a guess what savings plan will leave you with the most in
the end: At 7% interest, with an annual addition of $20,000 a year for 40
years. Or 7% with an annual addition of $40,000 a year for 30 years?

~~~
matt_wulfeck
Indeed, this is rich people advice. You only have to get rich once, and then
you can do things such as ignore your 401k, which unlike savings has tax
advantantages.

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analogwzrd
I'm a big fan of Mr. Money Mustache's advice: If you have a large chunk of
money in savings, don't leave it in a savings account because the interest is
so low. There's a Vanguard index fund (I'd have to look up the name) that's
designed to represent the entire US economy. Use your savings to buy that
fund, and you'll at least be able to get a better return than a savings
account and still keep your money accessible.

Is this risky? Not at all. Will it give you a huge return? Maybe over 50
years, but not in the short term.

But it's better than leaving it in a savings account.

The one time that I decided not to contribute to my 401(k) was when I had just
graduated and still had some credit card debt and my salary was low(so the
value of the company match was minimal). Getting rid of the debt was more
important to me than saving a little for 40 years in the future. Arguably,
this was still a bad idea, but mentally, not being in debt was important to me
at the time.

~~~
superuser2
It's extremely risky if you are laid off in an economic downturn (when you are
most likely to need an emergency fund).

He advocates using a HELOC as your emergency fund, but that only works if you
have home equity.

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jrs235
"to Grant's point, they won't help you get rich quickly or invest in
opportunities today."

It all comes down to [being able to] taking risks and having the funds
available when opportunities arise to be able to. Without a "risky
opportunity" fund then one can't participate in high risk high reward
opportunities.

However, if one has a company match to their 401(k), why couldn't someone
contribute to their 401(k) to get the max "free" match and then if an
opportunity arises one could do an early withdrawal of some funds to pay for
it? Yes, you'll pay taxes and penalties but if you view the companies match as
free money and it covers those taxes and fees, then are you really any worse
off then never having contributed? Until an opportunity presents its self
you're also getting returns on the free company match money.

Thoughts?

~~~
i_don_t_know
I think it's a really bad idea. High risk high reward opportunities are
essentially gambling. Whereas a 401k is a back-up plan and a safety net. Don't
take money out of your safety net and gamble it away (which is a very likely
outcome on a high risk opportunity).

If you want to participate in high risk high reward opportunities, create a
separate account for it and consider it "throw away" money from the beginning.
(Your high risk opportunity might pay off, but don't count on it.)

~~~
JoeAltmaier
Its a matter of degree of risk. The 401K isn't guaranteed either. The job
isn't guaranteed. Each of us has to make our own call on this.

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shinta42
Not true. I have a friend who has 1.4mil in his investment accounts(mostly
Roth IRA and 401k) by age 35. He started around 25. He does mostly low cost
index funds from Fidelity and Vanguard.

~~~
phlo
Assuming his investments gained by 10% a year (which is extremely optimistic),
he would have had to save $80k per year. Only a small minority of people have
the required income to do that; especially at 25.

~~~
shinta42
all I know is he started from scratch(no money passed from family). He started
investing after college, after losing money to stocks for 1 or 2 years, he got
into low cost index funds. Right now he is 37 and got about 1.5 mil in his
account (mostly 401k and individual after tax). He started entry level
position in a fortune 500 company (chemical) after college and have not
changed job.

~~~
shinta42
update:

his contribution was 638k past 10 years. employer contribution was 87k. And
bulk is in 401k and individual after tax, not Roth.

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brianfitz
Rate of return goes hand in hand with risk. The man in the article took
greater risk and, because successful, became a multi-millionaire. There is
success bias built into this because while a large percentage of millionaires
are entrepreneurs, a large percentage of entrepreneurs are not millionaires.
Also, the idea that you cannot become a multi-millionaire through saving (and
inside a 401k) is coming from a guy who never tried it. From those who have
tried it, it is indeed possible. :-)

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koolba
Best retirement advice ever: Save money automatically without even knowing it
because you'll adjust to just spending less. Doesn't matter if it's money
going into your mortgage, money into your 401k, or money into a separate
savings account that you don't touch. Just sock it away, live like you don't
have that money and you'll thank yourself years later.

~~~
petercooper
The only real difference between that and Cardone's approach is sock it away
into a savings account you _can_ access at some point, then invest in real
estate (or whatever) with it to make the real money.

~~~
koolba
> The only real difference between that and Cardone's approach is sock it away
> into a savings account you can access at some point, then invest in real
> estate (or whatever) with it to make the real money.

I'm saying do all of them. Tax advantaged, non-tax advantaged, mortgage, you
name it. There's really no wrong answer. The bigger item is saving in general.

Regarding 401k, Roth IRAs, and other tax exempt/deferred account with
withdrawal penalties, I'm all for them. If nothing else it makes you lock away
the money where you can't get it because otherwise, shocker!, you will. Those
account types make it easier to pretend you don't really have that money as
the fear of paying the 10% early withdrawal penalty is enough to knock sense
into people.

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spking
My biggest concern with all government investment/savings schemes is that the
rules and future tax rates when I'm ready to withdraw are a politician's whim
away from scuttling any plans I've made based on the original assumptions.

~~~
yellowstuff
It's certainly a risk. If you were exploiting some unpopular loophole then
there's an excellent chance that the regulations will change in the future.
But the 401k is so widely used and promoted that any major change would be
highly scrutinized and incredibly controversial. I think the US defaulting on
its debt is more likely than a change to 401k rules that would screw over
savers.

Ultimately, if you don't want the government to have any ability to affect the
value of your investment then canned food and ammo are the only asset classes
you're left with.

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chillingeffect
I just happened to have subscribed to Grant Cardone's youtube channel about
four weeks ago.

He's a real estate investor and self-made media magnate. Based on advice like
Kiyosaki's in Rich Dad, Poor Dad, he buys and rents out apartments. He
supplements his income and presence with youtube videos and books and
educational materials on sales techniques.

It is definitely true that almost anyone could do what he is doing. And it is
also true that if more people were into real estate, the Pareto curve of real
estate ROI would be less steep.

The big obstacles are mostly mindset (esp. if you have read Kiyosaki). We
almost all have meager financial education. Being broke is definitely not an
obstacle. There are communities of people who teach you how to save radically
you can build business credit.

Also, a lot of people (particular those with investments in skill, such as
software developers) simply don't want to change career paths for something as
"pedestrian" as real estate. It's certainly not appealing to me, personally. I
wish it was :)

Gell-Mann Amnesia Effect: knowing Cardone as well as I do, I can certainly see
the media's bias on this article. They've hyper-focused on one aspect of
Cardone's philosophy for the sake of a provocative clickbait article,
mushroomed to catastrophic proportions. And note that they've removed all the
educational value. They haven't given the information I've given here...

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pmoriarty
A lot of people in America going to work until they die, because they can't
afford to retire.

I've always had a problem with saving for retirement. I'd rather spend money
when I'm younger and can enjoy it, than when I'm old and can't enjoy a lot of
the things that I could when I was younger.

I've also never been big on chasing money, either through climbing the
corporate ladder or entrepreneurship. I'm just not interested in that stuff,
and get burnt out before long working in a career I don't enjoy, so I wind up
taking years off when I can afford it, and that eats in to my savings. My
investments have never worked out either. I'm just not good with money.

Yes, I know a lot of people are going to suggest that I should put my money in
to an index fund and forget it. But I've never been able to trust that the
market will keep going up. Of course, I've been proven wrong so far. But how
much longer will it keep going up? No one knows, and I really don't know why
some people pretend they do. No amount of statistics are going to guarantee
that you'll have more money when you take it out of your index fund than when
you put it in. And plenty of people have been burnt by the market and watched
their savings burn up.

A lot of people talk about investing as if it's guaranteed to make money for
them. But it's not. You could lose every penny you invest, and wind up being
worse off than if you didn't. It's happened to me before, so I'm really wary
of "investing" (ie. risking) my money.

So I'm kind of resigned to not having all that much money left when I'm too
old or sick to work. And then I'll probably die. But at least I'll have lived
somewhat by then.

~~~
agentgt
> So I'm kind of resigned to not having all that much money left when I'm too
> old or sick to work. And then I'll probably die. But at least I'll have
> lived somewhat by then.

That is fine and all if you don't have family (ie kids) but if you do you
really should put money away so that you don't become a burden later. Right
now my generation and a little older (Gen X-ers) have parents that were
slightly irresponsible with money (buying ridiculous houses and double
mortgaging etc).... and now when they get sick and old guess who has to pay.
One might argue you that is fair but it certainly wasn't the case for the
previous generation.

The grandparents (ie greatest generation or whatever they call the
war/depression generation) typically saved up.

This is a good thing because wealth takes time to build up. Our country did
not become wealthy overnight.

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jressey
This is moronic click-bait. If you're a wage slave, take the extra 5% from
your employer, it's literally free money even if you can't use it. If you have
the sums the author is talking about, keep it liquid to play with or whatever
he's advising.

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sharemywin
I would argue what he's saying is reckless. I remember "rich dad poor dad" a
while back and it had similar reckless messages.

If 9 out of 10 businesses fail, why will your be the one that doesn't? If you
want to gamble, got for it. But, it's exactly that. Investing is about
spreading risk.

I'm not telling people not to follow their dreams. But be prepared for the
consequences if it doesn't work out.

In full disclosure: I'm not currently following my own advice. If my current
part-time business meets a few KPIs, I'm planning on withdrawing from my 401k
to fund it.

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notacoward
His advice is damn close to saying that you should invest all your money into
lottery tickets because, hey, it worked for him. Sample of one. It's great
that he has been able to prosper that way, though I do wonder how he got by
during those times he was broke and whether that same support is available to
others. Statistically, his approach would be a disaster for most people. The
only point worth remembering is that some people really are blind to their own
luck and privilege.

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joshuaheard
My employer matches my 401k contribution, so I'm not going to turn down free
money. That being said, I will take it all out when I can avoid the penalty.
The 401k is simply tax deferred, so if I have the income I plan to have when I
retire, I will still be in the top bracket. For that reason the 401k is
useless to me.

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payne92
This seems like generally terrible advice. Your 401(k) contribution is pretax,
like most retirement contributions. So you're getting serious discount by
avoiding taxes that you would otherwise have to pay.

And if your employer matches your 401(k) contribution in any way, this advice
is worse than terrible.

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blahshaw
What's wrong with a Roth IRA? You withdraw the principal penalty-free at any
time, and you don't pay taxes on the growth in retirement. You don't even have
to invest it in stocks if you're risk-averse.

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ac29
>What's wrong with a Roth IRA? You withdraw the principal penalty-free at any
time

Yes, but you don't get to put it back in. If you take out, say, 20k, thats 20k
of tax advantaged space you never get back. That being said, I max out my Roth
IRA every year and consider the ability to withdrawl penalty free a last line
emergency source of funds.

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muninn_
someone post this on r/personalfinance so they can have a field day. You'll
get 2000 comments.

