Five Unbelievable Reasons Why Your Pension Plan Might Be Your Riskiest Investment
Banking institutions have a distinct genius for marketing and advertising. They are able to get millions of Americans to hand over their money with extremely little thought taken, very little knowledge of the so-called investments offered, as well as less control of their investments.
It really is one of the riskiest gambles for most people. Read the following reasons why I say this, and ask yourself if it is time to reconsider your 401k.
1. Minimal Opportunity For Cash Flow
Qualified retirement plans, such as 401k’s and IRAs, do not supply immediate cash flow, which would mean that you can't benefit from them through velocity and utilization. The idea is that letting the funds sit allows it to compound, but for many folks this actually means that it stagnates.
A lot of people will not choose to utilize these funds even when a particularly compelling opportunity arises that can make them much more than the 401k would, even accounting for the penalties. This means that many legitimate opportunities are passed by as men and women stay "in it for the long haul."
Instead, use your 401k to invest in equity capital markets. Just be sure that you avoid investing in shell companies. A shell company may come with a very long list of “clean up” issues.
2. Lack of Liquidity
The cash is tied up with penalties attached for early withdrawal. Although you can find a few technicalities that allow penalty-free withdrawals, the limitations are so numerous that very few know ways to get around them.
3. Market Dependency
The actual performance of the funds depends on market factors that most people do not have the knowledge or the ability to understand or mitigate. This means that your retirement plans are determined by unknowable projections, making for a risky and uncertain planning environment.
4. The Match Myth
"Take the match. It is a guaranteed 100 a year, according to an average return of 8% annually, but that indicates that some years will probably be lower, some will probably be higher. If in one year your funds are down 10%, you're tapping into your principal to take your own interest withdrawal.
At that point, you have got only two choices: 1) start withdrawing principal, or 2) leave the funds alone until your funds are up again.
5. No Holistic Strategy
I've witnessed on several occasions, folks whose finances are in shambles and although they have much more pressing needs, they diligently contribute to their 401k. They have been convinced to do so, of course, simply because of the match, tax deferral, and so on. It's like a person trying to take care of an injured knee when their wrist is slit.
What they really need is a macroeconomic approach to their finances that may help them identify, prioritize, as well as manage all pieces of their financial puzzle, with all pieces coordinated and then working together.
Conclusion
Qualified plans are promoted on such a wide scale mainly because individuals promoting it have vested interests and their interests do not necessarily coincide with yours.