Welcome to the extra post as part of the Investing Crash Course — I wanted to throw in some bonus content! Today’s topic tackles the all-important topic: Why 401k’s Are Broken and My Secret to Fixing 401k’s.

If you haven’t read the first three posts, I highly recommend it as I poured countless hours refining the major takeaways on the journey to creating financial freedom in my life. The first post details the ONE shift we experienced when we went from 20% savings to 60% savings and it builds from there.

Should we place our hopes and trust into the 401k? Is the 401k sufficient to cover all my retirement needs? This post dives into why 401k’s are structurally broken and my “secret” to fixing it.

401k’s Are Broken – Cracks in the Foundation

For millions of Americans, 401k’s are the premier retirement vehicle – and this is a crisis for two reasons.

The first reason we have heard plenty of times: 401k’s are vastly underfunded and under-appreciated. More than TWO THIRDS of Americans DO NOT contribute a single dollar to their 401k’s (when given the option)!

Even for the one third who do participate, more than half are underfunding their retirement needs.

The second reason is 401k’s were NEVER designed to be what they represent today.

The original design of a 401k was to be used as a tool for corporations to shield taxable earnings. You can go more into detail here with a recent podcast interview we did on this subject and more:


When handed a tool that we will rely on for our future, it helps to understand what the tool was originally designed to do.

The overlying problem is that we have made 401k synonymous with retirement. When someone says, “Oh, preparing for retirement? I fund my 401k up to the match, so I’m good for now,” or, “I max out my retirement savings by topping off my 401k,” either of these phrases is cause for alarm.

We should utilize tax-efficient retirement accounts such as a 401k, but we should not let 401k’s be our only means to effective retirement planning or planning for our future.

Let’s run through some numbers and identify potential solutions to this 401k crisis.

My “Secret” to Fixing 401k’s

By investing the maximum amount of $18,000 every year for 40 years, and assuming a 5% return, the total value of your portfolio will rise to just over $2,000,000.

Two million might sound like enough today to retire, but in 40 years, 2,000,000 may appear much closer to $1,000,000 in purchasing power, due to inflation. With a “conservative,” 4% withdrawal rate, income from a 401k alone will not be sufficient.

Even with the 401k FULLY funded, we still fall short of our retirement planning.

These numbers represent our case and my suggestion to you is to take ten minutes to run the numbers on your current setup and then ask yourself:

Are you relying too heavily on your 401k?

Is it possible to fix 401k’s to do what people want them to do? Yes, I believe it is but the effort here (as mentioned in the interview above) is best directed towards lobbying for a federal change… AKA much, much more difficult than the personal solution I proposed above!

-Matt

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