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3 Reasons Your 401k Account Gets a Bad Rap (And Why They Are Wrong)

Investing your 401k account isn’t cool. It’s not sexy. No one is gonna call you or me a financial genius for doing so.

But here’s the real truth:

  • Boring investing is good
  • Most people who say investing in your 401k account isn’t worth it, aren’t doing it right
  • Investing in your 401k account is one of the best financial moves that you can make
401k account

Needless to say, I am a big fan of investing in your tax advantaged retirement accounts, like your 401k, to the fullest extent that you can.

But, I also dabble enough in other investment strategies, mainly real estate investing, that I hear the growing murmurs from the anti-401k crowd. Unfortunately, I think this can be dangerous for a lot of investors.

So that’s why I am setting the record straight with the 3 main reasons that your 401k wrongly gets a bad rap…

3 reasons your 401k account gets a bad rap

I’m going to assume that all of you reading have a good grasp on the different tax advantaged retirement accounts out there, especially the 401k.

However, there was a time not that long ago when I really didn’t understand this. So, for anyone in that boat (and it’s ok!), this is a refresher.

With that said, let’s dive right in…

1. You can get better returns with other investments

This argument can sound so convincing. But it really falls flat on its face as soon as you begin to dissect it.

So many investors will say that the money invested in your 401k account is wasted because you could take that same money, invest it elsewhere, and get way better returns.

Usually, these investors are advocated for vehicles like actively managed mutual funds not available in a 401k, real estate, cryptocurrency, or some other alternative investment, most of which are best avoided.

And while they can be correct when considering gross invest meant return rates, they are wrong for so many reasons…

  • The after-fee, after-tax return on these alternative investments usually brings the return below that invested in a simple index fund within a 401k account
  • These alternative investments are usually much higher risk than needs to be taken by high income earners like doctors to reach financial freedom so why take it?
  • 401ks are through employers. Usually an employer match is involved. Not taking the match is like leaving free money on the table
  • People love to act like they are rational investors and consumers. But none of us are. Money going into our 401k comes right from our paycheck. We never see it so we can’t spend it. Money invested elsewhere goes into our bank account first. Most people will spend some or all of this money before investing it. Even when they intend to invest it
  • I’ve met tons of people saying their 401k accounts are worthless only to find that they are just invested in a money market account…

So to me, this argument holds no water.

The name of the game in investing is to win consistently and avoid big losses. Wise investing with low cost diversified index funds in tax advantaged accounts using a consistent savings rate hits both of these marks.

No need to chase outliers…

2. The myth of the money jail

It’s become quite popular to refer to a 401k account as “money jail.”

The reason for this is because money in your 401k or other tax advantaged investment account cannot be accessed before a certain age without a penalty.

And this is correct. And even a more reasonable argument than the one above. But it is still not a reason to avoid investing in your 401k.

Let’s take the 401k

If you withdraw before age 59.5, you get hit with a penalty in addition to the taxes upon withdrawal. Nobody wants that. So this can seem overly restrictive.

But here’s the thing, if you are early in your career like me, you don’t know when you are going to retire. I should be able to retire well before 59.5 years, but will I? No idea! So I’m not going to throw away all the advantages of my 401k for a “maybe” event.

If you are closer to actually retiring, there are a ton of ways to get your money out without penalty.

For example, certain expenses are excepted from the penalty. You can also convert some portion to a Roth 401k, taking a tax hit but now being able to withdraw the money whenever you want.

So there are plenty of options. Check out Cory Fawcett’s piece on this topic for more information.

Plus, let’s not forget about diversification

Diversification works in many ways. There’s diversification of investments of course. But there is also diversification of timing.

I love investing in real estate that create cash flow in my pocket right NOW. It’s awesome. But, I really love to idea of having immediate cash flow as well as a reserved nest egg that will create future cash flow via withdrawals in the future.

This maximizes my chance of success and minimizes risk of failure. And that is the name of the game.

3. The funds I like aren’t offered in my 401k account

This one makes the least sense to me.

In this argument, someone has access to a 401k through their employer. The brokerages and/or funds available in this 401k aren’t the ideal ones that they would like. So they rationalize that they should not invest in the 401k at all.

This is a mistake.

In fact, this exact situation happened to me. I would love for my 403b (essentially a non-profit’s 401k) to be through Vanguard or Fidelity. But it’s not. It’s through TIAA.

My expense ratios are a bit higher than I would like (by about 0.10%) and all of my ideal funds aren’t available.

But regardless, the advantages of investing in this tax advantage retirement account far, far, far outweigh these disadvantages. And these advantages include:

  • Tax deferred growth
  • Behavioral advantage by pulling right out of my paycheck
  • Generous employer match

Except in very, very rare cases when only high cost, actively managed mutual funds are available in a 401k would it make better sense to not invest within the account…

The exceptions the prove the rule

Like I said earlier, I am a proponent of a hybrid investing approach using both equity investing in stocks and bonds as well as real estate investing.

So this post is not to say that you should only invest in your 401k or in equities (although that is really fine if it gets you to reach your financial goals).

This post is to say that pretty much all high income earners and investors should utilize their 401ks.

But, I know a handful of physician investors who don’t have a single penny in their 401k

For the most part, these investors are fully invested in real estate. And they are doing very well.

So it is possible to just completely ignore your 401k.

I just don’t think that is overall good investing advice for the grand overall majority of investors, myself included.

These physicians have largely become full time real estate investors. There’s nothing wrong with that. But for many doctors, that is not the goal.

Further, and for the last time, the name of the game is to win and avoid big losses. And you win by reaching your financial goals. So you need to take only as much risk as will get you to your goals and not an inch more.

For most high income earners, this is not only possible but highly probable using a simple investing strategy involving:

What do you think? Does a 401k get a bad rap? Is this right or wrong? What is your investing philosophy? Let me know in the comments below!

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    The Prudent Plastic Surgeon

    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

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