Hi everyone, Davey Pockets here. Man of thee financial frontier.
Here’s an interesting example most people do not consider when it comes to a 401k-
Let’s say person A, we’ll call Tim. Tim does not put money in 401k. Instead he blows it on a million dollar mansion with a pool, basketball court, and the whole bit. Timmy, after 40 years of hard work gets a heart attack and dies. His heirs and children are left with a huge mansion to sell. They sell it a few weeks later and how much are they taxed on their inheritance of the sale?
If you guessed $0, then you got it right. Kind of ironic since buying a huge home is not a wise financial decision, but even it can have an advantage over a 401k.
Now let’s say person B, we’ll call Rhonda. Rhonda on the other hand is 401k fanatic. She loves putting away $100 a month in her account. Unfortunately, just like Timmy she has the awful fate of heart attack. For example sake we will say she works the same 40 years at the same job at the same pay and dies the same day. Instead of ever buying the huge mansion she is “smart” by putting it in her 401k and she leaves $1,000,000 to her heirs. Can her heirs and children get the money out? Yes, but not without rules and penalties as to when and how much they cab withdraw.
Are they taxed on the million? Yes. Ooof!
One final point on 401k’s before you decide if they are the right investment for you.
Let’s say you do follow the Suze Orman plan but you don’t start socking away the $100 a month until the age 35 instead of starting at age 35.
So basically you save $100 a month for 30 years, 360 months, 131,400 days and how much will you have?
Not a million.
You see “the magic” of compound interest does not really work unless you have either A- a large sum of money or B- you have your money withheld from every single paycheck for 40 years!
Also remember that 300,000 is also taxable, in fact typically at a higher tax rate now that you have more money!
If you figure 50% to taxes, that’s $150,000 and even at the poor old age of 65 you still can’t access it all!!
Only small portions and increments that someone else sets the rules and laws for!
At the end of the day it is your money and you have to decide what’s best for you! Obviously putting money in a 401k can be a solid decision at times. It is certainly better than putting it into Beanie Babies or Nascar Collectibles. However, when it comes to the notion of investing and taxes, I think it is time we take a harder look at the facts and consider other alternatives of investing!
Agree with this post? Disagree? Share your opinion in the comments. Thanks for reading and following this blog. Until next time!