Maximizing Retirement Accounts and Why They Will Be Meaningless to You

Retirement accounts are largely a scam. They are set up to make you feel richer than you are and create a false sense of security that does not exist. Most of the fund managers within the 401K structure also underperform the market making it an overall bad investment. That said, since many people will be forced to work in a Career or Job for their first 3-5 years of life, lets walk through all of the ways to work the system in your favor.

Where to Put The Money

First Priority Emergency Funds: Lets say you’re starting your career. Instead of maxing out your accounts it makes a lot more sense to save a chunk into an emergency cash fund first. Maybe you’ll hit a recession, maybe you won’t. It just doesn’t make any sense to take that type of risk when you’ve got nothing in the bank to start. We used to think that maxing out the account was the smart move since your tax rate “may go up… That is now a dead idea. Instead, first priority is putting an emergency fund away so if everything goes south you’ll have money in the bank just in case.

Contribute the Match: If your Company has a match, this is where you’ll happily go up to the percentage match. After all, you plan on starting a Business and want to be financially independent before you’re 40 (otherwise we have no idea why you’re reading the blog!). Since you’re all in on being rich young enough to enjoy it, you’ll only put in the match. Typically this is around 3-5% or so. Therefore if you make $100K you’re going to put $4,000 into the retirement account assuming that the match is 4%. This will result in a total contribution level of $8,000. That is factually a 100% return and is worth it. Even if you pay penalties to pull the money out that is still going to be worth more than $4,000 (post tax).

Contribute to Pre-Tax Only: Never pay the taxes on it up front. Unless you are 100% certain you’re going to jump into a new tax bracket within a year (still working a Career for example) then it does not make any sense to pay taxes on it immediately. Put it into a Pre-tax retirement account and get the 100% match. Do not take mainstream advice that taxes will only go up in the future, in fact they may go *down* during this Presidential term. We’re not making a prediction since we’re not really interested in retirement accounts anymore but if it does change, you may want to look at ways to get it out (more on that below).

Summary: You’re going to put away a chunk of emergency funds. Then you’ll only contribute the Company match (we no longer recommend maxing out for our current readership). All of this money will go into *Pre-tax* funds.

Choosing the Right Fund

Mirror the S&P: Make the commitment that you’re not interested in working a dead end job/career for 40 years in the hopes of enjoying life at 60. Again, we don’t think you’re in that group given our readership data. With this in mind the money is only going to go into equities. Since you have a 40 year horizon, there is no reason to own a basket of bonds/treasuries/fixed income if your goal is to create a growth portfolio over a 40 year horizon.

Screen Your Options: There is a huge movement to avoid fees and Personal Capital can do that for you with its fee analyzer tool. We cannot recommend a fund because we do not know where you will be working. Every firm has a different set of funds so you’ll have to do the dirty work (won’t take long) and find every single fund where the goal is to mirror the S&P 500. Since we recommend you eventually venture out on your own, avoid all of the structured products that change your portfolio as you get older. “Set and Forget” into the fund that closely mirrors the S&P 500.

Monitor 1x a Year: Every year, the funds may change. Your Company will send an update or add new retirement related products. Simply check to make sure you’re still in the lowest cost fund that mirrors the S&P 500. After that you’re entirely done with choosing and monitoring your retirement assets. You will not look at the balance. Since you’ll monitor the fund choices 1x a year you can go ahead and make sure you received the Company match and move on (wipe it from your mind).

One Time Events

New Tax Bracket Change: If you are going to switch firms and jump up into a new tax bracket it may be worth it to roll over the entire fund into a Roth IRA. You’ll pay the tax on it but you can then withdraw the entire principal *penalty free* in five years. This is an important point. If you have $30K in a 401K and jump to a new firm that will move you from tax bracket 1 to tax bracket 2 forever… Go ahead and roll this over into a Roth IRA. Paying the tax on it upfront will hurt, but it won’t matter because your tax rate is going to go up anyway. After five years have passed you can now take out the principal in a worst case scenario. For bonus points if you move from a high tax state to a tax free state you can avoid paying state taxes. Just make sure your residency has officially changed and then flip the money over.

Real Estate: If you love the city you live in and would like to purchase a property, you can use $10,000 and avoid paying any penalties on it as well. This is another great reason to get the Company match. Lets say you’re moving from State 1 to State 2 (a place you’d love to live forever), when you move… it may be a good time to buy that first property. To keep it simple, if you had $5,000 and got a $5,000 match, you’re now unlocking ~$6,000-7,000 post taxes despite contributing the equivalent of ~$3,000-3,500 on a post tax basis.

Summary: You’re going to mirror the S&P with the funds offered by your Company. Ideally something that is practically equivalent to an ETF of the S&P 500. After that there are two scenarios where you can unlock more value with 1) roth IRA roll over assuming you are certain your tax bracket will change for the next few years and 2) using $10,000 to fund part of a real estate purchase.

That is our summary of retirement accounts and you’ll never have to search for it again on this website. We used to recommend maxing them out but… that just doesn’t make any sense. All it does is lock up slightly more money for a longer period of time when you should be financially set *well* before you’re anywhere near 60 years old. If you’re financially set, the money sitting in these accounts are essentially meaningless.

Why Retirement Accounts Will Be Meaningless

When you begin making money from your product based Company, you’ll no longer care about your Retirement accounts. This is due to life style changes and the need for cash flow over net worth. Do you really *need* $500,000 in retirement if you’re already financially independent? The answer is no of course. If you’re already making enough passive income to more than cover your cost of living, there is no need for the extra money that will be available at age 60 (or higher if they change the laws).

Psychology of Retirement Accounts: It seems that retirement accounts were set up to make people feel richer than they really are. When calculating net worth it should always be done on a post tax basis. How is $500K in a 401K account equal to $500K in a brokerage account? They are 100% unequal. Even if the retirement account is all post tax money… It still doesn’t work. There is a 10% penalty to be paid so it would be 90% of that value. Either way. The account offers a false sense of security because it seems like you have more money than you do. $500K in a pre-tax account is = to somewhere around $250-300K.

Retirement Accounts Offer No Cash Flow: Since the money can’t be withdrawn without penalties, it certainly does not offer any cash flow. So for 40+ years you’ll see $0 except for the psychology of knowing there is money floating around in a financial system out there… that can be obtained for an outrageous penalty. Without the cash flow it doesn’t help you live your day to day life once you’re financially independent (money is locked up for over 30 years… assuming you’re a millionaire within 10 years).

Forced Check Ups: This is probably the biggest drag. Who is running the retirement account? If you’re in an awful situation where all of the offerings are fund managers charging 1% for something that mirrors the S&P 500, you’re in trouble. You’ll likely underperform the market which is not good. So you’ll be thrilled when you you’re officially done working and take all the retirement accounts over to Vanguard for the lowest fees possible to mirror the S&P.

Why You Won’t Want to Retire

Here is the kicker. Most people (not our readership) long for retirement because they don’t want to do repetitive tasks that make someone else richer. Over and over and over again. Instead you’ll want to strike it out on your own and make money for yourself (only way to get rich is with a business). Once this happens and you begin making money on your own, you’ll have no interest in sitting on the beach all day. You’ll be interested in earning money from your new venture.

Once this becomes exciting or “entertaining” for you, there is no turning back. There is no reason to stop earning money from your venture because you enjoy it. Who would retire from doing something they enjoy?

The question laid out above is very important. Retirement accounts are set up under the *assumption* that you hate working. Therefore, the entire system knows you’re unhappy working. Now… Who would want to be part of that system?


  1. Richard says

    I’m taking out a 401k loan for a down payment on a short sale that has a good potential for a 25-40 k profit resaling as is to investors and families. After the resale I’m thinking of moving to another job to cash out the full amount and do more real estate deals. What course of action would you take. Thanks

    • Wall Street Playboys says

      Very aggressive move, we’re not sure as we’ve never gone down that route.

      The facts / rules are stated in this post. We wouldn’t take loans against a retirement account but it’s not our decision. This is not a Q&A as you know.

      • Richard says

        Thanks for the reply. It’s aggressive and I’m currently gathering a bank of investors that know my remodeling skills aside from my career. I’LL keep you posted on the project and the end results.

    • OwnMyHood says

      I’ve used 401(k) loans a couple times to buy property.

      You can only borrow up to 50% of your balance with a max of $50k so the stakes aren’t that high to begin with.

      In retrospect, I wouldn’t recommend this route over forgoing 401(k) contributions above the match and just banking the rest, because in addition to all the reasons mentioned in this post, there isn’t a lot of flexibility (like most loans) which can lead to headaches down the road. That said, if it’s the only way you can access the $ needed to make a purchase it’s worth looking at.

      If you bounce from your job prior to the loan being paid off you’ll default, so you’ll be “cashing out” whether you want to or not.

      • Richard says

        Thanks I’m now of today waiting for a well off friend to check out the property and possibly find the down payment. If he doesn’t then I will have to pull from the 401k.

  2. says

    Retirement is a dated concept. Back when labor was principally manual, you’d reach a point where you could no longer physically perform your job. Your life depended on those savings. The landscape is very different now. On top of being scammed out of their best years, middle-class, retired people are incredibly bored. They followed that path without questioning the concept because the previous generations built it up as a milestone to look forward to. They are paying for it now with a bleak end to their existence.

    Fortunately, the capacity of the mind outlasts the body. With the exception of top tier athletes, working requires little physical prowess. If you manage to avoid neurodegenerative disease, you can keep doing your work until you stop breathing.

    Many of those I hold in high esteem have vocally rejected retirement at some point. Guess I’m adding you guys to the list.

    • chicken_or_egg says

      On top of being scammed out of their best years, middle-class, retired people are incredibly bored.


      Which leads to all kinds of preventable things they would have mercilessly criticized themselves for doing 10 years earlier. And then there’s the ugly fact that many people’s health does not follow them well into their later years.

      While I absolutely agree with what’s posted, planning health/managing your time is a rich topic for your average reader if you can make it relevant.

  3. 1 says

    Doesn’t it make sense to have a tax deferred account if you aren’t going to touch the money anyways? Could wait until a year with very low income to cash out?

    I was making a ton (top tax bracket) until this year. I probably won’t have much income besides dividends from S&P. I did the math and I barely would have saved 10k doing this but if I had put pre tax funds into S&P instead of paying super high tax, and withdrew this year even after penalty I would have saved money and also had capital gains from investing the taxed portion.

    • 1 says

      I guess you guys assume that income is always going to increase year after year and you focus on having cashflow at all times so your income would never decrease to a level where it makes sense to have the retirement account.

      But here’s a theoretical:

      Guy saves $2m and sticks in S&P. Stops working, or does a job he loves that barely pays 50-100k. Dividends would only be 40k… even if he sells 80k in order to live, the cap gains tax wouldn’t be much. If he takes additional money out of 401k, he gets hit by 10% penalty but tax rate is so much lower than the 35-50% paid during previous years that it still saves money. Meanwhile the untaxed funds have been appreciating in the market.

      So you save money by cashing out at a lower tax rate and also get additional cap gains. As long as those things add up to more than the 10% penalty you’re making money. Am I missing something here?

      • 1 says

        I thought about it more and it only makes sense if you go from an extremely high tax rate to extremely low in a future year. The 7% gains on untaxed capital barely mean anything because the max is 18k a year and we’re planning on withdrawing early while the money is still valuable to us at a young age, so it doesn’t really have time to compound… (though if you’re not touching it anyways because of all your cashflow, maybe it does?) Actually come to think of it, you’d probably never need to touch the deferred $18k/yr if you’re doing things right, correct? I mean, there’s just no way that I’m ever going touch the last 100k in my brokerage account because it’ll never dip that low. That portion might as well be in a 401k account?

        Back when I was making bank I thought about it but didn’t research much, and figured since I couldn’t take the money out until I was basically dead, it was worthless. The penalty is only 10% though… so there is possibility to beat that spread if tax rate decreases by more than 10% later. Unless I’m missing something here

      • 1 says

        Some calcs:

        Say your tax rate is 20% now, you put 18k into 401k…

        In 20 years it doubles twice, its now 72000. You withdraw at 15% tax rate and 10% penalty = $54000

        Or you pay taxes immediately. 14400 quadruples in 20 years, near same amount 57600. However if you sell it outside of the retirement account, it’s taxed at 15% cap gains. Now you have $48960.

        Higher tax rate of 35% now:

        18000 * .65 = 11700 * 4 = 46800 * .85 = 39780

        So that’s a $14k difference in 20 years for every year that you don’t tax defer the $18k if you have a 35% tax rate. The difference is much larger if you wait until you’re 60.

        If you don’t need the 18k/yr anyways why not just leave it there until you’re 60 and pay 15% no penalty? I’ll never touch all of the money in my brokerage account anyways. Am I not understanding something?

        All of this added up over many years still won’t do much because the max deferred amount is $18k a year, but why not defer taxes on money you don’t need? Can’t we safely assume that at some point in our lifetimes our tax rate will be more than 10% lower?

      • 1 says

        OK I used the magic of Google and my thinking was somewhat flawed:

        – High fees/bad options available in most 401k plans (I guess you could solo 401k if running biz not sure on details) I had a biz so wouldn’t be in traditional 401k
        – Tax rates may actually be higher in the future, not lower. So deferring taxes may not be a good thing if income tax rates increase or income increases.

      • 1 says

        Oh yeah, and I also made an error in assuming that we would be withdrawing money at capital gains tax rate of 15% if I’m also going to assume same tax rate of 15% on income. Cap gains tax usually lower

      • Wall Street Playboys says

        No clue what all the comments add up to didn’t have time to read it all.

        1) if you’re financially set at a young age = no reason for “retirement” money
        2) given goal of being set, just put in the match
        3) tax rate is not cap gains it is taxed as normal income

  4. says

    Retirement plans were built for the working mass. The illusion of wealth, the fees, the penalty for early withdrawal … you presented well all the downsides. There is no way to be good for a person who wants something more than “the average”

    But as I said: built for the working mass. And yes, they hate the work they do. So retirement is something desired by all of them.

    The feeling of making money for your own business is something that is not part of their context. The ‘vacation’ feeling is the best they have known so far. This is what they will aim for.

  5. New says

    BH FB is dead, would be interesting to know yalls thoughts on this. I hope the next Q&A is coming soon.

    Thanks for the post, only time it makes sense to contribute to your sep or 401K is if you experience a 1-time event and think you’ll be in lower ta brackets the proceeding years. At least that’s my understanding. I maxed out mine in 2015 and 2016 and 2017 based on my income dropping. Now it’s dead lol, so It was a good plan

    • arl says

      BH FB is dead? There have always been regulations and stuff like that, this latest ‘storm’ will come and go once this fake news narrative dies down eventually.

    • 1 says

      This is exactly what I thought with income dropping during later years, but if you consider that taxes may increase in the future, the fact you’re only supposed/allowed to withdraw from 401k in emergency scenarios, all the hassle and fees of doing it, accounting fees, 10% penalty, fund fees, it being taxed later at higher rate as income and not cap gains you may end up losing money or not saving much at all.

  6. says

    This is why gap years are dangerous. People who get a taste of that “always working yet never working” vibe.are extremely disloyal employees.

  7. Dan says

    I would like to second the motion that using so-called 401(k) loans to buy real estate (esp a personal residence) is a useful tactic. As a previous commenter mentioned, you can borrow up to lesser of $50k or 1/2 your balance.

    Now, let’s answer what does “borrow” mean. Effectively what happens is your 401(k) plan administrator sells a portion of your portfolio and writes you a check form the proceeds. Voila! You now have tax-free money to use for a down payment!

    Only requirement to avoid a default and the 10% withdrawal penalty is to have your employer make monthly withdrawals from your check to “repay” the loan — back to yourself at a predetermined rate (mine was fixed at prime +1%).

    Some admins like mine allow for a 30-year repayment schedule. Others require repayment within 5 years. Either way, if you need cash for a downpayment, this is a neat trick. And bonus points if you think your home equity will appreciate faster than the S&P 500!

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