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