What is Your 401K/IRA Costing You
And Who is Really Coming out Ahead?
In the Introduction section, we discussed opportunity cost and how it is kind of like compound interest in reverse. Like a compound “penalty.”
Imagine taking out 2% of your portfolio every year for 30 years. The losses start at year one with the first 2% that was taken out. We have to look at what that amount of money could have grown to if it were allowed to stay in the account and accumulate for 30 years. Then we have to do the same for the money taken out in year 2. What could that amount have grown to if it were allowed to stay in the account for 29 years, and so on.
What many people don’t realize about the funds available in most 401Ks is that they have published fees and then they have fees that they do not have to disclose. Non-disclosed fees include brokerage fees on the trades made by the fund, as well as taxes that the funds have to pay on gains. Even though our accounts are tax deferred, the funds themselves must pay taxes on gains – these taxes are taken out in the form of fees.
By the way, these fees are charged regardless of whether or not the fund made you any money!
People are surprised to find out that after fees and taxes, upon distribution in retirement, the amount they actually have in their 401k/IRA account is about half of what they potentially could have had.
In addition to taxes and fees, there is the fact that during the period you are funding a qualified plan, your money is, for the most part, inaccessible to you. If an emergency or an opportunity, where cash is needed, were to present itself to you, there would be stringent limitations and/or stiff penalties for you to access that cash.
Finally, the adage goes that, since qualified plans are tax deferred, we are “using the government’s money” to grow our retirement savings. You may be surprised to find out who is actually getting the best deal with this arrangement. Hint: It’s not you…
What if there was a way to put money away for the future without giving up control of that money and, at the same time, reduce or eliminate the opportunity costs of taxes and fees? Watch the video below to find out more:
(Video Source: Truth Concepts)
Our mission is to help your family and/or business realize its full financial potential. We help identify areas where money is getting away from you in the form of opportunity costs (taxes, fees, inaccessible cash) and bring that money back under your control.