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Chapter Five
have their money automatically deducted from their paycheck, the same
way the tax department collects taxes. Many workers in America simply
allow their employer to deduct their money and put it into
their 401(k) retirement plan, possibly the worst way to invest for
retirement. (401(k) plans go by different names in different countries.
In Australia they are called superannuation plans, in Japan they are also
called 401(k)s, and in Canada they are known as RRSPs.)
I say the 401(k) may possibly be the worst way to invest for
retirement for the following reasons:
1. TIME magazine is on my side.
TIME magazine has run a number of articles over the years,
questioning the wisdom of putting so many people’s retirement
at risk. TIME has been predicting that millions will not have
enough money to retire after a lifetime of turning their money
over to strangers.
A typical 401(k) plan takes 80 percent of the profits. The investor
may receive 20 percent, if they are lucky. The investor puts up 100
percent of the money and takes 100 percent of the risk. The 401(k)
plan puts up 0 percent of the money and takes 0 percent of the risk.
The 401(k) company makes money, even if you lose money.
2. Taxes work against you with a 401(k).
Long-term capital gains are taxed at a lower rate of around 15%.
But the 401(k) gains are taxed at the ordinary earned income-tax
rate of around 35%, the highest of the three types of income,
which are:
• Ordinary earned
• Portfolio
• Passive
If you want to take the money out of your 401(k) early, you’ll
have to pay an additional 10% penalty tax.
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