Five Levels of Investors 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 of the profits, 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 fund 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) treats any gains as ordinary income. Ordinary income is taxed at the highest rate, sometimes as high as 35%. And if you want to take the money out early, you’ll have to pay an additional 10% penalty tax. 3. You have no insurance if there is a stock-market crash. To drive a car, I must have insurance in case there is a crash. When I invest in real estate, I have insurance in case of fire or other losses. Yet the 401(k) investor has no insurance to prevent losses from market crashes. 4. The 401(k) is for people who are planning to be poor when they retire. That is why financial planners often say, “When you retire, you’ll be taxed at a lower tax rate.” They assume your income will go down in retirement into a lower tax bracket. If, on the other hand, you are rich when you retire and you have a 401(k), you could pay even higher taxes at retirement. Smart investors understand taxes before investing. 5. Income from a 401(k) is withdrawn at ordinary-income tax rates, the highest of the three types of income, which are: • Ordinary • Portfolio • Passive 212
by Rich Dad, Robert Kiyosaki