Is This Author an Idiot or Not?

[oldtoyota]

I am reading a book called Killing Sacred Cows.

The author says that the 401K is designed to encourage us all to keep our money for a long time. He claims this benefits the banks who keep their cash--which is our cash--liquid and give us 3-5% percent while charging others to borrow the money at 6 or whatever percent is the going rate.

He says he advises clients to remove their 401K money if they can get a better return. To support this statement, he uses a woman who wants to start a business as an example. She has $200K in a 401K and wants to start a biz. He finds out she's not getting a great return on the 401K so she asks if she would get a better ROI from the biz idea. She says yes.

I find a lot of fault with the book.

1. Why doesn't she just move the 401K into a better investment portfolio if she's not currently earning?
2. He doesn't mention any risks to starting a new business. Her idea could fail.
3. We all know that the tax man will take 10%. He notes this and says that she says her biz would do better than that, but how can anyone know for certain?

He gives another examples where he counsels someone to purchase rental property with their 401K money because they will then clear $1,000 per month. He does NOT note that:

1. Houses need care. One appliance purchase could wipe out a month of this $1,000 income.
2. Renters could be great. They could also be terrible and cause a lot of problems.

My question here is: Is it a valid to say removing money from a 401K to, say, purchase a house that will provide rental income is better than leaving it there?

He's obviously a contrarian of sorts.

[SunshineGirl]

I can't speak to that book in particular, but I have my doubts about retirement accounts for the very reason that they ARE sacred cows.

[oldtoyota]

I have to say that the book is making me wonder if I should reduce the percentage I put in there and direct it into Vanguard.

He also mentions the tax "advantage" and points out that you might NOT be in a lower tax bracket when you retire. So much of the sales-y part of the 401K relies on "you will be a lower tax bracket so the deferred tax is better" idea.

[GreenGuava]

The author says that the 401K is designed to encourage us all to keep our money for a long time. He claims this benefits the banks who keep their cash--which is our cash--liquid and give us 3-5% percent while charging others to borrow the money at 6 or whatever percent is the going rate.

Well, those numbers don't apply anymore.  The 401(k) wasn't designed to encourage us to keep our money for a long time - it originated as a means of executive compensation.  It just applies to more of us now.  Yes, the rules are such that you should keep your money in it for a long time.  It only benefits the banks if the money is held at a bank (which is a bad place to do any investing). 

He seems to object to that banks make a profit.  Not sure what he expects the bank to do:  hold your money for free and keep it entirely there? 

I find a lot of fault with the book.

The faults you point out are correct.  Rental property is nice... if you maintain it well, keep it occupied, and don't have problem tenants.  There's also the issue of "do you want to be a landlord"?   Some people do, some don't.  If you have no desire to be a landlord, don't get into buying property with the intent of renting it out.  Yes, there are management companies, but using one will eat significantly into your return.

Yes, the ROI on your own business is higher... if it succeeds.  What's the success rate on that?  And how much work does it take to maintain that?  And that's taxed now - it doesn't grow tax free.

I have to say that the book is making me wonder if I should reduce the percentage I put in there and direct it into Vanguard.

The general advice for priority on tax-advantaged savings is to put enough into the 401(k) to get the employer match, then max out your Roth IRA, then add more to the 401(k).  This changes if you plan to leave employer at some point in the near future, or if your 401(k) has great investment options. 

Similarly, once you leave an employer, if the 401(k) wasn't fantastic (and I mean ERs better than you can get at Vanguard as an individual) and the next one isn't either, you roll it over to Vanguard and any problems with the investment menu disappear promptly.

He also mentions the tax "advantage" and points out that you might NOT be in a lower tax bracket when you retire. So much of the sales-y part of the 401K relies on "you will be a lower tax bracket so the deferred tax is better" idea.

Forget people in general;  their situations don't apply to you.  Will you be in a lower tax bracket when you retire?  Probably, unless you're super spendy.  If taxes at my retirement are equal to today's (adjusted for spending power, so let's talk in 2013 dollars), I will be in a far lower bracket.  My annual expenses including mortgage is about $35,000.  When that mortgage is all or mostly paid off, as it will be when I'm able to withdraw from my IRA (formed mostly by 401(k)s), it will be about $18,000 - even without any deductions, that's a lot lower than my current taxes (28% federal marginal, 9.3% state marginal).

[brewer12345]

The author is smoking dope, to be blunt.  Ignore the book.

[oldtoyota]

The author is smoking dope, to be blunt.  Ignore the book.

LOL. Will do.

[oldtoyota]

Guava--

I knew someone would pick up on the old percentages. I will ignore this dumb book. It actually gets worse. He mentions a woman who came back to Utah and worked in a gift store until she could get a business going. Her business is making food for people. He said he ordered food from her, and her business is great. Well, a few items are left out.

1. When I hear "has 3 kids" and "Utah," I figure people are Mormon. It's not easy to live in Utah if you are not Mormon, so...she has a business maybe because people from her church/temple are purchasing her services. Maybe not. But, maybe.

2. He doesn't mention the time-consuming experience of that sort of business. Yikes. Are the hours she puts into it worth it? I ask because I've known people with businesses like that, and it seems like they put a lot of hours in for not-such-great pay.

I wanted to make sure my assessment about this guy is correct. Ugh.

[Jamesqf]

I have to say that the book is making me wonder if I should reduce the percentage I put in there and direct it into Vanguard.

So why is your current 401k not with Vanguard, or another company that offers a similar low-cost choice of funds?  If it's not, you put in enough to get the company match (it's free money, right?), then put anything else in your own IRA or personal funds.

He also mentions the tax "advantage" and points out that you might NOT be in a lower tax bracket when you retire.

Sure.  You might win the lottery, marry money, drop dead...  How's your crystal ball working?  Lots of things MIGHT happen, but chances are you're going to come out ahead figuring today's tax deduction compounded for however many years it will be before you have to start taking those required minimum distributions.

To say this author is smoking dope is an insult to all dope smokers.  He's either an idiot, or has a political agenda - or possibly both.

[oldtoyota]

Good question. My 401K is via my employer so they decide upon my options. Although their management company does not say the funds are Vanguard--how weird is that??--the fund names are similar to Vanguard. I have been all over their website trying to figure it out and finally gave up.

I max out my 401K and contribute the max to my IRA at Vanguard plus other investments.

At my last company, I could only do the 401K via their choice of investment firm. So, I invested in my 401K Vanguard funds via a third party--no other choice--and then had to transfer Vanguard to Vanguard. I know. I think it's messed up too. I paid for that transfer. Of course, they hide the fees. Sigh.

[Jamesqf]

Vanguard is not magic.  Other mutual fund companies have similar funds, with similar expense ratios.

I don't see how expense ratios &c would not be available.  I'm no expert, but I think disclosure of all that is legally required.

[oldtoyota]

It is available. I have to write a letter on paper and snail mail it. The other option is showing up in person to get the info. Seems crazy to me. Seems like they want to keep it hidden.

[Jamesqf]

That seems really strange...  I would (given my suspicious nature) suspect some sort of funny business.  I'm no expert, though.

[oldtoyota]

I would too -- except I work for an organization that reallllly reallllly does not want bad press. Therefore, I think their plan will be legit.

I looked into it some more. The funds are, indeed, managed by one of three companies. One is Vanguard. I submitted a question to ask for the prospectus.

Another reason I'm not so worried is that my funds have the exact same names as Vanguard funds. I'm pretty sure they are Vanguard, but I just can't *see* that from inside their system.

[GreenGuava]

At my last company, I could only do the 401K via their choice of investment firm.

That's how almost every 401(k) works - a rare few have a brokerage window.  Sometimes there are decent funds in a 401(k), even if they aren't Vanguard's.  It's especially nice (in the event of a bad 401(k) plan) when your current 401(k) is a small fraction of your investing assets. 

In general, I'd try to use the least bad of funds in a 401(k) and, at the very least, use my existing IRAs to make up the rest of my desired asset allocation.  If you're going to ask for help on that, you'll need to make another thread (or possibly go to the Bogleheads' forum for such advice, although there are enough folks here - plus the overlap - that can help you).

[meadow lark]

Wow, I rather enjoyed this book.  It is all about seize the day, use everything at your disposal to get what you want out of life.  It is very entrepreneurial in perspective.  I think he is not impressed by retirement accounts because he encourages people to be more active with their money, investing it in creating businesses, as opposed to buy and hold index fund investing.  It was fun to read, he said some things I haven't heard before.  This absolutely is not a book about tax strategy!  I wouldn't read this book and believe everything he says - but I think there is value in listening to other arguments, especially ones you've never heard before.  I found his perspective thought provoking - which is more than most of the financial books .

So no, I don't think his book is trash, or he is smoking dope.  Will I go out and do every thing he says?  Well no, but so?  I am an employee at heart, not an entrepreneur.  He's new agey, and very motivational, which is not my cup of tea, but worth reading.
  Every once in a while I read something that gives me a slightly different way of looking at things.  Like Freakonomics, or Survival of The Sickest.  (2 really cool books.).

[iris lily]

He also mentions the tax "advantage" and points out that you might NOT be in a lower tax bracket when you retire. So much of the sales-y part of the 401K relies on "you will be a lower tax bracket so the deferred tax is better" idea.

I have to say, that old chestnut is one of two  that cause me to throw an investment book across the room: "You will be in a lower tax bracket when you retire." So the fact that this author is attacking that particular sacred cow shows he's got some sense.

The other old chestnut is "Assuming a 10% investment... blah blah blah" so of course I throw any book that spouts this across the room.

[grantmeaname]

He also mentions the tax "advantage" and points out that you might NOT be in a lower tax bracket when you retire. So much of the sales-y part of the 401K relies on "you will be a lower tax bracket so the deferred tax is better" idea.

I have to say, that old chestnut is one of two  that cause me to throw an investment book across the room: "You will be in a lower tax bracket when you retire." So the fact that this author is attacking that particular sacred cow shows he's got some sense.

That doesn't seem like an overreaction? Looking at the historical rates, it's either extremely rare or totally absent that you could retire into a lower spending level and have a higher marginal tax rate, especially if you're not making millions. Then, there's also the tax-free growth of principal, which is valuable even without any tax benefits upon contribution or withdrawal (e.g., non-deductible IRAs). And the fact that you almost certainly won't disburse every cent in your traditional IRA and 401(k), and there are estate planning benefits. And you gain a free option to convert assets to a Roth account at any time you want.

That's four good reasons the accounts are valuable -- crucifying authors that generalize a little in promoting retirement savings and make someday-potentially-false statements seems a lot like throwing the baby out with the bathwater to me.

[Freeyourchains]

The book leads into all investors actually being puppeted by their Government's Federal Reserve and Power over investors.

That leads into debatable discussions about offshore accounts, starting up your own country (because you can actually do anything you please in your lifetime, though governments, companies, other's try to tell you differently like they own you or something), and the sorts.

Debatable discussions being the other options (of taboo) that investors have, if they don't like paying taxes, or moving their investments around to avoid every rising taxes, and/or their country in general.