Is 401k a scam? Text overlaid with an image of a pink piggy bank with a $1 bill sticking out of it.

Is 401k a scam?

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Is 401k a scam? I was talking with a friend of mine and she had pulled all of her money out of her 401k in 2009. She lost about 50% of what was in there because she was invested in a fund that had a higher risk than she was comfortable with. On top of that, the government took out income taxes on that money and took out 22% of what was left. Then the state took another 10% and because of her age, the US government fined her an additional 10%.

But here was the kicker, if she had just ignored it because she was in her 40s at the time she would have had all of her money back in 2011. Then if she left it alone until 2020 it would have tripled in value assuming she didn’t put any more money into it. And yeah in 2022 it would have lost another 15% of its value, but given her age, she should have moved a lot of that money into a bond that pays a guaranteed percent because at her age the goal would be to keep what you have accumulated.

Many people that did this in 2008 – 2010 have a similar story but they didn’t realize what they were doing or how to retire. They should have hired a professional before selling everything as it would have saved them a LOT of money. Let’s find out why.

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These ideas are based on my personal experience and opinion and should not be considered professional financial investment advice. Furthermore, the ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

Is 401k a scam? Text overlaid with an image of a pink piggy bank with a $1 bill sticking out of it.

What is a 401k?

A 401k is a retirement savings plan sponsored by an employer. It’s named after a section of the Internal Revenue Code, which sets out the rules for how it can be used.

401ks are a way to save for retirement, and they have some big advantages. For one thing, they offer tax breaks. The money you contribute to your 401k is deducted from your taxable income, so you’ll pay less in taxes. And the earnings on your investments grow tax-deferred, which means you won’t pay taxes on them until you withdraw the money in retirement.

Another advantage of 401ks is that they’re usually employer-matched. That means that if you contribute to your 401k, your employer will also make a contribution. That’s free money!

Jim from the office asking "Who wants free money? This guy" as he points two thumbs back at himself.

Is it really worth having a 401k?

In the past, 401ks was considered one of the best retirement savings plans available. However, in recent years there has been a lot of debate about whether or not they are worth the investment. There are a few key things to consider when deciding if a 401k is right for you.

The first thing to think about is how much money you will need in retirement. If you have a good estimate of this number, you can start to determine how much you need to save each month to reach your goal. Keep in mind that 401ks have contribution limits, so you may need to supplement your savings with other investments. But to be fair most Americans are not funding their retirement to these numbers.

In 2022 you could put $20,500 a year into a 401k.

In 2023 you can put $22,500 a year into a 401k.

Another important factor to consider is your company’s match policy. Many employers offer matching contributions, which can help you reach your retirement goals faster.

You should also know that if your company puts money into your account it does NOT count toward this limit. So if you put in the maximum amount and your company gives you an extra $6,000 then in 2023 you would have invested $22,500 of your money and then your company would give you an extra $6,000 for a total of $28,500 in 2023.

Can money be lost in a 401k?

Absolutely! It all depends on what you invest in and how the stock market is doing at the moment. You have to remember that 401k’s are designed to invest for decades not days. If you were to remove your money before the age of 59 1/2 you would pay a 10% penalty on that money to the US Government. If you put the money in pre-tax, which is what most people do, then you would also have to pay taxes on that money at the highest rate you would owe. It is considered income and could move you into a higher income tax bracket.

However, if you invest in the S&P 500 or a similar index fund then over time these funds have always made 10% or more when looked at over any twenty-year period.

The issue is people like to sell their stocks when they drop thus guaranteeing that they WILL lose money. Instead, you see stop watching the market when it drops.

During this time in 2022 when Amazon lost 45% of its value in a year, I would tell you to BUY Amazon because it is on sale.

Over time your 401k should gain in money if you invest in index funds. If you have no idea what that means please read my article on how to invest on autopilot here.

How to invest on autopilot

Where Is Your Money?

Most people don’t know what they are invested in when they start a new job and open up a 401k.

Do you know exactly what the fund or funds you are investing in even are?

How much are you spending on fees?

What if there was a way to invest in the biggest companies in the world easily and with fees less than 0.1%?

Click here to read how to invest on autopilot to learn more.

Is 401k match a scam?

It is the exact opposite of a scam. It is a perk that many businesses give knowing full well that all of their employees won’t take advantage of. Would you refuse free vacation days? How about a raise? Well if you don’t take advantage of a 401k match you are refusing free money.

Here is how a match works. Each company that offers one (and not all companies offer one) will set its rules.

The typical rules I have seen revolve around two things:

1) Percent Matched – Some companies will match up to 3%, 5%, or 6% of your salary. I am sure there may be other amounts out there, but basically, if you meet all of the rules laid out by the company they will give you 3% – 6% or more of your salary into your 401k account.

2) Matching Rules – I have seen three variations of this.

First, they just give you money, no strings attached. This was a Canadian IT Consulting Firm I was working for. Just 5% given to you.

Second, they do a 100% match. So if your company gives you up to 5% matching for your salary then you need to also put in 5% of your salary to get the money. If you put in 0% they give you nothing. If you put in 3% they match up to 3%. If you put in 10% they will give you 5% as that is the maximum they will match.

Lastly, they do a 2-for-1 match. I normally see these if the company only matches 3%. You will need to put in double the percentage to get the full match. So in this case you need to put in 6% or more to get 3%. If you put in 4% then your company will only put in 2% matching.

Regardless, of how nice your company is it is worth it to get the maximum amount of free money.

Remember that you will probably be putting this money in pre-tax so if you think you can’t afford 5% of your paycheck it won’t be that much because it will come out before you pay taxes.

What are the negatives of a 401k?

When it comes to retirement savings, a 401k can be a great option. However, there are also some negatives that come with this type of savings plan.

First, you can’t treat your 401k plan like it is a savings account and try to forget you have money there unless you need it to avoid being homeless. Seriously that is the only reason I would use it and I would sell my home first and downsize before draining my 401k.

Second, the money isn’t 100% safe if you try to declare bankruptcy because your 401k could be dissolved to pay your bills. It is important to pay your bills.

Overall, a 401k can be a great way to save for retirement.

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5 Steps to Prosperity

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Why is my 401k not growing?

If the market is in a downturn then you are buying stocks at a discount. This isn’t an issue if you are in your 20s, 30s, 40s, or 50s.

If you are in your 60s it could be a cause for concern but you shouldn’t be 100% in index funds in your 60s. If you are getting close to retirement you should hire a financial advisor and preferably one known as a fiduciary as they are legally only allowed to do what is best for you and your specific situation. They will move you out of stocks and into more bonds and other investments that don’t grow but rather retain their value.

Once you reach a certain age you have probably been able to save as much as you are able and you need to move from a growth mindset into a hoarding mindset. You need to make sure to keep whatever you have managed to save because you don’t have 10 – 15 years to wait for the market to bounce back.

Should I put money in a 401k?

There are only a handful of vehicles that poor and middle-class people have access to for investing. The 401k or another similar retirement account (403b or 457) is the best way to save the most amount of money. If you want to know more about 401ks see my 401k: The Ultimate Guide which answers over 25 questions people have about 401ks.

The other means to invest money are to invest in an IRA.

There are two other means to have monthly money coming into your account when you retire.

The first is social security but even they are saying to expect a 25% cut in 2034 in everyone’s monthly pay.

The second is to start a business that you can do while in retirement and one of the fastest ways to do that is with affiliate marketing, and you can read my affiliate marketing guide here.

Wow, you read a lot to get here. Can you do me a favor, please? Can you leave a comment if this was helpful to you or if I missed something? Alternatively, it would help me out a lot if you shared this content with those that might need to see it. Thanks, you are the best!

Picture of Dwight Scull sitting in his gaming chair in his office surrounded by board games and Role Playing Books.
“Marriage is hard. Divorce is hard.
Choose your hard.
Obesity is hard. Being fit is hard.
Choose your hard.
Being in debt is hard.
Being financially disciplined is hard.
Choose your hard.
Communication is hard. Not communicating is hard.
Choose your hard.
Life will never be easy. It will always be hard.
But we can choose our hard. Pick wisely.”

About Dwight Scull

I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.

I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.

I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.

I used these daily habits to lose 100 pounds and keep it off.

I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.

Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money and work toward having the option of retiring early.

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