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The Big 401k Blunder

Likwid24

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After hearing for most of my life about how great a retirement plan is, how I need a 401k, how after I retire I'll have all the money in the world, especially if I put away most of my paycheck in the beginning, I feel like smacking all those people in the face right. Just giving everyone that has been brainwashing me my whole life a quick slap in the face and send them a bill for all the money I've wasted! :pissed:

When I got on my Job 6 years, I thought I was doing the smart thing. I put 15% of my paycheck into my 401k. And hey, it was taken out before taxes! That's great!

I was a few steps ahead of everyone else because I started young and was putting away a larger %. I was a GENIUS! When I retired I would have more money than I could have ever dreamed of!

I would have been able to get the house I wanted, put the kids through college, retired at the ripe age of 47 and never have to worry about getting another job for the rest of my life!

And Then I Woke Up!!!!!

Wow, what a terrible nightmare!

I can't believe I listened to those people. But they were all so much wiser than me. They've been through it all. They knew best. Or did they???

The reality of it is that I've lost tens of thousands of dollars this week. There was really nothing much I could do about it. I inquired about taking my money out of my 401k a few weeks ago but was informed that I can not touch it until I was disconnected from service. I couldn't pay a penalty and take it out early so I could use it for a wise investment.

It's my money that I've been putting in there for over 5 years and I can't even touch it!!!

What a joke!! I can't touch my own money!!

What a scam!

Soon it will all be gone!!!

I began to realize at the end of last year that the value of the money in my account would be nothing where I though it would be in 20 years with inflation and cost of living. Then throw in tax for taking it out before I turned 65.

It was after reading TMF that I really starting thinking what a bad decision I had made. What a waste of money! Money that I have no CONTROL over!

At least I stopped putting money into it months ago. I also figured out a way to transfer it to a TDAmeritrade account so I can manage it myself. Maybe a little too late.

Lesson learned though. It was a big failure but that's the way you learn. Learn from you failures so you never make the same mistake again.

Now I know what to tell my kids and anyone else who asks me my opinion on retirement plans.

Hopefully I can save someone else from the false reality of 401k's!
 
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kurtyordy

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my thinking is, my company matches up to 3%, so I double my money right away. Then if I need/want it I pay a 10% penalty in taxes.

S0, for simple math, I put in $100, my company puts in $100, I withdraw $200, the fed takes $20 so I get $180 instead of $100.

accountants or tax people, please correct my logic if I am wrong. I know I pays taxes on the $180, but I pay them on the $100 if I do not contribute, so that math is a wash in my mind
 

Likwid24

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Yea mine works a little different because I'm not working for a company. I work for the City of New York. They don't match what I put in. I also can't take it out until I retire, resign or leave with disability.
 

Runum

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my thinking is, my company matches up to 3%, so I double my money right away. Then if I need/want it I pay a 10% penalty in taxes.

S0, for simple math, I put in $100, my company puts in $100, I withdraw $200, the fed takes $20 so I get $180 instead of $100.

accountants or tax people, please correct my logic if I am wrong. I know I pays taxes on the $180, but I pay them on the $100 if I do not contribute, so that math is a wash in my mind

You are correct that you would pay a 10% penalty but that is not the tax. You still have to pay income taxes on it based on your tax bracket. Could be another 25%.
 
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kurtyordy

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You are correct that you would pay a 10% penalty but that is not the tax. You still have to pay income taxes on it based on your tax bracket. Could be another 25%.

right, but I pay that on the $100 or the $180, so it is a wash to me.
 

Runum

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right, but I pay that on the $100 or the $180, so it is a wash to me.

You would pay the penalty on the whole amount withdrawn AND you would pay income tax on the whole amount withdrawn.

Using your example:

$100 your contribution
$100 company match

$200 total withdrawal
-$20 penalty
------
$180
-$50 taxes @25%
------
$130 net
Your net gains are 30% of your contribution.
Of course this is assuming a 100% company match. Not all employees have that option.

This is also assuming no market moves. If the market is losing 50% of the fund value and you aren't allowed to move the money or cash out, then you lose 100% of your company match right off the bat.

You may say, "I'm in it for the long haul." However, some people had planned all their lives to retire this year or maybe next year. Now they may never get to retire.
 

kurtyordy

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You would pay the penalty on the whole amount withdrawn AND you would pay income tax on the whole amount withdrawn.

Using your example:

$100 your contribution
$100 company match

$200 total withdrawal
-$20 penalty
------
$180
-$50 taxes @25%
------
$130 net

right, but I would also pay it on the $100, so the $100 is now $75, so my net gains are $55.


Of course this is assuming a 100% company match. Not all employees have that option.

true, I was just giving my outlook.

This is also assuming no market moves. If the market is losing 50% of the fund value and you aren't allowed to move the money or cash out, then you lose 100% of your company match right off the bat.

that is a risk, but that risk is in everything. If I took that $100 and put it in real estate and the local factory closes and real estate plummets, I now lost a good chunk of my investment.

You may say, "I'm in it for the long haul." However, some people had planned all their lives to retire this year or maybe next year. Now they may never get to retire.

and there in lies the lie of the 401k. It is sold as a guaranteed, you do xyz and you will get abc when you retire, and nothing could be further from the truth. This is why I maintain such a different viewpoint for my 401k.
 
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Runum

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right, but I would also pay it on the $100, so the $100 is now $75, so my net gains are $55.

Not sure where you are getting that Kurt.

If you withdraw any money, yours or your employer contribution, the whole amount withdrawn will be taxed as ordinary income. If you withdraw any money before retirement age you will pay a 10% penalty on the whole amount withdrawn. There are exceptions to the penalty for hardships.

The way that 401k's were pitched was that it is a tax deferred account you would be paying lower taxes after retirement due to lower tax bracket. May or may not be true, but you will pay income taxes on any money removed from that account no matter who put it in. The general rule is if you cash out early and pay the penalty you can expect to net 60% of the total amount of the cash out. You will pay 40% in taxes and penalties.

Given that general rule, if you cash out your $200 ($100 from you + $100 from employer) you will net around $120-$130 dollars. Thus making your total, in pocket gain $20-$30. That is still a good return but not what you seem to be expecting.

I went through this in 2005, cashed out, paid the penalties and taxes, and never looked back.

that is a risk, but that risk is in everything. If I took that $100 and put it in real estate and the local factory closes and real estate plummets, I now lost a good chunk of my investment.

To compare a 401k to real estate investments is like comparing apples to oranges. I agree they both have risks, but they are not the same risks and not to the same degree. The lack of control one has with a 401k compared to a real estate investment is like day and night. My past employer would impose black out dates where we were not allowed to move funds around in our 401k. They also put a limit on how often we were allowed to shift funds or change contribution amounts. Tough to take when you are watching your money lose 50% of it's value. Also, unless you quit your job or can prove a hardship you cannot get your money out, period. You can't even take the loss and cash out.

REI on the other hand, sure it can and has devalued. However, I have several options available to me to mitigate any losses. I can claim sales losses as a tax write off, I can choose to rent(my rentals have been cash flowing throughout all this economic turmoil), I can choose to redevelop, I can choose to sit on it an wait it out. No one has put any limitations on what I can choose to do.

My 401k never put one dime in my pocket for 15 years, not even during the massive valuation run-up during the 1990's. My real estate has provided me with a check each month for many years now.

As I said, both have risks, but the control factor tilts the risks in one direction for more than the other.

Good luck Kurt.
 

Jeremy

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A 401(k) is not an investment...it is a tax-advantaged entity in which you put investments. A 401(k) is also NOT the stock market.

You can hold cash, bonds, REITs (basically a mutual fund of commercial real estate), gold, silver, commodities, etc... in a 401(k).

If your 401(k) didn't make a positive return over the last 15 years, it's because either you or the firm managing your 401(k) made bad investments and not anything inherently wrong with the 401(k).

There are two main advantages to the 401(k):

1. Contributions and gains are not taxed until you withdraw.
2. The balance of your 401(k) is protected from creditors if you declare bankruptcy (this is huge--your 401(k) can be there to help you start a new financial life after bankruptcy--a possibility all fastlaners and sidewalkers need to face).
 

kurtyordy

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Not sure where you are getting that Kurt.

If you withdraw any money, yours or your employer contribution, the whole amount withdrawn will be taxed as ordinary income. If you withdraw any money before retirement age you will pay a 10% penalty on the whole amount withdrawn. There are exceptions to the penalty for hardships.

The way that 401k's were pitched was that it is a tax deferred account you would be paying lower taxes after retirement due to lower tax bracket. May or may not be true, but you will pay income taxes on any money removed from that account no matter who put it in. The general rule is if you cash out early and pay the penalty you can expect to net 60% of the total amount of the cash out. You will pay 40% in taxes and penalties.

Given that general rule, if you cash out your $200 ($100 from you + $100 from employer) you will net around $120-$130 dollars. Thus making your total, in pocket gain $20-$30. That is still a good return but not what you seem to be expecting.

I went through this in 2005, cashed out, paid the penalties and taxes, and never looked back.

my point is I either pay the taxes on the $100 now neting me $75 (using the 25% tax bracket) or I put it in the 401k, assuming no appriciation or depreciation and recieve $130 which is a net gain of $55. Taxes are constant, so it needs applied to both sides of the transaction or not at all.

Not advocating 401k for anyone, just giving a different perspective.
 
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Runum

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A 401(k) is not an investment...it is a tax-advantaged entity in which you put investments. A 401(k) is also NOT the stock market.

You can hold cash, bonds, REITs (basically a mutual fund of commercial real estate), gold, silver, commodities, etc... in a 401(k).

If your 401(k) didn't make a positive return over the last 15 years, it's because either you or the firm managing your 401(k) made bad investments and not anything inherently wrong with the 401(k).

There are two main advantages to the 401(k):

1. Contributions and gains are not taxed until you withdraw.
2. The balance of your 401(k) is protected from creditors if you declare bankruptcy (this is huge--your 401(k) can be there to help you start a new financial life after bankruptcy--a possibility all fastlaners and sidewalkers need to face).


I do agree it is a vehicle that MAY contain cash, bonds, REITs (basically a mutual fund of commercial real estate), gold, silver, commodities depending on what your employer offers. Mine never offered REIT's but did offer company stock as an option.

Jeremy, you did not read my post correctly. I did not say I did not make any gains over 15 years. My funds gained rapidly in the 1990's just like everyone elses. My fund also lost 40% in 2001. I rearranged my portfolio in a rollover IRA at that time and made all my losses back. I then cashed out. By the time I paid penalties and taxes I did a little better than broke even. Had I left the money in I would have had a significant loss in 2008 and now 2011. Had I invested in rental properties instead I would have had the monthly cashflow and capital gains until 2008.

My wife's 403B has been going through all of this. All I have to do is look at her balance to know what my 401k would have done over the same time and then compare it to what my REI has done.

What I did say, was over those 15 years, my 401k did not put any money directly in my pocket, cash. My properties do.

I do agree with the bankruptcy protection. Gotta love that.

I do believe some people will benefit from 401k's and 403b's just as some people benefit from REI. 401k's are fine for some but you better know all the risks and options before you start. Once you start it's hard to get out.
 

Runum

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Here's a little riddle I am sure many here know the answer to:

If your investment loses 50% of it's value, how much growth will it take to get back even?
 

Likwid24

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My plans now are to be my own 401k. To rely on myself to make as much money as I need to live comfortable the rest of my life. To have total control of what I can and can't do with MY OWN MONEY. To not rely on the economy and the markets.

I guess a 401k is good for a sidewalker or slowlaner, but it has been permanently deleted from my plan for my future!
 
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MJ DeMarco

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JayKim

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Not sure this is accurate but I saw someone post it on facebook and it reminded me of this thread :rofl:


"if you purchased $1,000 of shares in Delta Airlines one year ago,you would have $49.00 today, if you purchased $1,000 of shares in AIG, you would have $33.00. If you purchased $1,000 of shares in Lehman Brothers, you would have $0.00 today. But, if you purchased $1,000 worth of beer, drank all the beer, turned in the aluminum cans for recycling, you would have $214.00. Thus the best current investment plan is to drink heavily & recycle. It is called the 401-Keg Plan."
 
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MJ DeMarco

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Not sure this is accurate but I saw someone post it on facebook and it reminded me of this thread :rofl:


"if you purchased $1,000 of shares in Delta Airlines one year ago,you would have $49.00 today, if you purchased $1,000 of shares in AIG, you would have $33.00. If you purchased $1,000 of shares in Lehman Brothers, you would have $0.00 today. But, if you purchased $1,000 worth of beer, drank all the beer, turned in the aluminum cans for recycling, you would have $214.00. Thus the best current investment plan is to drink heavily & recycle. It is called the 401-Keg Plan."

Ha ha, I gotta steal!
 

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Where do you guys come down on SEP IRAs?

On the positive: can move cash from business to personal without paying income tax, same idea as a 401k that you will pay taxes much down the road in a lower tax bracket.

Negative: though far more control over the investment vehicle than you would have in a company plan, fundamentally it is money you can't have until you're in your 60s.

I'm not asking if SEPs are the golden ticket to fastlane wealth, obviously...just curious if others use them as part of their long term money planning.
 

Runum

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Where do you guys come down on SEP IRAs?

On the positive: can move cash from business to personal without paying income tax, same idea as a 401k that you will pay taxes much down the road in a lower tax bracket.

Negative: though far more control over the investment vehicle than you would have in a company plan, fundamentally it is money you can't have until you're in your 60s.

I'm not asking if SEPs are the golden ticket to fastlane wealth, obviously...just curious if others use them as part of their long term money planning.

Not sure about SEP IRA's. Are you the employer or the employee?

I have learned that more people are putting their REI holdings into a self directed IRA. They cannot directly run the REI, has to go through an intermediary. Still can't spend any of the profits until retirement age. However, it is a way to have some control and reinvest profits tax deferred.
 
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Ska2free

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Not sure about SEP IRA's. Are you the employer or the employee?

I have learned that more people are putting their REI holdings into a self directed IRA. They cannot directly run the REI, has to go through an intermediary. Still can't spend any of the profits until retirement age. However, it is a way to have some control and reinvest profits tax deferred.

Thanks, Runum. I'm the employer, so pick the percent contribution at year end that works best for company profits and maximizing contribution to my (and my spouse's) SEP acct. We also do this for all employees with us over three years (legally have to, but also like offering this benefit). I think you are allowed to contribute a max of $49k/yr/person, though we haven't gotten near that limit. We offer this instead of a 401k bc the investment limits are higher, and right now it's a good way (I think) to pull company income into a personal holding tax free.

I like the idea of REI in a self-directed IRA...are there annual maximum investment limits? Maybe they would be the same, if it was set up as a SEP. I will look into this some more, but if there's a book you would immediately recommend, I'd love the info...thanks!
 

MJ DeMarco

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Where do you guys come down on SEP IRAs?

I had one created when I first started a business many moons ago. When I firmly solidified that I didn't want to retire at 65, I stopped contributing. It's nice to have around for tax planning if you want to lower your tax burden via contributions - I think I did that a few times to lower my tax cost.
 

Jeremy

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I do agree it is a vehicle that MAY contain cash, bonds, REITs (basically a mutual fund of commercial real estate), gold, silver, commodities depending on what your employer offers. Mine never offered REIT's but did offer company stock as an option.

Jeremy, you did not read my post correctly. I did not say I did not make any gains over 15 years. My funds gained rapidly in the 1990's just like everyone elses. My fund also lost 40% in 2001. I rearranged my portfolio in a rollover IRA at that time and made all my losses back. I then cashed out. By the time I paid penalties and taxes I did a little better than broke even. Had I left the money in I would have had a significant loss in 2008 and now 2011. Had I invested in rental properties instead I would have had the monthly cashflow and capital gains until 2008.

My wife's 403B has been going through all of this. All I have to do is look at her balance to know what my 401k would have done over the same time and then compare it to what my REI has done.

What I did say, was over those 15 years, my 401k did not put any money directly in my pocket, cash. My properties do.

I do agree with the bankruptcy protection. Gotta love that.

I do believe some people will benefit from 401k's and 403b's just as some people benefit from REI. 401k's are fine for some but you better know all the risks and options before you start. Once you start it's hard to get out.

Point taken on the cash flow issue--you're right, until you are 59 1/2 years old, a 401(k) will not generate spendable cash flow without incurring IRS penalties or having to arrange a loan which has its own problems.

Also, you're right about what employers offer--some offer terrible plans with high fees and little choice.

On the other hand, fastlaners ought to look at solo 401(k)s and similar plans (e.g. SEP-IRA) for the tax advantages and asset protection features. It's not a bad thing to have $40,000/yr socked away pre-tax, growing tax-free until it is withdrawn, and protected from creditors. Not to say this will make you rich, but it is a way of diversifying risk.

You can even do solo-Roth 401(k)s where the contributions are after-tax, but when you withdraw the money, it's tax free. Great plan if you think taxes will be higher in the future.

With a solo 401(k), you are the employer and get to choose the investments. The only cons are that you can't withdraw the money without penalty until a certain age.
 
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Likwid24

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Quick question. Say the market does crash. What will happen to 401ks then, even if your in a stable fund? Will you be safe?

I've also heard talk that if things get out of control, the government would "borrow" from our retirement plans.
 

Runum

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Quick question. Say the market does crash. What will happen to 401ks then, even if your in a stable fund? Will you be safe?

I've also heard talk that if things get out of control, the government would "borrow" from our retirement plans.

The answers are going to be ...it depends.

It depends on what you call a crash.
It depends on what you call a stable fund.

Your investments in your 401k are probably not guaranteed by any agencies or your employer. Most likely the value of your investments will lower as the major indices lower, it depends on your fund and it's focus.

I have not heard anything about government "borrowing" from 401k's. Here's one way to look at it...If the markets still keep going down there won't be enough valuation in the 401k's to be worried about. One less thing...

In all honesty, I wouldn't worry about the government borrowing from the 401k's. They made it clear this week that they can print all the money they need.
 

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I have not heard anything about government "borrowing" from 401k's. Here's one way to look at it...If the markets still keep going down there won't be enough valuation in the 401k's to be worried about. One less thing...

In all honesty, I wouldn't worry about the government borrowing from the 401k's. They made it clear this week that they can print all the money they need.

I have heard this rumor about the government "confiscating" 401(k)s. It's mostly hyped on survivalist and gold-bug websites and forums.

I guess they think that the government will tread that fine line of corruption where it will be evil enough steal your 401(k), but not so evil as to attack your retreat in the woods stocked with MREs and gold bullion...Good luck with that one, guys!
 
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just checked my year end numbers, so updating here with real numbers to concretely illustrate my original point a little better.

at my job 5.75 years. in that time I contributed $5800 to my 401k. had I just taken it as extra income on my paycheck, I would have netted after 25% tax, $4350.

Those contributions are currently worth $6400. pretty piss poor if you ask me. After 10% penalty and 25% tax, I would net on withdrawal $4160. Oh crap, loss of $190 on what I contributed.

BUT WAIT!!!!!!

my employer over that same time period also contributed $5800, which also appreciated at a craptastic rate to $6400.

so now, I have the opportunity to have $4160 in my pocket and $6400 in my account. Another way to look at is I spent $200 bucks for a $6400 401k. Yes, limited control, but you can't argue with the return.

now the big question is- will I withdraw, and my answer is not yet. I believe once the euro drama settles down a little more I will see some nice appreciation in my account and by fall will be doing my withdrawel.
 

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When I got on my Job 6 years, I thought I was doing the smart thing. I put 15% of my paycheck into my 401k. And hey, it was taken out before taxes! That's great!

I was a few steps ahead of everyone else because I started young and was putting away a larger %. I was a GENIUS! When I retired I would have more money than I could have ever dreamed of!

I would have been able to get the house I wanted, put the kids through college, retired at the ripe age of 47 and never have to worry about getting another job for the rest of my life!

And Then I Woke Up!!!!!

Wow, what a terrible nightmare!

I can't believe I listened to those people. But they were all so much wiser than me. They've been through it all. They knew best. Or did they???

The reality of it is that I've lost tens of thousands of dollars this week. There was really nothing much I could do about it. I inquired about taking my money out of my 401k a few weeks ago but was informed that I can not touch it until I was disconnected from service. I couldn't pay a penalty and take it out early so I could use it for a wise investment.

Well, my first post here - hat eto make it a sort of negative one... but I'll be honest, I have no idea what the OP is talking about! IF he'd been putting 15% of pay into most mutual funds in a 401K over the past 6 years he'd have to have some decent PROFITS as of the end of 2011! Where did the losses come from? 2008 was a big down year to be sure, but the markets have fully recovered AND he'd have been buying lots of share cheap during the downturn - then up 30% or so for 2009.

You can't trash the idea of a 401k IF it was YOU who made the lousy investment choices that lost YOU lots of money. As someone else said, a 401K isn't an investment, it's a tax-defferred vehicle you hold investments within. Sometimes they have limitations, but almost all offer a decent range of choices. Also, a City worker would normally NOT have a 401K, but more likely a 403B or similar vehicle. What's up there?

Lastly, HOW did you get to move the account to a self-directed IRA? These plans typically cannot be moved until seperation from service or age 59 1/2. Can you explain?

All that said, I do support the idea of investing in yourself and your own business, so not saying everyone should pour $$$ into 401K's. It's just that in reading this thread I didn't see anyone question the "how" and "why" of the story or question the wisdom of the assertion that 401K's are "horrible investments". They are what they are - no scam, no big secrets. C'mon, take responsibility for your decisions for gosh sake. No corporate ploy stole your 401K money - it performed exactly how the investments YOU selected performed.

In reality, a 401K in the "fastlane" world would be one option for a vehicle within you might create the future income source for age 59 1/2 onward; NOT the wealth generator! Make money in your fastlane business, maybe put away some in a solo 401K, invest wisely and for income if/when you're 59 1/2. Again, no big secret, just smart after-tax income planning for many. Solo 401K's can even be used for passive real estate investing - just be careful of the rules.
 

CPisHere

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I personally utilize a Roth 401k (essentially a Roth IRA - taxed now, not at withdrawal- with employer-match like a 401k). I like that I have the ability to take a loan out against it as long as I'm employed at very good %'s, and also the bankruptcy protection.

That said, once I leave this company I will likely cash it in to invest in my business, unless I'm at risk of bankruptcy.
 
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