James Altucher on 401k’s

Adam Personal Improvement 6 Comments

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I love James Altucher. I love his writing style and his honesty and willingness to tell you about his fears, failure and embarrassing moments. I’ve bought all of his recent books and I listen to his podcast. I think 10 ideas a day, and the Daily Practice are really important ideas I’ve implemented in my life. Having said that, I ways cringe anytime I hear James talk about saving and investing.

Most recently James put out a video for Business Insider (see below) that I very much hope young people don’t listen to. James is a shock guy. He likes to say outrageous things to make important points, however if your not super familiar with his work, and you take his words at face value, your going to make some decisions.

Where to begin? Let’s look at some quotes from James.

“You have no idea what’s happening with your money.”

What? I’m pretty sure when I select a 2 vanguard funds with expense ratios of 0.14% and a prospectus that tells me past performance, investment mandate, country holdings, type holdings (value/growth), and top 10 stocks by percentage, I have a really clear idea of where my money is and what I’m spending. Pull up VXUS and VTI at Vanguard. It’s as transparent as I can picture.

You can’t get to it before age 65

First off, for the average person that’s exactly the point (and the number is 59.5 by the way). Human beings are notoriously awful at delayed gratification and saving for retirement. That’s why ideally the pension system was better for average joe. He couldn’t make poor decisions, underinvest, or move money at the wrong moment. A 401k is the best thing most people have to set aside money and pretend it doesn’t exist until retirement time.

Second, that’s not exactly true. As Go Curry Cracker, the Mad Fientist, and many others have demonstrated, with a bit of initiative and knowledge you can move that 401k to an IRA and slowly pull out large sums well before retirement. In addition there are exceptions for first time home buying and educational expenses among other things.

They’re doing whatever they want with your money. Investing it where they want and paying themselves salaries

This statement has no basis in fact. What are they doing? I’ve already covered this above, but again, I know exactly where the money in my ETF’s are invested. It could not be laid out more clearly. Nobody at Vanguard is using my retirement funds for opulent weekends in Vegas and they’re not betting with options or playing in some space that’s not mandated.

Are they paying themselves salaries? Of course. Nobody works for free. But we’re in a golden age of investing. Only a few decades ago, to hold a broad fund of stocks would have taken 1-2% off the top and there were likely many hidden fees. This could have cost hundreds of thousands over multiple decades. Same thing goes now for most financial advisers and the products they push on you (like closed end funds, private REIT’s, insurance products, etc…) But the funds I listed above with the 0.14% fee? I know I’m paying $1.40 per year per $1,000 invested. THAT is straightforward.

Average 401k returns 1/2 % per year

Again this is ridiculous. Check out the data from Stern on returns since 1928. $100 in T-bills is now worth $2k. $100 in T-bonds is worth $7k. BUT $100 in stocks is now worth $290k. Historically the market will average out to 6-8%. If an investor can stay out of his own way (which we’re not very good at) and just set it and forget it, you should do pretty well over a 30 year period. Even with the most recent financial crisis the market managed to hit 9.5% from 2002 to 2007 and 12.7% from 2008 to 2013 (see Vanguard here) Even going through the 08 crisis, the market returned in excess of 2% over 5 years.

This also excludes the extremely important tax benefits of a 401k. By putting in the money pre-tax, you allow a greater amount of money to compound tax free over the long-term. This has substantial implications for your compounding and will greatly increase your long-term returns.

James also makes no mention of company matches in your 401k. While I’m sure not every company does this, there is certainly a significant number of corporations that match their employees somewhere between 3-14% match. That’s literally dollar for dollar free money, plus the tax benefit.

James also downplays why would you invest in your 20’s when you are SO FAR from retirement. Again, that’s the exact point. Let’s not forget this all important chart, ironically also found on Business Insider. It highlights the key to investing, is STARTING EARLY. I’m sure most anyone reading this knows the story, but it’s worth repeating. Susan invests $5k per year from 25 to 35 then stops contributing and NEVER adds another dime (10 years / $50k). Bill starts at 35 and invests $5k/year (30 years / $150k).

He never catches up.

The compounding engine that Susan created early in her career builds too much momentum by the time she’s in her 40’s and Bill’s $5k/year can’t add up fast enough to compare to the dividends and capital gains Susan keeps amassing. Starting early and living long are the keys to huge equity appreciation.

Why James, who absolutely is aware of this fact, would make the length of time before touching the money, seem like a negative rather than a young person’s greatest ally is beyond me.

compound interest

Invest in yourself

Of course. You should absolutely do this. No question, build your skillset, network. Build businesses and diversify your earnings streams. These are all the things that James teaches best and they’re incredibly important. We should all be working much harder on these topics. But what does that have to do with your 401k? Why are these mutually exclusive? I’m write on this blog, have several other side projects I’m hustling on, and still max out my 401k / IRA every year.

James, thanks for all that you do with the daily practice, the entrepreneurial advice, the amazing interviews, and a host of other things. I also know that you know everything I’ve said above, so your probably just looking to stir up some dust and get that link shared all over the net and written about (like I’m doing now). However that push for traffic may seriously misguide and impact some young people when it comes to investing in the market and utilizing a 401k. I hope you consider a 2nd video talking the facts and points above.

For other views on the video, see Jack over at Barrons and Morgan at Motley Fool.


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Comments 6

  1. Gen Y Finance Guy

    James is a smart dude, but agreed that he probably took this one a bit far.

    – The company match is Free Money, take advantage of that.

    – You get the opportunity to shelter $18K/year pre-tax, save yourself some money.

    – You can access it for the first time purchase of a home, I did.

    – You also can take a loan from it and pay yourself interest if you really need to.

    – And if you lose your job there are different hardships that may allow you to take the money without paying the 10% penalty.

    – Worse case you take it out and have to pay the 10% penalty.

    I will say that I am not a big fan of the options available in most 401K’s or should I say the lack thereof. Your lucky to have access to the Vanguard funds. I wish ETF’s were a staple in all 401K plans. I also wish all 401K’s allowed for in service roll overs.

    But you play with what you got.

    Great post.

    Cheers!

  2. Fervent Finance

    I heard about this, and I hope people didn’t listen to him and stop contributing. As most people know and GYFG also laid out above, it’s pros definitely outweigh its cons. Mad Fientist is a great place to stop to prove that.

  3. Scott

    I do think as well that James may have gone a little overboard with this interview. However, some 401Ks (like my brother’s) do not actually have access to “cheap” index funds. The best that we could do for my brother was the Growth Fund of America mutual fund, which had good past performance but does come with an expense ratio of 0.66% (before whatever other fees get added on for inclusion on the 401K plan). I’m definitely recommending my brother to roll it over into an IRA once he leaves that company so that he has access to the entire world of index ETFs.

    Adam, I’m not sure if you’ve heard of or listen to Frank Curzio’s podcast but James Altucher was just interviewed on there. I’m only a few minutes into the interview but Frank usually does a great job. Maybe Frank will ask about this Business Insider interview? The link to it is here: http://www.frankcurzio.com/304/

    Scott

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      Adam

      That’s too bad about your brother’s 401k. I find that pretty shocking in this day and age. I’ve been at companies that use both Fidelity and Vanguard and all 3 places I’ve worked and many more that my friends work at have had access to at least a few low fee options. Though it’s worth pointing out 0.66% is a bargain compared to just a few years ago, and it’s better to invest, take the tax benefits and match, and just roll it when he can. If I were him I would be lobbying the company to fix the issue.

      I’ll check out that interview. I don’t listen to Frank’s podcast frequently, but I always enjoy listening to James. I listen to Ask Altucher and The James Altucher podcast regularly.

  4. DivHut

    I always get a kick out of JA. I agree with so many of his unpopular viewpoints especially on college education (not worth it) and home ownership (not worth it). But I guess the one take away from this is the statement about investing in yourself. There is nothing truer than that.

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      Adam

      I love the daily practice and 10 ideas concepts. I’m also on board with a lot of the more contrarian ideas like the ones you name, though I think they’re a lot more nuanced than he typically gets in to. It’s really just the savings and investing issue that I think is just flat wrong. Either way I think he adds a lot of value to the world (certainly more than my meager blog does) and he gets people thinking in ways they wouldn’t have otherwise.

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