Rich Dad Debate - The Sequel

Hi, welcome to another episode of Your Money Mindset guiding you to achieve lasting financial freedom and peace of mind. Just another beautiful day here in Hawaii, in fact, it's our last day here on The Gold Coast of Oahu here in Honolulu and it is a spectacular day. Hate to actually leave this place, but we will be back. And now you're talking to the newly engaged John MacGregor, and beautiful fiancee Renee, sitting right next to me.

Anyway, for this post, I wanted to circle back on a previous podcast that I did with Robert and Kim Kiyosaki. I was on the Rich Dad radio show and we had a great conversation. It's always an honor to be on their show, I just love doing it. We cover a lot of useful topics, a range of subjects and you should definitely subscribe to their podcast because there's a lot of great guests in there.

Anyway, in any case, this podcast got a bit heated. It was, let me say a lively debate between two very good friends of mine, Andy Tanner and Tom Wheelwright. These guys are also Rich Dad advisors and have been so to both Robert and Kim and have been so for a long time. Andy Tanner focuses on paper assets and has some great courses on trading, stock trading, and option trading. He also wrote a book called 401(k)aos where he spends the entire book attacking 401k retirement plans while fawning over pension plans, and I'll get into this debate in a second. He is a great guy, love Andy, just the salt of the earth guy. By the way, my 90-year-old dad, soon to be 91, is taking Andy's stock option course and he absolutely loves it. 

Tom Wheelwright is a longtime Rich Dad advisor. He's the c. p. a. and tax advisor to Robert and Kim and the Rich Dad organization. He's written several books, but my favorite is Tax-Free Wealth and it is a must-read for anyone who wants to start their own business and, and most especially for anyone looking to lower their tax burden.

And if you're paying attention to me or any other truthful financial expert, your taxes are going up. It's not if, it's when it's happening and they're going to go up a lot and they have to pay for all this massive amount of spending that has and will be coming. So be prepared. Another reason to read that book, by the way, both Andy and Tom have a great podcast as well and I highly recommend that you listen to them, also you'll learn a ton that you can use immediately in your own life.

THE DEBATE:

So anyway, Robert loves to stir things up on the show and he loves to pit me against Andy, and Tom kind of acts as the referee of the show. But this time I decided I was going all in, I wasn't going to hold back. I just wanted to recap a little bit because I don't think I really got a chance to give my case and there's a lot of talking over each other and so forth. So i'm not sure I was able to really clarify exactly my position and that's what this is about.

Why a 401k is extremely important to you and why you need to pay attention to what you're doing for your future. So here we go.

So Andy takes his first shot and declares that 401k's suck and they're designed to make you broke or just designed for broke people or whatever nonsense he was spewing. He says they're a rip-off, costs too much, people barely have anything in them etcetera, the same old diatribe, he always says, and again, I love Andy. But first off, I believe this is not a good thing to be pushing or saying, to dissuade people and even convinced them that they're idiots for participating in a 401k is downright dangerous in my opinion. If the 401k did not exist, do you have any idea how much people would have in retirement savings? Let me repeat that. If the 401k didn't exist, do you have any idea how much people would have for retirement? Well, let me tell you. It would be zero, goose egg, nada. Now Tom the tax guy, to my surprise, comes out and says 401k's aren't that bad and in many situations, they make a lot of sense. I was shocked frankly and we definitely had a good laugh on that one.

But in any case here's where I went off and I want to make sure everyone clearly understands my point here because a lot of it got muted from the back and forth debate. First off, 401k plans are not the be-all, end-all, and they were never designed to be the sole retirement vehicle for your future retirement. It was designed to be a supplemental plan to your pension. So because these pension plans are so expensive and such a massive financial burden on these companies, you're seeing fewer and fewer of them um being offered.

In fact, today, there is a surge of pensions being challenged in court and these companies are winning. We're seeing promised benefits to employees, those people who work their entire life, who were promised a pension for life and for their surviving spouse in many cases, only now to see those benefits being cut upward of 50%. I mean, there are some pensions that are flat-out broke and people receive nothing. That's right, those promised benefits in writing are no longer being honored in many cases, and this is sweeping across the country as more and more companies are waking up to this fact that they can indeed challenge these obligations, these promises they made to their employees. And here's why the majority of pension plans in this country, and I will say around the world, are underfunded, some significantly underfunded.

If there's no money, there's no money. Many of these plans have been mismanaged, they're invested improperly, the costs have risen dramatically, plus many struggling companies are unable to contribute what they're supposed to. On top of that, the actuarial assumptions they use to determine benefits were flat out wrong. They assume that people would die at 70 or around that when in fact, people are living well into their 80s or even 90s. They also assume and count on much higher rates of return on their pension assets. But with interest rates today near zero, they're never able to achieve their targeted returns. Add that all up, that's why so many pensions are underfunded and going broke. As a result, pension managers are forced into investing in riskier assets and they've taken on much more risk than they should to try to get those higher returns and now have paid the price.

It's an absolute train wreck. So going back to the debate, I couldn't disagree more that pensions are superior to 401k plans. Look, I would much rather have money in my hand than some hope in the future that we now know can be challenged and taken away. Secondly, the argument that 401k money will be taxed when the money comes out. Yes, it's very true. You get a tax break when you put money in, right? But now, when the money comes out you will be taxed of course, but so are pensions, pension incomes taxed to this day I still don't get that argument. Pension income and 401k money are taxed at the same rate, they're both taxed at ordinary income. So to say that pensions are superior to 401ks because 401k's are taxed when you retire is insane to me.

It was brought up in the show that people are planning to be broke when they retire because they're assuming they'll be in a lower tax bracket. They will because they will be earning less since they don't have a job anymore. In other words, 401k plans are a plan for broke people. So, are pensions a plan for broke people as well? To me, that's just an absolute head-scratcher. Look, when a majority, I would say 90% of people retired and no longer have their salary, they will indeed be in a lower tax drive bracket because they're earning less during retirement. It's just common sense. Look, I'm not advocating this, I would love to see more and more people educate themselves financially and become entrepreneurs and start businesses so they can make more money when they retire or even now before they retire. I mean, that's what my mission is all about, helping people live, a life of financial freedom and peace of mind. But the hard core, cold reality is that most people won't do it.

If you're making $75,000 a year and then you're suddenly in retirement and you're not making $75,000 a year and instead you're making $24-$25,000 a year from say social security and maybe another 10 from investment income or a rental unit or whatever it is, then yes, you will be in a lower tax bracket and most people are, it's just math, it's common sense. My dad was a very successful executive and he did quite well and when he retired he didn't have the same income, hence he was in a lower tax bracket. I mean where's the confusion here? But let's say for argument, you're making $75,000 and then you retired and now you take a part-time job, you start a business, you're consulting or whatever it is and now you're making the same as you were before. Or let's say hypothetically you're making way more than $75,000 and now you're pulling money out of your 401k plan, then yes you'll be in the same tax bracket or even a higher tax bracket if you're making more money, common sense right? But here's where this argument is all wrong. Who says you have to start pulling your money out when you retire, you don't, just leave it in there until you do in fact stop working and earning less in a lower tax bracket. I mean, to dissuade people into putting money away in a retirement plan based on a hypothetical 30-year tax bracket from now is downright dangerous and I think it's destructive to people's future.

So let's go even further, let's say you retired from your $75,000 a year job and now you're making $200,000 a year whatever you're doing and you're in this super high tax bracket, I would say continue contributing to a retirement plan, take that tax deduction for the money you put in at that new high tax bracket you're now in and then when you finally do retire and your income is a fraction of what it was, your tax bracket will obviously be lower, then you start pulling the money out anyway, I could go on and on, I just don't get that argument. In fact, as I said earlier, I think it's financial mismanagement to even try to convince people not to use these retirement vehicles. Scaring people from using them is a recipe for financial suicide down the road. And I'll explain more about that in a minute.

So another argument I hear is that the median amount people have in their 401k is around $70,000 and that's pitons and it just, and according to many people, it just proves that 401k plans are a scam. Again, another ridiculous argument. Look, the reason the median, the amount of money people have in their 401k plans and other retirement plans are so low is that not everyone is participating and those that do are not taking advantage of them as they should, they're simply not maximizing the amount they can contribute. Also, there's a huge amount of money sitting in these plans that are not invested, meaning when you contribute to a retirement plan, you have to allocate it into investments within the plan. Otherwise, it just sits in a savings account earning next to nothing, and many people don't invest the money when you invest in your chosen mutual funds or your investments. Your accounts have an opportunity to grow, but many people simply leave it in cash so there's no chance it will. It's a huge reason why the average or median balance of 401k's are $70,000, it's like saying 64% of people could not come up with $500 for an emergency expense. That's an actual statistic. Let me say it again, 64% of people in the US could not come up with $500 for an emergency expense. So are you going to blame the banking system that people don't have much money saved? That's the same argument. The other argument I've heard for years now is how expensive 401k plans are especially vs pension plans. Well, again it's 100% untrue.

I mean that may have been true several years ago, but not anymore. The average cost of a 401k plan to an employee is 0.46%, and if you ask Ted Siddle, the co-author of Who Stole My Pension and the leading authority and whistleblower on pension plans. He will tell you that the cost of pension plans to an employee far exceeds that of a 401k. Far exceeds. So that argument that 401k plans are rip off because they're too expensive is dead on arrival.

And lastly, the big one that I still don't understand. I hear this and it was on the show is that it's impossible to make a lot of money in a 401k plan, impossible. On the radio show, I was asked, "show me one person, one person who's made $1 million in their 401k", and I responded, I'd be happy to, he lives with me and he's downstairs in his office. It's my dad. I mean there are a lot of people who become millionaires in their 401k plan, a lot. Again, just another baseless argument. Anyway, so here's where I simply get lost in the debate. I mean, perplexed, confused, and mystified. Look if you were to maximize your 401k, and today that limits $19,500 per year, in fact, you can put more in if you're over 50, but let's say you put in that amount and you contributed that amount every year for 30 years. And remember your employer is likely to match some of that as well. So you may be putting in 14 or 15,000 and your employer's kicking in the rest. Let's say you've got an average return of 7% over that time period, over that 30 year time period. Now, if you read other posts or watched my YouTube videos, that does not mean 7% every single year. What I'm talking about is if you average seven over a period of time, in this case, 30 years, and keep in mind the average return on the stock market has been 10%, going back over 100 years. So I'm assuming seven as a more conservative number. So after 30 years, $19,500 per year, you'd have $1.97 million. Almost $2 million. That's the power of compounding returns. I mean, just pull up any compounding calculator and do it yourself. It's just math.

So anyway, going back to the original debate and my original contention, I would rather have $2 million in my pocket than the mere hope that I'm going to get an income stream for life in this day and age when pensions are being challenged and thousands of people and growing are seeing these benefits cut drastically. I mean, look, social security is going broke, it will be broke by 2034. Look it up if you don't believe me, pensions are getting cut at an alarming rate. And right now, the only retirement vehicle available for most people, especially young people is a 401k or a similar plan 403b or 4 57, they're all basically the same. Otherwise, you're looking at universal basic income.

In other words, the government simply sending out a check to everyone which would be pittance by the way, and without a doubt would destroy this country. You know, I guess it's easy to attack something without a solution to the problem. Yes, in a perfect world, everyone would rather have their own thrive. I would rather have everyone have a thriving business or passive income from commercial real estate or a thriving online business on Shopify or a million followers on Instagram. But sadly that's not a reality.

Well, that's my case. What do you think? I would love to hear from you!

Just a reminder, I've got a ton of free resources on my website you can implement immediately. And my new online course is now available and I think you're gonna love it. It's called Thrive Path, your solution to financial freedom and peace of mind.

And remember it is never too late to start your journey to financial freedom and peace of mind.

Until next time, Mahalo and Aloha, take care.

John MacGregor is an international best-selling author, global speaker, and financial mentor to thousands of people worldwide.  For over 26 years John has been assisting individuals with their personal financial needs using paradigm shifting techniques and strategies so people can finally live the life they deserve to live.  Check out John's website for a variety of free resources so you can immediately start your journey to financial freedom and peace of mind.