Should You Dump Your 401 (k)?
The Pre-tax vs Post Tax Planning Myth
One thing we know are facts of today, but no one can predict the facts of the future. Today you may be married with children. You may have a home with a mortgage. IF you wanted you could simply call your CPA and have them, what your marginal tax and how much do I owe? The challenge is not knowing what the future holds. All too often people rely on what “worked” in the past when the facts of today are vastly different from 20 years ago. Having a herd mentality or relying on people's opinion, whether it is coming from a family member or a financial guru who writes books for a living, can destroy your financial future. Just because someone loves you and has your best interest at heart does not mean that they give you good advice. Relying on a book, TV or internet personality is falling prey to what Malcolm Gladwell calls a tipping point. Malcolm defines a tipping point as "the moment of critical mass, the threshold, the boiling point." Gladwell states: "Ideas and products and messages and behaviors spread like viruses do."Just because it spreads does not mean it is good accurate advice.
If I were to describe a story with two bags of seeds. The first bag I will give you and I will want to take 20% of the seeds and give you the rest. You can do anything you want with the remaining seeds. You can plant them, you can grow them, you can eat them or you can just put them away and do nothing with them. You will never see me ever again because you gave me the 20% upfront. The second bag of seeds I will give to you, but this time I will take nothing from you, you will have the full bag of seeds. In the second scenario you will need to follow specific rules. You must grow this bag of seeds. You may not do as you wish as described in the first scenario. You need to grow your seeds into a huge crop and I will come back in the future. I will locate where you are and where you live. I will not tell you when, it might be in 15, 20 or 30 years from today, but it will be a surprise. When I decide to come and find you I will come over and into your house and demand to look at your crop. When I see your crop I can take ANY percentage of your crop. If I want I can take 30%, 50% or all of it! it will depend on my mood and how much I need. Which scenario would you subscribe to? Most people pick the first scenario, yet today everyone is putting money into their 401 (k)’s.
Based on everything you have seen happen in our country for the last several months, do you believe our government will require more revenue in the future?
Our current debt for our country is over $25 trillion. Just a year ago it was $22 trillion. By 2024 our country’s debt will rise to $42.6 trillion.
Our Gross Domestic Product (GDP) is $21 trillion with $9.5 trillion or 44.6 percent of our entire GDP going to taxes. That leaves only 55.4 percent available for the private sector to repair all this economic damage.
It is exponentially worse by 2024. Our GDP falls to $18 trillion while the spending from Fed, state and local governments increases to $11.9 trillion, so our governments will be using 66 percent of the entire GDP of our country, which leaves 34 percent for the private sector to repair all the economic damage.
This year, the budget for the U.S. government climbs to $6.6 trillion. We only collected $2.7 trillion in federal taxes, which leaves a $3.9 trillion deficit. In 2024 our federal government will spend $7.1 trillion while only collecting $2.6 trillion in federal taxes. This is a $4.5 trillion deficit.
In 2020 the unfunded liability for Social Security is $20.5 trillion and for Medicare, it is $31.7 trillion. The total U.S. unfunded liabilities in 2020 are $148 trillion. In 2024 the unfunded liability for Social Security rises to $24.7 trillion and for Medicare it increases to $39.1 trillion. The total unfunded liability increases in just four years to $187.8 trillion.
Would it be smarter to take a tax deduction now on a small amount of money and build it into a large amount of money for the government to come and take later, or would it be better to pay your taxes now when they are historically low and transfer a large amount of tax free money to the future that the Internal Revenue Service could never get their hands on? So why are so many American’s put money into their 401 (k), for the government to use in the future. Shouldn’t they put themselves first?