If someone gave you $100 today, what would you do with it? Buy something with it? Pay a bill with it? Invest it? Donate it? The #1 answer will fluctuate over time depending on your age, overall financial security, and whether the economy is growing.
- Buying something means immediate gratification or usefulness, turning the $100 into something you consume or use.
- Paying a bill means immediate financial return, as reduced debt means every dollar you make in the future is worth more to you.
- Investing or donating makes a different choice: you are not only implicitly saying that someone else can do more or be more productive with that money than you can, but you are also saying that you are talented enough to be able to decide who that is. Otherwise you would probably use that money on yourself!
Everyone wants to use what they earn to make their life better. Do you believe that others can do more with your money than you can? Moreover, do you believe that others will use your money to represent your interests better than you can?
Well, maybe some of it…but let’s explore. In an uncertain world, with lifespan extending beyond retirement age, if you spend all your cash today, you might not have any left for when you are not working. And there is some merit to saving: nobody wants to spend the twilight of their life impoverished, or even at a declining standard of living.
Retirement accounts were created as a way to combat this concern: rather than take a lump sum of cash as you earn it early on, you hold some back for later, smoothing your income out so it will last into your post-working years. The government has built deferred tax structures to incentivize this, typically by allowing you to invest tax-free up front and only pay taxes when you withdraw money after retirement.
In the public sector, or with large companies, this was primarily accomplished with pensions. Work at one place for a long time, and the company will take care of you for life. Trade your labor now for cash (much) later.
In the private sector, where companies have greater risk of survival, the 401K has taken root. Rather than have people store money for retirement under the mattress or have smaller companies do the smoothing themselves, companies in the finance industry offer products that take income straight out of paychecks and into the economy - but under the management of their professionals. You get a tax-free veneer, but underneath it get charged holding fees, get smoked by inflation, and worse yet often are sending your money to support initiatives that are inconsistent with your values, or at the very least do not have your financial best interests at heart.
For some, the 401K will make sense. But three points to consider before you just sign those forms:
- Investing in yourself today can lead to exponentially better outcomes for the future. As you enter your prime earning years, it may be the time to take risk, not buy insurance. If you are working 100 hour weeks, you’ll want to eat well and get a comfortable bed so you are always at top form. If you are starting a business, you’ll want as much cash now as possible to give that business the best chance of success. If you are starting a family, spending now on nutrition and education will pay off massively down the road. When you are 60, you will not care one bit that your retirement fund is paying you a little less per month, because you will be happy, wealthy, and wise from everything you invested in today.
- High inflation is crushing to the concept of investment, and especially the 401K. In an inflationary environment, people typically choose to spend rather than save because things are always getting more expensive; money is getting less valuable over time. With businesses also losing value in this environment, any money tied up in an investment will fall in value. Diversification does not help; every producer is hit by the increases in raw material cost except for those that own the raw materials themselves.
- Putting your hard-earned money in the hands of fund managers could mean that your cash goes to companies that champion causes or initiatives you do not support. If you are investing in a 401k, take the time to learn what you are investing IN. Every public company is required to publish reports that talk about their business in great detail. Use these resources to consider where you are putting your money with the same care you would use in making any other major purchase decision.
Your work is valuable. Your income represents more than just numbers on a screen, it represents your time and effort. Take care to preserve and grow that value to turn your effort into a better life, and the world you want to create. Bet on yourself, bet on what you believe in - and think long and hard before you contribute to that 401K.