muses of the moment

January 12, 2009

401Ks and IRAs

Filed under: Long term investing, Odds 'n ends, The Financial Crisis — totallygroovygirlfriday @ 7:47 pm

As you have probably figured out I am suspicious of 401K and IRA savings programs as a source of primary retirement income.

Here are some reasons why:

If you still have 10-20 years to retire, your taxes will be higher (way higher) in the future. Better to pay those taxes now.

If you are in the US, your only option is to invest in assets dominated by US Dollars. The US Dollar will continue to lose value and implode all together. At the very least we are facing hyper-inflation in the next 2-10 years.

The fees take 80% of your profits (with the compounding effect) over the average 20-year span of a 401K or IRA. Compounding doesn’t work well if you keep taking money out for fees or anything else.

401Ks were set up to be a supplement to traditional pension plans. They are not structured to stand alone.

You are limited in how to take out money. Not flexible for you or your financial needs AND if all the baby boomers are forced to liquidate part of their investments over the same period of time, markets are destined to fall. If markets do fall at the time you need your money, you will be forced to sell at a loss. This is what is happening now to retirees.

Most people are not schooled in investing. Relying on the fund manager or broker who is paid whether you lose money or not is just foolish. If you lost 40% of the value of your 401K, your fund manager got the same amount of salary as last year, maybe more.

If the government decides to “confiscate” anything in the future, it will probably be 401Ks and IRAs. They will bring it under the social security system when it becomes completely insolvent when the interest on borrowed funds is too much to pay. They will call this “nationalization” and it will be “to protect” your retirement investments.

What to do in face of these major problems in the private retirement system:

Don’t take out your money. There is a huge tax penalty. Reorganize what you have as best as you can. Put the percentage of your 401K that you are comfortable with in Gold, Silver, and Oil ETFs. If you have an IRA, you may be able to invest in physical precious metals.

Stop putting money into your 401K and put the same amount of money into investments that preserve  purchasing power of the dollar. Such things include physical gold and silver. Commodities for the long term (5-10 years). CDs in non-US dollar currencies, especially, the Euro, Swiss Franc, and Canadian Dollar. Mainland Asian currencies if you can invest outside of the US. This is your new retirement account. But it’s really a long term wealth/saving preservation account. Over the next 10 years (or longer) wealth will not grow, it will need to be preserved. That is your objective.

Learn about cycles and trends in the things you are investing. There are lots of honest websites out there that teach and not sell. Avoid CNN. You don’t need to be a day-trader, but you do need to understand about basic trends and how to spot changes in trends. We are in the middle of a 20-year precious metals/commodities bull market.

Know when you are going to get out of an investment before you get into one. Factor in taxes and future inflation or deflation. Know the cycles so you can enter an investment at a low point and exit at a high point. Decide on an investment from true percentage gained not dollar amount.

Create a living trust to put these new investments to protect against future liabilities.

Take possession of your investments. If a stock, get a certificate (if you can). If a metal, hold the physical metals in a safe location. Have the shortest distance between you and your investment as possible. Do not allow a brokerage to hold your account. If you must, do it for a short period of time, or a small percentage of your overall savings.

Oh, and if you are living off a pension plan or plan to, forget it. By March of this year, pension funds will be “nationalized” because they are broke. Your payments will be reduced, or your payments will not buy what you need (inflation), or you will get an IOU from the government.

Do not fear, educate yourself and prepare, now. If you are not listening today, you will after March 2009. This will be a long crisis. Reorganize your financial matters now, not later.

1 Comment »

  1. Nice Site layout for your blog. I am looking forward to reading more from you.

    Tom Humes

    Comment by Tom Humes — January 12, 2009 @ 8:28 pm

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