muses of the moment

June 4, 2012

Is Your 401k a good retirment plan?

Groovygirl was asked to re-post this blog post from December 2010. Click here to go to original. Update, judging from Martin Armstrong’s current prediction of a high in gold in 2017, gg would not suggest saving for gold past that date at this time. Groovygirl also acknowledges Jim Sinclair’s prediction that gold will go up and stay there, because of the collapse of the current fiat currency system. One, or a combination of both predictions is possible. As we get closer to 2015-2017, timing should become clearer.

Totallygroovygirl is asked these types of questions almost every week:

Should I cash in my 401k?

Is the 401k retirement investment a good plan?

Should I continue to contribute to my 401k since my company is matching my contributions? Won’t that help add to my retirement fund?

The answer to all these questions is no. Although, I am not an investment professional, I can add and subtract. And in a K-wave Winter cycle, like we are in now, where the dollar will continue to be devalued and stocks are in a long-term bear market in real dollars, the 401k is not a wise investment.

The majority of Americans have their savings in a 401k or their home equity.

Major Disclaimer: a retirement plan is only part of the big picture or your total net worth (total assets minus total liabilities). For instance, if you have a negative net worth, it might be a better idea to pay off debt rather than contribute to your 401k or buy gold. Seek out professional financial advice for tax advantages and liabilities pertaining to your own unique situation. The spreadsheet below is a demonstration, not a suggestion.

Groovygirl is not a professional financial adviser, she used this spreadsheet to determine for herself how to plan for retirement and nothing else should be suggested by her attachment. People don’t believe the amount of money involved in the different plans unless it has real examples and real numbers.

Groovygirl would never suggest having all your eggs in one basket, even if it is a physical golden basket. One should never have all their savings in one investment, with one broker, in one bank, in one country or in one currency (and that includes a 401k). Especially during the times we live in now when economic stresses are occurring every few years/months, and the probability of a major collapse of some kind gets higher and higher. My goal is to show you that the 401k investment plan is not as advertised in the long-term and show you what considerations you should examine, what questions you should ask, in a long-term (or depending on your age, short-term) investment plan.

The time for the 401k was between 1980 and 2000, as long as you cashed out before the multiple market crashes from 2000-2010. That is the fatal flaw of the 401k, you are limited mostly to stocks and funds and you can never get out of them without a penalty. Now, no one was worried about this fatal flaw as long as all stocks were always going up. But now, stocks are down and you are stuck whether you have some money in your 401k and are not retired yet or you have already retired. You can not switch investment classes from stocks and equities into something else. And yes, there are other investments out there. Let’s look at one, gold.

Currently, we are in the middle of a 20-year bull market in precious metals and most commodities.

401k options vs. Gold Investment

The link above is a quick and dirty spreadsheet comparing a 20-year 401k investment plan and the use of that savings in real dollars for 20 years of retirement and then the same scenario in gold coins. Now you can only do this to your advantage during a precious metals bull market. However, the nice thing about investing in gold outside of your 401k and IRA (anything that is tax “deferred”), is that you can get out of it, pay your taxes on profit, and move onto another investment, when the bull market is coming to a close.

In the attachment groovygirl covers basic tax liabilities, dollar depreciation, and fees of a 401k plan vs. investing in gold as current law and circumstances suggest in this investment cycle. By putting $12,000 a year for 20 years, or $240,000, into a 401k fund system, you will have a total of $154,000 of real purchasing power during the 20 years of retirement. Using that same $240,000 to purchase gold coins prior to retirement, you will have $918,000 of real purchasing power during the 20 years of retirement. This is a huge difference. Your personal circumstances will/could be different. Use the attached spreadsheet to run the numbers based on your own financial concerns and projections, you will see the benefits and liabilities very clearly.

Don’t panic. Don’t cash in your 401k. Simply put aside the same amount of money you are contributing and purchase gold and/or silver coins and pay down debt. If you do not have any retirement fund or savings, you are in luck. You can make up for lost time by starting now and purchasing gold and/or silver coins.

Some other things to consider about a 401k or IRA:

  • There are fees hidden in hedge funds, mutual funds, ETFs, as well as fees that you pay to your 401k management company. These financial leeches get paid a percentage or dollar amount whether they make or lose money for you. It takes a lot of digging to find these layered fees. They range from 5% to 35%. Your 401k may be better, find out. Make sure you don’t just ask the broker, read the fine print of the agreement between your company and the 401k.
  • Gold coins have a low premium right now and low storage fees. I have assumed that they will go up in total dollar amount in the coming years, that is calculated into the spreadsheet formulas.
  • Roth IRAs  are ok, but you are still locked into the investment options of the fund. During a decline of any investment, you do not want to be stuck in that investment, gold included. You always want the option to cash in and get out at any time.
  • One thing I have not calculated in the attached spreadsheet is the possibility that you may have to sell the assets of your 401k at a loss during your retirement years. What if stocks peaked 3 years before you retire? Or the other option might be to take no money for a few years and wait. Can you really afford that risk? How will you pay retirement living expenses? There are retirees today that fully understand this problem. With a gold investment, you sold at the top and moved on. Outside the 401k system, you chose when to sell and take the profit, not your age. Timing is everything.
  • Some 401ks, IRAs, and Roth IRAs have more investment options than others. However, most are very generic and limited. This is a key point to consider when deciding how to move forward with your retirement planning. In some IRA plans you can hold physical gold and silver. Check to see if you will get taxed the earned income rate or collectible tax rate upon retirement.
  • If the government should suddenly allow you to hold physical gold and  silver in a 401k (highly unlikely), make sure the fees and earned income tax rate doesn’t kill any profit. Maybe better to hold outside the 401k system for that reason alone…..should that every occur.
  • Exchange traded funds, like GLD and SLV, are not physical metal, they are a 1:10 ratio (if that) of physical metal to paper money with added fees. Do not invest in these funds unless you have no other option within your 401k.
  • If you are just starting out in the working world, I would suggest not starting a 401k plan. I would buy gold and silver first. You can always start a 401k or IRA later if they are still around and it is a good idea for your long-term retirement plan. It will be at least another 50 years until we see the stock frenzy of the 1980-1990’s again, if at all. That is long time to wait.
  • Groovygirl is more worried about the government taking over pension plans and then 401ks and rolling them into the Social Security System than she is about the government confiscating gold. However, it is possible both could happen at some point. The nice thing about owning gold at that time is you can sell it, most likely at a major profit. The government would probably need the political environment of another major stock market crash to take over 401ks. By then, you would have to pay a penalty on top of losing money to get out of your 401k.

It is groovygirl’s goal to educate you on investment options enough to start asking questions. You will never hear from a stock broker, 401k fund manager, or Federal Reserve chairman that physical gold and silver is a wise investment, because it does not make them money. Therefore, it is not in their best interest.



  1. Why would you want to pay down debt? That’s one I do not get.

    If you have a sub 5% loan (say a mortgage), why would you want to put today’s (relatively expensive compared to future) dollars into paying off that debt? You could just put the extra money into gold. If you run into financial trouble (losing income), you could sell gold in the future and pay off what you need at that time.

    Granted, this can force you to sell gold at time that you might not like to do so, but the upside, relative to downside risk of gold, is phenomenal right now. There’s a very good chance you would be better off putting your extra money into gold now.

    Expensive debt is another story.

    Comment by bam — June 5, 2012 @ 1:13 am

  2. Bam,

    gg always suggests paying down some debt first or splitting the extra monthly cash between gold/silver and debt. The reason I do this is because the main thing holding most people back (not necessarily you or other readers of muses of the moment) is debt. And most Americans can not understand gold gaining value and hyperinflation, but they understand how paying down debt can free up 20-30-40-60% of their monthly paycheck for other things. Groovygirl’s first focus is to teach people how to prepare/get through this depression alive. I have to start with where most people are mentally, not where I would like them to be.

    When you are unemployed or under-employed or on a fixed income or are young and have a lot of debt, debt makes you a slave. If you must make a certain amount of money because you have too much debt (vs. income) you are always limited in everything you do or want to do in life. From moving, children, a better career option at a lower income/better location for jobs, getting life-continuing medical procedures, saving money for your schooling, your child’s schooling, helping aging parents, helping children/grandchildren. I could go on. Reducing monthly expenses well below living expenses is the first step on the process, and the easiest and quickest way to do that is pay off some debt and not take on any more.

    What if you have to sell your gold for an expensive medical issue? What if you are in a car/plane accident? What if your wife or children or parents require money for medical issues? Then you are choosing medical expenses vs. your mortgage. I mention medical expenses because they will get more expensive and with the large majority of aging Americans, it is a large concern for my readership.

    If you have little/no debt, you can get debt (probably at a high cost, but you can get it) in an emergency like that. But if you are tapped out, you will be limited in an emergency.

    This is a personal and individual decision. Everyone’s circumstances are different. But for the majority in America (not necessarily you), it is debt that holds them back from being able to save any money (whatever form that might take).

    That’s my reasoning for focusing on debt first, then gold. In a perfect world, the average American could do both, but we are past that point. Th best option for most to hope for is to split the difference. People just don’t have lots of disposable income, that is why they are in debt in the first place.

    Looking at your case of 5% mortgage, my question to you is what percentage of your monthly income is that mortgage payment? 50-60%? If your other monthly expenses should shoot up 500% (say for 1-2 years or longer), do you have enough disposable income to make up the difference and still pay the mortgage? If you can not make the payment under those circumstances, are you OK with losing your home? Some people don’t care about defaulting, others do. This is the type of thing that can happen during a hyperinflation. It is the monthly payment to debt that is my concern, not necessarily the total debt. What if the government changes the rules and your mortgage interest is not tax deductible?

    Most Americans understand month to month, not total debt. If they did understand total debt, they would know that if they pay for a house with a 30-year mortgage, they just committed to buying that house for 2 and half times the original cost. The joys of compounding interest. Compounding only works in favor of the lender, not the borrower.


    Comment by totallygroovygirlfriday — June 5, 2012 @ 11:08 am

  3. Thanks for the response, groovy. All good points.

    I was simply thinking of it from an ‘investment’ perspective, not ‘living’ perspective. For the majority of in debt Americans, your points above could very well make the most sense.

    Comment by bam — June 5, 2012 @ 5:02 pm

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Create a free website or blog at

%d bloggers like this: