The Hidden Costs of Traditional Retirement Vehicles

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Most of us are saving as much as we can for retirement, using the savings vehicles that are advocated by our employer (i.e., the 401(k) plan) and/or by Wall Street in general (i.e., IRAs, mutual funds, stocks). We want to believe that everyone is looking out for our best interests and that all of our hard-earned income is going to be safe. But would it really surprise you to learn that Wall Street is, first and foremost, looking out for itself?

The reality is that Wall Street benefits handsomely from a huge cash infusion by ordinary Americans hoping to secure their retirement savings. But in return, Wall Street offers relatively little security: Wall Street bets big with your money and is none too concerned about whether those investments pay off for you, the individual investor. While you’re hoping your retirement assets will be secure at the micro scale, Wall Street is looking to secure your money – and the money of all other investors – on a macro scale. And this, unfortunately, can come at a very high cost to you – the individual investor.

Let’s explore in greater depth all of the hidden costs of traditional retirement plans that eat away at your hard-earned savings:

Hidden Costs of Traditional Retirement

  • You are dependent on a volatile market: As history has shown us, the market has its up days and its down days, and the down days sometimes morph into bear markets, where 30% of market value might be eviscerated. Wall Street can recover, but if you’re approaching retirement age or, worse, already retired, can you recover? Traditional retirement savings vehicles are simply too vulnerable to market volatility, and that reality is never going to change.
  • Your income may not decrease substantially enough: When we invest in 401(k)s and similar tax-deferred savings plans, the assumption is that by the time we withdraw the money, we’ll be in a much lower tax bracket and Uncle Sam won’t be able to collect quite so much in taxes. But in reality, we don’t know exactly how much income we’ll need to pull to pay for our expenses, or how much income might show up unexpectedly at our doorstep. While it could certainly be a blessing to end up with an inheritance or other unexpected windfall, the tax implications can be disastrous. Elevated income levels also can trigger our Social Security income to be taxed as well.
  • Inflation could eat away at your nest egg: As we hedge our retirement bets on Wall Street, we’re essentially counting on our investments to not only go up in value, but also to beat inflation. Runaway inflation can quickly reduce the spending power of retirement income, because inflation does not always move in lockstep with the financial markets.
  • Investment fees are costly: When you invest on Wall Street, you can expect to pay exorbitant investment fees; sometimes the fees are hidden or misleading until you read the fine print. For example, “no-cost” mutual funds can actually be quite costly, where you might end up paying custodial fees, managerial fees, administrative fees, shareholder servicing fees, revenue sharing fees and transaction costs. (At least you don’t have to pay a commission, right?) Investment fees eat away at your retirement savings, and there are no two ways around this reality.

The only way to avoid the hidden costs of traditional retirement savings plans is to stop putting so much of your hard-earned income into them and to find alternative investment strategies. Your goals should be to shed your dependency on Wall Street markets, to not subject your money to income taxes, to buffer your investments against inflation, and to avoid costly investment fees.

If you’d like to learn more about alternate investment strategies, check out our video, Life Insurance: The ‘AND’ Asset.

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