The 401k has been a disaster for the average American. In the best of times, a 401k is too complicated for most people. When you put money in your 401k, you need to choose between a dizzying selection of stocks and bonds. Since the market is always changing, it also becomes a full-time job to keep track of your investments. Most Americans just don’t have the time and training to make this plan work.
Today’s horrible stock market makes the 401k even less appealing. The market crash in 2008 wiped out years and years of dedicated savings. Millions of Americans saw their retirement plans fall apart because of an unpredictable financial disaster. Does it really make sense to base your financial plan on such a risky and complicated account? Of course not. So why not get out before it’s too late, why not make a 401k withdrawal?
If you want to get out of today’s current financial trap, you need to revamp your investment mindset. Instead of locking up your money in an account that you hope will earn money in the future, why not use your savings to increase your earnings today? Why not use your 401k savings to build residual income?
Residual income is money that comes regularly from an investment. Once you get these income sources up and running, they take very little work on your part and start earning money right away. These are investments like rental income property, automated businesses, and royalties. All these assets use your savings to generate extra income right away, which you can use to build another source of residual income.
By putting your savings to work, you’ve created a source of money that will last for the rest of your life. While investing in a 401k forces you to ration your limited resources during retirement, passive income makes sure you’ll have a paycheck for the rest of your life.
Someone with a traditional mindset would say this is a terrible idea. “Don’t touch your 401k fund, you’ll get killed with fees!” Is this true? Are you really trapped? Let’s take a look at these extra costs. When you take money out of your 401k, you owe income tax on the entire withdrawal. You would pay this tax no matter what, even if you kept your money in the 401k until retirement. Since you’re going to pay these taxes eventually, they’re a sunk cost and shouldn’t influence your withdrawal decision.
The other cost of making a 401k withdrawal is the early withdrawal penalty. If you take money out before your turn 59 ½, you need to pay an extra 10 percent fee. Unfortunately, there’s no way to avoid getting hit by this cost. Put this fee in perspective though. How long will it take you to make this money back in through your residual income? One year? Maybe two? In the long-run in most cases, the early withdrawal penalty is a small price to pay for getting your investments back on track.
So, when does a 401K withdrawal make sense?
Pretty much right now. As long as you withdraw the money and convert it into a residual income vehicle… Yep! Right now.
The 401k is based on a broken investment mindset. By making a 401k withdrawal, you’ll cut your losses and move your money into investments that actually work. Take the first step towards residual income today and get out of the 401k trap.