Maximizing the Benefits and Structures of your Retirement Accounts

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 Today on Trader Tip Tuesday, I want to talk to you about a concept that is really important, which is maximizing the benefits and structures of your retirement accounts. Today, I'm borrowing from a PowerPoint we did a few weeks ago from a presentation that we did. I want to talk about how you might turbo charge your 401K, or your IRAs while reducing your risk, how about that? Wouldn't that be amazing? Now, small shifts can make a massive difference in accelerating your financial freedom. Your retirement accounts need to be a weapon for you to move to the life that you want. It's ironic that a retirement account is called retirement. Some of you want to retire, but for me, I don't want to retire, I love working. What we want to do is we want to work from a place of financial freedom, not retirement, we want to live a life that we love to live, not just go off to die. When I hear retirement, I think of being put out to pasture and just waiting to die. Anyways, that's my view. I want you to be able to be financially free on the path to financial freedom, your retirement accounts are a key asset.

 First of all, when we look at a typical American, they keep their savings and really two places, the equity in their home, and the equity in retirement accounts. It's really interesting because people tend to only get savings when they put it away in someplace they can't access. You make your home payment, you can't get the money out of your house, you take the deductions or get tax benefits from your retirement accounts and it gets taken out of your check and it goes right into account that you don't really see. Now, I'm not gonna get all the details of this, but there's several standard retirement accounts. There's a traditional IRA, there's the Roth IRA, they're two of the big ones. There's the SEP IRA, which is for really self employed people, there's a simple IRA and then there's the 401k. The 401K is the big one that really replaced pension funds. Companies use to have pension funds, but they got to be way too expensive for the company, so they got rid of them and instead they created a 401k, which instead of guaranteeing you what you'd get, what they do is they set it up in a way that you manage it yourself. So we have traditional 401k and we have Roth 401 K's, the simple difference between a traditional and a Roth is a traditional, you get a deduction on what you have to pay taxes on now, but you will pay it later. So it's really a tax deferral, you don't have to pay the tax now, you can take that money, put it in a 401k or put it in an IRA and it can grow over many years and then when you pull it out, you pay taxes, or Roth, you pay all the taxes just like you normally would without a contribution. You put the money in the Roth IRA or the Roth 401 K, and it grows and grows and grows and then when it's done, you take it out tax free. So you pay your taxes up front and you don't pay taxes later. 

Now the problem that most people have is it in a retirement accounts, they have mediocre performance, this for a variety of reasons. First of all, let's talk about who benefits from retirement accounts. You'd say Chuck, well obviously, to save her. Well, that's not really true. We want to look at why are these things in place, not just doing it to be nice. Of course, politicians love to buy votes, so it helps a little bit, but the reality is, is that these accounts are in place for firms like Fidelity and Charles Schwab and Vanguard, Franklin Templeton and BlackRock and Pimco, these are fund managers. So when they can create a structure like a 401K, or an IRA, what happens is these structures are incentivized to have the administrator manage it and they direct you to funds like this. Retirement accounts are a fee generator for Wall Street. In fact, this is one of the biggest sources of profitability for financial services. The plans are run by an administrator who collects fees. The fund choices themselves have their own fees and the fees charged for these products tend to be much higher than industry standard. If you're just investing in them on your own and the government puts rules in place they're supposedly to protect you, but they really make sure that you invest in products that are created by the financial industry. They don't really want you to have your own freedom of where you put your own money. 

Some of the problems with 401K's is that limited opportunity for cashflow. We really believe in the current concept of cash flow, it's hard to get cash flow in a 401k. Most of your offerings don't pay cash or interest, or if they do, it has a lot of risk. Because of this, we cannot benefit from the velocity of money, we can't put our money to work. So what ends up happening is people get benefits to put money in 401k, but then it just stagnates there. 401K's tend to have a lack of liquidity. If you pull money out, you gotta pay penalties and because there's a limited amount of funds that are offered, most people in a 401k end up just tracking the market. The stock market's good, the 401k goes up, if the stock market's bad, they lose money. There's a concept called Modern Portfolio Theory, which is what most basic financial advisors use and when you have a 401k, you pretty much are stuck in solutions that mimic a provider portfolio strategy. So your long stocks and your long longer term bonds. It's kind of it, but your long them and your long them paying really high fees. There's a lack of transparency with 401K, so when you invest in a fund, there's usually little knowledge of what that fund actually invests in. You're just given like seven funds, you can maybe get a prospectus, but it's a lot of work to actually figure out what they put their money in. So many of the fund choices are terribly run funds. We want to remember the big asset management firms like we mentioned, like the Fidelity's, and the PIMCO isn't a black rocks, they are marketing machines. That's what they do. They're not great performance, they're great marketers. Get your money in their ecosystem, charge fees, get just enough performance that you don't leave or get you invested in a structure like a 401k that you can't leave. 

The other problems are there's a limit to how much you can contribute to a 401k. Another problem of 401K's is a lack of investment choices. There's no fund offerings for precious metals, exposure or commodities, so you can't diversify away from stocks and bonds, or if there is, might be really bad. I'll show you an example in a moment. Another big thing like right now, short term interest rates pay much higher interest in longer term bonds. Typically, the short term interest rates are below long term bonds, but right now, T bills have been paying five, five and a half percent are long term bonds are like three and a half percent. When you look at the fund offerings, you cannot get short term interest rates like this. For example, I was just looking at a typical 401k and about the best you could do is get one and a half percent in short term investment. That's like three and a half to 4% under what the market rate is. The other thing is many of these funds have awful performance relative to their benchmarks. Typically, the best of 401k investor can do is have 60% stocks, 40% bonds with high fees, something like that. When we look at these funds, almost 80% of active fund managers underperform the index and this is just an example of a fund that I was looking at in a recent 401k and it's the commodity real return Strategy Fund from PIMCO. Now you look at this and go, Oh, great, I can get commodity exposure, I can diversify, but then you come in and you look at this fund and this fund is nowhere near its peak high in 2008. In fact, that is 68 and a half percent drawdown over 12 years. Does this sound like the kind of fund you want to be rotating your money into? Well, I won't get into it. It just obviously, is very poor. 

Now, if we move to IRAs, IRAs have a lot of trading and investing restrictions. You can't short stocks, you can't buy stocks on margin, you can't trade options unless it's a covered call, or married Porter or collar you can't trade FX or crypto. You certainly can't invest in real estate or buy businesses and you're usually unable to trade futures depending on the structure. The bottom line is a retirement account, even though the average investor saves a lot of money in tax advantaged accounts. They often underperform the market and they're subject to all the market risk and why is it they underperform due to high fees and a lack of investment flexibility. Our big concern is that retirement accounts are going to massively underperform in the next 10 years. This is because you can only invest in stocks and bonds and we see a lot of things going on right now that we think inflation is going to last for several years. There's a lot of structural issues in the economy. They're gonna make it very difficult for inflation to come down. Modern Portfolio of long stocks, long bonds, does terribly in environments of recession or during periods of inflation. That's because it has no way to address these issues, you can invest in commodities or metals or short term interest rates. We believe a major bear market is potentially being set up with prolonged inflation and on and off cycles, kind of like the 1970s. If you do not have proven protection in place for these developments, your portfolio could get crushed. We don't want that for you. 

Another issue is that retirement accounts are potentially facing attack. Politicians in Washington are trying to find ways to raise money and they're looking at where we can go raise some money and IRAs are one of the big things that are being looked at. So let's just talk about the possibilities. What if instead of dealing with all these restrictions in mediocre performance, and just not paying attention, because you can't do anything? What if you could contribute massive amounts of tax deductible contributions to a retirement plan? What if you can maximize low tax rates now,  or you face higher tax rates down the line? By creating and funding the right structure, you'll be able to invest in whatever you want, you could trade in it, you could invest in real estate, you can invest in crypto, you can invest in precious metals, you could trade complex options, structures, you could invest in trade with margin, you could protect your estate from lawsuits and creditors and you could massively reduce the fees you pay. What if you could do all of this. Another thing is, many people, many of you out there have multiple IRAs and multiple 401Ks. What ends up happening when we have a lot of these is we ended up having an account is $30,000 in or $50,000 in it, we don't pay attention to it, it just sits there, but that money is being wasted. One of our core premises is that every dollar we have must have a job, it's gotta go to work and do something for you can't have $50,000 sitting there not doing anything, but because of all these structural issues, it's hard for people to do something well, what if we could roll all that up into one account, make one trade one investment, and it was automatically allocated to all your accounts. 

As we do this, we have our 11 principles for creating wealth through tax efficiency. One is we own our tax efficiency, but we hire an expert tax advisory, so that means you got to own your own plan, but you need an expert to help you. Second is your tax plan is one of the best investments you'll ever make. I see people clipped coupons or go BOGOs, or things like this to save 50 bucks, but they're paying $100,000 a year in taxes. Wouldn't it make more sense to figure out how to take 100,000 and get it down to 75,000 and it would be going buy one get one on a dress or groceries, somebody at the grocery store? The third principle is we want to deduct expenses against the highest tax income and minimize expenses against the lowest tax income. Or we want most of our life expenses to be deductible. Five, we want to focus on reducing the tax rates on all the rest of the income. Six, our optimum tax rate is usually from a blend of strategies not a single strategy. Seven we want to seek to own nothing but control everything. Eight, we want to maintain control of our tax structures. Nine, we want to be an expert at tax efficiency in your niche. So if you're a real estate guy, you better know your real estate taxes. 10, all tax planning has a business purpose other than reducing taxes and 11, we don't like to hear this, but the better the tax benefits, usually, the more complicated the rules. This means to get some of the best tax benefits, you're going to need an expert to help you guide your way through it. 

So to accelerate our financial freedom, we want to contribute as much as possible to our retirement accounts, knowing that we maintain flexibility in how we invest and we maintain flexibility and how we spend it. We want to trade and invest at the lowest tax structures. So if you're trading and you can trade in a retirement account, this is when you can blow up your retirement account and massively increase the value because you don't pay taxes on it. We want to trade and invest in the structures that have no taxes or low taxes. I'm going to skip over this for now. I just want to show you this in order To wrap up, this is one of the concepts we teach. You can create an LLC, that becomes the primary investment vehicle for your IRAs or your 401K's. This creates the flexibility to be able to manage your money yourself, and direct it to whatever you want to direct it to within reason. It also builds a much stronger layer of asset protection, in case there's ever a lawsuit. Because it's in this other entity, it's protected, but this is one of those structures, you don't want to do this yourself, you want to make sure you do it the right way. So that everything is done right. So there's no surprises and this is something we can help you with. 

This freedom accelerator is something that we are working with students on this month. I encourage each and every one of you to step back and look at how you structure your retirement accounts. This is big. I have a student I talked to a couple months ago, is 2.4 million in investable assets. That's a good amount of money. He has 1.6 million of it in a 401k, which only has seven investment choices, seven. So 67% of his assets are tied up in its shitty 401k. He needs to get out of it and rotate into something like this and this would help him massively. So I'm talking to him because that 1.6 million can be invested in anything not stuck in the seven funds and would do so at much lower fees. Where are you at on this? Are you maximizing the amount of money you can put away? Are you maximizing what you invest in? These are important questions to get right. So that's it for this trader Tip Tuesday tune in next Tuesday when I continue to share tips like this with you that help you be able to perform at an elite level. Have a great week. God bless.