401(k) plans: 'The Smartest 401(k) Book You'll Ever Read' offers insight
Every Sunday, The Simple Dollar reviews a personal finance or other book of interest. Also available is of the hundreds of book reviews that have appeared on The Simple Dollar over the years.
About a year ago, I reviewed Daniel Solin鈥檚 and concluded that it was a strong book to read if you鈥檙e a high income earner and concerned about retirement.
It was good enough, though, that I decided to keep an eye out for Solin鈥檚 other books and read them over time. Last month, I picked up Solin鈥檚 in an effort to take a deeper look at the realities of retirement plans that many people use.
Does the book offer any real advice, or does it just rehash information that can easily be found elsewhere? Let鈥檚 dig in and find out.
Rules for All Investments
Solin鈥檚 real focus in this book, much like his other books, is that a successful investor focuses heavily on minimizing costs. You shouldn鈥檛 worry so much about short term return numbers on the investments you鈥檙e looking at. Look instead at things like expense ratios and the fees you鈥檙e charged. You鈥檒l find that investments like index funds tend to stand out from the pack. Also, Solin urges people to avoid the hype for various funds out there in the financial media and instead focus on just the numbers.
401(k) Plans: Rigged to Rob Your Nest Egg
Here, Solin argues (quite well) that 401(k)s are fraught with risks. For starters, your employer often chooses a 401(k) plan that benefits them the most, not the plan that benefits you the most. In short, you鈥檙e usually going to get the short end of the stick with your work plan compared to what you could get on an open market. Companies know you鈥檙e restricted in your 401(k) choices, so they offer up relatively poor investment choices inside those plans. They鈥檙e expensive, fraught with conflicts of interest, and can make things even worse if you make poor investment choices.
How to Beat a Rigged 401(k) System
So what鈥檚 the solution? Lobby your employer for better options. Minimize the portion of your investment portfolio that鈥檚 actually in a 401(k) plan. Look for the lowest cost investments in the plan. Invest only enough to get all of your employer鈥檚 match, then look for other options. In short, don鈥檛 buy into the idea that your only way to save for retirement is through whatever options the 鈥渁dvisor鈥� at work tells you to invest in your 401(k).
The Care and Feeding of Your IRA
What do you do if you don鈥檛 invest in your 401(k)? Solin recommends opening up an IRA, either a Roth or a Traditional depending on whether your income is low enough to qualify you for a Roth. An IRA gives you much more control over your retirement savings, as you get to choose the investment house rather than relying on what your employer has chosen. Look for an investment house that has very low fees (preferably none) and a diversity of investments that have very low expense ratios. I use Vanguard, for example.
403(b) Plans and Annuities 鈥� They Make 401(k) Plans Look Good!
403(b) plans are much like 401(k)s, but they鈥檙e often even worse than 401(k)s because the problems with 401(k)s are exacerbated with 403(b)s. With 401(k)s, employers are involved but are often looking for a balance of minimizing costs for themselves and providing good options for their employees. With 403(b)s, employers often don鈥檛 care at all about the investment plans, leaving greedy investment houses to offer up poor investments to subscribers. Not only that, 403(b) plans often push people into annuities, which are terrible options for such retirement plans.
Alternatives to Traditional Retirement Plans
What can you do? Solin offers a few options here. The most interesting, in my eyes, was to invest in things outside of retirement plans that return a consistent income, never mind the tax burden. He mentions lifetime annuities as one example.
Is Worth Reading?
This book does a great job of making the case that your 401(k) plan at work is likely not your best investment option. If you take the ideas in this book and use them to evaluate your 401(k) or 403(b), you might not like what you find.
From there, though, Solin鈥檚 ideas for alternatives are spare and vague. He does offer some ideas, but he doesn鈥檛 offer an abundance of specific pointers to follow.
If you鈥檙e willing to use this book as a starting point for evaluating your retirement options and learning more, is a very good choice. It is not, however, a one-stop-shop for everything you need for retirement planning.
Check out .
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