Last week I wrote about how I took a loan from my 401k to help me pay for my 20% down payment on a house.
Other readers thought my 401k loan was such a terrible idea that they have decided to stop following my blog.
Who knew taking a low interest loan from yourself was so controversial?
My 401k is Retirement Play Money
I understand why some people were offended by me taking a loan from my 401k. For many people, their 401k is their retirement lifeblood. Their hopes and dreams of reaching retirement are resting on the balance in their 401k.
My 401k is different. I consider my 401k as spending money for retirement. Nothing more.
Here are a few problems with the idea that someone can save up enough money to retire
- No one knows how many years they are going to live (so you can’t know how many years of expenses need to be saved)
- No one knows how bad inflation will be over the course of the next 30-60 years
- No one knows what the stock and bond markets will do over the next 30-60 years (which is where most 401k investments are held)
- No one knows when they will want to retire, which might be much earlier than a 401k allows you to access your money without penalty
- No one knows what the government will do that could change 401k laws in the future and restrict access to money
- No one even knows if the US dollar is going to survive the coming debt crisis
Given all these unknowns, I find it rather foolish to try to retire by saving up a huge pile of money.
I have a better solution.
Retire At Any Time By Generating Income
Imagine I want to have $50,000 a year (in 2012 dollars) in spending money when I retire. I can try to save up some amount (probably millions of dollars) to be able to pull out $50k a year, but I really can’t answer any of the unknowns I just mentioned.
Another option is to start generating passive income streams.
I could buy a house (maybe with the help of a 401k loan) and live in it for a few years. When I buy a new house, I can keep the old one and rent it out. I might make $800 a month from renting my old house. That’s $9,600 of income every year.
Maybe I work on building some internet business where I am the owner and I pay other people to run it. Pretend this generates $1,500 a month with minimal effort on my part. That’s another $18,000 a year.
Let’s say I’m old fashioned and want to get involved in a business that exists in the physical world instead of just on the internet. Maybe I find some partners and start a restaurant. We hire high school kids as employees and pay a few responsible adults to be the managers. Let’s say this real world business makes $1,900 a month. That’s yet another $22,800 a year.
Between my rental property, my online business, and my restaurant I’m making $4,200 a month. That comes to $50,400 a year. Every year. And I don’t have to do any of the work myself.
I’m ready to retire.
I might have $4,200 a month in passive income by the time I’m 65 years old and I can retire with the 401k folks. But what if I get that much at 35 years old? Looks like my way worked a little better than the saver’s route.
What if medical advancements mean that people my age are going to live until they are 120 years old? Those 401k-saver retirees are gonna be living off government assistance and charity when they run out of savings. As long as my businesses are still going, then I’ll have all the money I need no matter how long I live.
If inflation gets bad, my business just raises prices to keep up with inflation and as long as I can keep them profitable then my retirement is safe. A 401k doesn’t get an automatic inflation adjustment.
If the stock market crashes then it doesn’t directly affect my businesses (although the indirect implications could be that one or more go out of business). People relying on their 401k to retire might lose decades of savings.
If I want to retire early there’s no law saying I can’t get to my business income before I’m 60 years old. The 401k savers are stuck until the law allows them to get their money.
Saving Is NOT The Only Way to Retire
Some people are going to work until they are in the late 60’s, save as much as they can their whole young lives, and then retire with a big lump sum of money. Then they just have to hope they die before the money runs out.
When I’m retired I don’t want to live my life hoping my heart gives out before my bank account. I want to have multiple, diversified streams of income that will allow to retire as early as I can and to stay retired as long as I live.
Why Do I Even Have a 401k?
Despite everything I just said, I will keep saving money in my 401k.
First of all, my employer matches 100% of my contributions, so I can’t pass up a 100% instant return. Even if I decide to pull the money out early and pay the penalties I’ll still come out ahead because of the match.
Second of all, when I need to access the money I can just take out another 401k loan. This will probably happen again when I’m looking to start some kind of business and need start-up capital.
If I have anything in my 401k when I retire (which I probably will) then I’ll use it for play money. I can take killer vacations or buy sweet presents for my grandkids. I will not use it to plan for my retirement.
There’s only one path to retirement for me, and that’s generating income.
Readers: How are you planning to get to retirement?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
I like this way of thinking for retirement. I don’t think your example of a restaurant is a good choice since those have extrememly high failure rates and you could end up be hundreds of thousands in the hole because of it. But I think your point still stands, that building multiple income streams is the way to go.
I am working towards multiple income streams and within the next year I will probably purchase my first rental property. Unless of course the housing market makes some sort of insane comeback.
That’s my goal. Plus, you’re young and can afford to take risks on stuff like that. I currently am saving up 20% to buy some property. I’m always looking for passive income streams I can take advantage of.
I think everyone got upset because being debt free, having a 401k, and a solid rainy day fund is the religion. You just upset the applecart by saying you’re going to risk your 401k.
Your “few problems” are mostly valid, but you ignore the fact that despite downturns, investing in stocks has always been the most lucrative means of amassing wealth over the long turn. It’s also not a matter of saying, “they just have to hope they die before the money runs out.” Good retirement planning consists in large part of calculating appropriate safe withdrawal rates to minimize the risk of running out of money. And all of your passive income strategies have to work successfully before you can retire on them. You also allude only briefly to social security, which despite all the naysayers who are positive that “they’ll never see a dime,” shows no immediate sign of challenge as an important source of retirement income. Finally, you don’t mention the use of single premium annuities, which can provide another stream of significant and largely stable income.
Speaking as someone who just turned 64, I expect to work a year or two beyond 65, in part because in this way I have more time before I start drawing on social security and my retirement funds, in part because I won’t have to pay health insurance premiums before Medicare kicks in, in part because I rather like working. I don’t mean to sound patronizing, but you are what – 28? I think it’s far too early to make definitive decisions about how you’ll fund your retirement. It’s fine to plan, sure, but you need to revisit your plan periodically to ensure it’s working optimally for you.
I’m planning to do a little of both. I’ve been investing through a 401k since I started working full-time at age 22 and don’t plan to touch that money until I retire. I’ve also been saving for a down payment on a house, and plan to buy in the next year. I’m going to look for a multi-family home, so I can rent one side of it and start my first passive income stream.
Bravo Kevin. This entrepreneurial thinking is not taught in school. Most people come to rely on the work/paycheck/spend cycle. True financial freedom comes from passive income.
I started my rental business 3 years ago and it has been great. I’m acquiring more property shortly and I don’t plan to stop. Land-lording and real estate is a whole other topic but I’d really be interested to hear more from you regarding passive income. This website alone seems to be a great mechanism although I’m sure it requires consistent effort. Maybe you could talk about that as well?
Keep up the good work.
Well said
A fun post with some fun comments below. A very out-of-the-box view, and my hat’s off to you for that. But…
Danger Danger Danger
In principle – I agree that hedging retirement risks is important. And that non-traditional sources of income are a good thing.
With that said – with all due respect – your plan sounds sophomoric. Earning 24k in passive income from a successful, long-term, stable, hands-off restaurant is very ambitious to say the least. Heck – making 18K from an internet business with the same properties is a little crazy. And is this while doing your normal job? Where does the capital come for these?
Even still, for me, the worst thing is the underlying theme. I may have missed it, but I don’t hear a defined plan to start a business, or an internet site, etc. I hear some ideas, but I read those as “why I don’t need to lean on my 401k” rather than “how I won’t need to lean on my 401k.”
I’m a long ways away from retirement and I also have huge concerns about my 401k. I’m not worried about a stock market crash – I’m worried about the notion of stocks vanishing. I’m worried about US becoming the next Greece, or Iran, or USSR. But I know this:
Saving/investing today increases my likelihood of a successful retirement. Whether that’s paying down your debt/principle on your house, your 401k, an IRA, gold, purchasing a rental, buying art, or Alpaca makes relatively little difference. Having ideas is fine, having alternatives is fine – but that does not change this truth.