Ditching Traditional Retirement Plans

by JT McGee

The personal finance thought machine has this love affair with 401Ks and IRAs that, frankly, I really don’t understand.

It all boils down to three things. Well, mostly three things.

Why Pass on Traditional Retirement Accounts

Here’s my three reasons for passing on traditional retirement accounts:

  1. 59.5 years old – This may be a fairly unconventional viewpoint, but I have no problems breaking from convention. To state my issue as simply as I can, I’ll just say that money I can’t touch until I’m 59.5 years old is pretty much as attractive to me as a needle to the eye. I’m of the belief that financial freedom requires both financial well-being and freedom. There’s no such thing as being free to use your money as long as you wait until you’re 59.5 years old. For me, that’s about 37 years from now, a long time away – and besides, I don’t trust prime numbers.
  2. Predicting the future – Find a discussion on ROTH IRAs. Now find a discussion on ROTH IRAs that does not include the use of passive index funds. Most advice with self-managed retirement funds focuses around the viewpoint that mere mortals cannot beat an efficient market. My bias aside, I find it crazy to assume that mere mortals cannot predict financial markets, but can predict the actions of Congress members 10, 20, even 30 years from now. If I told you 15 years from now you’d have to surrender to a pat down to get on an airplane you’d tell me I was nuts. Well, that’s the new reality. There is no order to the whims of 535 people.
  3. Nomenclature vs. Utility – This works in with point #1. Just because a ROTH IRA is labeled “retirement fund” does not necessarily make it a better vehicle for storing retirement funds. I can scribble “keys” on a 1.5”x2.5” little manila envelope, but there is no way that I would find it a better place to store my keys than the unlabeled kitchen table. Sometimes the most obvious place to store something, even if properly labeled, isn’t the best place.

Retirement vs. Retirement Accounts

I really do believe younger people would be better ditching retirement accounts in favor of taxable accounts for any number of reasons. First, I don’t think the tax benefits are really all that favorable, especially relative to the potential investments that one can purchase through traditional pension plans.

Real estate, options, and a slew of other financial products and investments are either off-limits, or made to be more complicated with funds meant for retirement. In many cases, I purchase options where I’d prefer not to own common stock due to the potential loss. (See article about my purchase of Ford options.) Nevertheless, options are considered “too risky” or “too speculative” for retirement accounts. (This seriously makes no sense.)

I’m of the mind that there are more opportunities than there are potential pitfalls. When opportunities arise, they’re usually short-term opportunities where one can fill the void in an otherwise efficient market. Just think, a few months ago I was thinking about buying a condo. Now I know why they’re relatively inexpensive (it’s a freaking retirement community!) but I think there’s a lot to be said for being liquid enough to take the path less traveled when it brings about other investments.

Commitment – at least so far as an investment strategy – has really no appeal. While the safe and certain route is supposedly found in traditional retirement accounts, there’s some kind of “imbalance” I find lacking in having assets build in a restrictive vehicle. The idea that I can’t remove assets from one side of the equation to tend to assets and opportunities on another doesn’t seem to jive with any potential tax benefits.

Meanwhile, concern needs to be paid to the exit strategy. I started tending to my finances early, and have a head start that seems somewhat…wasted in restricting the benefits of an early start until I’m nearly 40 years older. This is just as important in making the jump to retirement. If safe and reasonable cash flow is the aim, real estate owned directly sure seems to kick the snot out of corporate or government bond yields. Plus, given I’d have the time, who’s to say that managing real estate investments wouldn’t be worth the trade-off for higher yields?


Ever have a love-hate relationship with retirement planning?

Do you – or someone that you know – embrace the idea of investing outside traditional retirement accounts?

{ 18 comments… read them below or add one }

Jonathan February 6, 2012 at 10:37

Bingo! I’ve felt this way for a while too. A couple years ago when my company was founded, we voted against starting a 401k plan; my coworkers’ votes may well have just been apathy regarding retirement savings, but for me it was an easy choice to see that I could do much better, much faster, investing that money on my own rather than tying it all up in outsourced accounts that I couldn’t touch for 35 years.

We’re buying real estate and investing in other opportunities as they come along – with the cash we save. Tax benefits? We don’t get any “retirement account” benefits, but as you show above I haven’t seen any really compelling arguments for those, especially since I want to invest in real estate primarily. As it happens, my wife and I are on course to be able to replace our current incomes with rental income by the time we’re 40 or so.


JT February 6, 2012 at 14:53

So are you 100% real estate, then?

See, I’m in a similar position where I can see myself displacing my income much earlier than 59. (Ah, it sure is nice to start young!) While I don’t think I’d call it quits early, I do appreciate the ability to do so if I’m so inclined. I figured you were investing in real estate via your retirement accounts. I guess I thought wrong – I know it can be a PITA to do it.

Also, I’m curious – did you get more pay instead of a 401k/match?


Jonathan February 6, 2012 at 20:10

Not 100%…but as far as investments that are producing, then yes, 100% real estate 🙂

We’ve considered RE through our self-directed Roth IRAs but that would be a MAJOR hassle and the company we use gets a little happy with the transaction fees.

We didn’t necessarily get any more initially by not having a 401k, but the company was brand new and had a startup loan to pay off. We’re a few years in now, the loan is almost gone, and profit distribution will likely start to go up. So we’ll see.


JT McGee February 6, 2012 at 21:20

I hear ya! Even those “low fee index funds” based on the S&P500 were getting smacked at a -.29% return over 5 years to end of the year 2011. Real estate can definitely beat a negative return, even though the market isn’t all that great.

Interesting to hear about the 401k deal. Hope 2012 is a good one!


Jonathan February 7, 2012 at 10:42

The market isn’t that great? I guess not, if you’re trying to sell! But in my position, the market is unbelievable! Super-low prices, super-low financing costs, and decent rents that provide great cash flow from Day 1 and are highly likely to rise over time.

JT McGee February 7, 2012 at 14:05

I have to reply to this, since the comments won’t thread further.

The market is great, except for this 800 pound gorilla: http://www.bucyrustelegraphforum.com/article/20120206/NEWS01/202060302/Feds-shed-foreclosures-rentals?odyssey=mod%7Cnewswell%7Ctext%7C%7Cp

I know you’re in California, and probably so too are your rental properties. Given that California is one of the worst when it comes to foreclosures, don’t you worry about an surge in rental supplies on the market?

Actually – maybe you can turn this into an opportunity. According to a number of stories I’ve read over the past month, the government is looking to off-load foreclosures as locally as possible. It seems the Feds are willing to break lots into individual properties. Maybe you might be able to snag a few if you can show the liquidity and experience in rental housing.

That might be something to keep your eyes on. Who knows, you might be able to drive your average purchase price down and rental yields up by grabbing a few foreclosures as they hit the market. Have you checked into this program? No doubt it’ll hit California soon!


Jonathan February 7, 2012 at 15:03

I do buy in California, though about 80 miles from where I live. Truthfully, yes there is a mild concern about floods of rental properties driving down rents in the short term, but the rents could go down quite a bit and we’d still be making a profit. Anyway, we just listed our latest purchase on the rental market 2 weeks ago and looks like we’re about to get tenants so we’re pretty happy about that turnaround.

JT McGee February 7, 2012 at 15:47

Well then if you’re still cash flowing even with lower rents then you’re in a very good position. Two weeks is a very good turnaround too! Get it while it’s hot!

Really glad to hear that you’d still be in the black even with falling rents. I know you have a really good feel for finance, and I don’t intend to lump you in with the whole universe of real estate investors, but that doesn’t seem to be so common. A lot of personal finance bloggers who have real estate seem to be in a position where they have extreme amounts of equity and eek out only minor cash flow. My thinking is that if you’re eeking out a profit because of your equity stake then you’re not really getting an economic return on your investment.

But, to be in a position where you’re cash flow positive even in declining rents tells me you’ve managed your purchases much better than the average real estate investor I’ve come across. If you ever feel like sharing your real estate investments with the world, I know a blog that would really enjoy posting the story. 😉


Thomas - Ways to Invest Money February 6, 2012 at 12:16

I have the love hate with retirement for some of the same reasons you mentioned. Though I do contribute to them I dont like that I really have to be careful about the amount of money I put in simply because if something else comes up then I may not have to funds to invest in it. I don’t want to take a loan from my 401k. I would prefer investing in real estate and other things as well as retirement accounts.


JT February 6, 2012 at 14:56

Exactly. For one, retirement accounts do have awesome bankruptcy protection in my state, and in a lot of states.

However, liquidity is a serious concern. For one, some providers kill off the match if you borrow from a 401k (which really sucks.) Also, 59.5 years old – enough said about that!


FG February 6, 2012 at 15:30

I am more for retirement in the form of financial freedom and entrepreneurship, but otherwise a high savings rate is also a way to go. I view forced retirements savings as a tax and don’t expect to receive anything by the time I’m in my late 60s.


JT McGee February 6, 2012 at 21:21

Makes sense to me. Forced retirement contributions like FICA in the US is definitely considered a tax on my end. Traditional (private) retirement plans are a little better, though – but there’s no way to know how those will get tapped by greedy government in the future!


John | Married (with Debt) February 7, 2012 at 14:38

I’m trying to put down on paper my strange approach: rather than trying to save a huge lump sum and pray and pray that it will be enough, I will be periodically investing in things that will give me complete self sufficiency in retirement. Things like a ranch with solar and wind power, gardens, animals, a well, etc.

My thinking is this will allow me to retire way earlier than I thought. And by retire, I mean having the freedom to pursue my own interests.


JT McGee February 7, 2012 at 15:51

This kind of saving always catches my interest. The finance person in me says that investing in those kinds of things – solar, wind, gardens, etc. – provide for a less than stellar return. I guess I see it as I could invest in more traditional asset classifications and use the money to pay for my needs, or for those things I feel I need.

Then again, if those “things” are necessary for pursuing your own interests, you can’t just come up with a number and put a price on it. Sounds like you’re planning an off the grid lifestyle in retirement? That’s too much work for me, but mad props to people who pursue it as an alternative.


PK February 8, 2012 at 11:19

Curious on your thoughts on Social Security? Kidding!

I think you dislike the programs too much, at least accounts with a brokerage window. Take the brokerage account you have now and make compounding tax free? Sign me up… and I know iB offers Roth IRAs.

Also, the median investor will get median returns. If you have a 401(k) account which matches 100% up to some percentage, you can basically double what the market will give you in terms of cash invested. Plus, retirement accounts are a convenient place to put bonds… you know, if people decide to invest in those. I have some coworkers that buy real estate instead of investing in retirement accounts… here in expensive CA.

Also, check out 72(t) distributions if you’re worried about the retirement age lockup.


JT McGee February 8, 2012 at 13:49

Thank you for that 72t rule link. I looked through the penalty and exemptions. It looks like you’d have to have some oddball events happen to be able to withdraw before 59.5.


Funancials February 8, 2012 at 18:39

It’s definitely a love/hate relationship. Whenever I get annoyed though, I stop and think about the average American. If the government didn’t nudge (I know you love nudges) everybody in the direction of retirement accounts then the average American would have very little saved up.

As PK stated above, the 100% match is hard to pass up.


Jacob @ iheartbudgets June 14, 2012 at 13:10

I haven’t done much retirement planning (working on getting my income up before investing any more), but I do hate the fact that the money is tied up for another 34 years! I really want to look at maybe spliting my contributions. Maybe invest in my 401k up to the match, and everything else in a brokerage account that I can actually touch if I need to. I like your thoughts on this, I’ll do a bit more reading.


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