If you’re fortunate enough to be among that small percentage of those who work in Corporate America that are compensated handsomely for your work, this is for you. Why? Well even though the stock market is still going strong it does not matter how much cash you stuff in your 401k as you’ll never save enough for a rainy day some 20 years or more down the road. That rainy day is also known as retirement to some. Which is why we will have a conversation about 401k alternatives for highly compensated employees.
Why will you never be able to save enough in your 401k?
Simply put. Your 401k can go from 7 figures to 6 figures in about the same time it takes for you to sneeze. And no that money won’t come back anytime soon. You’re more likely to be taking a dirt nap when that money comes back. This has to do with the volatility of the beloved stock market.
Imagine that. All those long hours you spent trying to make that bank and poof it goes away just like that.
Unbelievable. It really is.
Which brings us to what this article is all about. Current or new ways you can save money as an alternative to 401k’s. Hence the Justin Bieber reference.
New Types of 401k Alternatives For Highly Compensated Employees You Should Know
Whole Life Insurance
Wait, What? Life Insurance. How’s that an alternative? Settle down I’ll talk about that in a minute. I said the alternatives would be new or current if you will. I’ve had whole life insurance going on 5 years now and this is the primary reason – an alternative to 401k’s. Additionally, I have a family so if something happens to me they’ll be all set, which is a double bonus. Before we talk about the nuts and bolts, the earlier you get whole life insurance the better.
- You pay your whole life insurance premiums with your net income. Which means that when you decide to take cash out of your life insurance policy it’ll be tax free. Remember you’ll have to pay taxes on your 401k withdrawals during your retirement.
- Highly compensated employees often need a place to put their money – a tax shelter if you will. So, what do they do? They stuff it into a life insurance policy. Another benefit to a whole life insurance policy.
- The value of a whole life insurance policy always grows year-over-year. There is no market volatility you have to worry about, like you do with a 401k. My whole life policy has grown every year, since I purchased it almost 5 years ago. You certainly can’t say that about your 401k. Can you? Didn’t think so.
- So you want to retire at 65. You need money to continue living your life. The great thing about a whole life insurance policy is that you can start taking money out of it while you’re still alive. Which means depending on how long you’ve had it and had not taken out any money prior you can easily take out 5 figure sums until you pass tax free! What do you think about that? Awesome right?
Residential Real Estate
What do you mean by that? Condos, single family homes, and multi family homes are what I am referring to. Real estate is definitely no where near as volatile as the stock market (which is what your 401k is mainly comprised of), which means you’re not going to lose your shirt over night, if the market decides to tank.
- Real estate increases in value over time. Meaning if you decided to buy a condo and rent it out for 3 to 5 years or longer, you’ll be able to sell it for a profit. The real estate market does go up and down. But, the bottom will never fall out over night like it will in your 401k.
- You’re making a profit on a monthly basis, which generates an income stream for you in retirement. Will you have to take care of little stuff or fix something when it breaks? Sure. Depending on how many pieces of real estate you own it may make more sense from a time stand point to have someone like a contractor or handyman on speed dial to fix those things. Only you can figure that out.
- It’s very rare that you’ll own multiple properties outright. So, chances are you’ll have a mortgage with interest. Well you can deduct that interest from your income and pay less taxes. Can you pay less taxes on your 401k?
- Lastly, you can utilize a depreciation deduction, which means another tax deduction in addition to mortgage interest and less of your income will have to go to Uncle Sam. I like that, which is why I invest in real estate as an alternative to 401k’s.
These are a couple of examples of “new” types of 401k alternatives for highly compensated employees (which means you) that I know work and can help you accomplish your ultimate financial goals down the road.
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