An advisor for wealthy people who have retired early explains why he thinks 401ks are ‘money jail,’ and where he tells clients to invest instead
Austin Dean calls retirement-specific accounts like 401(k) plans and IRAs “money prisons.”halbergman/Getty Images
Austin Dean advises his high-net-worth clients to avoid the 401(k) “money prison.”
He recommends alternatives that offer greater flexibility and control for building wealth.
Their advice for clients provides quick access to cash without the need to sell investments and trigger capital gains tax.
While Austin Dean was pursuing various financial advisor certifications, he wasn’t entirely satisfied with the curriculum revolving around conventional wisdom, particularly the advice to maximize retirement accounts.
He was in his early 20s at the time and was personally involved in the financial independence movement. The thought of “locking up” their savings in accounts that wouldn’t be accessed until age 59 ½ was unappealing.
“I was thinking, ‘There has to be a better way. I don’t want to have to wait until I’m 60 to feel like I have the financial flexibility to do the things I want to do,'” the founder and CEO said. Roadstone ConsultantsRIA, an RIA firm that specializes in helping people achieve financial independence through non-traditional means, told Business Insider.
He started looking into what the top 1% were doing, and their strategies were completely different.
“The richest people don’t get to this point by maxing out their 401(k) and making coffee at home,” said Dean, who holds the ChFC, CLU, CFP and RICP designation. “They started businesses, they bought businesses, they invested in real estate, they prioritized cash flow, they became banks.”
Dean refers to retirement-specific accounts like 401(k) plans and IRAs as “money prisons.” These are excellent savings vehicles with strong tax advantages, but you generally can’t access your contributions without paying a 10% fee until you reach age 59 ½. This rule is in place to encourage individuals to invest their retirement money rather than spending it on short-term goals.
Another consequence of maxing out tax-deferred retirement accounts may occur years later when you need to start withdrawing from them in your 70s—the IRS calls these required minimum distributions (RMDs), and they’re calculated based on your account balance and life expectancy. If you do not start taking RMDs, you may be subject to a 25% penalty.
“The IRS very reasonably says, ‘We didn’t get our share of this,’ and you need to start withdrawing that money,” he explained. However, if you’re financially savvy and have established income streams that provide enough cash flow to get by without needing retirement account funds, “unfortunately you’re stuck in the position of having to withdraw that money anyway and then pay taxes on it. Retirement accounts take away our control and puts it in the hands of the IRS.”
Dean doesn’t discourage saving for retirement; He believes it is a more effective way to save that will give investors greater control and flexibility, especially those interested in early retirement.
Austin Dean is the founder and CEO of Waystone Advisors.Courtesy of Austin Dean
The non-traditional solution he offers his clients is to obtain a securities-based line of credit (SBLOC). It is a type of loan where the investor uses his stock portfolio or other assets. including fine art and luxury yachtsas collateral. It allows quick access to cash without needing to sell investments and trigger capital gains tax, and the investor can then move that money into other investments, such as starting a business or purchasing real estate.
“Now your money is doing two things at once: It’s being used in the market and it’s being used for other wealth-building tools,” Dean said.
The main risk is taking out too much money and the stock market crashing, he explained: “We always recommend leaving a buffer between what you’re approved for and what’s being used. I’d also recommend keeping other liquid assets or lines of credit in reserve in case the market experiences unexpected volatility. But if someone has a properly diversified account, leaves a 20% buffer on the credit line, and has other flexible and uncorrelated assets, they should be able to weather meaningful market volatility.”
SBLOCs are popular among high net worth individuals. Elon Musk, for example, “used his line of credit on Tesla stock to buy Twitter and create X,” Dean explained.
But people with five-figure savings can also benefit, he said: “If someone has as little as $50,000 to $60,000 in an investment account, we can help them establish a securities-based line of credit of $35,000 to $40,000. They can then use that to buy their first rental property.”
Even if you have the skills to use SBLOC, this strategy may not be for you, he added: “First determine what your goals are. If your goal is to have some money in retirement accounts at 60 or 65, keep doing that.”
He also said he does not advise clients who already have a large nest egg in their retirement accounts to liquidate and face penalties. But if they want to achieve financial independence and retire early, he generally recommends reducing their contributions enough to take advantage of the 401(k) match, which is essentially free money.
Another strategy he discusses with clients is funding a self-directed IRA, which allows them to invest in alternatives within their own IRA.
“The younger the person, the more likely we are not to use a self-directed IRA because we would prefer their money not be in a ‘money prison’ and be able to do two or more things at once with an SBLOC or well-designed whole life policy,” he said. But for clients age 50 and older with large amounts of money in their retirement accounts, “a self-directed IRA is a way for them to access unique alternative investments that will help diversify their assets and generate income without having to liquidate their retirement accounts and pay taxes and penalties.”
Dean understands that non-traditional planning isn’t for everyone, but he wants investors to understand all the options.
“I think the conventional wisdom that, ‘You should fund your 401(k) or IRA to the maximum,’ is counterproductive,” he said. “When people come to us and say, ‘Okay, I want financial independence,’ but then they realize that the money they’ve worked so hard to save, they can’t access it without giving up at least 10 percent plus taxes, that can be really discouraging.”
