Congress Wants To Reset Investing | Savings At Risk

What's up guys, it's Graham here. So Congress is about to pass several major changes to your retirement account that everybody needs to be made aware of because once this goes into effect, you either stand to make or lose quite a lot of money. Not to mention, this all comes at the same time that more than 50 percent of employers are considering cutting jobs over the next six months. Thanks to inflation, Millennials and Gen Z will now need three million dollars in retirement to live comfortably.

That's why we have to talk about these new proposed changes: what this means for your retirement account, the biggest risks to watch out for, and then, most importantly, how you could use this information to make you money since most likely you will be affected. Although before we start, I want to give a huge shout out to Clear Value Tax for bringing this topic to my attention. Here's a fantastic video that I'll link to down below in the description for anybody interested. Also, big thank you to Public.com for sponsoring this video, but more on that later.

Alright, now before we discuss these changes and the potential impact to your investments, you first need to understand which accounts are being affected. The first is a traditional 401(k). This is an employer-sponsored retirement account that you invest pre-tax money into, and then you're taxed on that money once you begin taking it out after the age of 59 and a half. This saves you money up front; it allows you more money left over to invest tax-free. If you're already in a high tax bracket, you're gonna save a lot of money.

Of course, the downside is that even though you're not paying taxes now, you wind up paying taxes later in the future at which point you could be in a higher tax bracket. But overall, a 401(k) can be a great option for a lot of people. Many employers match contributions dollar for dollar, and they offer a variety of safe investments to choose from. Although that's what brings us to the second account being affected: the Roth IRA. This is a retirement account that anybody can set up that allows you to invest six thousand dollars a year of post-tax money. After the age of 59 and a half, all the profit you make within that account is completely tax-free.

But in the big picture, these accounts are just designed to help everyday Americans save for retirement, except now there are some rather serious changes being proposed, and this is what you need to be made aware of. As of the other week, the Retirement Savings Modernization Act would allow 401(k)s to do the unthinkable that would either make or lose people a lot of money: alternative assets. This plan, in a quote, will open the door to higher returns in a more secure retirement for millions of Americans.

If you're curious which investments would be allowed, it's everything from private equity, hedge funds, venture capital firms, real estate, real estate investment trusts, commodities, infrastructure investments, insurance products, annuities, and digital assets including cryptocurrency. Although this is only one of the changes, and before we go through everything else in this proposal, we need to talk about why some critics are warning that this is about to be a huge mistake.

The first reason is that with higher returns come higher risk. Now, even though the diversified portfolio did do better, it was only studied during a time where interest rates and taxes have been progressively lowered. In hindsight, that may have been the perfect condition for alternative assets to outperform, and it's unclear just how well they'll continue to do over these next 30 years.

The second, like I mentioned earlier, investors are really, really bad at picking their own investments. In fact, the average investor is so bad that they barely managed to outperform inflation. This means that investors could lose a significant amount of money that they can't afford to risk. Third, sometimes alternative investments come with higher fees. After all, someone needs to manage the plan to rebalance the fund as needed and ensure that everything is operating smoothly. Even though the returns could be higher, the net amount back to you might not be as great as you would expect.

Finally, fourth, the biggest reason this hasn't been offered in the past is because of potential lawsuits. What most people don't know is that within a 401(k), the employer is responsible for offering the plans that are in the employee's best interest, and generally that encompasses offering the safest options to avoid being sued. Of course, others argue that this is good because investors have the potential of making even more money.

After all, investing in alternative assets increased the average portfolio by 17% from 1990 through 2016. They're not the only ones finding this; another study found that just a five percent allocation to bitcoin would have posted a cumulative return of a traditional portfolio by 65% since 2014, even despite the sell-offs along the way. A third study discovered that having alternative assets could help balance a portfolio during times of a market sell-off.

Another benefit is that you would have significantly more options for retirement. To me, one of the biggest drawbacks of traditional retirement accounts is that the choices are pretty slim. By opening them up to a variety of other options, you'll have a lot more flexibility in terms of where your money is allocated.

Third, it levels the playing field between the wealthy and the middle class. The thing is, just like certain investments are off-limits unless you're an accredited investor, alternative investments have not been available unless you're self-employed and can create your own plan. By opening this up to everybody, working-class Americans would have access to the exact same investments that the wealthy do.

Although before we go into my own thoughts about whether or not this is actually a good idea, there are a lot more changes about to go into effect, and most likely this is about to have a direct impact on your own retirement. Alright, now in terms of the other changes that Congress wants to make for your retirement:

Number one would be automatic enrollment. As it is right now, retirement accounts are optional, meaning you have to know about them and want one in order to contribute. By making enrollment automatic, employees would be enlisted from the very beginning without any work on their end, unless they choose to opt out.

Two, larger tax credits, but with a catch. Currently, if you deposit money in a 401(k), you save the equivalent of your tax bracket. So someone contributing ten thousand dollars would save thirty-seven hundred dollars in a thirty-seven percent tax bracket, twenty-four hundred dollars in a twenty-four percent tax bracket, and so on, meaning the wealthiest people get the highest benefit of contributing.

However, this new proposal would automatically give 50% back up to the first two thousand dollars, but it would be given as an investment back into your 401(k). So you couldn't just go and use the savings to buy a jet ski. Three, they would allow penalty-free withdrawals under certain circumstances. Now, like I mentioned before, typically, if you take out your money early, you're hit with a 10% fee. But this would allow for up to a thousand dollars a year to be taken out for forseen financial emergencies, and you would have three years to put that money back to avoid paying any tax.

For Roth IRA catch-up contributions, those would be indexed to inflation. This would allow people over the age of 50 to contribute an extra one thousand dollars a year, and this would increase each year thereafter depending on CPI.

Five, the 401(k) catch-up plans would also increase, and it sounds like I'm saying ketchup, but I mean catch-up, not that ketchup. As it is now, those over the age of 50 are able to contribute an extra sixty-five hundred dollars a year, but this would create a new provision that allows those people to contribute an extra one thousand dollars a year on top of that, also indexed to inflation.

Now to be honest, there are 69 changes that are currently in the works, with most of them being fairly specific. So I'll link to the full page down below in the description for anyone who wants to follow along. But in terms of my own thoughts on this and what's currently going on in the market, here's what you need to be made aware of.

And a quick reminder, if you're not already subscribed, feel free to give it a gentle tap since I post three times every single week. It's totally free and is a thank you for doing that. Here's a picture of a baby.

Alright, so to start, we need to address this article which now says that Millennials and Gen Z will need three million dollars in retirement to live comfortably, which would equate to an income of 120 to 150 thousand dollars a year. Why is it so high, you might ask? Well, as they explain, everything is continually getting more expensive, and 40 years from now, a million dollars just isn't going to buy what it does today.

For example, one million dollars 40 years ago is equivalent to what three million sixty-nine thousand dollars would buy you today. With that in mind, they presume that most people will need substantially more money stashed away than they might think. That means, in order to get there, assuming you're starting with zero dollars today, you're going to need to invest ten thousand dollars a year, or eight hundred and thirty-three dollars a month, or seventeen dollars a day for 40 years, averaging an eight percent return, and voilà, you've hit three million dollars.

Now, of course, keep in mind that this would be in the year 2060, where the cost of a Big Mac could be twenty-five dollars and gasoline could be sixty dollars a gallon. But the point still remains: Americans are just not saving enough for their retirement, with the average worker contributing just 10.5 percent of their income, which just is not going to get there.

So in terms of my own thoughts about the new retirement changes from Congress, to be honest, I'm a bit mixed. On the one hand, I think it's fantastic that more options are available and that alternative assets could be bought by the general public. But there are no guarantees that they will continue doing well, and betting your retirement on that is a bit of a risk. After all, their entire goal is to modernize retirement plans to ensure they can provide diverse investments with higher returns.

What they fail to mention is that there's no such thing as free money. It's not like they could just say, "Yeah, since inflation is high, just go and make investments that earn more money. Problem solved." With higher returns comes an equal amount of higher risk. I'm just concerned that, given the poor performance of average investors, allowing highly volatile, illiquid, and heavily managed investments could be a recipe for disaster if that person doesn't know what they're doing.

Now, I am all for diversifying a portfolio, investing in a wide range of assets, and taking on a balanced approach for retirement. But chances are, if you're watching my channel, you made it this far in the video and you're already subscribed, you're the type who could probably handle it responsibly, and you're not the target demographic for this warning to apply to.

Although most people have no idea what's going on in a retirement account, it's not something to be taken lightly. Ideally, these should be placed in safe, diversified, and low-fee investments, the type that are no frills and very boring. Then you'll let the market do its thing. Sure, if you know what you're doing and you understand the nuances of investing, then by all means, I think it's great.

But without checks and balances to ensure that a person's portfolio is weighted to the risk tolerance, it could turn bad really, really fast, especially if that person sees their investments falling, they panic, they sell at the very bottom, and then they fomo as everything goes back up. But you know what? I have to say, I'd like to hear what you think. So comment down below, let me know your own thoughts if you think this is a good or a bad idea.

As usual, I do my best to read and respond to as many comments as possible. So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram. Thank you so much for watching, and until next.