Financial Fairy Tales 3: 50% of Your 401(k) is the Government's

Ever seen those financial ads that scream, “Half your 401(k) belongs to the government!”? They’re designed to spark fear and uncertainty about retirement savings and taxes—but how accurate is this really? In this episode, we’re pulling back the curtain on these misleading claims to help you sharpen your bullshit detector and make smarter financial decisions. 

First, let’s tackle the scary tax myths. While it’s true that taxes can impact retirement savings, most Americans don’t face the apocalyptic tax rates these ads suggest. In fact, understanding your actual tax bracket and how withdrawals work can reveal a much less frightening reality. 

Then there’s the sneaky phrase: “Let’s see if you qualify.” It sounds exclusive and tailored, right? But often, it’s a marketing tactic to hook you into an insurance product sales call rather than rescuing your retirement. Recognizing these red flags is a critical step in protecting your financial future. 

By the end of this episode, you’ll have the tools to see through some of the “financial fairy tales” spread across social media. You’ll feel confident navigating the noise and focusing on facts—not fear—when making retirement related decisions. 

Want more tips? Check out our previous Episodes #17 and #18, where we dive into Tax-Free Retirement Accounts and Tax-Free Roth Conversions, cycling through social media financial misinformation traps. Let’s get after it! 

We love to hear your thoughts, questions, and ideas. Send us a text!

Developing your financial bullshit sniffer one episode at a time.

Episode Transcript

Speaker 1 (00:01):
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads

(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it, okay.
So welcome back to Bullshit onStilts.
It's Kelly again.

(00:45):
I'm going to be flying solo onemore time when it comes to
wrapping up our three-partseries on the financial fairy
tales that one finds out insocial media land while we're
flipping through our phones oron our laptops or whatever we're
doing.
Or whatever we're doing,there's an awful lot of

(01:08):
financial service advertising,and certainly in the last couple
of episodes we've talked abouttwo, which are the tax-free
retirement account, tfra and thetax-free Roth conversion.
So today we're going to takeaim on bullshit on stilts, at
those financial serviceadvertisements that frame the

(01:32):
discussion around.
Let's say, 50% of your 401k youdon't owe, that goes to the US
government that's Uncle Sam'sbecause you're going to owe
taxes and retirement.
So we're going to take aim atthose outlandish, overstated
statements to start creatingconcern on the part of the
viewer and maybe get them totouch the call to action button

(01:55):
inadvertently.
So you may be asking yourselfgeez Kelly, I don't know what
advertisements you're talkingabout, so I'll sort of set the
table on that, so you might seethe advertisement opening up,
with someone talking about andframing the discussion around
this If you have a milliondollar 401k, well, you don't

(02:19):
have that.
In fact, half of that 401kthat's the government's See,
because you're going to paytaxes in retirement and so 50%
of your 401k is going to go totaxes.
The stilts when oh, you got somebullshit, I got some stilts.
That is the correct answer.

(02:40):
And here's some quotes afterthat statement Better to know
the truth, because I can showyou how to get free.
But quote, unquote.
You have to know the truth, thetruth will set you free.
And then the last quote this isbrilliant, but wait, I have a
tax deferral, but you could havedone it in a different way and

(03:03):
all of that money would havebeen all yours.
Give it back.
So there's sort of a naturalreaction to this right In the
mind of someone that doesn't dofinance for a living.
Their mind might be holy balls.
I've been putting this moneyaway.
I've been doing it for yearsand years and years and now I
find out that 50% of the valueof my statement that's not even

(03:27):
mine.
Someone just made me very angryman.
That pisses me off.
Another reaction could be geewhiz, why the hell am I saving
this money into this accountthat the government's going to
get half of?
I might as well stop saving andlive it up now.

(03:50):
So many reactions to thatframing of that advertisement.
But the advertisement doesn'tstop.
See, the video changes and nowthere's a woman and she looks at
the camera and she startstalking and she says well, I did
the math.
The average 401k is costingAmericans 30 to 40% of their

(04:12):
retirement income.
That kind of sounds like somebullshit to me.
Grandparents.
They had something much better.
They had pensions, worry-freeretirement income as long as
they lived, income thatcontinued year after year.
It was untaxed in many statesand then Wall Street created

(04:33):
this big bad thing called the401k to basically take away the
pensions and make you save allyour money and blah, blah, blah,
blah.
Oh, by the way, that 401k it'snot guaranteed, it's a hundred
percent connected to the marketand it's fully taxable, every

(04:55):
red cent when you take it out.
So if we stop right there andwe're just gonna think, geez,
what did they just say to me?
This sounds like I'm gettingripped off Once again, the
little guy getting ripped off bythe big guy because
advertisements that stoke a fearthat gets people to act, and
then they act on the call toaction.

(05:16):
They touch that button.
They touched that button First.
Claim a million dollar 401k.
Well, half of that's not yours,it's the government.
Now, that is an absolutemischaracterization.
When you look at the US taxreturn data all right, this is

(05:38):
just the data man.
There's 158 million tax returnsin 2019.
Of that, 104 million of thoseUS tax returns had income tax on
them.
Of that, the only people thatstatement could possibly apply
to as a percentage of taxreturns filed would be 0.003% of

(06:06):
American taxpayers.
Yet this advertisement is goingeverywhere, almost regardless
of your income, but it couldonly possibly apply to less than
1% of Americans, or I shouldsay American tax filers.
That's fascinating.
So that's point one.
Point number two sort of areality check that, of those tax

(06:30):
returns that paid income tax,the percentage of tax returns
that paid an effective tax rateof 15% or less, that was just
under 91% of the returns.
91% of 104 million tax returnspaid an effective tax rate of

(06:54):
less than 15%.
Now how does that blow up to50% of a 401k being owned by the
government because of taxes?
That's the thing, bullshit onstilts.
Now, if you go to the nextlevel and add the number of tax
returns that happen to pay aneffective tax rate of 20% or
less, now you're at almost 98%of tax returns in 2019.

(07:20):
Certified badass, I mean.
Think about that.
98% of the returns filed in2019 paid an effective tax rate
of 20% or less.
But this advertisement starts byscaring you and 50% of your
401k is the government's money.
It's not yours because of taxes, because you did it wrong.

(07:42):
Bullshit on stilts.
Aw boo Three that you have toknow the truth.
The truth will set you free.
And yet we've already dispelledthe accuracy of the statement.
So is that really true?
50% of my 401k is going to thetaxes to Uncle Sam.

(08:03):
Is that really the truth?
And yet I think we know theanswer.
Incorrect answer.
What else are you going tomislead me with Mr Advertisement
.
All right to be fair.
Four is accurate, right.
But wait, you could have donethat a different way.
And that absolutely is alwaystrue.
You always have options.

(08:24):
There's always a different wayto get to point B from your
starting point.
If we're talking retirement,how you save and accumulate
money, there's different ways todo it.
No doubt.
Number four that absolutelyaccurate.
How wonderful.
So let's break down a little bitof the demonization of the 401k
retirement plan.
Right, this thing is actually aresult of the Revenue Act of

(08:48):
1978, right?
So this guy, ted Ben, is theguy that came up with the idea
and he simply looked at thatRevenue Act and interpreted the
law a little bit differently.
And the way he interpreted ithe said hey, gee, whiz, if we
apply this Revenue Act 78language, that means employees

(09:09):
could choose to defer some oftheir income into an account and
that would also allow theemployer to match some of that
income in that same account andthat later on that employee
could get access to that moneywhen they leave or they retire
and certainly would be taxable.
But not a bad plan, right?
Brand new, brand new concept.

(09:32):
Eventually that becamerecognized by the IRS and so
forth, and we now know it as the401k plan.
Oh, by the way, let's look at afew things regarding the
accuracy of the environment.
That existed in 1978, 1988 andso.
So the advertisements comparingpensions that are better.

(09:54):
You cannot live the income.
They're wonderful, yourgrandparents love them, and this
big bad wolf out of Wall Streetchanged the rules and now
you're stuck with this bad 401kplan.
That's the framing right.
So let's look at the facts.
Historically, not more than 45%of private workers were ever
covered by pensions, meaning themajority of American workers

(10:16):
didn't have a pension to fallback on upon retirement.
Isn't that interesting?
The fact is that less than halfof workers had a pension.
But the truth will set you free.
Quote, unquote.
Now, with regards to the 401kplans, whiz back in 1980 brand
new idea only about eightpercent of americans were
contributing to it.

(10:37):
But as recently as 2021, onlyabout 43 percent are
contributing to definedcontribution plans 401ks, 403bs,
457s, depending on the case.
When it comes to statements likethe 401k isn't guaranteed, it's
100% connected to the market,and so forth Well, those are
sort of misleading as well.

(10:58):
Right, in a 401k, you can putyour money into both growth
oriented or more volatile, alsoknown as more risky investments,
and you can also put them intoless volatile and or safe
investments, even to the tune ofwhat's called a stable asset
value fund, most likely withinthe 401k fund lineup.

(11:20):
But you certainly don't have totake the roller coaster ride of
the S&P 500 US stock index andthat's the only option.
You have, stock index, andthat's the only option you have,
in fact, within your 401k.
Depending on how you allocateyour money between stocks, bonds
, cash and alternatives, yourride may very well be very

(11:41):
smooth, very stable, and whetherthe return is right for you or
not, that's a separate story.
So it's really not guaranteedand it's really not 100%
connected to the market.
It really depends on how youactually invest.
Another point to just keep inmind is this Advertisements like
to promise guaranteed incomeyou can never outlive, but

(12:04):
almost never is that going to be.
An income stream that willadjust with annual inflation or
otherwise known as cost ofliving.
Increases Doesn't mean that the$100 from 1950 buys the same
amount of goods and or servicesthat $100 does in 2024.

(12:26):
And now these advertisementstypically will then slide into
the last sort of bullshit onstilt statements and that

(12:48):
proving through the use of otherexamples, how great of an idea
this is.
You know this president andthat president made these
solutions a part of theiroverall wealth management plan.
That these wealthy individuals,these oil barons and land
magnates and all sorts of folkshave used this secret solution

(13:09):
to retirement planning andretirement income planning that
you should now see.
After knowing all of this andhearing all the truth that we've
been spewing at you, you shouldnow see if you qualify and
that's a tell like no other tellwhen it comes to playing poker

(13:30):
with financial serviceadvertisements.
Well, what exactly is that tell, kelly?
Well, good question.
I'm glad you asked me me.
This guy was good.
The tell is let's see if youqualify.
That qualification can onlymean one thing, one thing Do you

(13:57):
qualify, based on healthunderwriting questions and tests
, to be offered a life insurancepolicy?
That's that, teller.
Do you qualify Bing bing, bing,bing, insurance, agent
insurance product?
All right, so developing yourbullshit sniffer when it comes
to social media financial fairytales, all three in this series
actually do originate and comefrom the life insurance industry

(14:22):
and not the investment advisoror broker industry.
So just know that, as we goalong through figuring out some
of these advertisements, youdon't get duped into a 15 minute
call that enters into the highpressure sales marketplace of

(14:43):
financial service salesprofessionals.
Thanks for joining us.
We'll talk to you next time onBullshit on Stilts.
Have a great day, man.