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 such as 401(k) plans and IRAs “money jail.”halbergman/Getty Images
Austin Dean advises his high-net-worth clients to avoid 401(k) “money jail.”
He recommends alternatives for building wealth that offer more flexibility and control.
His advice for clients enables quick access to cash without the need to sell investments and trigger capital gains tax.
As Austin Dean was earning his various financial advisor certifications, he wasn’t fully satisfied with the curriculum that revolved around traditional wisdom — particularly the advice to max out retirement accounts.
He was in his early 20s at the time and personally interested in the financial independence movement. The thought of “locking up” his savings in accounts that wouldn’t be accessible until age 59 ½ wasn’t appealing.
“I was like, ‘There’s got to be a better way. I don’t want to have to wait until I’m 60 to be able to feel like I have the financial flexibility to do the things I want to do,'” the founder and CEO of Waystone Advisors, an RIA firm that specializes in helping people achieve financial independence in non-traditional ways, told Business Insider.
He started digging into what the top 1% do — and their strategies were entirely different.
“The most wealthy don’t get there by maximizing their 401(k)s and making coffee at home,” said Dean, who has ChFC, CLU, CFP, and RICP designations. “They started businesses, they bought businesses, they invested in real estate, they prioritized cash flow, they became the bank.”
Dean refers to retirement-specific accounts such as 401(k) plans and IRAs as “money jail.” They’re excellent savings vehicles with strong tax benefits, but you typically can’t access your contributions without incurring a 10% fee until you reach age 59 ½. This rule is in place to encourage individuals to keep their retirement money invested, rather than dipping into it for short-term goals.
Another consequence of maxing out tax-deferred retirement accounts may arise years later when you must 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 don’t start taking RMDs, you could incur a 25% penalty.
“The IRS very reasonably says, ‘We haven’t gotten our piece of that,’ and you need to start pulling that money out,” he explained. However, if you’ve been fiscally savvy and built income streams that provide enough cash flow to live on without needing the retirement account funds, you’re “unfortunately stuck in this position of having to pull that money out anyway and then pay taxes on it. Retirement accounts take away our control and put it in the hands of the IRS.”
Dean isn’t discouraging saving for retirement; he just believes there’s a more efficient way to save that gives investors, particularly those interested in early retirement, more control and flexibility.
Austin Dean is the founder and CEO of Waystone Advisors.Courtesy of Austin Dean
The non-traditional solution he provides for his clients is to obtain a securities-backed line of credit (SBLOC). This is a type of loan in which an investor uses their stock portfolio or other assets, including their fine art and luxury yachts, as collateral. It allows for quick access to cash without having to sell investments and trigger a capital gains tax — and the investor can then pump that cash into other investments, such as starting a business or purchasing real estate.
“Now, your money is doing two things at the same time: It’s in the market, and it’s being used for other wealth-building tools,” said Dean.
The main risk is pulling out too much money, and the stock market crashes, he explained: “We recommend always leaving a buffer between what you are approved for and what is being used. I also recommend having other liquid assets or lines of credit in reserve, in case the market takes an unexpected swing. But if someone has an account that is properly diversified, leaves a 20% buffer on their line of credit, 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 a line of credit on his Tesla stock to go and buy Twitter and create X,” explained Dean.
However, individuals with five-figure savings can also benefit, he said: “If somebody has as little as $50,000 to $60,000 in an investment account, we can help them set up a securities-backed line of credit for like $35,000 to $40,000. Then they can use that to go buy their first rental property.”
Even if you have the ability to use an SBLOC, this strategy may not be for you, he added: “First and foremost, figure out what your goals are. If your goal is to have a bunch of money in retirement accounts at 60 or 65, then keep doing that.”
He also noted that he doesn’t advise clients who already have a sizable nest egg tied up in retirement accounts to liquidate and incur penalties. But, if they’re looking to achieve financial independence and retire early, he typically recommends lowering their contributions to just enough to take advantage of a 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 inside their IRA.
“The younger the person, the more likely we are to not use a self-directed IRA because we’d rather have their money not in ‘money jail’ and able to do two or more things at once with an SBLOC or well-designed whole life policy,” he said. But for clients in their 50s or older with a large amount of money in retirement accounts, “a self-directed IRA is a way for them to access unique alternative investments to help diversify their assets and create income without needed to liquidate their retirement accounts and pay taxes and penalties.”
Dean understands that non-traditional planning isn’t for everyone, but wants investors to understand all of their options.
“I find the traditional wisdom of ‘you should max fund your 401(k) or your IRA’ to be damaging,” he said. “When people come to us, and they’re like, ‘OK, I want financial independence,’ but then realize all of the money they’ve been working hard to save, they can’t access without giving up at least 10% plus taxes — that can be really disheartening.”
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