Mad Money w/ Jim Cramer 9/4/26

Mad Money w/ Jim Cramer

Jim Cramer discusses the critical importance of financial literacy and retirement planning, focusing on the pros and cons of 401(k) plans versus

Key takeaways

• 401(k) plans offer tax-deferred growth and potential employer matching, but high fees can erode long-term returns.
• Many 401(k)s charge over 2% in administrative fees—often more than the mutual funds themselves.

Main topics

• Financial literacy in education
• 401(k) plan advantages and disadvantages

Notable quotes

"You're a thousand times more likely to read Marx's Das Kapital than to read anything about planning a budget."

Conclusion

Cramer concludes that while employer-matched 401(k)s are valuable, investors should critically

Transcript preview

Speaker 2 (0:00) It's NFL kickoff time. Wednesday, exclusive NFL team valuations from Michael Ozanian. Thursday, CNBC Sport, live from the NFL's first ever game in Australia with Commissioner Roger Goodell. Starts Wednesday, CNBC. My mission is simple, Speaker 5 (0:17) to make you money. I'm here to level the playing field for all investors. There's always a home market somewhere, and I promise to help you find it. Mad Money starts now. Speaker 5 (0:32) Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. I'll be with my friends. I'm just trying to help you make some money. My job is not just to entertain, but to teach you. So call me at 1-800-743-CNBC or tweet me at Jim Kramer. There is a gaping hole in the American education system, although I hesitate even to call it a system. When you go to high school, they teach you chemistry, they teach you geometry, they teach you physics. You have English classes, history classes, foreign language classes. You can graduate from college speaking three languages with a deep understanding of quantum physics or ancient philosophy. Speaker 5 (1:08) But you know the one thing they almost never teach you in middle school or high school or say nothing of college? Financial literacy. And I'm not talking about economics here. You could be an econ major and still learn nothing about financial planning or retirement readiness, let alone investing. Speaker 7 (1:23) Money is just not Speaker 5 (1:24) talked about. Frankly, it's become the third rail of American education. You're a thousand times more likely to read Marx's Das Kapital than to read anything about planning a budget. Certainly picking stocks. And that's why I want a constant mission to teach you how to manage your money, which is what we do every day in the CNBC Investing Club with the Charitable Trust providing a constant source of examples. And when it comes to managing your money, nothing is more important than retirement. Sooner or later, you're going to stop working. Hopefully sooner rather than later, unless you really love your job. So I'm betting most of you, even if you don't own individual stocks, still have some money in a 401k plan. Now, decades ago, corporate pensions started going the way of the dodo, and now the 401k is the main way that Americans save for retirement. They're offered by your employer, and they're among the greatest tax-deferred investment vehicles out there, along with the IRA. And I'm not talking about the Irish Republican Army. I'm not even talking about the Inflation Reduction Act, for that matter. I mean the individual retirement account. For those of you who are about to change the channel because the whole idea of saving for retirement puts you to sleep, hear me out, darn it. You need to know this stuff. Your future self will thank you for getting your retirement funds in order. And while you may think you know everything you need to know about these tax-favored accounts, the truth is there's a lot the so-called experts don't tell you or don't want you to know. For example, the conventional wisdom says that you absolutely must invest in your 401k. You'd have to be a fool not to contribute. Many experts will even advise you to max out on your 401k contributions every year if you can afford to. Right now, the maximum contribution is over 20 grand, with room for an additional 7 grand if you're over 50. But it tends to rise gradually over time, usually a little faster than inflation. Now, in 2004, it was $13,000. By 2023, it was $22,500. Either way, serious chunk of change, even with these contributions coming from your pre-tax income. However. Sometimes I think it'd be the wrong approach. I'm not going to sing the praises of the noble 401k planner, tell you it's the key to your financial salvation, because 401k plans can be a real mixed bag. Sure, they have a couple of really great features, but they also have a lot of bad ones. And those problematic features will eat away at your returns. Speaker 5 (3:42) Sometimes through fees that are almost totally hidden from you. I do not like that. So let me lay out the good, the bad, and the ugly of 401k plans. Then I'll tell you whether it makes sense for you to contribute more money to your own 401k. Maybe there's a better way for you to invest for retirement. First, the good. The best thing about the 401k is that it's tax deferred. That's right. It's a tax deferred investment vehicle. In plain English, that means you pay no taxes on what you put in and then you never pay a penny of capital gains taxes on the profits you make within your 401k, which allows your gains to compound year after year, decade after decade, totally tax free until you decide to start making withdrawals. Regular viewers know that I'm a huge believer in the power of compounding. Some people call it the eighth wonder of the world. you're 30 years old and you start investing $5,000 a year in your 401k, if you choose your investments wisely, you should be able to generate an average return of, say, 7 % per year, at least historically, and that's being conservative. So at that pace, over the course of the next 30 years, you'll be contributing $150,000 as pre-tax income to your 401k plan. Because that money is able to compound year after year without any capital gains taxes, by the time you're 60, those $150,000 of contributions should be worth over $511,000. Without the tax paper status, you know what? That number would be roughly $110,000 lower. What a huge break! You only ever pay taxes on your 401k money once when you decide to withdraw it. At that point, your withdrawals are taxes or an early income. And since you'll likely be retired by then, most of you will end up paying a lower rate than what you get hit with if you got taxed on that money while you're still in the workforce. That's one huge reason to like the 401k. The other one, many employers will actually match or partially match your 401k contributions. For every dollar you invest in your 401k plan, your employer might say throw in 50 cents up to a certain point. That's free money for you. It's also untaxed. So if your employer even partially matches your contributions, you should absolutely take advantage of it by putting money in your 401k. I'm not saying take the money and run, but definitely take the money. Of course, if 401k doesn't have any kind of employer match, then it's actually a much less compelling option because, as I said before, 401k plans can have a lot of problems. Without the match, sometimes you're better off saving for retirement via an individual retirement account or IRA, which has the same exact tax-favored status as a 401k. Now, you can only contribute $6,500 a year to your IRA or $7,500 if you're over 50, and that's an outrageously low amount. IRAs rolled out in 1975, and while they've raised the contribution limit since then, the increase has not kept pace with inflation. If it had, the limit would be more than $8,500. Now, I want it personally to go to $10,000, and I'm going to make it my mission to fight for you to get that. Still, there are ways to better yourself. When you change jobs, you can roll over the money in your 401k into an IRA, and that's exactly what you should do every time you switch employers or find yourself out of work. What makes an IRA the better option? First, they're the fees. When you invest in a mutual fund within a 401k, you have to pay the mutual fund's fees. But your 401k administrator, the company your employer hires to run these plans, will also charge you its own fees. On average, they take more than 2%. I find that extortionate. Speaker 5 (7:00) Most actively managed mutual funds charge less than 2%, and Speaker 7 (7:03) they're, you know, actively managing money. Speaker 5 (7:06) If you ever looked at your statement and wondered why the heck your 401k holdings aren't increasing in value like they should be, believe me, these fees are probably the reason. Second, 401k plans vary widely from company to company. Now, some of them give you a terrific range of choices and even let you pick individual stocks. But others are more limited, only giving you the choice of a couple dozen different mutual funds. So for those of you who can't pick your own stocks in your 401k, my number one rule is that before you contribute money to your 401k plan, you have to make sure it gives you the option to put your cash into something that's actually worth investing in. I spend so much time teaching this in how to pick stocks in the CBC Investing Club because I believe it works. You should be skeptical of a retirement plan that doesn't give you that option to buy individual stocks. If you can't pick your own stocks in a 401k, then you want a nice, low expense index fund, probably one that mimics the S &P 500. However, if your 401k doesn't even offer that or it charges exorbitant fees, then just go with a self-directed IRA from a full service discount program like a Fidelity or Merrill Edge. So you have control over your money. The bottom line on retirement investing, if the company you work for matches your 401k contributions up to a certain point. Take them for all they're worth. But other than that, an IRA is the superior way to go, especially if your 401k plan doesn't give you any good investment options. Let's take calls. Let's go to Ian in Illinois. Ian. Speaker 6 (8:30) Jimmy Chill, how are you doing, my friend? Very strong. How about you, Ian? Glad to hear it. I'm doing well. Thank Speaker 5 (8:37) you. Speaker 6 (8:37) My goal is to get out of my nine to five as soon as possible and retire. And I'm wondering how younger investors should think about the balance between growth stocks versus dividend stocks. Speaker 5 (8:48) All right, this is a great question. I believe you should not bet against yourself. A younger person should be almost entirely in stocks. Now, I have been on the extreme on this, but I tell you, over the course of the last 40 years that I've been teaching, that's been the right way to go. So let's forget about the bonds until you get to at least the mid-50s and then start adding them slowly. You're a stock guy. You got it. Don't want to bet against your life. Let's go to Michelle in New Hampshire. Michelle. Speaker 4 (9:14) Hey, Jim. I could use your advice. Of course. My portfolio was doing fine before inflation, before Speaker 5 (9:22) the interest rate Speaker 4 (9:23) hike, and now it's almost all red. And I just need some tips on how to manage the investments in the down market. Speaker 5 (9:31) Okay. What we want to do is we want to say that we're going to ride through down markets. And what we do is we put cash away. Regardless, we are not going to look at the day-to-day, month-to-month, or if it comes to retirement. Even year to year, yes, we want to have the right stocks, but we're not going to stop contributing because historically the rain does go away. And if you only invest when it's good, you're going to end up with not good prices. Carl Washington, Carl. Speaker 7 (9:57) Hey, Jim, thanks for having me on. My question is, for the novice investor, what tools and methods would you recommend? I mean, obviously, besides the obvious PE ratio, I mean, how do I evaluate companies for a good investment? Speaker 5 (10:16) All right. Well, what we do with the investing club, and I know you can say I'm talking my book, but it's really about exactly that. We show you what the many different ways are to evaluate stocks and also to pick Pick the ones that are most suitable for you. We can't do that. That's up to you. But we value them on price journeys. We evaluate them on book. We evaluate them on future earnings. And we also kind of overall value them against other stocks in their same peer group and in the market in general. OK, if the company you work for matches your 401k contributions up to a certain point, take them for all the work. But other than that, an IRA is the superior way to go, especially if your 401k plan doesn't give you any good investment options. Oh, man, tonight, schools in session, Craymerica. Tonight's lesson, financial literacy. I'm taking you through all my top tips to help develop a strong financial foundation. You're not going to want to miss this one. So stay with Cray. Speaker 2 (11:15) Don't miss a second of Mad Money. Follow at Jim Kramer on X. Have a question? Tweet Kramer. Hashtag Mad Mentions. Send Jim an email to madmoneyatcnbc.com or give us a call at 1-800-743-CNBC. Miss something? Head to madmoney.cnbc.com. Speaker 2 (11:38) It's NFL kickoff time. Wednesday, exclusive NFL team valuations from Michael Ozanian. Thursday, CNBC Sport, live from the NFL's first ever game in Australia with Commissioner Roger Goodell. Starts Wednesday, CNBC. Speaker 5 (12:01) If