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401K or not?
nibanny
Posts: 2,761 ✭
After 4 years as a stay-at-home mom, my wife got a job 3 months ago.
With the last paycheck, she found out that she has been automatically enrolled in her company’s 401K.
That made me think of starting my own 401K too, now that we have a little extra income.
Both our companies match $0.5 on the dollar. We are turning 40 this year.
I know pretty much nothing about stock or other forms of investments that are not physical PM.
Is this a good idea? Is it the right time? What are the cons or the alternative?
Any advice is highly appreciated.
With the last paycheck, she found out that she has been automatically enrolled in her company’s 401K.
That made me think of starting my own 401K too, now that we have a little extra income.
Both our companies match $0.5 on the dollar. We are turning 40 this year.
I know pretty much nothing about stock or other forms of investments that are not physical PM.
Is this a good idea? Is it the right time? What are the cons or the alternative?
Any advice is highly appreciated.
The member formerly known as Ciccio / Posts: 1453 / Joined: Apr 2009
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<< <i>Always good to start a 401K. As far as investing, it depends largely on the choices that your company/plan offers. >>
Free money. You should have been doing this from day 1. No major asset class has outperformed the stock market over the long term and equities are a good inflation hedge/beneficiary.
Knowledge is the enemy of fear
<< <i>Both our companies match $0.5 on the dollar.
Free money. You should have been doing this from day 1. No major asset class has outperformed the stock market over the long term and equities are a good inflation hedge/beneficiary. >>
Since he hasn't been doing it since day one are you advising him to now buy high?
401K participation should be based on two things:
Percentage of matching funds
Investment options
Give Me Liberty or Give Me Debt
If you don't have any stock exposure then it makes sense to diversify.
You can't beat the 50% return on your money out of the gate.
Max it out if you can and out in the 17,500.
As car as what to choose, throw most of it in Large Cap stock funds.
Is the market high? Some might argue that the sp-500 is up 165% over the last 5 years while other might say its only up 20% over the last 14 years.
Its not like he is taking his entire life savings and committing it now. He just starting, and there is never a better time to start something than the present. Over the next 25 years his equity savings will most likely outperform his PM savings especially since he is making 50% on every new dollar invested. Imagine buying an ounce of gold and getting a 1/2 oz free. That alone makes equities a much better investment than PMs, IMO.
Knowledge is the enemy of fear
I see that there are only funds in my options. They are "bucket" of companies, correct?
Should I use one of their management tools or allocate myself?
Should I rely on our Prudential's advisor or find an external one?
Lastly, I was thinking to start aggressively for the first year or so, worse come worst I am gonna loose few hundred dollars. Does it make sense?
Sorry for all the questions, I appreciate your input while I start getting familiar with it.
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Sure, give the on-line management tool a try, check with the offered advisor and read to educate yourself and take charge.
Especially with the 50 cent/dollar match makes it a real no brainer.
You have some PMs already.
Getting equities into "your portfolio" is a smart move.
Do an asset allocation and stick with it and contribute regularly.
Do it now, do it every year without fail.
You will be really happy you did when it comes time to retire!
401K participation should be based on two things:
Percentage of matching funds
Investment options
In a vacuum, I'd agree totally with derryb. However, at your age, some diversification might be reasonable. I was a big fan of diversification until one day when I read a little blurb that made a significant point, a point that has changed my thinking ever since.
When you buffer your downside risk, you also limit your upside potential. It's that simple.
Besides, there are ways to diversify risk over time, not JUST between asset classes.
So, the real question is - how much confidence do you have in your own money management skills? If you hand money over to a 401K that contributes $0.50 for every dollar, that is hard to beat in Year 1. So how long before the company contributions are eligible to be taken out? And how long will they contribute $0.50 for every dollar? Indefinitely? Into Year 2, Year 3, Year 4, etc? If they EVER stop matching funds, you should reconsider immediately. These are some of the questions.
Tax deferred savings aren't the same thing as tax-free. You will still pay taxes when you take the money out. Tax rates may be higher then, especially considering our huge, huge, huge debt problems and the continuing trends toward increased welfare spending. There is also a 10% penalty if you ever change your mind and want the money out of the plan, plus the taxes on the gains are due that same year.
Your situation is different than mine, given your age. No matter what your decision is, you're better off saving than not and you're better off focusing on earning money and advancing your career than focusing on investing for profit.
There's no magic bullet. You're smart, just manage your situation using your basic common sense. That's already a step ahead of most people when it comes to money.
I knew it would happen.
Now a few cases to consider:
- what is the vesting schedule of company match? Different option may call for different choices? What is the likely hood of you staying at that job during vesting period?
- What are the investment choices? Are there "target date" portfolios? This maybe the simplest option to start to avoid asset allocation decisions upfront
- Does you plan offers automatic rebalancing? How frequent?
- are there "stable value" choices with high interest yield? Eg my mother-in-law teaching plan offers guaranteed 7% annual return that is very much these days
- Asset allocations within 401K and/or across your assets.
The second simple advice. If not sure about above - just contribute up to max company match to money market fund. This way you collect your company match from day one making instant 50% return and can decide how to allocate the $$$ later on
Again, investment options are crucial as well as limitations on making changes to investments. By options I do not mean diversification, I mean investment choices. In your case the ideal fund would be one of junior miners. How quick an investment change is implemented by your custodian is also a concern.
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M
Fellas, leave the tight pants to the ladies. If I can count the coins in your pockets you better use them to call a tailor. Stay thirsty my friends......
You are correct that being aggressive with a low dollar amount cannot cost you much if it goes south.
However, be sure and know that High Risk does not mean High Reward. That can be a very expensive fact to learn.
<< <i>If there's an employer match of 50%, put in enough to get the match. Beyond that... meh. >>
That's what my employer does. They'll match up to 6% (currently I put 8% of my check into my retirement, will be switching to a Roth IRA soon I hope). It's a 403b (whatever that means).
I'm 28 and just starting putting into retirement last year. It's just their "basic" investment, not investing in any particular stock or whatever you call it. I just don't know enough about the stock market to make an informed decision. I do play around with those fantasy apps on my phone, I never lose and did make out huge on a Canadian solar company (started at $3, is now $25+ in less than a year).
I figured at my age, by the time I hit retirement we will all either have to die at work because we can't afford to retire or we'll hit the lottery. No real other choice.
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I disagree. Nobody knows at 28 what they will be doing or how they will have done by 60. It's a long and winding road. Use your time wisely.
I knew it would happen.
I want just to answer some questions and provide you with more info, in case someone has any additional help to offer.
<< <i>So, the real question is - how much confidence do you have in your own money management skills? >>
I have no confidence, that’s why I realized I need to find a way to save for retirement.
The only way I was able to save some of my money was through the “hobby” of stacking PMs.
<< <i>- what is the vesting schedule of company match? Different option may call for different choices? What is the likely hood of you staying at that job during vesting period? >>
I started thinking about enrolling on the 401K because I am now on the 3rd year with my company. The vesting % is now 40%, going to 60% in September on my 4th anniversary.
<< <i>- What are the investment choices? Are there "target date" portfolios? This maybe the simplest option to start to avoid asset allocation decisions upfront >>
That is the part I am in trouble. I read the list of funds and have no clue of what all those names/descriptions mean.
<< <i>- Does you plan offers automatic rebalancing? How frequent? >>
The tool they provide has a quarterly rebalance feature. Don’t know what that mean though…
<< <i>- are there "stable value" choices with high interest yield? Eg my mother-in-law teaching plan offers guaranteed 7% annual return that is very much these days >>
No clue but will ask.
<< <i>- Asset allocations within 401K and/or across your assets. >>
Didn’t quite understand the point…(language problem)
You really have to contribute at least to your matching, it is a huge advantage to get some matching. put it in an world index type of fund and forget it.
Be wary of taking financial advice from anyone suggesting otherwise.
that is JMHO of the current stock market climate
GrandAm
*disclaimer*
I am not a financial advisor of any kind. Nor have I any college education.
govt sponsored funds where a % (or all of it) HAS to go into treasuries or specific govt fund choices remains to be seen. All I know is that you won't recognize them decades from now. Get the company match and leave it at
that. If you have additional funds available for investment that's fine. At least those will be under your control. The expanding wedge pattern the stock market has mapped out over the past 17 years is something to be cautious
about. The majority of the time those patterns show severe corrections....and I'm talking 5,000 point corrections not 500 Dow points. The stock market could easily tank for several years between 2014 and 2020. But, no one
knows for sure. Maybe a new paradigm is being constructed that will take us to that goal from the 1990's of Dow 36,000?
Remember that pieces of a company are still "things" and buying things makes sense when currency is losing its value.
Next...you need to contribute up to the maximum your company will match. If you can't afford that much, then increase your contribution every time you get a raise...that's a painless way to do it.
Next, remember that if you elect to have $100 taken out of your paycheck, that will really only impact your paycheck by $80 because the money is pretax. So you can probably contribute about 20% more than you think you can afford.
You might want to consider the track record of your mutual funds over a period of at least 10 years. That covers all kinds of economic environments.
Steve
The first thing you must do is educate yourself regarding the different investments options available to you in your 401k plan and investing in general. Read books, magazines, the Wall Street Journal is very good in my opinion. There are so many investment options which can cause confusion and this is why some people get paralyzed when making these choices.There are large cap funds, mid cap funds, small cap funds, bond funds, foreign funds, hybrids, select funds, aggressive funds etc., this is why you need to understand what the basics are.
Another lesson you need to teach yourself is not to listen to the daily buzz, and all the talking heads on television, about the markets going up, down, sideways etc., the stock markets go up, they go down and they move sideways. You need to be disciplined not too pull your investments out because the market drops 500 points in a day, week or month. I’ve ridden out all of the financial disasters in the past 15 years and have come out better in the long term. Yes I’ve lost money during these times but the upswing and recovery was well worth staying put.
I’ve also diversified my investments, I don’t just have mutual funds but own stocks, precious metals, sports memorabilia and other investments made along the way.
I hope this helps and doesn’t cause more confusion, just trying to help.
<< - What are the investment choices? Are there "target date" portfolios? This maybe the simplest option to start to avoid asset allocation decisions upfront >>
That is the part I am in trouble. I read the list of funds and have no clue of what all those names/descriptions mean.
If they are publicly traded funds - feel free to post their ticker symbols here and we can comment. Generally you can look them up on Yahoo or Morningstar for details
Disclaimer: I'm NOT a financial adviser and it is only MY OWN opinion. However Im in your age group and have been contributing to my own 401K close to 20 years with MIXED results. The only lesson I've learned so far that contributing up to company match is still free money in your account
With that said YOU will need to decide on your basic allocation. Typical advise is 80% stocks/20% bonds.
If this sounds already too complicated then at this point just slow down and contribute to money market or stable value fund just to collect company match and put some funds aside to manage later.
debating any asset allocation advise on public forum is pointless - there will be more opinions than forum members
So when you invest, remember always that you're relying on the government not to change the rules on you later. Personally, when I look at these plans, which trillions of dollars in assets sitting in them, I see a pot of money that's ripe for the picking by a government that's trillions in debt and needs more revenue. Not saying they'd confiscate the money - they won't. But could they accomplish much of the same by tweaking the rules? Yep. I could easily see them imposing a 5 or 10 or 15% surtax on all withdrawals. They'll say it would "only be fair" since people got a big tax deduction up front. Or they could redefine what it means to be an acceptable investment option for some or all of your money -- and the new option will be "safe, secure" government bonds.
You get the idea. So proceed at whatever level you're comfortable. I think if you get a 50% match, that's free money which offsets much of the risk. But I wouldn't invest a penny beyond that.
Myself, I ramped my 401k at a previous job, starting at the 6% of my salary and they matched 50% of that or in other words added another 3%, that was the limit for matching.
Every year when I got a raise I increased my percentage deferral by 1 or 2% until after several years I was adding the maximum company percent which was 15
as mentioned, they're pre-tax dollars, so that's like another 30 or 40 percent "gain" right there in terms of investing fuel, versus investing after-tax dollars.
being young and willing to take a risk for a long-term reward (which the history of the stock market over the long term made seem likely) I split it among funds investing in blue chip stocks, small cap stocks, emerging market stocks, and dividend-paying stocks. I have never invested much in bonds, except for short-term and sweep -type money market accounts
As mentioned, the match was a guaranteed instant return in number of dollars invested (though no guarantee against market declines, of which I saw plenty, and enjoyed the dollar cost averaging versus the eventual rebound, so in hindsight the declines were actually beneficial, because I held through them to new highs. I am not precient or magic so I never sell it all at the peak and buy it back at the bottom, doubling and redoubling like some of the geniuses claim to be able to do)
Anyway, after 8 1/2 years it was a tidy sum for me at that stage of life and when I left that job I rolled it into an IRA which has continued to perform well.
I liken it to a snowball that you just keep rolling, through thick snow and thin, and it grows, but occasionally the market sun shrinks it a bit. I've never taken pieces off to make snowcones or throw snowballs, because this snow if for me to ski on during retirement.
I've since been at another job for over 10 years and done the same thing, have another snowball to roll into an IRA if/when the time comes to move on.
I like the 401k accounts, they're rather painless to build, over time can be substantial, have tax advantages, and unlike the old style pension, are portable.
my opinions and experience only, consult a professional and make your own decisions, blah blah blah.
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<< <i>When you invest in a 401(k) you're playing in the government's sandbox. It's called a 401(k) plan because Congress amended the Internal Revenue Code to add Section 401(k), which allows for these plans and in particular the favorable up-front tax treatment. These plans are governed by a thicket of government rules.
So when you invest, remember always that you're relying on the government not to change the rules on you later. Personally, when I look at these plans, which trillions of dollars in assets sitting in them, I see a pot of money that's ripe for the picking by a government that's trillions in debt and needs more revenue. Not saying they'd confiscate the money - they won't. But could they accomplish much of the same by tweaking the rules? Yep. I could easily see them imposing a 5 or 10 or 15% surtax on all withdrawals. They'll say it would "only be fair" since people got a big tax deduction up front. Or they could redefine what it means to be an acceptable investment option for some or all of your money -- and the new option will be "safe, secure" government bonds.
You get the idea. So proceed at whatever level you're comfortable. I think if you get a 50% match, that's free money which offsets much of the risk. But I wouldn't invest a penny beyond that. >>
On the other hand, these retirement plans were created by politicians for their friends in the private sector that needed tax breaks. If you are fortunate enough to be in a position to ride on their coat tails, by all means do so.
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<< <i>Do you any of you do Traditional IRAs or ROTH IRAs? I want to get into these and have done some research via google......just wanted to know if other members have one or both? >>
Both.
Roth is preferrable. Deposits are taxed, all gains/withdrawals are tax free.
Give Me Liberty or Give Me Debt
<< <i>Just got a note that our 401k's will now be charged $50 per year, just for them to exist. They say that will make the plan more fair. Sounds like a retirement plan for Merrill Lynch, instead of us. >>
I manage our companies 401K plan. Let me tell you, there is a hell of a lot of compliance and reporting to do. Our plan charges $24.00 per person. $50.00 is a bit high, but behind the scenes there is a lot of paper work to make it all happen.
Index funds are the way to go if you want to contribute and forget about it. They track the broader market and have the lowest fund fees. Back in 07, when the 'Peak oil' talk was going around and oil was supercharging to $130 a barrel, I put all my 401K money into a energy sector fund. Well, you all can image how that went. Then I did it for gold. I must have the reverse midas touch, because everything I touched with my 401K turned to half of what it was worth.
Now, it is index funds for me.
Tyler
1. To expand on the "snowball" effect that was touched on before, you should take into consideration that once you get enough money stacked up in your 401k your money will actually be working for you at a pace that will grow faster than your federal maximum limit. Right now its somewhere around the $200,000 range. This means that when you reach that amount give or take $20k either way your money will most likely be growing by more than $17,500 per year not including what you're alloud to contribute each year. Thats where the real snowball effect kicks in.
2. I didn't see it mentioned that most 401k plans will allow you to take loans out of them. A lot of people will tell you how bad of an idea this is but once you've got enough money built up in your account you can become your own banker. All of the 401k plans i've been envolved with will cap the loan amount at $50k. I'm not sure if that is a federal limit or not. But consider that if you have enough money built up in your 401k say $100k for example you could use 5-10k of it as a loan and pay interest too yourself instead of a bank and thats pretty nice. There are a few disadvantages too that such as if you leave your job it is all due back in one lump sum or you default but the point is that with enough saved in there you can become your own bank and loan money too yourself without paying a bank the intrest.
3. You can also use it one time for a house loan I believe without penalties.
For most people this is the best way to save money for retirement. The biggest thing your losing by not starting immediatly is the time your money will not be growing. The sooner the better. I'd recommend putting in as much money as you possibly can because most likely your 401k will perform better in the long run than anything else you will invest in.
JMO
401(k)'s and IRA's are a really good place to start, ESPECIALLY if your employer matches funds.
Too many positive BST transactions with too many members to list.
Well, let's call it myRA - that's eventually where all good and faithful citizens' ('patriots') IRA's/401K's will eventually wind up - says my crystal ball.
<< <i>After 4 years as a stay-at-home mom, my wife got a job 3 months ago.
With the last paycheck, she found out that she has been automatically enrolled in her company’s 401K.
That made me think of starting my own 401K too, now that we have a little extra income.
Both our companies match $0.5 on the dollar. We are turning 40 this year.
I know pretty much nothing about stock or other forms of investments that are not physical PM.
Is this a good idea? Is it the right time? What are the cons or the alternative?
Any advice is highly appreciated. >>
Sounds like you've been missing out on a lot of free retirement money
I feel it's great that some companies are defaulting to opt-out for retirement plans - it should be easier to start than stop.
EDIT: You should also consider the fact that it's better to contribute pre-tax pay into a 401k than it is to invest funds after-tax....Max of $17,500 a year and it brings down your tax basis!
<< <i>- What are the investment choices? Are there "target date" portfolios? This maybe the simplest option to start to avoid asset allocation decisions upfrontThat is the part I am in trouble. I read the list of funds and have no clue of what all those names/descriptions mean. >>
Focus on finding a single index fund option that most closely mirrors the S&P with the lowest expense ratio (should be 0.10-0.4%). Keep it simple.
You should really surf the bogleheads forum for a great strategy on retirement saving planning.
I'd think it would be much more beneficial for the future health of your retirement to focus on 401k/index funds than bullion as your retirement fund.
I started my 401k about six years ago, and put in as much as I could stomach. I think I was getting a 5% match. Six months later it was down 25%. I say this because six months from now, with the market where it is today, you (and the rest of us) could be in a similar position.
I didn't stop contributing. Instead I ratcheted up as my means allowed. Every year of the last five since that 25% downer has seen double digit gains on top of the contributions. Last year the account earned more than I contributed, and I was using a fairly conservative allocation which included 25% to bonds, even though I don't believe bonds are a good investment right now. I haven't gotten a company match in two and a half years.
Treat it like a tax, allocate it properly, try not to play games with it, and try to forget about it. You won't regret it.
<< <i>EDIT: You should also consider the fact that it's better to contribute pre-tax pay into a 401k than it is to invest funds after-tax....Max of $17,500 a year and it brings down your tax basis! >>
Whether a Roth is better then a 401k or vice versa is entirely dependent on a multitude of factors, including current tax rate, expected future tax at withdrawal, time frame, etc.
<< <i>
<< <i>EDIT: You should also consider the fact that it's better to contribute pre-tax pay into a 401k than it is to invest funds after-tax....Max of $17,500 a year and it brings down your tax basis! >>
Whether a Roth is better then a 401k or vice versa is entirely dependent on a multitude of factors, including current tax rate, expected future tax at withdrawal, time frame, etc. >>
Factor 1: if you accomplish your goal and grow your money you will avoid more taxes with the Roth
Factor 2: Tax rates go up over time - "pay me now or pay me more later."
Factor 3: Even if lower annual income puts you in a lower tax bracket later, odds are you will still be looking at higher tax rates in each of the brackets.
An example: you deposit $10,000 this year to a roth. You pay regular income taxes this year on that $10,000. Over the next 10 years you accomplish your goal and turn that $10,000 into $100,000 (10% annual return) and are now eligible to withdraw it completely tax free. Are you glad you paid taxes on the $10,000?
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