patrick.net

tatupu70 says

So don’t invest in the stock market. Invest in money market.

Not to ignore your comment about money markets, but the rate of return is not much different than a money market savings account - which is what we use (I think BoA was paying us 2% for a while). The difference, is since I'm not wrapped up in some corporate plan, I have ready access to my money all while earning interest as well and the freedom to put it in WHATEVER I wish, whenever I wish.

I don't get the company match - which you'll only get by sticking with your company until your account has vested. But that's a risk I'm willing to take.

Okay, so I wrangled a spread sheet to do a half baked withdrawal analysis on the Roth (post tax contrib.) vs 401k (pre-tax contrib.). Our previous conversations focused on the opportunity cost of the taxes that are lost with a Roth. Admittedly, this is something I tended to discount a bit too much as I usually think of it as $5k to a Roth or a tax deferred account (when it really is $5k + $1666.67 tax savings, or more, depending on your marginal rate).
My spread sheet shows a series of $40k withdrawals over 20 years with the original investments still compounding at 5%. The Roth side shows a $40k withdrawal as it is tax free; the 401k requires a $48k withdrawal to also pay for taxes. Admittedly, this is where the half baked comes in; I didn't take into account the standard deduction (!), but at the same time I don't show social security income. I'm letting those two cancel each other out (but that is probably not the case). What the spread sheet shows, is that you need $628k in the 401k versus $523k in the Roth to make the payments (both accounts are zeroed out after 20 years). Make of it what you will. My retirement savings are biased to tax deferred accounts (401k, SIMPLE IRA) over the Roth (at least 2 to 1). Roth does give more flexiblility on withdrawals, and you can see where it would work well for portions of retirement income at higher marginal rates (for example, withdrawing money in one year to buy a car). YMMV (especially if you are currently taxed at high marginal rates)...

Josh--

First--didn't know you had a vesting on the 401K match. Many companies vest immediately. And my comment about the historical performance of the market referred to stocks not 401Ks. 401Ks are an investment vehicle--they have nothing to do with stocks.

Moving from job to job is actually a good thing with a 401K. After you move, you can take your money out of the 401K and put it into an IRA. That way you can invest in pretty much whatever you want and still get the tax benefits. You'll be WAY ahead doing that.

Josh,

I don't doubt your method is not successful, but structurally challenging,

Your way, post tax working capital, post tax return
401k, pre tax working capital and pre-tax return and company match

It's hard to save for retirement with your method, the government takes away too much to build a nest egg your returns have to outperform the 401k by HUGE amounts.

The SCAM part of the rise of the 401K, which you all have missed:

IT'S A CONCERTED EFFORT TO WIND DOWN THE CONCEPT OF COMPANY PENSIONS AND MOVE ALL THAT MONEY TO THE WALL STREET CRIMINALS!

Yes, yes we get to outsource all that pesky caring for retirees, and let them manage the money for themselves. In exchange for not us not having to do anything anymore, they get the "freedom" to watch their retirement dreams vanish every time the Wall Street sociopaths run the economy off a cliff. They certainly were good con artists to convince people this once-small thing should take over as everyone's primary retirement plan. And it has the most desirable (for them) Confidence Game element, at the end of it the criminals get to skedaddle out of town with pockets bulging and no consequence from the damage they leave behind.

It’s hard to save for retirement with your method
At this point it may be a good time to remind everyone of the 28% tax on the sale of 'collectibles' like gold and silver.

SF ace says

It’s hard to save for retirement with your method, the government takes away too much to build a nest egg your returns have to outperform the 401k by HUGE amounts.

Not really. Just a little discipline. We have become to Americanized, materialistic and plastic happy that we forget what it's like to save. Just stay out of debt and live within your means. I easily save over 50% of my income.

I also drive a 10 year old car, wife clips coupons, pay for Christmas gifts every year with my credit card points and eat like a king. Did I mention that we rent?

Vicente says

Yes, yes we get to outsource all that pesky caring for retirees, and let them manage the money for themselves.

Pretty much. Investing your own money is not rocket science. Why not do it yourself? I'd rather do my own thing than choose between the different colored pie charts.

EBGuy says

It’s hard to save for retirement with your method

At this point it may be a good time to remind everyone of the 28% tax on the sale of ‘collectibles’ like gold and silver.

Which is the penalty for withdrawing early from your pre-tax 401k.

There are benefits to a cash society :)

As I stated earlier: joshuatrio says

The 401k was never designed to be a full fledged retirement plan, it was designed to assist/help save for retirement. In other words, supplement your income.

If you do it, great. But it's not my cup of tea.

tatupu70 says

401Ks are an investment vehicle–they have nothing to do with stocks.

Seriously ?

joshuatrio says

tatupu70 says

401Ks are an investment vehicle–they have nothing to do with stocks.

Seriously ?

Yes--I get the sense that you lump them together. You shouldn't.

Unbelievable.

I'm not even going to ask you what a mutual fund is.

Did you pick the blue pie chart or the purple one?

joshuatrio says

Unbelievable.
I’m not even going to ask you what a mutual fund is.
Did you pick the blue pie chart or the purple one?

Josh--mutual funds are one choice. Money market is another. Bond funds are another. Those are generally in every 401K program because that's what most people want to invest in. But a 401K is just an investment vehicle that gets preferential treatment from the IRS. Nothing more, nothing less.

joshuatrio says

Pretty much. Investing your own money is not rocket science. Why not do it yourself? I’d rather do my own thing than choose between the different colored pie charts.

Rocket science involves precision engineering and models and producing repeatable results. It's nothing like rocket science, as a former rocket science dude who invests I feel perfectly qualified in saying this. You are implying it's not difficult, which is neither here nor there. Most people are better off in CDs than in picking "emerging market funds" and spending lunch hour watching CNBC Power Lunch or trying to follow Jim "Spaz" Cramer's latest picks. Yet that is precisely what we are told we must do. We must all become investors, thus providing a field of ignorant sheep to get sheared by the Wall Street players who are running the rigged casino. I don't feel much better about 401K, typically your company offers a short list of mediocre money manager companies who offer a menu of fund choices that run from bad to mediocre.

You proved my point. Thank you Tatupu.

joshuatrio says

You proved my point. Thank you Tatupu.

no problem. What point was that?

Vicente says

The SCAM part of the rise of the 401K, which you all have missed:
IT’S A CONCERTED EFFORT TO WIND DOWN THE CONCEPT OF COMPANY PENSIONS AND MOVE ALL THAT MONEY TO THE WALL STREET CRIMINALS!
Yes, yes we get to outsource all that pesky caring for retirees, and let them manage the money for themselves. In exchange for not us not having to do anything anymore, they get the “freedom” to watch their retirement dreams vanish every time the Wall Street sociopaths run the economy off a cliff. They certainly were good con artists to convince people this once-small thing should take over as everyone’s primary retirement plan. And it has the most desirable (for them) Confidence Game element, at the end of it the criminals get to skedaddle out of town with pockets bulging and no consequence from the damage they leave behind.

This is an excellent point. Completely forgot about this till I read it.

Vicente says

I don’t feel much better about 401K, typically your company offers a short list of mediocre money manager companies who offer a menu of fund choices that run from bad to mediocre.

That's what prompted me to bail on the plan. The options were so limited that I felt like we were just being pushed in the same boat with all the other "Lemmings." I can understand the company match, but after watching the performance of my (and other friends) previous 401k plan(s), it was highly overrated, and greatly exaggerated to be a solid way of saving for retirement.

tatupu70 says

no problem. What point was that?

That you have no idea what a mutual fund is and how 401k plans directly relate to the stock market.

joshuatrio says

That you have no idea what a mutual fund is and how 401k plans directly relate to the stock market.

OK--whatever you say. Good luck with your future investments.

joshuatrio says

the options were so limited that I felt like we were just being pushed in the same boat with all the other “Lemmings

Fidelity has gold stock funds ( that I have been in and out of a couple times in the past 5 years ) mutual funds, bond funds, international funds, money market funds etc.

One does have reasonable options. It would have been possible to have your fund in "cash" (MM funds)and then periodically move it into other funds. Or what most do which is just always be putting money in, so it goes in at some kind of average price over the period you are contributing.

If there was an employer match, I agree with others who have said it's foolish not to do it, unless the plan your employer offers is bad in some unusual ways.

Vicente says

Yet that is precisely what we are told we must do. We must all become investors, thus providing a field of ignorant sheep to get sheared by the Wall Street players who are running the rigged casino. I don’t feel much better about 401K, typically your company offers a short list of mediocre money manager companies who offer a menu of fund choices that run from bad to mediocre.

NO! we have to learn to be savers. And NO! company sponsored pensions dont work. Your better off learning to wipe your own bottom.

Thomas, dear Thomas.

Do you expect my Mom to repair her own car? I don't.

Nor do I expect her to be a whiz with investing, and with reason.

The point being all this "bootstrappy" rugged individualist stuff where everyone learns to do just about everything for themselves, is stuff and nonsense.

Nomograph says

Personally, I will be relying on my own savings and investments for retirement. I consider it very unwise to rely on a company pension or the government.

That's generally what most well off people do. Live within their means, save, diversify and they are just fine.

Problem with the majority of individuals who invest in their 401k, is that it's all they ever end up getting into - so when everything blows up, they have to work another 10 years. I know a handful of people who postponed retirement when the market tanked in 2008, because they lost out big.... while my dad and some of his more intelligent friends retired comfortably at 59.

I don't understand why some people make retiring out to be such a complicated issue. All you have to do is come up with enough money to live on when you quit working.

joshuatrio says

I know a handful of people who postponed retirement when the market tanked in 2008, because they lost out big

If you're that close to retirement, you shouldn't be so heavily invested in the market--whether it's inside or outside a 401K. That's investing 101.

I don’t understand why some people make retiring out to be such a complicated issue. All you have to do is come up with enough money to live on when you quit working.

Because, conventionally people retire in their late 50's, have to budget to live to their 90s, with large medical bills and have savings that are inflation-indexed. Unless folks have other streams of income setup - like real estate rentals, the pot of savings has to be really large.

I get jealous when I hear about employer matching on 401k. I don't have this, and I dont think I know anyone who does. I still think 401k's a good deal though. I currently have all mine in a money market fund because I'm not confident that there won't be a 2nd dip in the recession. Stocks have been running up recently, but it sure seems like there's way too much unemployment and government dysfunction, especially here in Calif.

Kevin says

Oh, and in an emergency, you can take out a loan against the account and just pay yoursel interest as the only real penalty. You’d have to be in really terrible financial shape to need more than that kind of safety net provides.

Not all plans allow loans. Even when they do, you want to avoid them, since then you pay the loan back with after-tax dollars. In addition to the 50% match your employer made on the 15k that you borrowed, the U.S. government didn't charge you taxes on it. When you take out a loan, you pay it back with the money you earned after you paid taxes on it, so it's like you just got a 33%+ interest loan (if you're at the top marginal tax rate). Lesson to learn: don't borrow $15k from your 401k ever again.

Mark_LA says

Not all plans allow loans. Even when they do, you want to avoid them, since then you pay the loan back with after-tax dollars. In addition to the 50% match your employer made on the 15k that you borrowed, the U.S. government didn’t charge you taxes on it. When you take out a loan, you pay it back with the money you earned after you paid taxes on it, so it’s like you just got a 33%+ interest loan (if you’re at the top marginal tax rate). Lesson to learn: don’t borrow $15k from your 401k ever again.

You need to compare apples to apples. This explanation is completely false. If you borrow from your 401K, you play back the loan + interest. Just like any other loan. Only in this case, you are paying the interest to yourself.

If you want to argue that you shouldn't take a loan from your 401K because you don't want to lose the tax free gains, fine. That much is true. But there is in no way a 33% interest rate.

Mark_LA says

Not all plans allow loans. Even when they do, you want to avoid them, since then you pay the loan back with after-tax dollars. In addition to the 50% match your employer made on the 15k that you borrowed, the U.S. government didn’t charge you taxes on it. When you take out a loan, you pay it back with the money you earned after you paid taxes on it, so it’s like you just got a 33%+ interest loan (if you’re at the top marginal tax rate). Lesson to learn: don’t borrow $15k from your 401k ever again.

This is a really bizarre argument. If you had taken out a $15k loan from *any* source you would have been paying it back with after tax dollars. Trying to equate that with interest makes no sense whatsoever.

eric878 says

I get jealous when I hear about employer matching on 401k. I don’t have this, and I dont think I know anyone who does. I still think 401k’s a good deal though.

Some of the bigger cash rich and profitable public companies do match. Further down from mid size to smaller non-public companies it becomes more rare to find since smaller companies are trying to conserve capital they have for operations.

A company that has a 401K program but does not have a company match is not viable and plain stupid. What's the incentive for the employer/employee. From that perspective, there is little reason to even do a 401K plan with no match, it costs the company $$ to administer these things with absolutely no value. Employees are better off opening their own ROTH/IRA.

The fact of the matter is no 401k match means your job is little regarded and they have 0 reasons to think you add value long term that is not replacable. Companies are top line focused before they are bottom line focus. It's all about getting value for the money.

Unfortunately I think most companies don't realize this. And most employees don't realize this. The advantage to a 401K is the 16K limit vs 5K limit in that case.

I'm guessing that most employees and employers just have a simple check list. Am I getting paid well? Am I getting health care? Am I getting a 401K plan? They don't look deeply into each category. The only one they look at closely is "How much do I get paid?" Lots! great, now lets check off Health plan, 401k plan, vacation, etc.

The company match is like getting free money. If anything, your company match can cover your tax.

Zlxr says

Before 401 K’s - people used to save their money in the Bank (and actually got interest for it) - but they also had access to it when they needed money or wanted to start a business or whatever.
Somehow it all changed to us putting our money in a 401K where we can’t touch it and then using Credit when we need cash. What happened to the Savings Accounts? We should all have savings equal to 6 months of earnings - And then invest in the Retirement Accounts.

Bankers refer disparagingly to "savings gluts".

They hate the idea of saving money. From the perspective of money & finance people. all money should be in motion at all times and savings are YOU being selfish and keeping money from THEM. You must sacrifice your cushion on the altar of a perfectly efficient market.

Zlxr says

Before 401 K’s - people used to save their money in the Bank (and actually got interest for it) - but they also had access to it when they needed money or wanted to start a business or whatever.
Somehow it all changed to us putting our money in a 401K where we can’t touch it and then using Credit when we need cash. What happened to the Savings Accounts? We should all have savings equal to 6 months of earnings - And then invest in the Retirement Accounts.

Flexability is a good thing, but not worth the cost. Money in savings account (and most other non-preferred treatment) are post tax and returns are post tax. You can't build working capital (or retirement nest egg) if the government keep on taking money away from what you earn. Consider:

401K, 10-K pretax @ 5% annual return average. In 30 years, 10K = more than 43K

Savings 10K = Post tax @ 7K (presuming 30% federal/state tax bracket). 5% annual return is 3.5% net of tax. In 30 years 10K = less than 20K.

I agree having 6 months of earnings for liquid access, but not necessarily in savings account. Trading accounts, CD's Bonds, are just as liquid and serve the same purpose. Retail banks love deposits. It is their financial lifeblood.

My position is to take care of your retirement goals first and foremost, then leave working capital for short/mid term opportuniities.

I'm going to go out on a limb here and say that most of those people, if they didn't have a 401K plan would have a sizable savings plan for roughly...... 3 months, before it turned into a new 65" tv or a boat. We've seen what people will do when given the chance to refinance. Many people simply don' t have the skills to save for later, everything they do or run into today is the major issue and they don't have the ability to look down the road 30 years.

It's in part due to our cultural situation, and our economic situation. We've had it good for so long, that we've never worried about money. Lose a job? Get a new one. Use your saved money. Use credit cards. Move in with your parents. Whatever the situation, we've had very easy access to money, with almost 0 potential of falling into a lifestyle one might find in China if they find themselves out of a job. We're secure. We spend because we're secure and we've lost the ability to save because of those securities, which we built up. It's fairly difficult to remove fear from a society and then turn around and say wait, you need to fear your retirement... you must save, you can't just spend....

Not only that we live in a society where a person can't be good at everything. You can be good at say fixing computers, but not fixing jet engines. 100 years ago, you fixed everything. Even now, you might have the skills to fix some computers, but not others! You might only work on a couple types of jet engines. Likewise finance has taken off on it's own and is massive now. People simply can't know the ins and outs of every financial detail going on around them. 401K is an easy one for people, it helps simplify things for most people. We can't know everything and handle everything in our lives. Some of us do better than others, but it's about ensuring the majority are safe.

If you've got 100K in debt, you can eliminate that debt. If your goal is to get to 100K you'll just convince yourself of getting there next year, the problems of this year were one offs, when in reality those expenses are just "life". People can deal with debt much easier than a surplus.

As far as poor dealing with one day at a time, I think the real poor think far ahead. If they get $5 they'll spend it wisely. They might only be able to worry about one day at a time, but given the chance they'll invest anything extra into food and what not. The poorer a nation the higher the savings rate across the board is. They understand that the savings are their only life line.

We have dozens of life lines, therefore we don't need to save at extreme rates.

Finally, 100K in a 401K will increase in value faster than inflation in general.

Zlxr says

This is the generation that grew up in from of the TV and learned all about WANTS.

Does anyone know how to change that mentality?

You start by getting rid of the TV. Haven't had one in my house nearly 3 years now. And you spread this idea. Convinced one friend to cut the cable cord on money grounds. He watched on rabbit ears for a while, now watches nothing and reads more.

There are some that are that poor and have become accustomed to hand outs, while there are others that are poor and live off whatever they can. If they don't let the chicken lay an egg, they die. Some are just ignorant of the facts or perhaps too desperate, but poor can range from dirt poor, to working foxcomm employee poor. They're all poor, and they all save like mad.

We don't need to change our behavior, just like we don't need to setup sentry guards at all hours to guard our front doors from intruding ANIMALS. We don't need to change that either. We're PAST that level of existence now. While we still keep some of the skills around, we don't need all of them. We don't guard against intruding animals anymore, but we do worry about intruding people, but then again those people just want our stuff in general, vs wanting to EAT us.

We just need some new skills for our new challenges. Retirement is a new challenge that most never dealt with prior, they either kept working, or died. This is probably the first generation that will retire and live on their own. Before this generation, people lived with family. This is mostly a new situation, and we need new saving skills for it.

First real large generation, where previous generations are also included in the whole pay out system. The 80's and 90's would have seen the group, but now we're seeing where the system started and now being loaded down. Also this is probably the first time ever that any culture has had to deal with these types of drain on a system. In just the last 40 years we've come a long way in what we can do. We've changed how we live when we get older.

Meat should be expensive, it's a luxury item and shouldn't really be a primary source of protein. It consumes massive amounts of resources including grains and water to produce meat. But that is a side issue.

The food will be there, because we'll keep making it. We've been living off a 2 month supply for a very long time. 2 month supply means if we stopped today, we have 2 months of food stores.

Volcanoes are erupting every year, all over the world. Just like the earthquakes. This has been a normal year for them, the only thing that hasn't been normal is the number that hit near populated areas.

The right way is to make a deal with the next generation, we'll call this "Social Security" for a better word. You pay for the current generations SS, and the next generation will pay for that generations SS. SS pays for current needs, if those needs go up for the next generation, they need to deal with it.

It's a pay it forward type of deal. This way, if you royally screw up your retirement, buying pumpkin futures on nov 1st, or inflation takes off, or whatever else might happen between now and then, you've got SS. SS isn't a set dollar amount, it's the ability to live through retirement. You'll get what you need, when the time comes. If it's more or less money, more or less medical care, or what not.

The next generation might not like it, but it's part of the deal, we're paying for last generations SS, they pay for ours in whatever currency they use, and their children pay for theirs.

It isn't a money game, it's a matter of each generation covering the needs of the current generation.

Now farming... and other issues.
We have moved away from farming towards urban living. Some people remain in farming, that is their business. If they stop, more people will move towards that business, or large corporations or whatever. There won't be a food shortage because farmers suddenly decide they don't like to farm. Like wise, if they stop farming, we'll buy our food from else where, food will SKYROCKET around the world as we offer up more money for it. We can pay more than any person in south american can pay. Therefore, farmers will sell to us. They would produce more food to bring down prices, if we didn't do it.

Exactly, it's impossible to guarantee that large sums of money for retirement will be safe, thus SS.