401k advice

[austinN4]

Investing pretax via a 401K on the theory that your tax rate will be lower during retirement is all well and good, but what people need to understand it that it is possible for it to turn out exactly the opposite.

By that I mean the tax due on the pretax funds when withdrawn from the 401K in retirement may well be taxed at a higher rate than would have been due if the money was invested via a Roth instead.

Withdrawls from a 401K are taxed as ordinary income in the year the withdrawl is made. And the IRS mandates the annual minumum withdrawl rates. Your 401K withdrawls also can affect any social security benefits you may be entitled to.

If you do a really good job of contributing pretax to a 401K, and investing that money wisely, it is possible that your required minimum withdrawl can bump your taxable income up to the point that your SS benefit is also fully taxable.

If you are employed at a company that matches, by all means definately contribute as much as you can to get the max 401K match. And if you are self employed, you can do a self employed 401K also. But always be aware of and plan for the future tax liability you are creating for yourself.

In my particular case, if I had know then what I know now, I would have put more in a Roth and less in a 401K. YMMV.

[Waylander]

Investing pretax via a 401K on the theory that your tax rate will be lower during retirement is all well and good, but what people need to understand it that it is possible for it to turn out exactly the opposite.

By that I mean the tax due on the pretax funds when withdrawn from the 401K in retirement may well be taxed at a higher rate than would have been due if the money was invested via a Roth instead.

Withdrawls from a 401K are taxed as ordinary income in the year the withdrawl is made. And the IRS mandates the annual minumum withdrawl rates. Your 401K withdrawls also can affect any social security benefits you may be entitled to.

If you do a really good job of contributing pretax to a 401K, and investing that money wisely, it is possible that your required minimum withdrawl can bump your taxable income up to the point that your SS benefit is also fully taxable.

If you are employed at a company that matches, by all means definately contribute as much as you can to get the max 401K match. And if you are self employed, you can do a self employed 401K also. But always be aware of and plan for the future tax liability you are creating for yourself.

In my particular case, if I had know then what I know now, I would have put more in a Roth and less in a 401K. YMMV.

This is why I'm leaning more toward the Roth than 401k. Salaried workers with a least a bachelor's degree (I'm hoping for an M.S.) should expect their salary to increase over their lifetime. So the generic answer is the Roth IRA. Obviously from others' suggestions though there aren't any guarantees that the rules for Roth's won't change at some point nearly 30 years down the road at my retirement goal. But I think that could also be said for any of the other retirement plans as well.

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My employer will not guarantee a match on any funds. On good years they will match up to 50% of the first 6% but I've been here over five years and only remember it happening about once or twice since I've been here. They do compensate us through our wages and year end bonuses that is well above the average for the area I live in. So while they may or may not contribute to our 401k, it's essentially like I'm already getting free money anyway to do what I choose with it. Maybe when you look at it that way it's more helpful than being forced to enroll in the 401k and get a guaranteed match.

Plus quite a few people here lost their ass on their 401k a few years ago. I don't know if that was an across the board type of thing depending on your asset allocation but it was my understanding it was pretty much nationwide.

My problem is I understand basic economics, know how to manage my finances, do my own taxes etc. but when it comes to investing I am not up to snuff at all. I have a Computer Science degree and anything technical I can master but reading about investing bores me to tears so I have to take baby steps. LOL

The investment forums sounds like a good idea. I agree with the safe investments being eroded by inflation. That makes a lot of sense and since I'm starting late I should take some risk.

I got a PM from someone mentioning a target retirement plan. From what I understand the plan adjusts risk and asset mix over time growing closer to your target retirement goal. Some examples are the Vanguard 2040 and the Fidelity 2040. So my goal would be to retire in 2040 when I'm around 63 years old.

Fidelity 2040
https://fundresearch.fidelity.com/mu...mary/315792101

Vanguard 2040
https://personal.vanguard.com/us/Fun...tExt=INT#tab=0

[rjacobs]

You have to watch your income to make sure you stay under the limits for a Roth, I think its like 112k for an individual.

Target date funds suck because most take almost 1% in fee's.

Most people who lost their asses in their 401k's lost their asses because they dont pay attention and dont know whats going on and part of the blame of that goes to the administrators of the 401k programs and the fact that they default is generally to push into a target date fund.

Target date funds are sold as "actively" managed and thats why they charge almost 1%. Sounds great right? These funds are no where NEAR actively managed. IF they were why did people lose ~30% when the market tanked? If they were being actively managed the "manager" should have been actively selling and getting into safe investments like cash. Thats what a good manager does. Target date funds are not actively managed. All they do is transition from more risk to less risk as you get closer to the "target date".

I prefer to move my own money around in my 401k. Currently I am in cash called a stable value fund(it charges .025%). The only other investment in my 401k that I like is the VINIX that tracks the S&P and charges .04%. The retirement 2045 fund I was default invested into was like .8% or something crazy like that. We also have a few bond funds that are ok, but not something that is attractive right now. The broad based funds like the VINIX tracking the S&P is a great fund and is on most 401k fund lists and is a very highly regarded fund. You could do a lot worse than just going into a broad based tracking fund like the VINIX and just letting it ride for 30 years(you would probably show 6-8% annual returns at the end of the 30 years).

Being your own manager of your money and learning all you can is the best thing you can do. Get a strategy and stick to it. You will read tons of stuff on what you should and shouldnt do, good and bad investments, etc... I have magazine subscriptions to Money and Kiplingers, I have a morningstar account to be able to get lots of info on possible investments, I talk to a friend of mine who is a retirement adviser about some of my thoughts and strategies. By doing tons of research through several different avenues I have returned almost 30% this year between a few different investment avenues and am now sitting in cash for the most part until after the fiscal bull shit here in the next few weeks plays out and watching the QE3 tapering bull shit.

[kcara]

There is a lot of good advice on here.

Always take all of your employer match money. As far as the investment mix, 80% stocks/20 % bonds is a safe mix with potential for growth for the future. Anything you save in your 30's and 40's will grow much more than anything you can save later on in life.

Always go for the index funds, if you have them. The costs of the funds can eat away at your return.

[Crow Hunter]

This is why I'm leaning more toward the Roth than 401k. Salaried workers with a least a bachelor's degree (I'm hoping for an M.S.) should expect their salary to increase over their lifetime. So the generic answer is the Roth IRA. Obviously from others' suggestions though there aren't any guarantees that the rules for Roth's won't change at some point nearly 30 years down the road at my retirement goal. But I think that could also be said for any of the other retirement plans as well.

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My employer will not guarantee a match on any funds. On good years they will match up to 50% of the first 6% but I've been here over five years and only remember it happening about once or twice since I've been here. They do compensate us through our wages and year end bonuses that is well above the average for the area I live in. So while they may or may not contribute to our 401k, it's essentially like I'm already getting free money anyway to do what I choose with it. Maybe when you look at it that way it's more helpful than being forced to enroll in the 401k and get a guaranteed match.

Plus quite a few people here lost their ass on their 401k a few years ago. I don't know if that was an across the board type of thing depending on your asset allocation but it was my understanding it was pretty much nationwide.

My problem is I understand basic economics, know how to manage my finances, do my own taxes etc. but when it comes to investing I am not up to snuff at all. I have a Computer Science degree and anything technical I can master but reading about investing bores me to tears so I have to take baby steps. LOL

The investment forums sounds like a good idea. I agree with the safe investments being eroded by inflation. That makes a lot of sense and since I'm starting late I should take some risk.

I got a PM from someone mentioning a target retirement plan. From what I understand the plan adjusts risk and asset mix over time growing closer to your target retirement goal. Some examples are the Vanguard 2040 and the Fidelity 2040. So my goal would be to retire in 2040 when I'm around 63 years old.

Fidelity 2040
https://fundresearch.fidelity.com/mu...mary/315792101

Vanguard 2040
https://personal.vanguard.com/us/Fun...tExt=INT#tab=0

Target retirements are extremely good for "Set it and Forget it" type of investing.

The only catch is you are stuck with their investment allocation which may or may not match your risk profile and you are paying the expense ratio of not only the Target Fund but also those of the underlying funds as well.

You can get the same benefits as the Target Date funds by chosing your own funds and not incur the increased expense ratios.

Rules of thumb:

%Stock vs %Bond allocation:

Least agressive = Age in bonds

Most aggressive = Age - 20 bonds (this is what I do)

-Diversification reduces risk of "losing it all". (It is unlikely that the 500 largest companies in the US will fail at the same time, and even less likely that ever single company in the world will also do it)

-Diversify by owning as much of "the market" as you can (think S&P500 Index or Total Market Index funds, not area specific funds)

-Diversify by owning stocks in both the US and the rest of the world. (Currently the US is right around 50% of the world market)

-Diversify by owning both Stock and Bonds. While they both can go down, the Bonds will act like a shock absorber. They won't go down as hard or as fast as stock.

-85% of the active managers will not beat their market indexs year over year. 15% do, the rest of the time a computer controlled index fund that approximates the market will beat them

-Index investing has the lowest cost because no one is paying anyone to any research. You can't "beat the market" but you will get market returns which will beat 85% of active managers. Most active funds run 1% or more in cost. Index funds will run under .25% with some funds, like the Vanguard Admiral funds running under .10%.

-No matter what you do. You have to be prepared to see the $ amount in your accounts drop. It is going to happen. It isn't going to be like a savings account. But remember, it is the number of shares that you hold that makes a difference and as long as you don't sell them at a lower than what you paid for them price, you don't actually lose the money.

Plus quite a few people here lost their ass on their 401k a few years ago. I don't know if that was an across the board type of thing depending on your asset allocation but it was my understanding it was pretty much nationwide.

I have been actively investing since I got my first job in 1997. Up until year before last, I was 100% stock allocation (other than real estate that I owned).

I didn't "lose my ass" during the 2008 tank. Some of my holdings did drop by 50%, but because I have a huge risk tolerance, I didn't panic and sell out. So they were paper loses only.

My #1 regret was that I didn't have some "dry powder", ie Bond fund, that I could use to rebalance and buy more stocks at 50% off fire sale prices. That is why I sold out some of my stock holdings and added in bonds so that next time there is a "Really Bad Day", I can rebalance and capture more gains.

ETA:

Since 1997 to this time last year my Internal Rate of Return has been 10.44%. Even counting all the mayhem in 2001 and 2008. You have to be in it for the long haul. It is probably quite a bit higher now with the spectacular gains that have happened recently. Which reminds me, I need to check my asset allocation and make sure I am still 40/40/20. You have to be able to sell the "winners" and buy more of the "losers". Right now the "losers" are International Stocks and Bonds. Which I have been buying more of.

[Crow Hunter]

https://personal.vanguard.com/us/fun...recommendation

Another thing that might help.

Vanguard has a very good website and has some stuff that can help you decide on the type of funds and what your risk profile is. Maybe it might help you decide what type of asset allocation you should be looking at.

[rjacobs]

Talking about asset allocation is great, but right now I wouldnt touch a bond with a 40' pole. Bond funds(and bonds in general) have been losing their ass's lately with treasury yields going up. Bonds move opposite of treasury yields. I expect treasury yields to continue to move up even though Bernenke keeps trying to suppress them, he doesnt set treasury yields, nor can he control them in any way.

[Crow Hunter]

Talking about asset allocation is great, but right now I wouldnt touch a bond with a 40' pole. Bond funds(and bonds in general) have been losing their ass's lately with treasury yields going up. Bonds move opposite of treasury yields. I expect treasury yields to continue to move up even though Bernenke keeps trying to suppress them, he doesnt set treasury yields, nor can he control them in any way.

There is a difference between bonds and stocks.

Bonds pay the principal back when they hit the end of their life. There is some fluctuation in the Bond market right now because people are not wanting to get stuck with bonds paying nothing as interest rates start back to rising, assuming they do, but a bond fund can only go down so far. Unless all the bonds in the fund default at one time, underlying bonds are still going to pay back the principal. When that principal is paid back, it will go into buying more bonds that meet the duration/quality targets of the underlying fund. While I undoubtedly won't get the return I would like on bonds, I won't have a 50% drop either. It just isn't fisically possible. (Heh, bad pun) Eventually the funds shares would be worth more money even with their yield being extremely low. If you came to me and said you would sell me a $10,000 bond that will be paying me $10k in 2 years for $5,000 because it is only going to pay you .05%, I am going to jump on it, because I would be getting MUCH more return on my money that the paltry .05% yield.

What we are seeing now is a "reversion to the mean" as the "smart money" that was artificially inflating the returns on the bond funds is leaving the bond funds and going into something else (mostly the currently roaring stock market). If the economy hits another bump, bonds will jump back up as people take a "flight to safety" for bonds. When that happens, I will gladly sell them the shares of bond funds they are wanting and I will buy the stock funds they are running out of.

That is why you have to be in it for the long haul and stick to your investment plan. Mine is to have 20% of my assets in bonds or other cash instruments. I do have a certain portion of it in CDs as part of my emergency funds.

I have money in both PIMCO Total Return and Vanguard Total Bond Market and while it is "down" we are only talking pennies a share. This is a great opportunity for me, as people are fleeing the Bond funds, every share I am buying is giving me more of a "%" of the individual bonds for every share I buy. When which means my share of the monthly dividend payment will go up over time.

Be careful about Market Timing. You might get lucky. But more than likely you are going to miss an opportunity becaue you really can't know when

until after the fiscal bull shit here in the next few weeks plays out and watching the QE3 tapering bull shit.

It might be next week, next month, or like Japan, 20 years later and still not quite played out. In the mean time, you are losing your future purchasing power by leaving it stuck in a stable value fund. If it lets you sleep at night, though, that is what you should do.

I am not smart enough to time the markets, if I was, I would be a stock broker and not an engineer.

That is why I just keep to my Asset Allocation and keep an eye on everything out of the corner of my eye. If I see a 5% or greater change one of my assets, I sell the "winner" and buy more of the "loser". I have a greater fear of losing an opportunity to buy stuff cheap than I do of losing money because I still have another 20+ years before I actually need this money.

[Djstorm100]

Wow great information here guys!


If I may butt in a little, I'm 25 soon to be 26 and put 4% of my salary in to my companies 401k (matches up to 3%). Since I'm young and still have alot of years before I retire I've set my profile to Aggersive, been thinking about opening a IRA Roth as well. But in all honestly the more I read the more questions/confuse I become. It's pretty overwhelming.

[Ick]

I'm 36 and I've been really slow to get much of a 401k going. I got a decent start years ago but got laid off my job and had to cash most of it out until I could find another job. I've had a Roth IRA for years but haven't put much into it either.
What's made me hesitant at my current job is there is no guaranteed match. They sometimes match anywhere from 0-50% of the first 6%.

I want stable investments not risky ones.

What would you recommend? Invest more in my Roth IRA, my 401k, or just stick to one or the other?

I think we need to step back for a bit before getting out the IRS regulations and comparing tax effects of different choices.

I don't mean to offend, and perhaps I am projecting a situation I know about on to you personally... but let me get this out there.

It seems to me you may have a more pressing issue that is more crucial than "401k advice".

By now I assuming you experienced the full weight of the cost of "cashing in" your 401k... in case you don't realize it that was a really, really, really, really costly move. Telling me that you hand was forced when the chips were down may show a serious lack of financial planning, possibly a lack of "financial seriousness" on your part. If so, THIS is the major problem you need to address: not what 401k bucket to choose.

Before you develop a long-term investing strategy in qualified plans you MUST get your short-term house in order. It is important to invest for the long term, and pay off debt faster and faster... but it is also more important to have some liquid assets so you don't have to burn down the house every time the SHTF in your life. The disadvantage you put yourself in of investing in qualified plans and spending everything else you make with no safety net... is not a plan. That is financial suicide.

Getting laid-off from your job should NOT result in cashing in your 401k. You may have a serious savings problem. your first priority should be having enough savings / equity in your home / (whatever)... to prevent you from having to "cash in" when your next financial crisis hits.... and it will come. There will be a "next time".

You should have enough financial assets in place for WHEN this happens again BEFORE investing in more qualified plans.