Author Topic: Should I continue investing in 401(k)?  (Read 4554 times)

Offline clayfarmer

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Should I continue investing in 401(k)?
« on: July 05, 2012, 09:51:10 AM »
Looking for some advice....
My employer offers a 100% match on the first 6% of my salary I contribute to my 401(k) plan.  Doing the math, that would add up to around $3600/year, assuming I contribute 6%.  My plan has bond funds, stock funds, and a cash fund.  Right now my entire balance (around 40k) is in the cash fund, and I am currently not contributing anything.

Given the state of our economy and the fact that major changes are ahead of us (collapse? inflation? etc, etc), would it be better to:
1) contribute to get the match (100% return ain't bad!)
2) use the money to pay off debt (around 20k left)
3) buy silver
4) accelerate the building of our preps
5) other options I haven't thought of?

Thanks!


Offline fritz_monroe

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Re: Should I continue investing in 401(k)?
« Reply #1 on: July 05, 2012, 10:09:10 AM »
As long as you have savings in other areas that are not 401k funds and you can afford the 6%, I would continue contributing to the 401k.  As you said, 100% return is great.

endurance

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Re: Should I continue investing in 401(k)?
« Reply #2 on: July 05, 2012, 10:12:11 AM »
As long as you have savings in other areas that are not 401k funds and you can afford the 6%, I would continue contributing to the 401k.  As you said, 100% return is great.
Agreed.  So long as you're building other savings outside of the 401k and eliminating debt, take the 'free' 100% return on investment and invest in a mix that will let you sleep at night. 

Offline ncjeeper

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Re: Should I continue investing in 401(k)?
« Reply #3 on: July 05, 2012, 12:23:35 PM »
Yep what fritz and E said. Cant beat free money given to you.

endurance

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Re: Should I continue investing in 401(k)?
« Reply #4 on: July 05, 2012, 01:14:48 PM »
Another thing you might want to look into is whether or not you can take a loan out against your 401k.  Many plans allow you to take out a loan for up to half the value and pay it back with interest to yourself, which is usually much lower than you're paying on current debt.  Every plan is different and make sure you know the details before you sign on the bottom line, but it may offer an option to have you debt-free a lot faster than you thought you could be. 

Make sure you know what happens if you're laid off or leave for another job and how it impacts your pay-off schedule.  In some cases nothing changes, in other cases you have to pay it off immediately or it's classified as a withdrawal and results in the same IRS penalties (which might just about wipe out the other half of what you didn't withdraw). 

Offline Roundabouts

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Re: Should I continue investing in 401(k)?
« Reply #5 on: July 06, 2012, 08:07:55 AM »
It can be a hard choice.  Don't forget to factor in your age.  If you are in your 20's decisions can be way different than someone in their late 50's.   As far as borrowing against a 401k?  I have heard that you pay the interest back to yourself.  I have also heard that you could also be paying double tax on that money in the 401k.  Paying it back with taxed money paying tax on it again when you reach retirement age.  Again if you put your money into the 401k after tax ( that seems like it would be triple paying).   I am not an expert and I do like the idea of paying interest to myself so…  Like the others have said you really need to do your research.  There are so many factors I can't really say what would be best for you but I can tell you what we have done.  Some think it was stupid but it worked for us so far. 

We stopped contributing a while back and started putting all that we would have contributed to our debit.  We have saved tons in interest. More than would have been in the match.  We then took / cashed out our 401k and slammed it to the house.  We were surprised that the only part of the 401k that we were allowed to cash out was the employers contribution part.  Yes you read that right.  What ever the EMPLOYER had put into the account was the only portion we could touch.  (In a ROTH the only part we could take out is the part WE put in.  After your account has been open for 3-5 yrs.  and there is no penalty or tax liability for doing so) It would have been different had it been a hardship that's a whole different game.   So it was a good thing that we had put in to get the max from the employer.  That has allowed us to all but pay off our home.   

Then we put 80% of what was left into a money market type fund (guaranteed rate of return).  Put the remainder 1/4of it  in a high risk fund the other  spread out evenly.  We keep balancing that out across the board.  We still do not contribute to it.   So far by doing this we have come out ahead.  Because of all that we have saved in paying out monthly bills and of course the interest.  Not to mention it is a huge peace of mind.   See we are a one income family and if something happens to the main income source for what ever reason it would be much better to have a large savings account and ZERO DEBIT plus the ability to produce our own food.  We still had quite a few years left to pay off all the debit this cut off a good 12 yrs total.  That will be 12 yrs we can invest in other things or go back and start up the 401k again.  We have options.  The only option we don't have is turn back the hands of time.  We are turning 50 this yr.  Dang if I could be 20 again.  Live and learn. 

The other thing is people were saying we would have to pay a huge penalty.  10% penalty is what we paid.  that was only $4000.00  We have made that up already.  The other portion you have to pay is tax.  Every one said it would be 30%.  That was not entirely true.  For us it depended on the tax bracket we were in.  So a portion of it was taxed at a lower rate.  The portion that pushed us up and into the next tax bracket got hit a little harder.  Check with your CPA.   We did calculations on projected earnings to see if it would be better to take some out this year and some out next.  Went with the lowest tax impact.  Besides that I felt we lost a butt load of money in the last crap storm.  Had we taken the money before that all that money we would have taken wouldn't have been lost it would have gotten us out of debit.   

So that's my story.  I hope it helped at least somewhat.  There are just way to many variables to be able to tell someone exactly what to do.  Except this.  Sleep on it.  Calculate calculate calculate.  Talk to your CPA.  Talk to your HR department or who ever handles things.  Research everything and know exactly what the FACTS for you are.  Then sleep on it some more.  Then decide.  Don't make a decision out of fear don't panic.  Know where you stand and have an exact plan for your money.  When we got that check it was less than 24 hours and it was put towards designated debit.  Didn't want the temptation to go buy a tractor or something. 

Now my oldest son thought he would do the same thing.  Well he's in his 30's and decided that it would have been stupid for him to follow our lead.  So he still contributes to his 401K the max allowed.  Watches it and changes funds around.  He has done very very well so far this year.  This works for him in his situation

My youngest dropped his down to an employer match after he found out that by not contributing to his 401k his pay check would have only increased by $50.   He made much more by just doing the employer match.  He's in his 20's and this works for him in his situation. 

Good luck and hope to hear your story.

 


nelson96

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Re: Should I continue investing in 401(k)?
« Reply #6 on: July 06, 2012, 09:30:44 AM »
I pretty much agree with everyones else.  With current state of affairs my wife and I have been discussing this very thing.  We don't have a retreat yet and are thinking if things get worse we could find our 401k's being worthless.

Considerations we are using . . .  Match money is free money and six percent is a pretty good return, not to mention the fact that if you put in the right place you'll earn additional interest.  Taking a loan and paying yourself interest is pretty cool too (if you must take a loan), but you usually have to pay it back in full if you leave the company.  Liquidating your 401k before you are retirement age will require paying penalties and if you add up the penalties on top of the taxes you'll pay on that money, it can mean something like 35%.  If you need money to consolodate bills, it's much smarter to take out a loan (if you can get an interest rate much lower than 35%).

Offline Cryptozoic

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Re: Should I continue investing in 401(k)?
« Reply #7 on: July 20, 2012, 05:09:46 AM »
Am no expert but I would continue contributing 6%.  I would not have it in stocks and bonds pay nothing now so cash is good.
Can you squeeze out another 6% for another form of savings?  (Kinda partial to silver myself.)

Offline DJ-JPL

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Re: Should I continue investing in 401(k)?
« Reply #8 on: July 20, 2012, 07:19:01 AM »
How much more do you need is the question? Have you put enough away that you can transition into self-sufficiency? If not you could be putting that 6% towards getting out from under the financial institutions and employers.


Offline Jeremy Downing

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Re: Should I continue investing in 401(k)?
« Reply #9 on: July 25, 2012, 07:15:14 AM »
I've taken a loan out of my 401k before to pay off debt.  My employer has a 6% match against my 5%.  That means I put in 5 dollars, they put in 6 and I have 11 dollars to invest.  Unfortunately, the funds I can invest in all have risk (No currency/metal ETF funds).  I happen to have picked the winner this year, which is a dividend-paying bond fund.  I'm up about 7.3% on the year so far.  I'm far from a financial genius... I just got lucky this year... so far.

I continue to input my 5%, because I'm guaranteed a 120% match on my investment immediately.  If the market lost half its value, and my investment lost half its value, I'd still be up 20%.  That's nifty.  In your situation, you'd still have your initial investment ((6%+6%) / 2 = 6%).

The loan process varies by employer.  Your HR department may be able to direct you to the knowledgeable people in the investment firm managing your 401k.  My employer uses Fidelity and they have a web page that lets me do everything myself.  It's set up to show me what I can do.  I can take half my 401k and am required to pay myself back as a garnishment from my paycheck.  I have up to 4 years to repay and the interest rate is 4.5%.  The entirety of that interest and principle comes back to me.  All I pay is a very small (like not even $10.00) loan-servicing fee maybe once / year.  If I separate from my employer for any reason, I'm required to pay back the balance in full (with the interest) within maybe 90 days.  Otherwise, it is called a withdrawal and I get to pay taxes on it.  IIRC, my repayment was before-taxes.  It was treated as a larger contribution to my 401k.

When I made the loan, it was 2007.  My 401k was doing fine and I took out half of it.  Soon after, the market crashed.  In my desire to pay off my debt, I dodged TEOMy401kAIKI.  Again, luck. 

I hope this post is of some assistance to you in your decision.


Offline snickers

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Re: Should I continue investing in 401(k)?
« Reply #10 on: July 25, 2012, 08:21:14 AM »
I was doing the standard 10% thing because Suze Orman said so... then I heard an enlightening podcast where Jack said that Suze Orman is an idiot who doesn't live in the real world and doesn't realize that most people can't afford 10% contributions so now I'm just doing the minimum contribution to get a match (4%) and using the other 6% to pay down debt. It's actually making a world of difference in my own finances!

Offline bigbear

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Re: Should I continue investing in 401(k)?
« Reply #11 on: July 26, 2012, 12:04:24 PM »
The loan process varies by employer.  Your HR department may be able to direct you to the knowledgeable people in the investment firm managing your 401k.  My employer uses Fidelity and they have a web page that lets me do everything myself.  It's set up to show me what I can do.  I can take half my 401k and am required to pay myself back as a garnishment from my paycheck.  I have up to 4 years to repay and the interest rate is 4.5%.  The entirety of that interest and principle comes back to me.  All I pay is a very small (like not even $10.00) loan-servicing fee maybe once / year.  If I separate from my employer for any reason, I'm required to pay back the balance in full (with the interest) within maybe 90 days.  Otherwise, it is called a withdrawal and I get to pay taxes on it.  IIRC, my repayment was before-taxes.  It was treated as a larger contribution to my 401k.

When I made the loan, it was 2007.  My 401k was doing fine and I took out half of it.  Soon after, the market crashed.  In my desire to pay off my debt, I dodged TEOMy401kAIKI.  Again, luck. 

Loans are capped at 50% of available balance or $50,000 loan balances over trailing 12 months.  That could be less depending on your employer.

Non-residential loans are capped at 5 years (residential loans are 15 years), but again, that could be less depending on your employer.  Some places require paperwork, most don't at this point.  The interest rate has to be ‘reasonable’ which means it also varies by employer.  The loan-servicing fee varies by employer (401k record keeper) too.  Many employers have a flat issuance fee (only charge when the loan is taken) or no fee at all.  If you don’t repay or become delinquent (or stop working there), then the loan is considered a withdrawal (early withdrawal penalties/taxes would apply).  The delinquent period varies by employer too (but the maximum is the end of the quarter following the quarter in which the payment was missed).  So make sure your loan payments are being applied, because even if it's coming out of your paycheck but payment isn't getting applied for whatever reason, it's your responsibility (mileage may vary on company flexibility - but that's the law).

Zeijandi - Loan repayments are made with after-tax dollars.  It is not treated as a contribution to your 401k.  If you confirm that this is not the case, you should question it as something is wrong. 


Offline Jeremy Downing

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Re: Should I continue investing in 401(k)?
« Reply #12 on: July 27, 2012, 04:57:27 AM »
Zeijandi - Loan repayments are made with after-tax dollars.  It is not treated as a contribution to your 401k.  If you confirm that this is not the case, you should question it as something is wrong.

I finished paying off the loan probably in the fall of 2011 so I definitely may not have recalled correctly.  ;) 

Ultimately, I felt it was a decent decision to take the loan out to pay debt.  I didn't know about the difference between residential and non-residential.  I'd be tempted to do it again to pay down the house if I knew it would be amortized over 15 years.  I may look into that.  Thanks!