You’ll note that nowhere in my post did I advocate a 100% income producing securities mix at any stage; I simply said the percentage should increase over time. I don’t ever plan to stop investing in stocks, and I don’t think anyone should. I do think that risk tolerance and age are inversely related, and that portfolios that don’t reflect that fact can face potentially crippling downswings when there is no longer sufficient time to recover.
Just to make this simpler for me, are you folks saying that the interest you pay on your 401(k) loan is deposited back into your 401(k) account, on top of the original principal?
So if I borrow $5000 against my 401(k) at 3% interest & pay it back one year later, my 401(k) amount increases by $5150 (5000 original loan + 150 interest)? I was under the impression the $150 interest went to the 401(k) plan administrators.
Wow, that makes the down payment on our next house a lot easier to plan for.
Read the specifics of your plan. In general it’s not a good idea except for one-shot very high rate payoffs and maybe a house down payment, yeah.
i have most of my roth (maxed out every year) and 401k(company match + more) in index funds (vanguard and fidelity). i got a small % in some amazon and netflix stock.
have 5 laddered cds. no credit card debt, a low interest student loan, and a 6 month emergency fund.
on top of that i got some spare cash sitting around gathering no interest now. after buying a computer i was thinking about putting the rest in some bonds or bond funds. but i have no idea what to pick. any ideas?
This is great–you’re way ahead of most people, especially with regards to the emergency fund and maxing out your Roth and your 401K
on top of that i got some spare cash sitting around gathering no interest now. after buying a computer i was thinking about putting the rest in some bonds or bond funds. but i have no idea what to pick. any ideas?
It’s impossible to say without knowing more details, really. Do you plan to buy a home with that money somewhere down the road? If so, when–or do you already own one? If you do, what’s the interest rate on your mortgage? How do the various asset categories you’ve invested in break down percentage-wise–i.e., how much is in each stock category, how much is in cash (the emergency fund) and cash equivalents (the laddered CD’s, money market, etc.)?
Some of those things shouldn’t be shared with the online world, so I’d recommend doing more research and analysis on your own. Like I said above, you’re already so far ahead of most people that I don’t think you need the specific advice of anyone here!
Forget about the interest; it’s a red herring. The reason you might not want to do a 401k loan is that if you take money out of your retirement account, you’re not saving for retirement. Taking a 401k loan is basically the same thing as pulling money out of your retirement savings to buy candy today, and telling yourself that you’ll put it back in later.
Any growth that you would have experienced in the interim is gone, and odds are that at the very least those “loan payments” will reduce the amount you contribute in the future, so you’re cutting into your future savings as well.
It might sometimes make sense to do a 401k loan, but it’s not free money.
No one’s mentioned dollar cost averaging. The same amount, every week or two, regardless of where the investments are. 401(k)s do that automatically, but I’ve done it as well on taxable fund investments and IRAs. I have no interest in trying to pick the right time to put a slug of money into something, and would lose more often than win even if I tried. I learned my lesson with dumping extra money into Janus during 1999. Overall, regular payments regardless of where the market is has served me well for about 18 years of investing, through the dot-com bust and the 2008-09 crash.
I have nothing new to add to the previous discussion on stock/bond distributions, etc. Pick a diversified mix, and dollar cost average.
[Edit] - oh yeah. And Vanguard for your funds, other than whatever company you’re stuck with for a 401(k) (mine is TRowe Price). Individual stocks I don’t do. I tend to put more money in small and mid cap funds than in big company ones, because big companies basically can’t get much bigger and too many don’t pay dividends.
That is correct, the interest is paid back to yourself since you borrowed the money from yourself.
But keep in mind you are not making any money on the amount you have loaned out. So if you take out $30,000 for a down payment on your house and it was getting a 10% annual return on your investments, that is ~ $3000 a year you are missing out on.
In the case of using it as a down payment you have to consider if that is your best option. Would the additional cost of the mortgage with a smaller down payment/higher LTV (i.e. higher rate adjustments and mortgage insurance) be greater than the opportunity cost (the ~$3000 in the example above) of the cash you loaned out?
With the new LTV price adjustments from the GSEs and the recently increased annual FHA mortgage insurance premiums, a 401k loan might be a more attractive option than a high LTV mortgage loan.
Low-cost passively managed investment fund. Having it be genuine low-cost and not just sort-of-low-cost is the most important part.
Or just buy Goldline.
To add: If for some reason you can’t make the repayment within the time frame (5 years, except for 1st home), you get hit with a 10% penalty on top of taxes for the withdrawal. So don’t lose that job.
Also, you’re paying taxes twice - - you repay the loan with AFTER tax money, then it’s taxed again when you withdraw it in retirement. I’ve been tempted to take out a 401(k) loan but never did it.
Alright guys, I just accepted my first career job (yay!) and thus encountering my first retirement plan considerations. Keep in mind that I am 23 years old.
My company has a 401k Profit Sharing Plan. They do not match contributions, but they “supposedly” have a very lucrative profit sharing plan. I don’t know much about that yet as I have only received documentation to read over, and will start my first day tomorrow.
Anyways, I will be able to contribute to my 401k as soon as I get my first paycheck.
The plan lets me make both 401k and/or Roth 401k defferals. I understand both in theory, but haven’t had experience with either.
I’m allowed to designate a % to take out of my salary, which will be distributed among a series of Asset Classes/Funds which include: Cash, Bonds, US Stocks, INTL Stocks, and other asset allocations. I’m not sure if that is the norm across most company 401k’s.
It wouldn’t be possible for me to achieve the max yearly contribution.
So any advice over what makes the most sense for someone my age? Whether I should stick to the classic or Roth 401k. As far as contributions go, I suppose I should put in as much as I think I can afford, but again I have no experience with a lot of these things and don’t want to get bitten in the ass.
At 23, your financial future is wide open. Congratulations on the 1st career job, and good work deciding to start saving now. You can have millions in your 60’s if you stick with it.
I don’t have experience with Roth 401(k)'s - my employer hasn’t set that up, but I’m at the point where I need all the tax break I can get NOW (2 kids, one going into high school), so I probably would just continue to max out my traditional 401(k) anyhow.
But at 23, assuming you’re not already with kids and house, I would seriously consider taking a hit on the taxes now in exchange for no taxes on money that’s grown for 40 years, using the Roth 401lk. You have to assume you’re making less money now than you will in the future, and your taxes today will almost certainly be less than your taxes in 40+ years. Even if money’s tight and you’re saving for a house, etc, life will never be cheaper for you than it is today. Switch to the traditional 401k later on when you need the money.
And put in as much as you possibly can.
So there’s some life advice from an anonymous guy on the internet. But for what it’s worth, if Roth 401k’s existed when I was in my 20’s I would have been all over them.
Okay, so you have no company match, right? Is the profit sharing thing independent of the 401k, or does it require you to contribute to the 401k?
Also, do you have the expense ratios for those funds that you’re investing in? They should give you a prospectus for them that lists the expense ratio somewhere. Absent anything specific, I’d assume that they’re okay but not great.
So. If you really genuinely have no particular reason to contribute to the 401k for “extra” rewards, then I would actually consider doing the following:
-
Invest in a Roth IRA through Vanguard. This is basically identical to a Roth 401k, except that you can put less money in it (only $5K/yr). If you don’t get any kind of match at all, then there’s no reason to prefer the Roth 401k to this, and this will let you pick (probably) better funds.
-
Take the remaining amount that you want to contribute, and put it in your regular 401k. If the funds in the 401k are pretty decent, and you’re going to be saving less than $10K/year, you might even want to split 50/50 between Roth IRA and regular 401k, to kind of hedge your bets on tax rates.
(Short digression: You want Roth if you think you will be paying a higher tax rate when you withdraw your money than you are now; you want standard otherwise. But good luck predicting both your income level and tax rates in 40 years. It would be like sitting in the Kennedy administration, trying to anticipate George W. Bush’s tax cuts. So I like the idea of putting some money in both, so that no matter what happens, you aren’t wringing your hands, agonizing over having chosen wrong.)
- Invest across both accounts with an asset allocation that you’re comfortable with. At your age, “experts” would say that you should be heavily into stocks with maybe a smattering of bonds, but I know people who, in 2000 and 2008, pulled all their money out of the stock market because they were horrified at how much they’d lost. If you’d be one of those people, don’t invest that much in stocks, because you’re just screwing yourself.
The loan has no effect on the taxation. You’re repaying it with after tax money, but the money you got was never taxed in the first place. Think of it this way: If you had a regular bank savings account with $10K of after-tax money, then you took a $10K loan out from the 401k, repaid it with the money from your savings account, and then put the loan amount into savings, did you pay extra taxes? Obviously not.
I guess I’m missing something.
Why put the loan into savings if you’re paying off the loan from those savings? He’s talking about spending the loan. Why not just spend it from the savings account if he already has it? What’s the need of a loan?
And you are paying extra taxes when you eventually get that money back in distributions during retirement. You paid taxes on it before you repaid the loan, and you pay again when it’s taxable distributions. The fact that what you withdrew from the 401k was not taxed doesn’t matter.
Deposit $10,000 tax free into 401k
Withdraw $10,000 from 401k as a loan
Pay back $10,000 loan with after-tax money, i.e, pay taxes
Eventually get that $10,000 back from 401k in retirement and pay taxes again.
Granted, in his case he doesn’t have to deal with this for 40 years.
You would never do what I’m saying, because it’s silly. It’s just removing all the other variables to make it clear what’s happening.
To use your example, if you didn’t take the 401k loan, you:
Deposit $10K tax free into 401k.
Make $10K in additional post-tax income eventually over time, paying taxes on it.
Spend that $10K on whatever you were going to take out the loan to do.
At the end of that time, you bought something with $10K of after tax money, and you have $10K of untaxed money sitting in your 401K. That happens whether or not you take the 401k loan for it; the taxes are a non-issue.
The profit sharing is independent. I can choose to opt out of the 401k, but if/when money shows up due to profit sharing, those funds will have been distributed among the same funds. So I still have to choose the distribution even if I decline the 401k.
I don’t have those in my current documentation. It’s possible I can get access to those elsewhere once I start working. Is there any reason for me not to list the funds here?
Thanks for all the other information. I never thought about opting out of the 401k plan, but you’re right I don’t think there is a bonus to it. I would get the same profit sharing money either way. Hmm, so many decisions.
mkozlows’ advice above sounds good.
also, these guys wrote a free pdf ebook on investing and it’s free to download.
Burton G. Malkiel is the bestselling author of A Random Walk Down Wall Street and Charles D. Ellis is the bestselling author of Winning the Loser’s Game
they condensed their knowledge into a compact little book a la the “elements of style”
Yep, I like the articles on http://www.efficientfrontier.com/
Not in the US, so the stuff on 401 I can’t comment on. But low cost, disciplined investment is the way to go, with a small amount of “play money” on individual things. We save >50% of income, mostly because our income outstripped our needs, and even wants, some time back. E.g. Car is 9 years old, bought 2 years ago. I could afford new one, but am too miserly.
Where I am weak at is rebalancing, in that I don’t get round to doing it. Will stick to x% of savings going into equity, but don’t rebalance the outcome.
At least you are in good company. I agree with about 95% of what Bernstein writes at Efficient Frontier, & I believe he advocates only rebalancing every 2-4 years. Usually just allocating new money to whatever part of your allocation has performed least well in the last 6 months takes care of any rebalancing that needs to be done.