Author Topic: To 401k or not to 401k? That is the question.  (Read 8312 times)

kasperle

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To 401k or not to 401k? That is the question.
« on: September 08, 2015, 12:48:38 PM »
Allo, fellow Mustachians!

I'm relatively early on in my path to FI, and I'm wondering if I should be investing in my company's 401k plan. I've read a handful of articles related to 401ks and early retirement, including the pinned topic here and the Mad Fientist's great article on 401ks. My situation might be a little different, though, as my company doesn't match.

I've currently placed all of my 401k into a single fund: the T. Rowe Price Retirement 2055 R. It has a higher expense ratio and worse returns than my Vanguard funds.

I'm currently planning to max out the 401k this year, but I'm wondering if I should adjust that at all. And if it's at all relevant, my yearly stash growth will be about 40-50k, so the 17.5k to max out a 401k isn't a majority of my total yearly savings, but it's not negligibly small, either.

Thanks for reading!


pbkmaine

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Re: To 401k or not to 401k? That is the question.
« Reply #1 on: September 08, 2015, 12:53:04 PM »
Is there a match? What are the funds offered? What are the expense ratios of the other fund So?

MDM

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Re: To 401k or not to 401k? That is the question.
« Reply #2 on: September 08, 2015, 01:21:37 PM »
No way to give you a justified answer without more info.

Unless your 401k fees are truly awful, and you plan to stay there for a long time, using the 401k will likely be advantageous - but you should check.  See either of these tools:
MMM Case Study Spreadsheet '401k vs Taxable' tab or thefinancebuff tool.
« Last Edit: March 21, 2018, 08:53:52 PM by MDM »

kasperle

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Re: To 401k or not to 401k? That is the question.
« Reply #3 on: September 08, 2015, 03:27:46 PM »
Thanks for the replies, everyone!


Is there a match? What are the funds offered? What are the expense ratios of the other fund So?

No match. These are the other funds offered. The expense ratios are all bad compared to Vanguard. For instance, my VTSAX expense ratio is 0.05%, yet the rough equivalent through my 401k is 1.18%. This is a typical comparison of the expense ratios.

With no company match, I'd say definitely not.  You're saving nearly $1000 a week (high-five!).  I don't know your age, but to me a 401k for you seems like a lousy idea.  Were I in your shoes, I'd stick to a combination of low fee after tax funds and real estate rentals to get your taxes down.

Thanks for the high five! I'm 25 if that changes your advice. I do like the idea of sticking to other funds for the purpose of keeping my savings systems simpler, especially since the 401k has no match. I haven't gotten into the real estate market, yet, but I've (slowly) begun the process of looking for homes in the area.

No way to give you a justified answer without more info.

Unless your 401k fees are truly awful, and you plan to stay there for a long time, using the 401k will likely be advantageous - but you should check.  See either of these tools: MMM Case Study Spreadsheet '401k vs Taxable' tab or thefinancebuff tool.

Thanks for those resources! I'll check them out.

wtjbatman

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Re: To 401k or not to 401k? That is the question.
« Reply #4 on: September 08, 2015, 04:54:55 PM »
Holy shit. If you can save 50k a year, you could invest in lemon mines and you'd still be able to FIRE in a decade.

And for a real comment, if you're able to save that much per year, your income is likely very high. In that case you want to invest in the 401k to save on the ton of taxes you must pay.

seattlecyclone

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Re: To 401k or not to 401k? That is the question.
« Reply #5 on: September 08, 2015, 05:19:58 PM »
The thing about high-fee 401(k) plans is that you only have to pay those fees for as long as you work for that company. Once you switch jobs, you can roll that money over to a Vanguard IRA and invest in whatever you want. Meanwhile the tax deferral you get from participating in a 401(k) with a high income can be very useful.

johnny847

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Re: To 401k or not to 401k? That is the question.
« Reply #6 on: September 08, 2015, 07:46:47 PM »
The thing about high-fee 401(k) plans is that you only have to pay those fees for as long as you work for that company. Once you switch jobs, you can roll that money over to a Vanguard IRA and invest in whatever you want. Meanwhile the tax deferral you get from participating in a 401(k) with a high income can be very useful.

To pile on, a rule of thumb I heard on the bogleheads forum was take the difference in expense ratio of your 401k fund and that you could get from say Vanguard, multiply it by 30, and if it is less than 30% you should still use your 401k beyond the match.

But I don't know what the tax assumptions are for that rule of thumb. I have been meaning to sit down and calculate it myself.

MDM

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Re: To 401k or not to 401k? That is the question.
« Reply #7 on: September 08, 2015, 08:11:02 PM »
But I don't know what the tax assumptions are for that rule of thumb. I have been meaning to sit down and calculate it myself.
That rule of thumb has changed recently.  See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=172808.

It is now
"A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years."

Both of these tools give the same results (at least for several different cases): MMM Case Study Spreadsheet '401k vs Taxable' tab or thefinancebuff tool, and tend to support the new rule of thumb over a much broader range than the old rule.
« Last Edit: November 27, 2016, 07:53:16 PM by MDM »

johnny847

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Re: To 401k or not to 401k? That is the question.
« Reply #8 on: September 08, 2015, 08:13:24 PM »
But I don't know what the tax assumptions are for that rule of thumb. I have been meaning to sit down and calculate it myself.
That rule of thumb has changed recently.  See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=172808.

It is now
"A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years."

Both of these tools give the same results (at least for several different cases): MMM Case Study Spreadsheet '401k vs Taxable' tab or thefinancebuff tool, and tend to support the new rule of thumb over a much broader range than the old rule.

Ah a rule that is pegged to your actual tax rates. Much more sensible. I shall have to remember this one.
Thanks!