Chickening out on the 401(k). Do I need a facepunch?

[punnymustache]

I've only posted here a few times; I'm more active on other financial forums. It is a goal of mine to gain lots of knowledge and then start participating more here myself.

Backstory:
While I previously worked low-pay jobs, I'm gainfully employed for the first time in my life since last summer. I've been trying to make aggressive but appropriate financial decisions.

In the next 10-15 years, I would like to only need to work part-time and/or stop "working" to focus on my passion. My timeline (for a move to part-time) could move up if my husband and I decide to have kids sooner.

Okay, so here's the retirement-related stress I've run myself into:
Last month, I started contributing the amount that would let me max 2013.
I also put the max in my Roth IRA with Vanguard for 2012 and 2013.

About the 401k:
My company does not match. I am not impressed with our plan, which has relatively high fees.

Because I didn't take action earlier and am investing aggressively, contributing the max to the 401(k) monthly guarantees that my family will run a deficit every month.
I do have the money in my checking/savings to cover that deficit at least until September, possibly until the end of the year (depending upon my husband's income).

While I tried to make the smartest calls I could, I miss not seeing a deficit every month in my budget. New expenses are cropping up that I didn't have to account for when I made these calls.
I stress all the time about whether an unmatched 401(k) with high fees is worth it, especially since I really won't be touching this money until I hit "retirement age."
And because, let's be frank, the major retirement vehicle here is probably going to be my husband's investment account, no matter how well I do with my Roth IRA and 401(k).


Do I need a facepunch?
_{I probably do. The big thing that has me panicking about the deficit is that my car now requires more in repairs than it's worth.
One issue is that the brakes are shot, so it will be undriveable for safety reasons if not repaired soon.
I'd like to be able to buy its replacement in cash, which would mean I cannot afford to keep running this deficit.}

[ghaynes]

First thing that strikes me is how does your husband have $400k in investments making $10-20k a year?

[punnymustache]

The magic of being born with a silver spoon?

Puts me in a very weird position trying to figure out how to do all of this money stuff right, since I'm from a solidly middle class upbringing and he's from a bit higher means. But he's not wasteful with money, and understands that we can't live the way his parents live, which I very much appreciate.

[GreenGuava]

How long do you plan to be at this employer?  Is it a career move or a stepping stone?  If you don't think you'll be there more than a few years, maxing out while you can afford to do so is a smart idea.  You could then roll the contribution into either another 401(k) (if your next employer has a better one) or into a rollover/traditional IRA.

Also... I'd be a little wary of putting money into a 401(k) in anticipation of receiving money seven months out.

You could also cut back on the contributions and, if the money arrives and you still have paychecks left in 2013, you could boost those immensely. 

Either way, sacrificing sleep (the worries) or safety (the brakes) in order to sock away extra into an unmatched, high-fee 401(k) doesn't strike me as a good idea -- and I'm usually the guy saying people should be using tax-advantaged accounts more!

[clutchy]

Don't put yourself into a deficit.

If you could hit break even that would be fine since you have an E-fund and cash in the bank. 


I wouldn't go negative though in anticipation of an event that may or may not happen.


also regarding your plan, you could request them to add a vanguard total stock market index fund or an s&p 500 fund.  If they don't do it that sucks but tax deferral is usually always a better option than not.


ALSO since you don't make much consider doing the Roth 401k and take the tax savings later.

[punnymustache]

How long do you plan to be at this employer?  Is it a career move or a stepping stone?  If you don't think you'll be there more than a few years, maxing out while you can afford to do so is a smart idea.  You could then roll the contribution into either another 401(k) (if your next employer has a better one) or into a rollover/traditional IRA.

Also... I'd be a little wary of putting money into a 401(k) in anticipation of receiving money seven months out.

You could also cut back on the contributions and, if the money arrives and you still have paychecks left in 2013, you could boost those immensely. 

Either way, sacrificing sleep (the worries) or safety (the brakes) in order to sock away extra into an unmatched, high-fee 401(k) doesn't strike me as a good idea -- and I'm usually the guy saying people should be using tax-advantaged accounts more!

All good points. Especially the wariness--I am by no means a count-your-chickens kind of person in my day to day life.


It's hard to say how long I'll be at this employer. I do like my job but not enough to keep it if I figure out a better fit. I also have seen a lot of employee churn recently, which is never comforting. If I am not let go (which, right now I have a fine review under my belt and a reasonable-seeming manager), I would like to stay here for maybe another 1-5 years.
I definitely had been thinking that it would be a benefit to get money despite the fees and then, when making my next job hunt, look for a better deal on the retirement front or roll into a lower-fee IRA.

The whole retirement situation is messed up right now because my husband and I ended up with $25k in non- or low-interest earning accounts at the end of March. This was due to not caring previously about keeping up with inflation, and therefore not prioritizing it.
Once I realized that this was ineffective, I tried to make some calls pretty fast to try to revive our dead money. It's why I've been able to run at a deficit--it's primarily money that should have been going into better accounts in the first place. (We're really new at this money thing.)

I wish the 401(k) let me change my investment amount more frequently than once per quarter. That's really the most troublesome thing here: Whatever decisions I make have to be ones I can live with for 3 months.


I might scale back somewhat for Q2 and try to readjust for Q3 at the break-even point once I have more data to tell me where that is.

[GreenGuava]

Another thought:  what are the funds in your 401(k)?  Even in a bad plan, there are sometimes a good fund or two you might be able to use. 

[punnymustache]

I appreciate you responding. Right now I'm in Maxim Lifetime 2055 Portfolio II T11,2 at 1.13% "investment expenses." I have access to a lot of different funds. Some of the bond funds have lower "investment expenses" at .70% or .90%, and some of the large cap funds are around .95%. "Investment expenses" go as high as 1.46% and 1.58%. I know I might be able to save on the fees if I get out of the 2055 Portfolio and choose my own places to allocate the money, I just don't know if I'm ready to take that on quite yet.

[KingMe]

Life cycle funds may not be appropriate for you, since your husband has 400k invested elsewhere. LC funds assume you have no other investments. Since your husband does, I would would look at his allocation so you both know how to direct your other investments. I wouldn't let the unknown or complex issues of asset allocation push you into paralysis, however. It sounds like you have income to invest, so I would make sure you do it.

I'd see if you could make do with making the 401(k) contributions to max out for the year. In the alternative, you could contribute the amount that would ordinarily max out over the course of a year ($17,500/number of pay periods in a year) so you're accustomed to making contributions to max out when next year comes along. If you don't max out this year, I would make sure that you invest what you can, including maxing Roth IRA contributions for both you and your husband. You may also want to look into 529 plans for either yourselves or future children, if future higher education or children are in the plans.

You don't have to figure it all out at once. Even if the fees on your fund and 401(k) plan are high, you can choose a cheaper fund later. High fees suck, but they're not going to kill you for a few years. You have time to figure out the details, but the most important thing is investing as much as you can while you're young.

[RewardTraveler]

I'm assuming your husband is self employed by the earnings range you provided, have you looked into a self employed 401k for him?  This should give more flexibility on the funds in which you can invest.  You could shift most of your 401k deferral over to him and have more options.  Also, what about contributing to his Roth IRA for 2013?

If you're going to stick with your 401k, I would definitely look into alternatives to the 2055 portfolio, there really isn't anything special about it, it is usually just a combination of other funds.  A quick glance at one 2055 portfolio shows 60% domestic stocks, 28% foreign stock, 6% domestic bonds, 2% foreign bonds, 3% cash and 1% of other.

If it was me, I would look for a stock fund that mirrors the S&P 500 with low expenses (most should be <0.25%) within your 401k.  If you really like the 2055 portfolio you could accomplish the same thing by holding foreign stock, domestic bonds and foreign bonds in your Vanguard account, which should carry lower fees.

Alternatively, you could do an S&P 500 index fund in your 401k and use something like a 2035 Vanguard portfolio to approximate the 2055 portfolio w/ lower fees.  You'd have to do the math to see what the correct mix is, though.

[Senor Smallchange Soulpatch]

How liquid is that $400k of "investments".  If it's liquid (i.e. sitting in a taxable brokerage account) a facepunch is in order.  Maybe not a full-on facepunch, but at least a good firm open handed bitchslap.   You have four hundred fucking thousand dollars, why is something as trivial as the condition of your car even factoring into your investment decisions?  Sell off 2% of your taxable investments and you can get a very nice used car.

As far as running a "defecit", I wouldn't worry about it.  Continue contributing the max to your tax advantaged accounts and draw down that $400k as needed for cash flow.  You're effectively just transferring money from your taxable account into your tax-advantaged accounts (which is a good move for a number of reasons).  That's an entirely different scenario than running cash flow negative because you're buying a bunch of shit.

If that $400k is not liquid (i.e. tied up in a property or trust or something) then you can disregard everything I said above, although in the long run it may be a good idea to figure out how to make it liquid so you have better options going forward.

[daymare]

I absolutely agree with others who have suggested not running a deficit and counting on the future gift.  Better to hold off until the windfall is definite, then aggressively increase your contributions. (At that point you'll be able to contribute a large part of your salary, while covering recurring expenses with the gifted money).

Until a few months ago (taking a break now before starting a PhD), I also worked for a company whose retirement plan was from Great West.  Now, I don't know whether the options you have are the same as what I have, but I've attached below the breakdown of how I allocated my contributions.  My financial advisor and I put together the allocation trying to make the best of the less-than-stellar options offered.  I will note that my IRA is with Vanguard and will be (once my 401K rollover completes) divided 80/20 stock and bond index funds (20% small cap US (NAESX), 45% large cap US (VTSMX), 15% International (VFWIX), 10% Short-term bond (VFSTX), 10% Medium-term bond (VBMFX)).  This is basically to illustrate that I invest simply, for the long-term, with an eye on costs (as keeping costs low is a clear way to keep more of your returns).


Hope this helps!

[dragoncar]

Agree that the $400k, if liquid, is essentially a large emergency/slush fund that should be used to bring your car up to safe conditions.  I wouldn't worry about an Operating deficit with those funds.

I'm surprised nobody has mentioned tax brackets.  How much does a 401k contribution reduce your taxes?  I'd guess not much.  In that case, just go taxable.  I think for low brackets a 401k can be more trouble than it's worth.  Do you expect to have a higher or lower bracket in retirement?  Do you expect to do a lot of trading or will you index?

[Senor Smallchange Soulpatch]

I disagree about the 401k not being worth the trouble if the alternative is adding to the $400k already in a taxable account.  OP is young.  The many years of tax-free compounding that the 401k money will see is worth a lot, regardless of her current tax bracket.  Couple that with the likelihood that she'll only be with her current employer for a handful of years and can roll the 401k over to a self-directed IRA upon leaving makes maxing out the 401k now a slam dunk IMO.

If a Roth 401k is an option that would probably be even better.  Then she'd get to pay her taxes now while she's in a low bracket and get the tax-free growth.  But it doesn't sound like a Roth 401k is available.

[dragoncar]

I disagree about the 401k not being worth the trouble if the alternative is adding to the $400k already in a taxable account.  OP is young.  The many years of tax-free compounding that the 401k money will see is worth a lot, regardless of her current tax bracket.  Couple that with the likelihood that she'll only be with her current employer for a handful of years and can roll the 401k over to a self-directed IRA upon leaving makes maxing out the 401k now a slam dunk IMO.

If a Roth 401k is an option that would probably be even better.  Then she'd get to pay her taxes now while she's in a low bracket and get the tax-free growth.  But it doesn't sound like a Roth 401k is available.

Taxable accounts can also compound tax-free, and you don't have to pay (usually higher) income taxes on the gains or principle.  Since we don't have enough details, it's hardly a slam dunk.

[Senor Smallchange Soulpatch]

That depends on what you've got in the taxable account I suppose.  I'm in a somewhat similar position to the OP in that I have much more in my taxable 'Stash than in my 401k/IRA/Roth.  That's forcing me to keep a lot of asset classes in my taxable account that would be much better suited for a tax-advantaged account.  Those taxable investments are throwing off enough dividends and interest that I'm having to ship a non-trivial check to the IRS every quarter.  Obviously in the list of life's problems that's a pretty good one to have, but it does amount to a pretty severe drag on portfolio growth over time.  There's also the very real advantage of being able to reallocate assets within a tax deferred account without having to worry about cost basis, wash sales, etc.

Given that the OP already has a fairly large taxable 'Stash but has very little in her 401k and Roth I still think shifting the focus to getting more money in tax-advantaged space is the right move given the limited information we currently have.  IMO everyone should aim to have a decent 'Stash built up in taxable, traditional 401k/IRA, and Roth accounts in order to have diversification against risk that comes with not knowing with certainty what our tax status is going to be years down the road and/or what the gov't will do with tax policy in that time.

[punnymustache]

Thanks for all of the advice, particularly dinirik--it's definitely helpful for me to see someone else make the retirement situation work for them.

I don't know the full situation with the investments--it is/was a trust, but my husband is old enough now that I know that he would be allowed to pull (some?) money from it.
I know there's at least 5 figures in that trust/family of accounts sitting around more liquidly at present; it was suggested that we could use that as part of a down payment toward a house. (Side note: As the breadwinner, I'm not ready for the stress of a mortgage quite yet.)
My husband wants to live like that money's not there. While I understand his reticence to start pulling money now from an account that, in an ideal world, we'll be passing on to our future kids (less the amount we use), I think it's absurd to make investing decisions like we're poor when we're clearly not.

I'm getting a safer car this month, paying in cash. Took me long enough to make that call. I'll be trying to sell the old one privately. Ideally, this transaction won't noticeably affect the rest of the money situation.

It sounds like Roth 401k is an option. I will think about switching my contributions to Roth 401k in 2014. My tax bracket won't change no matter what I do with the 401k.


Last month we ran a deficit of $300 (paid for out of the ~$7k in checking accounts). If I can keep the deficit that low, this can be partially attributed to my skipping 401k investing for the first 3 months of the year.
(Maxing the 401k over the course of 12 months = $1458/mo vs maxing over 9 months = $1944/mo.)

While there will be leaner months this summer, the thing I'm most worried about is what we would do if I suddenly found myself unemployed for more than 3 months after having just contributed so much money to an account I can't touch for so many years. But I guess once the emergency fund was gone (3-6 months depending on expenses), worst case scenario we'd either take from my Roth IRA or from the investments, providing we could.