Author Topic: Don't Invest in Your 401k Debate  (Read 2991 times)

thrifted

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Don't Invest in Your 401k Debate
« on: October 09, 2015, 09:48:54 AM »
i just watched this video where altucher debates with business insider.  and they make some interesting points that i was wondering if our more seasoned mustachians can speak to.

http://www.businessinsider.com/401k-james-altucher-retire-scam-investing-taxes-2015-6

altucher said capital gains tax is 20% whereas income tax is 40% so don't invest in 401s.
business insider says you're getting taxed twice, because you're using after tax money to invest in the stock market.

altucher also said that you never know what the fees are and how your funds are being managed.
business insider replied that yes you do because thats in the prospectus and required by law.

altucher said only the guys making the big bucks at work get the employer match because everyone else can't afford it.  so he says go get a better paying job. (yes, very anti-eustachian.)

my mustache is barely there.  i have $75k in my 401k and get employer matching 10% if i put in 5%.  the matching is what motivated me to save there rather than anything else.  its my only savings and its been the easiest for me to do since i never really "see it" come out of my paycheck.  now though, i want to explore other options and start savings and investing outside of that.

so i really look forward to your input.

beltim

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Re: Don't Invest in Your 401k Debate
« Reply #1 on: October 09, 2015, 09:58:16 AM »
altucher said capital gains tax is 20% whereas income tax is 40% so don't invest in 401s.
business insider says you're getting taxed twice, because you're using after tax money to invest in the stock market.

Altucher doesn't appear to know how math works.  If income taxes are higher, then 401ks are better.  Business insider is right here.

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altucher also said that you never know what the fees are and how your funds are being managed.
business insider replied that yes you do because thats in the prospectus and required by law.

Again, business insider is right.  Altucher is making things up.  You might notice that as a hedge fund manager he'd be better off if people didn't invest in 401ks and instead invested in his fund.

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altucher said only the guys making the big bucks at work get the employer match because everyone else can't afford it.  so he says go get a better paying job. (yes, very anti-eustachian.)

Not enough people get an employee match, but it's still a large number – I think a majority of 401ks plans offer a match.

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my mustache is barely there.  i have $75k in my 401k and get employer matching 10% if i put in 5%.  the matching is what motivated me to save there rather than anything else.  its my only savings and its been the easiest for me to do since i never really "see it" come out of my paycheck.  now though, i want to explore other options and start savings and investing outside of that.

so i really look forward to your input.

With that matching, it's a no brainer to at least invest enough if your 401k to get the maximum match.  It's an automatic tripling of your investment.

Retired To Win

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Re: Don't Invest in Your 401k Debate
« Reply #2 on: October 09, 2015, 10:02:11 AM »
I've always put money first into my tax-deferred accounts.  Anyone who is making decent money while working would be making a good bet that their effective income tax rate after FIRE is going to be lower, so that would put them ahead right there.  Then you have to factor in that -- while you are still working away -- your tax-deferred stash is compounding on a gross basis, because no income taxes are being deducted from it each year -- so that would put one even further ahead.  PLUS, if one is actually getting an employer match of any sort on a 401K contribution, that's another push ahead in favor of the tax deferred account.

The rest (IMHO) is way too speculative to take seriously.

kendallf

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Re: Don't Invest in Your 401k Debate
« Reply #3 on: October 09, 2015, 10:10:50 AM »
i just watched this video where altucher debates with business insider.  and they make some interesting points that i was wondering if our more seasoned mustachians can speak to.

http://www.businessinsider.com/401k-james-altucher-retire-scam-investing-taxes-2015-6

altucher said capital gains tax is 20% whereas income tax is 40% so don't invest in 401s.
business insider says you're getting taxed twice, because you're using after tax money to invest in the stock market.

altucher also said that you never know what the fees are and how your funds are being managed.
business insider replied that yes you do because thats in the prospectus and required by law.

altucher said only the guys making the big bucks at work get the employer match because everyone else can't afford it.  so he says go get a better paying job. (yes, very anti-eustachian.)

my mustache is barely there.  i have $75k in my 401k and get employer matching 10% if i put in 5%.  the matching is what motivated me to save there rather than anything else.  its my only savings and its been the easiest for me to do since i never really "see it" come out of my paycheck.  now though, i want to explore other options and start savings and investing outside of that.

so i really look forward to your input.

Can't this guy afford a hair brush?  My god...   OK, with that out of the way, this is mostly outrageous crap, for the sake of being outrageous; Altucher knows that being outrageous drives blog traffic (and book selling traffic, which he's really pushing currently).

You have the section I bolded backwards; the top income tax bracket is ~40% (39.6%) and the top capital gains tax bracket is 20%.  Want to know where the 39.6% bracket begins?  $464k (for MFJ).  The point BI brings up is true in any case; investing in a taxable account is done with income that has already been taxed, presumably at the same outrageous top income tax rate, if we're going to compare apples to apples.

Fees: some 401(k) plans are outrageous.  The push is on to reform this.  Check yours, read the fine print.

I also disagree that it's only the "big bucks guys" who get 401(k) matches.  As of 2011, a survey indicates that 58% of plans offer some match.  That's free money. 

If you're living your life in a frugal fashion and intend to retire early, it's very likely that you can arrange your post-retirement income to pay minimal to no taxes.  Google and read articles by Gocurrycracker and the Mad Fientist for more details on Roth Pipelines; I'm too lazy to find the links right now.  :-)

Tremeroy

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Re: Don't Invest in Your 401k Debate
« Reply #4 on: October 09, 2015, 10:11:44 AM »
altucher said capital gains tax is 20% whereas income tax is 40% so don't invest in 401s.
business insider says you're getting taxed twice, because you're using after tax money to invest in the stock market.
—Not just income tax, but also payroll taxes, social security taxes, etc.
altucher said only the guys making the big bucks at work get the employer match because everyone else can't afford it.  so he says go get a better paying job. (yes, very anti-eustachian.)
—This is almost entirely untrue. Employers offer a match as a way of complying with ERISA rules regarding non-discrimination. The goal of employer matches is to incenntive lower-paid employees to participate in the plan. Check out wikipedia for a fast & mostly accurate summary: https://en.wikipedia.org/wiki/401(k)#Highly_compensated_employees_.28HCE.29

TomTX

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Re: Don't Invest in Your 401k Debate
« Reply #5 on: October 09, 2015, 10:11:59 AM »
Altucher is either an idiot, or deliberately spreading bad advice.


Telecaster

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Re: Don't Invest in Your 401k Debate
« Reply #6 on: October 09, 2015, 10:21:48 AM »
I didn't watch the whole thing, because James Altucher's stupidity overwhelmed me. 

1)  His first complaint is about mutual funds in general (not knowing how they are managed).   These days most employers offer an index option, so you actually do know.   He mentions fees, but even ETFs have fees and expenses.   Doesn't mean they are a bad deal.  Sure, you gotta be smart, but we knew that. 

2)  Tax rates, boy this is where he is truely factually and mathmatically challenged.    The top margins; rate  is indeed 39.9%.   For married filing jointly, the top margin is applied to income over $464,851/year.  Income below that amount is taxed at lower rates.    Think you'll be pulling that much out of your 401(k) every year?   I won't be.   

Here's the part where he really screws up on taxes.   As you contribute to a 401(k) or a tIRA, you reduce your taxes at the top marginal rate.   But you withdraw starting at the bottom rate, after the standard deduction of course.   So you are working and at  the 40% tax bracket (cough), each dollar you contribute to your 401(k) saves you 40 cents in taxes!   That's a great deal.   Then in retirement when you starting taking money out and you would be in the more modest 10-15% tax brackets (up to $75,000).   Not only did you defer taxes, you wound up paying them at a much lower rate.   Not too shabby. 

3)  401(k) Reduces salary.  Here's where I had to stop watching.  If what he is saying is true, then workers should contribute to the 401(k) and get the match because they being paid a lower salary for that benefit.   He's arguing against himself.   

sheepstache

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Re: Don't Invest in Your 401k Debate
« Reply #7 on: October 09, 2015, 11:40:21 AM »
Here's the part where he really screws up on taxes.   As you contribute to a 401(k) or a tIRA, you reduce your taxes at the top marginal rate.   But you withdraw starting at the bottom rate, after the standard deduction of course.   So you are working and at  the 40% tax bracket (cough), each dollar you contribute to your 401(k) saves you 40 cents in taxes!   That's a great deal.   Then in retirement when you starting taking money out and you would be in the more modest 10-15% tax brackets (up to $75,000).   Not only did you defer taxes, you wound up paying them at a much lower rate.   Not too shabby. 

This is the part where I think '401ks are taxed as income' gets tricky for people, is if you're in a low tax bracket to begin with. If you would get taxed in the 15% bracket on both ends, now you have the disadvantage of paying taxes on gains and dividends as though they're regular income. Of course you won't be withdrawing as much as you were earning, so the 'withdraw starting at the bottom rate' principal helps, but that the gains and dividends count as income is disappointing whereas outside a 401k they wouldn't be taxable at all (assuming the tax laws don't change...).  And for non-ER, non-frugal folks who who save a lot post-retirement income will be closer to pre-retirement income, so somewhat similar circumstances.

That's my understanding, at least, take it with a grain of thought.

I think it's also worth thinking about if you're going to retire with a partner still working, such that you might be better off getting dividends and gains at the preferred rate. My hunch is a 401k is still better, that the advantage of deferred taxes (and being able to save more than you could have otherwise) outweighs the disadvantages, but I haven't put numbers to it.