Author Topic: Questioning the advice to max the 401k.  (Read 15587 times)

KBecks2

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Questioning the advice to max the 401k.
« on: July 07, 2014, 05:34:54 AM »
MMM Friends,

I am not sure that I agree with the advice to totally max out the 401k as the optimal way to save for retirement.  My concerns are the 401k fees vs. the tax advantage.

My preference is to fully fund 2 ROTH IRAS (myself and spouse) and then invest the rest in either A) a taxable brokerage account or B) rental real estate --- possibly C)  debentures or real estate notes but I have not learned enough about those types of investments yet.

If we dump the 401k plan (i.e. discontinue future contributions to the 401k), the plan would be to auto-tranfer a similar contribution amount into a taxable brokerage money market (and then invest from there).  I am an active stock and stock options investor, and work with my account on a regular basis.

The 401k fees are likely prohibitive, and I am recalling Kiyosaki's advice that most of the profits in a 401k go to the plan advisors. 

On the taxes side -- our capital gains would be paid whenever stocks are sold (I would also pay capital gains on short term options trades).  But the long term capital gains tax rate is currently 15% if you are in the  25% - 25% tax brackets and 0% if you are in the 10% or 15% tax bracket. 

Of course we would still be paying regular income tax on the money to begin with (25%).  If we made a 10,000 contribution, the tax would be $2,500.   Let's say our balance is currently $200,000 -- our annual fees to the admins are probably already > $2,500 per year. 

If we pursue real estate rental investments, we would gain some new tax benefits related to real estate. (Mainly depreciation and business expenses.)  There may also be opportunities to use a solo 401k or self directed IRA as a real estate business owner.  (I do not thoroughly understand these options yet.)

I should run the math and check ALL our 401k fees, to make sure my assumptions are in the ball park, but I am strongly leaning toward discontinuing the 401k contributions and switching to taxable savings and
investments.

I am confident that I could outperform the 401k funds by investing independently.

Do you see any errors or concerns in my presentation?  Thanks for any feedback.  :-)

Khan

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Re: Questioning the advice to max the 401k.
« Reply #1 on: July 07, 2014, 05:48:07 AM »
It depends on the plan, and the funds offered. Some companies offer completely shitty plans, with terrible ER's, fees, etc.

Some don't. My options are quite good, and when I leave the company I'm with, I'll transfer it over to Vanguard.


Also, Kiyosaki is a lying worthless bag of air. Don't ever turn to him for advice.

Edit:
Quote
I am confident that I could outperform the 401k funds by investing independently.

I wouldn't be quite so confident of that my friend. I'm all for optimism, but you should probably shield some of your money from your decisions. I love stocks too, but I'm not going to give myself the complete reigns to -all- my money.
« Last Edit: July 07, 2014, 05:58:49 AM by Khanjar »

Bbqmustache

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Re: Questioning the advice to max the 401k.
« Reply #2 on: July 07, 2014, 05:58:17 AM »



Also, Kiyosaki is a lying worthless bag of air. Don't ever turn to him for advice.

Agree quite wholeheartedly with this line.  Also, please put at least enough in your 401K to get the full match your company offers (if they do offer a match).  Don't leave free money on the table.  After that, proceed with your cunning plan if that what works for you.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #3 on: July 07, 2014, 06:10:14 AM »
Quote
I wouldn't be quite so confident of that my friend. I'm all for optimism, but you should probably shield some of your money from your decisions. I love stocks too, but I'm not going to give myself the complete reigns to -all- my money.

I actually would rather have complete reign of all my money and have the responsibility and control than hand it over to "professionals."  It is a big job, and I get that.  I am understandably very interested in preserving capital and managing risk.

There are definitely 2 camps about 401k investing.  The real estate investors (not just Kiyosaki) are often down on the 401ks.  I'm going to spend some time really digging into the plan we have access to to determine our real costs of the fees vs. both the employer contribution and the tax savings. 

Similarly, I need to look at the advice here about maxing out an HSA.  As far as I can tell our offered plan does not include any investment option, so additional unused cash there seemed to be "parked", not invested.  This is a concern as well, but I need to look further.

Thanks for the comments!


matchewed

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Re: Questioning the advice to max the 401k.
« Reply #4 on: July 07, 2014, 06:10:52 AM »
You haven't even run any of the numbers on the 401k fees.

Let's look into it real quick. Let's assume you can put aside a full 401k max. Let's even ignore a company match. So you're capable of putting aside $17.5k. If you go the 401k route you'll put aside that money into a 401k. Let's say your plan options suck. And the lowest expense ratio you can get which matches your desired AA is .7%. That money you've put in, ignoring any gains, will get a fee of $122.50 levered against it annually.

That same $17.5k if you were to try to invest it in a standard account would need to be taxed first. Let's say you can pull it off and keep it all taxed at 15%. Well there goes $2625. Now you've got $14,875 to invest.

Assuming you'll get similar annual returns (let's say 5%). Your 401k would be at $18,375 at the end of the year. While if you had chosen to use a taxable account you'd gain $15,618.75.

Now I don't know about you but a 401k expense ratio is a much smaller chunk of my money than taxes. But feel free to show an example where those egregious fees get anywhere close to 15%.

Indio

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Re: Questioning the advice to max the 401k.
« Reply #5 on: July 07, 2014, 06:14:46 AM »
My 401K and 401K Roth is invested in Vanguard funds where the highest expense ratio is .40%. I'm happy with that and the tax write off that I'm getting now. When I access the funds I'm confident that I will be in a lower tax bracket than I am now.

Khan

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Re: Questioning the advice to max the 401k.
« Reply #6 on: July 07, 2014, 06:20:32 AM »
My 401K and 401K Roth is invested in Vanguard funds where the highest expense ratio is .40%. I'm happy with that and the tax write off that I'm getting now. When I access the funds I'm confident that I will be in a lower tax bracket than I am now.

Also this so much. As FIREpeople, I'd assume most of us tend towards at least some amount of frugality and minimalism. Therefore, the tax implications are a pretty decent point, as is the 401k-Roth pipeline which we can use to skirt by some of the 15% taxes even.

Thedudeabides

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Re: Questioning the advice to max the 401k.
« Reply #7 on: July 07, 2014, 06:21:09 AM »
I would check the fees first before making any decisions.

Secondly, a lot of active traders I know still use passive investing strategies for a portion of their portfolio. I know a professional trader who is employed by a hedge fund. He uses Vanguard for retirement accounts. Completely passive in retirement accounts.

If you invest the difference, you'll need to beat the market by 15% (less fees) to make it worth it. That's a tall order unless you are the next Peter Lynch.


KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #8 on: July 07, 2014, 06:57:32 AM »
But the fees on 401(k)s are not just a one time charge. The fees continue every year of investments. So let's say it's a 1% fee annually. I need to look into it further, but most of the funds offered in the plan we have access to are around 1% of assets annually.  Emphasis on the recurring fees vs. a one time tax savings.

Also, I am expecting that my individual performance will outpace the 401(k). Unfortunately, our 401(k) does not involve low-cost Vanguard funds. If they did, I wouldn't be so concerned.

We use Vanguard as our main brokerage, and I could easily split our contributions into a Vanguard mutual funds, and save a slice for real estates or active investing, or any other option we feel like.

Also, the actual tax savings is not $17,500. The tax savings is $17,500 times your effective tax rate. So our tax bracket is 25%.  $4,375, if we contributed the maximum amount. 


matchewed

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Re: Questioning the advice to max the 401k.
« Reply #9 on: July 07, 2014, 07:11:23 AM »
But the fees on 401(k)s are not just a one time charge. The fees continue every year of investments. So let's say it's a 1% fee annually. I need to look into it further, but most of the funds offered in the plan we have access to are around 1% of assets annually.  Emphasis on the recurring fees vs. a one time tax savings.

Also, I am expecting that my individual performance will outpace the 401(k). Unfortunately, our 401(k) does not involve low-cost Vanguard funds. If they did, I wouldn't be so concerned.

We use Vanguard as our main brokerage, and I could easily split our contributions into a Vanguard mutual funds, and save a slice for real estates or active investing, or any other option we feel like.

Also, the actual tax savings is not $17,500. The tax savings is $17,500 times your effective tax rate. So our tax bracket is 25%.  $4,375, if we contributed the maximum amount.

Right. That $4,375 would be an annual amount of taxes you'd pay if you were trying to stock away that $17,500 in a taxable account. We've already determined that you'd pay a pittance ($175 using your example) in comparison with leaving it in your 401k. This is simple math here. If you choose to go a suboptimal route because you think you can get returns which make up the $4,200 difference go for it. But I'd be all ears if you could find a 24% return out there.

Khan

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Re: Questioning the advice to max the 401k.
« Reply #10 on: July 07, 2014, 07:22:42 AM »
There's also transaction costs if you're managing your money yourself. Nothing is free in this world.

Thedudeabides

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Re: Questioning the advice to max the 401k.
« Reply #11 on: July 07, 2014, 08:21:50 AM »

But the fees on 401(k)s are not just a one time charge. The fees continue every year of investments. So let's say it's a 1% fee annually. I need to look into it further, but most of the funds offered in the plan we have access to are around 1% of assets annually.  Emphasis on the recurring fees vs. a one time tax savings.

Also, I am expecting that my individual performance will outpace the 401(k). Unfortunately, our 401(k) does not involve low-cost Vanguard funds. If they did, I wouldn't be so concerned.

We use Vanguard as our main brokerage, and I could easily split our contributions into a Vanguard mutual funds, and save a slice for real estates or active investing, or any other option we feel like.

Also, the actual tax savings is not $17,500. The tax savings is $17,500 times your effective tax rate. So our tax bracket is 25%.  $4,375, if we contributed the maximum amount.

It is true that the 1% would be recurring. But since the contributions are also recurring, then you would need to beat the market average by a significant margin every year to make up for the tax savings.

To take a simple example:

Assume market average of 7% and fees of 1% in 401k.

Option 1: Invest in 401k
7500 * 1.06^30 = 43,076

Option 2: Invest Difference
(7500 * .75) * 1.07^30 = 42,819

You'll see that even in this example, you would still not come out ahead after 30 years. And keep in mind that this would be for one contribution year. You would likely still have other contribution years that would have less time to take advantage of compounding.

The difference is even more pronounced over shorter time frames. If you want to retire early and have access to these funds early, then you're going to be better off in most cases contributing the full amount to the 401k.

Joel

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Re: Questioning the advice to max the 401k.
« Reply #12 on: July 07, 2014, 08:43:15 AM »
Also you should keep in mind that while your marginal rate is 25% now, and you expect a 15% marginal tax rate upon retirement. Some of your money will be taxed at a less than 15% rate upon retirement since that is your marginal rate. So unless you have enough expected ordinary income or enough tax deferred savings to produce that much income, you should continue contributing to your 401k.

Thedudeabides

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Re: Questioning the advice to max the 401k.
« Reply #13 on: July 07, 2014, 08:57:25 AM »
Yes. Also good to keep in mind that while your tax bracket will likely be low in retirement, you will not have to pay tax on your first $19,500 of income nor you first $70,700 in qualified dividends and LTCG!

http://www.gocurrycracker.com/never-pay-taxes-again/

(hat tip milesdividendmd for the link)


usmarine1975

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Re: Questioning the advice to max the 401k.
« Reply #14 on: July 07, 2014, 09:54:33 AM »
I agree with the at minimum at least contribute to get your matching contribution.  After that it is up to you.  But the Match shouldn't even be a second guess. 

I contribute to my company's simple granted we are a financial firm so I pay no management fee. I also contribute to a Roth and my wife and I have a jt brokerage.  My wife contributes to her 401k as well.

Your plan may offer in service roll overs that you might be able to consider to get control of your money outside your 401k.  Some plans do some do not.

Numbers Man

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Re: Questioning the advice to max the 401k.
« Reply #15 on: July 07, 2014, 10:25:38 AM »
But the fees on 401(k)s are not just a one time charge. The fees continue every year of investments. So let's say it's a 1% fee annually. I need to look into it further, but most of the funds offered in the plan we have access to are around 1% of assets annually.  Emphasis on the recurring fees vs. a one time tax savings.

Also, I am expecting that my individual performance will outpace the 401(k). Unfortunately, our 401(k) does not involve low-cost Vanguard funds. If they did, I wouldn't be so concerned.

We use Vanguard as our main brokerage, and I could easily split our contributions into a Vanguard mutual funds, and save a slice for real estates or active investing, or any other option we feel like.

Also, the actual tax savings is not $17,500. The tax savings is $17,500 times your effective tax rate. So our tax bracket is 25%.  $4,375, if we contributed the maximum amount.

Right. That $4,375 would be an annual amount of taxes you'd pay if you were trying to stock away that $17,500 in a taxable account. We've already determined that you'd pay a pittance ($175 using your example) in comparison with leaving it in your 401k. This is simple math here. If you choose to go a suboptimal route because you think you can get returns which make up the $4,200 difference go for it. But I'd be all ears if you could find a 24% return out there.

This is why I continue to max the 401(k) plan instead of putting the money in a taxable account (I'm not eligible for a ROTH IRA). My effective tax rate over the years has hovered between 12% & 15%. I have done pro forma tax returns for when I retire and the effective tax rate is around 12%. There are those that seem to be able to predict the future (sarcasm) and say that tax rates will be higher in the future. All I know is what the current tax landscape is and am planning for more of the same in the future unless there's pending legislation to the contrary. Until recently, the fees associated with 401(k) plans has been hidden under the rug and should give participants pause, but at the same time, it's difficult to make up the the extra $4,375 from the example above to choose a taxable account over a 401(k) account in my opinion.

Zaga

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Re: Questioning the advice to max the 401k.
« Reply #16 on: July 07, 2014, 10:28:50 AM »
How long do you think you'll be with this employer?  That's the most important key here I think.  DH has a fairly crappy 401-K with high fees, but since he doesn't expect to be with this employer for more than a few years, it makes sense to get the 25% tax break, pay the 1.5% fees for a few years, then the minute he changes jobs rollover to a low fee IRA.

The math says that the break even point on this is something like 15 years for us, so it's still worth the fees for now.  They are painful to pay, but taxes are also painful to pay.

beltim

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Re: Questioning the advice to max the 401k.
« Reply #17 on: July 07, 2014, 10:35:42 AM »

But the fees on 401(k)s are not just a one time charge. The fees continue every year of investments. So let's say it's a 1% fee annually. I need to look into it further, but most of the funds offered in the plan we have access to are around 1% of assets annually.  Emphasis on the recurring fees vs. a one time tax savings.

Also, I am expecting that my individual performance will outpace the 401(k). Unfortunately, our 401(k) does not involve low-cost Vanguard funds. If they did, I wouldn't be so concerned.

We use Vanguard as our main brokerage, and I could easily split our contributions into a Vanguard mutual funds, and save a slice for real estates or active investing, or any other option we feel like.

Also, the actual tax savings is not $17,500. The tax savings is $17,500 times your effective tax rate. So our tax bracket is 25%.  $4,375, if we contributed the maximum amount.

It is true that the 1% would be recurring. But since the contributions are also recurring, then you would need to beat the market average by a significant margin every year to make up for the tax savings.

To take a simple example:

Assume market average of 7% and fees of 1% in 401k.

Option 1: Invest in 401k
7500 * 1.06^30 = 43,076

Option 2: Invest Difference
(7500 * .75) * 1.07^30 = 42,819

You'll see that even in this example, you would still not come out ahead after 30 years. And keep in mind that this would be for one contribution year. You would likely still have other contribution years that would have less time to take advantage of compounding.

The difference is even more pronounced over shorter time frames. If you want to retire early and have access to these funds early, then you're going to be better off in most cases contributing the full amount to the 401k.

You also need to take into account taxes when you withdraw the amount.  Say in your example the investor retires in the 15% tax bracket.  Then all of their 401k comes out as ordinary income, and will be taxed up to that 15%.  But long term capital gains taxes in the 15% tax bracket are 0%, so the after-tax amounts in your example are:
Option 1: Invest in 401k
(43076 *.85) = 36615
Option 2: Invest in Taxable
(42819 *1.00 = 42819

The crossover point at this return, and tax brackets is in year 15.  If you bump it up to 1.5% fees, the the crossover point is just 10 years.

There are easily 401k plans out there that aren't worth investing in, depending on individual circumstances.

slugline

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Re: Questioning the advice to max the 401k.
« Reply #18 on: July 07, 2014, 10:39:53 AM »
If a 401K administrator is charging anything like 1% of account balance, that's crappy. But if you get more than 1% in matching funds from your employer, passing those up would be even worse, right? I hope the plan has stuff worth investing in at least....

beltim

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Re: Questioning the advice to max the 401k.
« Reply #19 on: July 07, 2014, 10:50:18 AM »
If a 401K administrator is charging anything like 1% of account balance, that's crappy. But if you get more than 1% in matching funds from your employer, passing those up would be even worse, right? I hope the plan has stuff worth investing in at least....

You'd have to run the numbers, as there are cases where matching makes a difference and cases where it doesn't.  The percentages refer to different things - employer contributions are usually expressed as a percentage of salary, whereas fees are a percentage of the total invested amount.  So for year 1 contributions, let's say the employee invested 10% of his salary and the employer matched 1%.  The higher fees of the 401k outweigh the 1% contribution after 25 years.  If the contribution is 2%, then it takes about 34 years for the fees to outweigh the contribution.

If you have perhaps the mode of options, where the employee contributes 6% and the employer contributes 3%, then it'd take more than 50 years for a 1% higher annual fee to outweigh the contributions. Even at 1.5%, it'd take about 39 years to reach the crossover point.  This is why the standard advice is that it's a good idea to get the match regardless of how bad a 401k plan you have.

Thedudeabides

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Re: Questioning the advice to max the 401k.
« Reply #20 on: July 07, 2014, 10:53:30 AM »


But the fees on 401(k)s are not just a one time charge. The fees continue every year of investments. So let's say it's a 1% fee annually. I need to look into it further, but most of the funds offered in the plan we have access to are around 1% of assets annually.  Emphasis on the recurring fees vs. a one time tax savings.

Also, I am expecting that my individual performance will outpace the 401(k). Unfortunately, our 401(k) does not involve low-cost Vanguard funds. If they did, I wouldn't be so concerned.

We use Vanguard as our main brokerage, and I could easily split our contributions into a Vanguard mutual funds, and save a slice for real estates or active investing, or any other option we feel like.

Also, the actual tax savings is not $17,500. The tax savings is $17,500 times your effective tax rate. So our tax bracket is 25%.  $4,375, if we contributed the maximum amount.

It is true that the 1% would be recurring. But since the contributions are also recurring, then you would need to beat the market average by a significant margin every year to make up for the tax savings.

To take a simple example:

Assume market average of 7% and fees of 1% in 401k.

Option 1: Invest in 401k
7500 * 1.06^30 = 43,076

Option 2: Invest Difference
(7500 * .75) * 1.07^30 = 42,819

You'll see that even in this example, you would still not come out ahead after 30 years. And keep in mind that this would be for one contribution year. You would likely still have other contribution years that would have less time to take advantage of compounding.

The difference is even more pronounced over shorter time frames. If you want to retire early and have access to these funds early, then you're going to be better off in most cases contributing the full amount to the 401k.

You also need to take into account taxes when you withdraw the amount.  Say in your example the investor retires in the 15% tax bracket.  Then all of their 401k comes out as ordinary income, and will be taxed up to that 15%.  But long term capital gains taxes in the 15% tax bracket are 0%, so the after-tax amounts in your example are:
Option 1: Invest in 401k
(43076 *.85) = 36615
Option 2: Invest in Taxable
(42819 *1.00 = 42819

The crossover point at this return, and tax brackets is in year 15.  If you bump it up to 1.5% fees, the the crossover point is just 10 years.

There are easily 401k plans out there that aren't worth investing in, depending on individual circumstances.

Indeed. Need to run the numbers and map out an individual plan.

401k withdrawals will be taxed at ordinary income, but there are strategies for avoiding tax on withdrawals altogether, such as ROTH conversion ladders.

Here is a great article on this:

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

thepokercab

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Re: Questioning the advice to max the 401k.
« Reply #21 on: July 07, 2014, 10:56:39 AM »
OP- I contribute to a company sponsored Simple IRA, through Fidelity, and we only have access to horrible fund offerings.  No index funds, big expense ratios, etc..  But, I am actually able to park my contributions into a money market account and then every month Fidelity liquidates that money market account and sends a check to Vanguard, where I was able to set up a Simple IRA and invest everything in a Total Stock index fund. 

Anyway, just something to keep in my mind.  I had no idea this option was available to me and really had to dig for it (HR could provide very little in the way of guidance). It definitely took a few hours of work, but i'm able to get the tax benefits of maxing out my Simple IRA, while also getting to invest in a low cost index fund.  So if you dig hard enough, you might find some other options that are more palatable. 

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #22 on: July 07, 2014, 11:01:59 AM »
Thank you so much everybody for helping with this conversation.  I truly appreciate it.  I am starting to look at the 401k in greater detail, including the individual fund fees plus the administration fees. Some of the funds have fees if you sell and try to rebalance.

I am not sure how much longer my husband will be at his company before rolling over.  He is actually not too sure about retiring early, although I would love for him to have the option so he feels the freedom to do as he chooses.  I am guessing that he will be at the job for another 5 to 10 years.  (Does that sound awful?)

One of our goals is to just *save more*.  I had been keen on paying off our mortgage, but have decided that instead of paying down the mortgage, to auto-save and invest the money that would be used to pay it down. 

A higher savings rate is our ultimate goal.  Should it be in the 401k?  Should it be into our brokerage? 

I am learning from the conversation, thanks so much for sharing your thoughts and info.  :-)




matchewed

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Re: Questioning the advice to max the 401k.
« Reply #23 on: July 07, 2014, 11:05:13 AM »
You have to run the numbers for yourself. Lay out the 401k options and plan. Figure out the match if there is one. Figure out what funds support your chosen asset allocation. Pick the ones that have minimal expenses.

Then determine what would happen if you decided not to use the 401k. There are already examples laying out the math behind the decision in this thread.

Feel free to return and ask any questions you might have as you run these numbers.

okashira

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Re: Questioning the advice to max the 401k.
« Reply #24 on: July 07, 2014, 11:23:58 AM »
Thank you so much everybody for helping with this conversation.  I truly appreciate it.  I am starting to look at the 401k in greater detail, including the individual fund fees plus the administration fees. Some of the funds have fees if you sell and try to rebalance.

I am not sure how much longer my husband will be at his company before rolling over.  He is actually not too sure about retiring early, although I would love for him to have the option so he feels the freedom to do as he chooses.  I am guessing that he will be at the job for another 5 to 10 years.  (Does that sound awful?)

One of our goals is to just *save more*.  I had been keen on paying off our mortgage, but have decided that instead of paying down the mortgage, to auto-save and invest the money that would be used to pay it down. 

A higher savings rate is our ultimate goal.  Should it be in the 401k?  Should it be into our brokerage? 

I am learning from the conversation, thanks so much for sharing your thoughts and info.  :-)

This thread is mostly wasted cold, oxygenated air turned to hot air without any actual numbers. You can't question anything without actual data.

My company's 401k has amazingly low fees, and in fact, I would prefer to go over the max and I have considered after tax contributions.

beltim

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Re: Questioning the advice to max the 401k.
« Reply #25 on: July 07, 2014, 11:33:40 AM »
Indeed. Need to run the numbers and map out an individual plan.

401k withdrawals will be taxed at ordinary income, but there are strategies for avoiding tax on withdrawals altogether, such as ROTH conversion ladders.

Here is a great article on this:

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Yes, I'm very familiar with those strategies.  You can only avoid tax on withdrawals altogether if you spend less than $12,800 per year from your tax-advantaged retirement accounts.  It's possible, but it's far more likely that people will have to pay some taxes on their tax-advantaged retirement accounts.  Plus, once you turn 62-70 and begin receiving Social Security, you almost certainly will have to pay taxes from 401k or IRA withdrawals.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #26 on: July 07, 2014, 12:39:23 PM »
Thank you so much everybody for helping with this conversation.  I truly appreciate it.  I am starting to look at the 401k in greater detail, including the individual fund fees plus the administration fees. Some of the funds have fees if you sell and try to rebalance.

I am not sure how much longer my husband will be at his company before rolling over.  He is actually not too sure about retiring early, although I would love for him to have the option so he feels the freedom to do as he chooses.  I am guessing that he will be at the job for another 5 to 10 years.  (Does that sound awful?)

One of our goals is to just *save more*.  I had been keen on paying off our mortgage, but have decided that instead of paying down the mortgage, to auto-save and invest the money that would be used to pay it down. 

A higher savings rate is our ultimate goal.  Should it be in the 401k?  Should it be into our brokerage? 

I am learning from the conversation, thanks so much for sharing your thoughts and info.  :-)

This thread is mostly wasted cold, oxygenated air turned to hot air without any actual numbers. You can't question anything without actual data.

My company's 401k has amazingly low fees, and in fact, I would prefer to go over the max and I have considered after tax contributions.

I'm trying to sort out MY plan.  That's why I'm questioning.  It is not a critique of what other folks are choosing.

okashira

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Re: Questioning the advice to max the 401k.
« Reply #27 on: July 07, 2014, 12:50:54 PM »
Thank you so much everybody for helping with this conversation.  I truly appreciate it.  I am starting to look at the 401k in greater detail, including the individual fund fees plus the administration fees. Some of the funds have fees if you sell and try to rebalance.

I am not sure how much longer my husband will be at his company before rolling over.  He is actually not too sure about retiring early, although I would love for him to have the option so he feels the freedom to do as he chooses.  I am guessing that he will be at the job for another 5 to 10 years.  (Does that sound awful?)

One of our goals is to just *save more*.  I had been keen on paying off our mortgage, but have decided that instead of paying down the mortgage, to auto-save and invest the money that would be used to pay it down. 

A higher savings rate is our ultimate goal.  Should it be in the 401k?  Should it be into our brokerage? 

I am learning from the conversation, thanks so much for sharing your thoughts and info.  :-)

This thread is mostly wasted cold, oxygenated air turned to hot air without any actual numbers. You can't question anything without actual data.

My company's 401k has amazingly low fees, and in fact, I would prefer to go over the max and I have considered after tax contributions.

I'm trying to sort out MY plan.  That's why I'm questioning.  It is not a critique of what other folks are choosing.

But you didn't post your plan's fees ??? Or did I miss it.

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Re: Questioning the advice to max the 401k.
« Reply #28 on: July 07, 2014, 01:08:00 PM »
Start by looking at the plan fees and the fund choices.  Larger plans generally have better choices, some of the smaller plans are truly awful.  However, there is usually some form of an index fund or at least a money market or stable value fund with a fairly low ER.  In addition, the math shown in previous responses may not be relevant unless the before expense returns of the funds are equal.  Some of the managed funds with higher ER's actually perform well over time, even after expenses are deducted.  Look at the hypothetical growth of $10,000 before you turn your nose up at these funds.  If there is a company match that's FREE MONEY you are leaving on the table by not contributing.  Even if there is an administrative fee and the lowest cost funds are not great, that's still FREE MONEY.  Yes, I'm shouting.  Hold your nose and take the FREE MONEY.

I had a 457 plan administered by Prudential.  The funds were expensive and not particularly good.  I paid a monthly administrative fee of less than $5.00.  There was no match, as there was a pension plan.  I maxed out the plan and picked from the funds with the best long term performance after expenses were deducted.  I still did very well with the fund choices available and I got the tax benefit and the additional flexibility of deferred compensation.

Everyone is a trading genius when the market goes up consistently.  Just ask those folks that invested in tech stocks in the late 1990's.  Day traders made fortunes, or at least said they did. Sadly, those folks found out they weren't really all that smart when the market turned, and many of them lost everything.  My suggestion is to have a boring "Plan B," in case the options and trading don't work out as planned.  Your DH's 401k can be part of Plan B.

4alpacas

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Re: Questioning the advice to max the 401k.
« Reply #29 on: July 07, 2014, 03:04:06 PM »
Everyone is a trading genius when the market goes up consistently.  Just ask those folks that invested in tech stocks in the late 1990's.  Day traders made fortunes, or at least said they did. Sadly, those folks found out they weren't really all that smart when the market turned, and many of them lost everything. 
+1

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #30 on: July 07, 2014, 03:20:43 PM »
Our 401k is also through Prudential.  We will have the current balance, $200k, tucked away and I need to figure how the match works.  There is one and we don't want to waste it.  I hope to also look at real estate and diversify away from only stocks.  Our stocks are recommendations from a newsletter, so we are not totally alone.  Must learn more.

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Re: Questioning the advice to max the 401k.
« Reply #31 on: July 07, 2014, 04:39:42 PM »
I really have nothing nice to say about Prudential, except our plan had a good stable value fund that paid close to 3 percent through 2013.  I left enough money in there after I retired to cover a year of expenses if everything went to hell.  It made around 3 percent year in, year out, even in 2008 and 2009.  Deferred comp is not a qualified plan, so distributions are not subject to age penalties.  Once I reached the magic age of 59 1/2, I shed a crocodile tear and rolled it over.

You probably have at least one index fund, probably an S&P 500, that has an expense ratio of 0.5 percent or less.  There were a couple of American Funds in our 457 plan that after expenses performed better than the most comparable indexes over time.  The selling points on these IIRC was they were the Class A shares, but the load was waived.  The remaining funds in our plan were pretty much garbage.  The plan rule was no fund could be rated lower than three stars by Morningstar.  The joke at work was that we got all the deteriorating funds that started out at three or four stars and disappeared from the menu when they hit two stars. 

If you look through the funds and their "report cards,"  you should probably find a couple that you can live with.  They won't align with your overall asset allocation, but you can make adjustments elsewhere to compensate.  Just put a clothespin on your nose and go for that FREE MONEY!

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #32 on: July 08, 2014, 06:02:49 AM »
Here are the funds we are invested in in the 401k with fees.  I think there are additional fees for admin, but not sure, and I might need to call them and ask a lot of questions about this.  We had been putting into all of these funds, and still are putting into most of them (except Janus.).  Perhaps I will have us put everything into the lowest fee option -- T Rowe Price.

I had been interested in international exposure, but can get that on my own as needed.  I also do like American companies very much (as Warren Bufett recommends -- invest in American companies).

T Rowe Price Capital Appreciation Fund - 0.71%
American Funds Fundamental Investors R3 -- 0.96%
(X) Janus Balanced Fund -- 1.08%
American Funds Euro Pacific Growth R3 Fund -- 1.14%
First Eagle Overseas A Fund --  1.15%
Fidelity Investor New Insights T Fund -- 1.18%
Columbia Mid Cap Value A -- 1.17%
Prudential Jennison Natural Resources A Fund --  1.17%

There are fees, as far as I can tell, to sell and re-sort the balances, so I would let the current balances ride??  Or at least compare to see what the fee to change funds is compared to the recurring fees to stay.  Geesh! 

We are putting in about $500/month.  Not a huge number.  I need to figure and confirm how the match works, and I am guessing that any new auto-savings will go into a taxable account. (We do fully fund ROTH IRASs every year).

matchewed

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Re: Questioning the advice to max the 401k.
« Reply #33 on: July 08, 2014, 06:12:49 AM »
I wouldn't just arbitrarily pick by what the fees are, but take into account my asset allocation and the fees. What is the lowest cost option that meets your desired portfolio?

As for rebalancing the existing money in the 401k you need to find out definitively if there are fees for selling or not. You can't be too whishy washy on that stuff. There needs to be some clear language about front or back loaded fees. Sometimes funds say these fees are waived for 401k accounts.

Also if these are all the options you have to invest in I would contact my HR department and start asking for lower fee broad based index funds. You can get other employees to chip in on the request as well to lend some more weight to it.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #34 on: July 08, 2014, 06:55:27 AM »
There are a few others offered that we don't use.  I am digging into the Prudential Web site and am coming across some language about fees, but I am not sure of the meaning of some of these.  As for asking the company for more options….. I don't know….  it is a small company with several "cooks in the kitchen".  I am not sure if an effort will be viewed favorably.  We will definitely roll over the 401k balance to Vanguard in the future when my husband leaves this company (timing unknown).

For our asset allocation, I would be comfortable with almost anything that is generalized / not targeted. It seems the T Rowe Price may fit, I will look into it further. Thanks!
------------------------------------------

From time to time, Plan expenses may be incurred in the course of normal Plan operation for Plan services such as legal, auditing, third-party administration, consulting, investment advice to the Plan, etc. If allowed by the Plan document, the Plan Fiduciary may direct that these expenses be paid by the Plan. The Plan Fiduciary determines how these expenses are allocated among participants at the time the expenses are paid. These expenses are typically allocated based on participant account balance but may be allocated by dividing the total expense to be deducted by the total number of participants in the Plan. If such expenses are charged to participant accounts, the dollar amount of such expenses will be disclosed on the secure principal.com website and on participant statements (if applicable) for the quarter in which they are paid.

The following participant-level services have additional fees. These participant transaction fees will be charged to your account balance for the services you elect to use. Participant transaction fees for the Plan include:

· Distribution fee: $40.00

· Distribution In-kind fee: $40.00

· Distribution Installment fee for new installment elections: $10.00 per quarter

· Loan Maintenance fee for new loans: $12.00 per quarter

· Loan Setup fee: $50.00

· Personal Retirement Account fee for new Personal Retirement Accounts: $6.25 per quarter

· Qualified Domestic Relations Order processing fee: $350.00 for each Domestic Relations Order processed. The fee is divided equally between the participant and the alternate payee involved unless specified differently within the Domestic Relations Order or the Plan's Administrative Procedures.
Please see the Investment Option Summary for fees and expenses that may be charged against your account based on investment-level transactions.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #35 on: July 08, 2014, 07:10:23 AM »
I just want to thank everyone who is sticking with me in this review of our 401k plan.  Here is the info on matching.  It doesn't sound like much of a match to me:

Our matching contributions give you an additional return on the amount you defer. We will
make a matching contribution equal to 25% of your 401(k) elective deferral contributions.
401(k) elective deferrals over 4% of your pay are not matched.


So it sounds like if we contribute 4% of pay, they will match 25% of that, so 1% of pay.   Then there is vesting….

Oh hey, listen to this gem:

Many investment options have charges and restrictions that apply when you remove
money or transfer funds. The dollar amount that can be removed or transferred may be
restricted along with the dates on which such transactions can be made. The plan
administrator can tell you more about these charges and restrictions and when they will
apply.
« Last Edit: July 08, 2014, 07:13:25 AM by KBecks2 »

matchewed

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Re: Questioning the advice to max the 401k.
« Reply #36 on: July 08, 2014, 07:11:48 AM »
There are a few others offered that we don't use.  I am digging into the Prudential Web site and am coming across some language about fees, but I am not sure of the meaning of some of these.  As for asking the company for more options….. I don't know….  it is a small company with several "cooks in the kitchen".  I am not sure if an effort will be viewed favorably.  We will definitely roll over the 401k balance to Vanguard in the future when my husband leaves this company (timing unknown).

For our asset allocation, I would be comfortable with almost anything that is generalized / not targeted. It seems the T Rowe Price may fit, I will look into it further. Thanks!
------------------------------------------

From time to time, Plan expenses may be incurred in the course of normal Plan operation for Plan services such as legal, auditing, third-party administration, consulting, investment advice to the Plan, etc. If allowed by the Plan document, the Plan Fiduciary may direct that these expenses be paid by the Plan. The Plan Fiduciary determines how these expenses are allocated among participants at the time the expenses are paid. These expenses are typically allocated based on participant account balance but may be allocated by dividing the total expense to be deducted by the total number of participants in the Plan. If such expenses are charged to participant accounts, the dollar amount of such expenses will be disclosed on the secure principal.com website and on participant statements (if applicable) for the quarter in which they are paid.

The following participant-level services have additional fees. These participant transaction fees will be charged to your account balance for the services you elect to use. Participant transaction fees for the Plan include:

· Distribution fee: $40.00

· Distribution In-kind fee: $40.00

· Distribution Installment fee for new installment elections: $10.00 per quarter

· Loan Maintenance fee for new loans: $12.00 per quarter

· Loan Setup fee: $50.00

· Personal Retirement Account fee for new Personal Retirement Accounts: $6.25 per quarter

· Qualified Domestic Relations Order processing fee: $350.00 for each Domestic Relations Order processed. The fee is divided equally between the participant and the alternate payee involved unless specified differently within the Domestic Relations Order or the Plan's Administrative Procedures.
Please see the Investment Option Summary for fees and expenses that may be charged against your account based on investment-level transactions.

None of those fees seem to apply to the sale of funds within the 401k. Check the individual fund literature.

You may want to get a bit more specific than -
Quote
I would be comfortable with almost anything that is generalized / not targeted.
Your asset allocation should reflect your risk tolerance and an understanding of potential returns. It really should be something that resonates with you. And as for the fund specifically, you should have a rough understanding behind what the fund is investing in. Generalized and not targeted doesn't really mean anything in this context.

matchewed

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Re: Questioning the advice to max the 401k.
« Reply #37 on: July 08, 2014, 07:15:27 AM »
I just want to thank everyone who is sticking with me in this review of our 401k plan.  Here is the info on matching.  It doesn't sound like much of a match to me:

Our matching contributions give you an additional return on the amount you defer. We will
make a matching contribution equal to 25% of your 401(k) elective deferral contributions.
401(k) elective deferrals over 4% of your pay are not matched.


So it sounds like if we contribute 4% of pay, they will match 25% of that, so 1% of pay.   Then there is vesting….

It may not sound like much but you haven't ran the numbers. In a scenario of someone earning $50k and contributing $17.5k the match would be $500. That may not seem like much to you but consider the tax savings, a $500 match (in the scenario)...etc. it's not a bad deal. It's not a great match by far but it's free money.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #38 on: July 08, 2014, 07:21:03 AM »
On vesting, it takes 6 years to be vested 100%.  My husband has been with the company more than 6 years.  I wonder if that means his new contributions are fully vested, or if they get vested 6 years from now?  The way it is written in the plan it seems that his new contributions are 100% vested as they are entered…..  does that sound right to you? 

The chart with the vesting %s is titled "Years of Vesting Service" and "Percent Vested".
2 years - 20%
3 years - 40%
4 years - 60%
5 years - 80%
6+ years - 100%

Maybe Years of Vesting service means that the match of his last paycheck gets vested 6 years from now???  (shrug).

matchewed

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Re: Questioning the advice to max the 401k.
« Reply #39 on: July 08, 2014, 07:26:24 AM »
On vesting, it takes 6 years to be vested 100%.  My husband has been with the company more than 6 years.  I wonder if that means his new contributions are fully vested, or if they get vested 6 years from now?  The way it is written in the plan it seems that his new contributions are 100% vested as they are entered…..  does that sound right to you? 

The chart with the vesting %s is titled "Years of Vesting Service" and "Percent Vested".
2 years - 20%
3 years - 40%
4 years - 60%
5 years - 80%
6+ years - 100%

Maybe Years of Vesting service means that the match of his last paycheck gets vested 6 years from now???  (shrug).

He's fully vested going forward is how most companies handle that.

Another Reader

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Re: Questioning the advice to max the 401k.
« Reply #40 on: July 08, 2014, 07:38:17 AM »
The T Rowe Price fund is better than most of the lot.  The expense ratio is the same as the retail version - PRWCX.  For a conservative, moderate allocation fund, it has done very well.  I have several T Rowe Price funds including this one and I have been pleased with their after expense performance.  The two American funds are ok.  My guess is you are not paying a load to buy them, so they are worth a look.  I'm not familiar with the others, but again, the loads on the Class A shares shown are probably waived.  If they are not waived, I would not contribute another dime.

There should be other choices, including a stable value fund.

Your match is poor.  It's still free money and the tax advantages alone are likely worth paying these folks $6.25 a month.

However, as others have pointed out, you need an overall asset allocation.  Pick the better funds and balance the allocation outside this account.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #41 on: July 08, 2014, 07:57:58 AM »
Ok, yes, he is 100% vested.   (I am looking at everything online and I have to say that online info rocks.) 

Just taking a look at a statement and we are currently contributing 8%.  So we are getting 1% match vested.

And, I'm now looking at the 2013 statement.  It says our "personalized rate of return" for 2013 was 15.21%, and that there were no admin fees deducted from our account.  So it seems that the only fees we are paying are the fund fees.  The S&P was up about 30% in 2013. 

Now, I need to start making decisions…. what to do? 

-- I am thinking of dropping down our contribution to just 4% to make the 1% company match.

-- If we do this, then we will continue to fully fund our ROTH, and also do taxable stock investments and possibly purchase rental real estate property (will have some tax advantages)

--OR--

Max this sucker out?   

OK, let's use an average 100,000k income (DH earns in this neighborhood, but his pay is variable).

I DON'T KNOW WHAT OUR SAVINGS RATE IS / SHOULD BE / CAN BE.  One of my goals it to inch our auto-savings higher, and higher and higher and see how high we can get it as we go along.   Obviously we can do 8% and are running on that as we speak.

Sorry if I'm bouncing around.

I really, really like the idea of being in *taxable* for the flexibility of it -- not that we are going to rush to spend it, but we can…  we can manage ourselves, we can choose anything we want -- index funds, stocks, options, real estate, etc.   I also learned some things up thread about long term capital gains and about the limitations of that 401k to Roth conversion pipeline. 

Hmm.


Another Reader

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Re: Questioning the advice to max the 401k.
« Reply #42 on: July 08, 2014, 08:10:18 AM »
In your shoes, I would max out the 401k.  You are all over the map with your investing ideas, and this is the one consistent investment that will get you where you need to be.

From your various posts, it looks to me like you could generate some extra money for taxable investing by cutting expenses.  In your shoes, I would focus on how to cut out a lot of the less important spending and skim the savings off into a savings account.  Pile up some cash while you investigate your options and educate yourself more about paper assets and real estate.  Once you have a solid plan in place (as opposed to a collection of ideas), you will have the money to start executing the plan.


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Re: Questioning the advice to max the 401k.
« Reply #43 on: July 08, 2014, 08:22:42 AM »
KBecks2, I've been watching this thread transpire with great interest. I love to discuss this stuff, but I wanted to see what everyone else had to say first.

I think you should max it out and find the best asset allocation to meet your needs, high return with low(ish) fees. Like matchewed said, don't just blindly pick the lowest fee because the ROR might stink. You have online access, so post the returns for YTD, 1 yr, 3, yr, etc. and get some guidance here.

He should ask the powers that be for lower fees/better options. He will never get them if he doesn't try.

Lastly, this thread, and one other 401K thread finally got me to read the 401K plan documents for the plan at my work. I discovered we are allowed to do in-service distributions, which I never knew before. I plan to do this very soon, and then again each year to avoid extra fees. The data might not be online, but you need to ask your husband to look into this with his HR department. If you can get this $200k out into an IRA you can beat those fees and returns without any problems.

matchewed

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Re: Questioning the advice to max the 401k.
« Reply #44 on: July 08, 2014, 08:25:21 AM »
Ok, yes, he is 100% vested.   (I am looking at everything online and I have to say that online info rocks.) 

Just taking a look at a statement and we are currently contributing 8%.  So we are getting 1% match vested.

And, I'm now looking at the 2013 statement.  It says our "personalized rate of return" for 2013 was 15.21%, and that there were no admin fees deducted from our account.  So it seems that the only fees we are paying are the fund fees.  The S&P was up about 30% in 2013. 

Now, I need to start making decisions…. what to do? 

-- I am thinking of dropping down our contribution to just 4% to make the 1% company match.

-- If we do this, then we will continue to fully fund our ROTH, and also do taxable stock investments and possibly purchase rental real estate property (will have some tax advantages)

--OR--

Max this sucker out?   

OK, let's use an average 100,000k income (DH earns in this neighborhood, but his pay is variable).

I DON'T KNOW WHAT OUR SAVINGS RATE IS / SHOULD BE / CAN BE.  One of my goals it to inch our auto-savings higher, and higher and higher and see how high we can get it as we go along.   Obviously we can do 8% and are running on that as we speak.

Sorry if I'm bouncing around.

I really, really like the idea of being in *taxable* for the flexibility of it -- not that we are going to rush to spend it, but we can…  we can manage ourselves, we can choose anything we want -- index funds, stocks, options, real estate, etc.   I also learned some things up thread about long term capital gains and about the limitations of that 401k to Roth conversion pipeline. 

Hmm.

I think you need to take a step back for a second.

A) Form an Investment Policy Statement.

B) Pick an Asset Allocation (this ties in strongly with A).

C) Run the math on the various scenarios. Just going by I think or I feel makes it too wishy washy, you need to have clear information.

D) Savings rate - as high as it needs be to balance your lifestyle that makes you efficiently happy and your financial goals.

E) Financial goals. You need them. They need to be clear and concise (also strongly ties in with A).

Part of the math is easy. Let's assume your current information you've given. You could go with either of the two following scenarios.

100k income, 8% contribution. So you're contributing 8k a year with a 1k match. If you were to drop that to the 4% you're proposing you'll 4k a year with a 1k match. Now you're proposing putting that 4k into a taxable account. But you need to pay income taxes on it first. I'm assuming you file jointly and are in the 25% bracket. So there goes 1k. You're now investing 3k into a taxable account. So dropping your contribution increases your tax payments significantly. Increasing your contribution reduces the amount of money you'll pay on taxes. All things equal you'll save a great deal more money in a 401k than a taxable account.

GGNoob

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Re: Questioning the advice to max the 401k.
« Reply #45 on: July 08, 2014, 08:37:14 AM »
I agree with the others that you have a lot of work to do. Get a budget and a plan so you know how much money you can be putting away each month into savings. This will also help you figure out where you can cut back on expenses. Once you have a budget, you may be able to figure out how much you need to save before you can retire (25 times your annual spending).

As far as the 401k question goes, here's what I would do:

Contribute the 4% to the 401k to get the employer match. Then max out IRA contributions for the both of you. Then I would go back and increase the 401k contributions if you have more money to save.

For the IRA, I'd personally suggest either Betterment (<- my referral link to give you $25) or Vanguard. With Betterment, you'd open your IRA (Traditional or Roth) and then you can pick your estimated retirement date or the date that you think you'd start accessing this money. With that information, Betterment will suggest an asset allocation of stocks/bonds that will be appropriate for you. With Vanguard, I'd suggest putting your money into a Target Retirement Date fund. Choose the date that best goes along with your target retirement date.

I'm suggesting these because you don't seem to know which allocation fits you, so these will help you get an asset allocation that goes with your age and retirement plans. I'm also a huge Betterment fan and have my Roth IRA and taxable investment account there.

Cheddar Stacker

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Re: Questioning the advice to max the 401k.
« Reply #46 on: July 08, 2014, 08:49:05 AM »
Contribute the 4% to the 401k to get the employer match. Then max out IRA contributions for the both of you. Then I would go back and increase the 401k contributions if you have more money to save.

Emphasis mine.

Great advice if it's possible, but with a $100K income he might not be able to make a deductible IRA contribution - he's right in the middle of the phase-out for deductibility. KBecks2 might be able to but it depends on their combined income and whether she has a 401k plan at her work as well. Combined income with both spouses "covered" (with a company 401K) the phase-out ends at around $115K. If only one is covered it goes up to around $188K.

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #47 on: July 08, 2014, 09:53:12 AM »
Thanks for all the comments.  :-)    Honestly, I think I'm more focused than I appear here, but I agree there is a lot more work to do. 

I have a rough investing strategy, and I can lay it out, but not everyone here will agree with it (or perhaps, no one else here will agree with it) but that is OK, it's my plan, it's supposed to be individual.  :-) 

At the same time, I am trying to work out a "what do I want to do with my life and career" type of question….  I am not sure if my income is going to be more hobby-ish, or more serious, or if I will be more of an investor than an employee.  Maybe I will be an active investor / active landlord for the next 20+ years. (I'm mid 40's)

I feel like I've come a long way from last year, when I first tried to total up our investments and assets and figure out where we are at financially.  Now I have our accounts in Mint, and it's easy to see our net worth and track our spending.  It's awesome. :-)

But there is still more work to do, for sure!

-- We need to figure out our target spending.  In all honesty, our yearly spending will likely be more than Mustachians, we may not even retire early.  I am not sure.  I truly admire the MMM family and they provide great inspiration.  My guess is $40k - $50k before DH would even think of leaving his job.  We need $1.25M.  We are 66% of the way there.    Whoops, we are….  55% of the way there (I forgot to subtract home equity.)

-- We need to do better with budgeting.  We had a budgeting meeting in April and made a budget, but who knows how it turned out.  Must practice this.  It's not easy!

Ah well, baby steps.  I am glad that this topic has been interesting and useful for some community members.  That is great.  Do you want me to try to articulate the investing plan (even though none of you will bless it, and I am not interested in approval stamps??)  Otherwise, maybe it's back to the topic of really figuring out if the 401k tax savings are worth it.  Math time??!! 
« Last Edit: July 08, 2014, 10:13:17 AM by KBecks2 »

KBecks2

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Re: Questioning the advice to max the 401k.
« Reply #48 on: July 08, 2014, 10:01:31 AM »
I think you need to take a step back for a second.

A) Form an Investment Policy Statement.

B) Pick an Asset Allocation (this ties in strongly with A).

C) Run the math on the various scenarios. Just going by I think or I feel makes it too wishy washy, you need to have clear information.

D) Savings rate - as high as it needs be to balance your lifestyle that makes you efficiently happy and your financial goals.

E) Financial goals. You need them. They need to be clear and concise (also strongly ties in with A).

Part of the math is easy. Let's assume your current information you've given. You could go with either of the two following scenarios.

100k income, 8% contribution. So you're contributing 8k a year with a 1k match. If you were to drop that to the 4% you're proposing you'll 4k a year with a 1k match. Now you're proposing putting that 4k into a taxable account. But you need to pay income taxes on it first. I'm assuming you file jointly and are in the 25% bracket. So there goes 1k. You're now investing 3k into a taxable account. So dropping your contribution increases your tax payments significantly. Increasing your contribution reduces the amount of money you'll pay on taxes. All things equal you'll save a great deal more money in a 401k than a taxable account.

Thank you for the great advice on getting clearer.  But as to that last part, did you see the post upthread where the withdrawals from the 401k will be taxed at ordinary income rates?  And also the poster who said that there is a max (a rather low max) on how much those tax free withdrawals amount to using that Roth conversion method from the blog?  These are two concerns that I feel are very valid.  Our target for comfort is going to be more like 40k or 50k a year, or heck, more than that if we do well with investments. 

You are right, it is about goal setting. :-)  Will we hang it up as soon as we reach "the number"?  I think we can and might play around just as the MMM family has done and earn more, grow more, etc. 

It feels like we are getting within range of our number, and are within 10 years of it.  Must keep planning and preparing. 

Cheddar Stacker

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Re: Questioning the advice to max the 401k.
« Reply #49 on: July 08, 2014, 10:08:21 AM »
If you are paying 25% taxes right now you will save taxes by deferring. Even if it's only due to the graduated tax tables. If you take out $45K during FIRE with no other income, $20K will be immediately sheltered by your standard deductions and exemptions, just for you two. You also have 3 kids, and who knows where they will be then, but if they're still dependents that's another $4K/kid. Plus you might have tuition you can deduct/get credits for.

Even if it's just you two, that $45K is now $25K. At today's rates you would pay about $2,850 on that income. $2,850 is 11.43% of $25K, and 6.35% of $45K depending on how you want to look at it. That's much, much less than 25%.

This is a huge win.