Author Topic: Goal: FI by 40, and not investing in 401k till FI'd.  (Read 30847 times)

Freeyourchains

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Goal: FI by 40, and not investing in 401k till FI'd.
« on: March 15, 2013, 09:27:20 AM »
Hello everyone,

My first concept of early retirement extreme came from an ebook called "How to retire by Age 35 by not winning the lottery."

In this book, she invested in real estate and rentals young, while not contributing to 401k plans and bonds had return rates of 18% during the 80's.

She advised not to invest in 401k/IRA until you were retired first, then invest all you want to  keep taxes at 0% since your AGI would be closer to $0 at financial independence.

Since i do not trust the government with money, as they are currently spending $4 Trillion dollars a year while in extreme Debts, I have a feeling by the time i turn age 59.5 or 67, the government will figure out some way to fee or tax every 401k/IRA account in existence, like they did with borrowing from social security, medicaid, and medicare programs.

I rather control my life and taxable portfolio account now in the present, then have some Billionaire Hedge Fund Managers pass all the risk onto my accounts, as they fee you, and take the first cut of all the capital gains and dividends, then give you a meager 3% cut. Let alone risking the Government in taking my life's savings, or increasing income taxes up to 90% later on in my life.

What do fellow Mustachians think? I live a frugal and happy lifestyle as is with average savings of 70% of my engineering paycheck. No more debts, no mortgage, and age 26 with goals in ERE/FI by age 35-40. My employer doesn't match any 401k amounts, but they offer it.
« Last Edit: March 15, 2013, 09:33:45 AM by Freeyourchains »

AlexK

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #1 on: March 15, 2013, 09:35:31 AM »
I'm putting away $17.5k per year into my 401k (the maximum allowed) because my tax bracket is high right now, and I'm not paying taxes on that money. When retired my tax bracket will be very low, so I can withdraw the money and pay little taxes on it. I don't see the benefit to pay taxes on all my income now.





GuitarStv

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #2 on: March 15, 2013, 09:56:23 AM »
Um . . . couldn't the government just as easily raise property taxes as tax 401Ks in the nightmare scenario you're describing?  And, doesn't 401k contribution end up being a tax deferral . . . so more money (back) in your hands right now?

There's no reason to have a 'billionaire hedge fund manager' manage your money, why don't you invest it yourself?

Don't get me wrong . . . owning property can be a great investment too.  Unless you're planning on somehow having a much higher income when drawing on your 401k than you do right now you're missing out by avoiding 401ks.  I don't quite follow the logic of your reasoning as described.

COguy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #3 on: March 15, 2013, 10:00:56 AM »
Since i do not trust the government with money, as they are currently spending $4 Trillion dollars a year while in extreme Debts, I have a feeling by the time i turn age 59.5 or 67, the government will figure out some way to fee or tax every 401k/IRA account in existence, like they did with borrowing from social security, medicaid, and medicare programs.

Like GuitarStv said:  Who's to say they don't levy a tax on real estate.  Say a 1% federal property tax.  Or, get rid of the mortgage interest deduction.  Or, something else.  What about taxable accounts.  They could raise the dividends and capital gains taxes.  Personally, since I save a lot, looking at it with your rhetoric I would say that:

1) I max out my 401k and play the "My average tax rate will be lower, so lets defer today" game.
2) I max out my Roth IRA and play the "The government might raise taxes" game.
3) I have taxable investment accounts in case they go after my retirement accounts.
4) I plan to have both a primary residence (which I effectively rent to myself) and possibly a rental house.
5) I max out my HSA to pay for medical bills for my future self.

Not totally fail safe, but it covers a lot of the bases.

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #4 on: March 15, 2013, 11:49:05 AM »
Like GuitarStv said:  Who's to say they don't levy a tax on real estate.  Say a 1% federal property tax.  Or, get rid of the mortgage interest deduction.  Or, something else.  What about taxable accounts.  They could raise the dividends and capital gains taxes.  Personally, since I save a lot, looking at it with your rhetoric I would say that:

1) I max out my 401k and play the "My average tax rate will be lower, so lets defer today" game.
2) I max out my Roth IRA and play the "The government might raise taxes" game.
3) I have taxable investment accounts in case they go after my retirement accounts.
4) I plan to have both a primary residence (which I effectively rent to myself) and possibly a rental house.
5) I max out my HSA to pay for medical bills for my future self.

Not totally fail safe, but it covers a lot of the bases.

I do like like 3 & 4 above.

However, 401k's, IRA's, HSA are hendering my ability to retire at an extremely young age.

If i want to retire or be FI'd by age 40, my self-controlled taxable account Freedom fund of say long term high quality dividend growth stocks will need to fully cover my expenses of say $15k/yr( will be 30% less at Retirement). At 4% returns, i would need $375k. For simplicity sakes, say the dividend growth rises above inflation each year, and if ever need be during another market recession with say less dividends paying out (though rarely do high quality dividend growth companies never pay out even during a crash for years) I could handle it by making $10k in income somehow that year.

Yes, the nontaxable accounts are the best at allowing you to accumulate more wealth over time until they allow you to withdraw without penalty and lower taxes at around a controlled by them age 67. (59.5 for investment returns with IRA's at much more limited deposit terms)

If I max out and invest $17,500 into a 401k, and an additional $5,000 into a Roth IRA and another $2,500 into an HSA, that leaves me with a controllable, liquid taxable account/Freedom Fund of only $10k/yr (if on a $60k before taxes paycheck, $35k AGI with fed taxes + SS + Medicare (state/local deductible) in all taxes minus 1k in health insurances  , and $15k in expenses/year).

Even at 4% dividend returns, it would take me 23 years to reach Financial Independence($375k on $10k/yr savings) with maxing out all my non-taxable accounts  starting at 26, without having to withdraw the 401k savings with 10% penalties plus taxes and limited deposit abilities of the Roth IRA's.

So yes, if I want to retire at age 67, with $750k- $1M if you include promotions...after working a "normal" life, i could if i am in the 2% of the population that have created a business and job i love and have passion for.

So age 49 isn't so bad for FI plus an additional $529,000 taxable account available and growing tax free but not allowed to touch for another 18 years. If my math is correct on all those tax calculations/scenarios O.o

OR

I could retire at age 40 or younger(36) by taking a more taxed and more double taxed on investments return, now and in my control. By only investing in a taxable account, and investing no amounts of money in a 401k, IRA, HSA, until after financial independence.

$2,500/month savings in my Freedom Fund after higher taxes with 4% dividend returns from my taxable account, will allow me to retire in 10.17 years. Age 36 (on $375k to cover my $15k/year expenses)

24% tax on working income, but for long term dividend/Freedom Fund returns, barely 5% taxes in my tax bracket while working on these investment returns. 0% at extreme retirement age up to $35,500 in dividend income.

At age 36 and FI'd my taxes would be $0 forever more. (even negative if i have dependents).

The U.S. government will of course think i am in extreme poverty for they have no concept of frugality and investing savings (at least not in modern times, anti-mustacian government).


So after thinking about it and attempting a rough draft of both sides of the equation calculation, i concluded that taking any employer match for a 401k is like free money and helps reduce your tax bill, however anything more starts to restrict you ability to retire extremely early though gives you more wealth in the very long run.

Another thing to consider is the probabilities of death after the age of 35.

If you are a frugal, minimalistic Cop, for 29 years and maxing out 401k's, IRA's, HSA each year, just to get shot randomly a month before your pension kicks in at age 55...sucks.

On your death, you taxable accounts get hit with 10% death withdrawl penalty, 25% taxes, 10% in death taxes. You may get a low balled pension severance to add to your inheritance. Hopefully you get Life insurance from you Company to compensate for your family.

But overall, you couldn't enjoy Financial Freedom, except on those 2 week vacations each year.

My theory is the government wants you to work longer and longer and longer, so you make more and more and more, and they collect higher and higher taxes from you.
For consumers they place sales tax on all consumer products, and place utility taxes on all utilities.

But if you live like a monk, save extremely well, and invest wisely, and not give all your investments to some 401k/IRA Hedge Fund managers to fee and play with without any risk to them, then you can retire extremely early, even in ten years.

This gives you a higher chance of enjoying financial freedom/retirement earlier in life and for longer time frams of life. As cash now is best, so is freedom now and as early as you can.

MMM should do a comparison post scenario of these choices after considering all variables.

Note: after FI, you can contribute the maximum of $17,500 to 401k's, $5k to Roth IRA's, and HSA's to keep your AGI at $0; because, you know, all those money employees are working hard 24/7 to make more money for you even after Financial Independence, and you don't want your money employees being taxed too.

« Last Edit: March 15, 2013, 11:57:02 AM by Freeyourchains »

JamesL

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #5 on: March 15, 2013, 12:12:05 PM »
Interesting take. Although I think HSA and Roth IRA are worth it either way, because you can withdraw from them at any point (at least the principle of the Roth) without a fee, before retirement. Plus, that's around 8k and the potential savings is a hell of a lot.

arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #6 on: March 15, 2013, 12:15:40 PM »
I'm sorry, but I couldn't follow most of that last post.  It was all over the place.

As far as retirement accounts after FI: you're sure you'll have earned income to contribute?  I don't necessarily plan on having any.  What are the requirements regarding that?  I've been meaning to start a thread asking about contributing to retirement accounts after FI...
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jrhampt

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #7 on: March 15, 2013, 01:25:52 PM »
Yeah, I was going to say that a 401k is pretty much available just through an employer as far as I know.  If you were still earning income through a business or something, you could do an IRA, but I think the 401k is no longer an option.

NumberCruncher

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #8 on: March 15, 2013, 01:31:05 PM »

So yes, if I want to retire at age 67, with $750k- $1M if you include promotions...after working a "normal" life, i could if i am in the 2% of the population that have created a business and job i love and have passion for.



You don't have to wait until 67. You can do a couple different things (see Strategy 2 and 3 here): http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

What is best for you is based on your individual income, etc. For me, the tax benefits now make it well worth it for me and I can use the Roth loophole, section 72(t), or pay penalties

arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #9 on: March 15, 2013, 01:52:50 PM »
Yeah, I was going to say that a 401k is pretty much available just through an employer as far as I know.  If you were still earning income through a business or something, you could do an IRA, but I think the 401k is no longer an option.

Some sort of self-employed 401k/solo 401k/SEP-IRA/etc.  But again, earned income.  Versus being FI versus FIRE.
« Last Edit: March 15, 2013, 01:54:55 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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JohnGalt

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #10 on: March 15, 2013, 04:59:59 PM »
OP should also check out the early withdrawal options for 401k funds... roth pipeline and SEPP.

No way am I paying my marginal tax rate (28%) now when I'll have the opportunity to withdraw at a much lower effective rate (~15%).  Hell, even if I end up paying the early distribution penalty (10%) + my expected future effective tax rate, I'll come out ahead. 

jrhampt

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #11 on: March 18, 2013, 08:52:42 AM »
No way am I paying my marginal tax rate (28%) now when I'll have the opportunity to withdraw at a much lower effective rate (~15%).  Hell, even if I end up paying the early distribution penalty (10%) + my expected future effective tax rate, I'll come out ahead.

Same here.

COguy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #12 on: March 18, 2013, 10:44:03 AM »
No way am I paying my marginal tax rate (28%) now when I'll have the opportunity to withdraw at a much lower effective rate (~15%).  Hell, even if I end up paying the early distribution penalty (10%) + my expected future effective tax rate, I'll come out ahead.

Same here.

that about nails my reasoning on the head

SunshineGirl

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #13 on: March 18, 2013, 11:21:59 AM »
If nothing else, the simplicity is very appealing!

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #14 on: March 26, 2013, 06:35:35 AM »
I'm putting away $17.5k per year into my 401k (the maximum allowed) because my tax bracket is high right now, and I'm not paying taxes on that money. When retired my tax bracket will be very low, so I can withdraw the money and pay little taxes on it. I don't see the benefit to pay taxes on all my income now.

How low will your tax rate be to get all of your saved 401k money at age 35 or 45?

If you withdraw $500,000 in one year, won't your tax rate will be at the highest bracket because it's considered "ordinary income" for either 401k or IRA accounts, 40% + a 10% withdraw penalty?

Meaning you only get back $250,000?

10% penalty + 10% bracket + State income tax (if not in florida) = 23% with 401k, if the withdraw does count as ordinary income from 401k's  to boost up your tax rate, then what is the point of them holding on to your money for so many years and to fee you for doing so? I still need convincing with numbers to contribute to a 401k. I tend to almost do the opposite of what the media tells me to do, and they say put everything into 401k's, they also say you need $20 Million dollars to retire...

For Roth IRA's the downside is:
"Withdrawals from your qualified plan are taxed as ordinary income and may be subject to a 10% Federal tax penalty if taken prior to age 59. If you left your employer in or after the year in which you turned 55, you may not be subject to the 10% early withdrawal penalty. There are other limited situations when the 10% early withdrawal penalty may be waived, including but not limited to, permanent disability and medical expenses greater than 7.5% of your adjusted gross income."
« Last Edit: March 26, 2013, 07:17:55 AM by Freeyourchains »

sherr

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #15 on: March 26, 2013, 08:07:20 AM »
I'm putting away $17.5k per year into my 401k (the maximum allowed) because my tax bracket is high right now, and I'm not paying taxes on that money. When retired my tax bracket will be very low, so I can withdraw the money and pay little taxes on it. I don't see the benefit to pay taxes on all my income now.

How low will your tax rate be to get all of your saved 401k money at age 35 or 45?

If you withdraw $500,000 in one year, won't your tax rate will be at the highest bracket because it's considered "ordinary income" for either 401k or IRA accounts, 40% + a 10% withdraw penalty?

Meaning you only get back $250,000?

10% penalty + 10% bracket + State income tax (if not in florida) = 23% with 401k, if the withdraw does count as ordinary income from 401k's  to boost up your tax rate, then what is the point of them holding on to your money for so many years and to fee you for doing so? I still need convincing with numbers to contribute to a 401k. I tend to almost do the opposite of what the media tells me to do, and they say put everything into 401k's, they also say you need $20 Million dollars to retire...

For Roth IRA's the downside is:
"Withdrawals from your qualified plan are taxed as ordinary income and may be subject to a 10% Federal tax penalty if taken prior to age 59. If you left your employer in or after the year in which you turned 55, you may not be subject to the 10% early withdrawal penalty. There are other limited situations when the 10% early withdrawal penalty may be waived, including but not limited to, permanent disability and medical expenses greater than 7.5% of your adjusted gross income."

He was not implying that he would withdraw all of the money from the 401k in one year. That would be stupid, as you correctly point out. However your numbers are not exact because not all of it would be taxed at 40%, only the portion of the withdrawal to fall in the 40% bracket would.

Let's say that you are in a 25% tax bracket now, and you will be in a 15% tax bracket when you retire (early) with an average tax rate of 10%. Your options are:

Tax advantaged account: Traditional (IRA or 401k)
Save 25% off the top right now.
Pay average of 10% + 10% penalty in retirement which drops down to only 10% when you hit "retirement age". That's assuming you don't find a way to avoid the 10% penalty like SEPP.
Result: +5%. Could be as high as +15% if you avoid the penalty.

Tax advantaged account: Roth (IRA or 401k)
Pay 25% right now in taxes.
Withdraw principle tax and penalty-free in retirement. Once you run out of principle payments and begin withdrawing from interest you will pay 10% penalty until you reach "retirement age". Again assuming you don't find a way to avoid the penalty.
Result: -10% maybe? Depends on when you reach various milestones. Could be as low as 0%

Non-tax-advantaged account: regular investment account
Pay 25% right now in taxes.
Pay 25% of every dividend payment you get while working in taxes, drops down to 10% in retirement.
Pay 15% Capital Gains tax on any stock you sell / rebalance while working. (avoided in retirement because you're in the 15% bracket.)
Result: probably -10% or more.

None of those may be ideal, but Traditional accounts are vastly better than non-tax-advantaged accounts for most people.

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #16 on: March 26, 2013, 08:28:48 AM »
Apparently this is still bothering me, I have thought about even more reasons why everyone should NOTjust invest in 401k's, and Roth IRA's.

1) They AGE restrict you, like saying you can't drink till your age 67, herosy and people would grab their shotguns I know, but that's what it feels like to me with any Government restrictions, thus I am glad i still have a choice in the say!

2) The Hedge Fund Managers are Billionaires, soon to be Trillionaires. This leads to my next point.

3a) The pass on all the risk on to your account. Do you get all the rewards in all capital gains, dividends, speacial discounts? Or do you just get dished out the left over promised 4% Max return. That varies, ask the Fund Manager.

3b) You only get to select general funds with 401k's, some IRA's individual stocks, but they restrict your contributions to $5,500 instead of $17,500. What if you think it's a resonable time to "Sell high"?

4) They fee you for allowing them to invest your money? 0.50-2.5% fee's per year depending on each individual fund and the "Risk strategy exclusivity" they follow. Like it's a privelage to use their exclusive special Portfolio.

5) 401k's aren't FDIC insured.

http://www.prudentmoney.com/401k-Plan/Is-the-401k-Plan-Really-Worth-it.html
says

there are a lot more cons then pros, stating relative points i mentioned above.

6) The Fund managers decide at will if I can withdraw money, when they may freeze the account, and when they must give it to the government if the government wants to take it. (Not you). (though unlikely unless they want rebellious uprisings)

I need some serious Financial Mathematics to go against these cons for convincing, any one? Sherr your points were noted as i was writing this reply. Response soon to come.

Besides the point of company matching benefits of 50% or 100% on the dollar up to 3-6%. (which many did away with over the last 5 years.)

Beaker

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #17 on: March 26, 2013, 08:53:33 AM »
Points 2,3, 4 & 6) I'm not sure why you're obsessed with hedge fund managers. For one thing, unless you're really rich already, you're investing in mutual funds rather than hedge funds. But if managed mutual funds bother you, and there are some good reasons that they should, then invest in index funds. Much lower expense ratios, all the dividends flow back, and they generally have low early withdrawal penalties. Depending on your plan you may still end up with 0.5% - 1.0% expenses (which I've complained about elsewhere) but it's still very reasonable. And there's no evil fund manager, hedge or otherwise, making decisions about your money.

Point 5) No investment accounts are FDIC insured. If figure out how to get FDIC insurance on your stocks, real estate, or really anything with a decent return, be sure to let me know how you did it.


shedinator

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #18 on: March 26, 2013, 08:55:22 AM »
Apparently this is still bothering me, I have thought about even more reasons why everyone should NOTjust invest in 401k's, and Roth IRA's.
2) The Hedge Fund Managers are Billionaires, soon to be Trillionaires. This leads to my next point.

3a) The pass on all the risk on to your account. Do you get all the rewards in all capital gains, dividends, speacial discounts? Or do you just get dished out the left over promised 4% Max return. That varies, ask the Fund Manager.

3b) You only get to select general funds with 401k's, some IRA's individual stocks, but they restrict your contributions to $5,500 instead of $17,500. What if you think it's a resonable time to "Sell high"?

Did I miss the memo about day trading with my 401(k)? Because so far as I can tell, literally none of this applies to me, and I doubt it applies to most other people here who have already subscribed to the idea that the best investment is to buy and hold an index fund. My 401(k) was, until recently, sitting in VFINX. When I rolled my old 401(k) into an IRA with Fidelity (my old employer was going to start deducting fees), I switched over to FUSEX. I have no plans whatsoever to 'sell high,' I have no money being managed by any hedge fund manager, billionaire or otherwise, and I get nearly all of the reward when the market goes up, minus 0.095% in annual fees.

arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #19 on: March 26, 2013, 09:06:56 AM »
It's hard to convince someone who has their mind made up.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Undecided

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #20 on: March 26, 2013, 12:01:37 PM »
Much of these supposed "issues" with tax-advantaged accounts are equally applicable to any investment in a mutual fund (e.g., the issues related to management or expenses). So I'll ignore those.

Other "issues" are just wrong, or incomplete. There are numerous forum posts (and posts on the blog here and elsewhere) about withdrawing funds from tax-advantaged accounts before reaching the age of unrestricted access. While there are important limits and procedural requirements, the money can be accessed before 59.5 without paying the early-withdrawal penalties.

Further, there are (at least) two financial advantages that result from the deferral, at least for the purposes of this board. One, even applying the same tax rates now and at the time of future withdrawals, the growth of the larger amount (having paid no taxes) will produce a somewhat higher future after-tax value. Probably more importantly, though, most people here believe that their retirement incomes will be taxed at lower rates (basically because their incomes will be lower in retirement) than the rates at which their current incomes are taxed.

Take a look at some things like:

http://www.mint.com/blog/investing/the-value-of-tax-deferred-savings-122011/


COguy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #21 on: March 26, 2013, 12:41:33 PM »
That planet money post is terrible

Quote
The best you can hope for with a 401(k) plan is a buy and hold strategy which has proven to be fatal for your account values.

Please point me to that data?

OP, if you are that afraid of the 401k and just looking for someone to validate your opinion, I doubt you will find it here.  But, I will give you this, if you are that afraid of the 401k and other tax deferred plans then don't put money in them.  It is your money.  Just know that many thoughtful and successful investor/savers here (most of whom are not the standard advice following sheep you seem to think we are) disagree with the choice to avoid the 401k due to mathematical and other well thought out reasoning.

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #22 on: March 27, 2013, 07:34:50 AM »
Very interesting responses. I personally am open minded to suggestions, just no solid evidence, yet,  makes a clear case for me against the debate of all the cons with 401k, IRA investing.

A great example of a MMM recommended financial blogger whom wants to retire by 40 and doesn't contribute to 401k's, IRA's, etc is DividendMantra at his website. Instead he likes managing every dollar in his own portfolio of high quality dividend growing stocks which is his strategy, and there are no restrictions, limitations, and Power Authority telling him he will be penalized for withdrawing his own money at will.

A side question: Do Index fund's pass on their Capital Gains to their fund investors? If not, does the Fund Management get all Capital gains, or the majority of them?

I like handling my own money and my own portfolio's. Only online trading from month to month, very liquid cash, my own research and selections at will. Mostly very passive as I am more heavily focused on dividend growth companies then Capital gains.

And when i hit Financial Independence, i don't have to wait 5 years to withdraw my own money for complete control again from some IRA restriction. Though i know it's somewhat possible to plan this out ahead; yet, from what Jacob at ERE says it only takes 10 years roughly with over 60% savings each paycheck and a volunteered frugal yet happy lifestyle.

I guess i will have to look at all the tax codes and do the hard situation income mathematics to see if the tax savings is worth the restrictions, fees, their control over your money for years and years, risks passed on to you money, plus they control buying and selling positions like clock work, which may not be ideal to the "Buy low and sell high" investment strategies you like.

But again, i feel as though nothing has really convinced me it is worth it, any more amount then employer matching, which employers are doing less and less of anyway...

For $17,500 (401k)+ $5,500 (IRA) +  the 2012 statutory limits of HSA are $3,100 for an individual and $6,250 for a family.

And no taxes paid on returns in account (for now).

It seems like a great plan for ages 60-90...as MMM as mentioned;

Yet seems way to restrictive and ageist for those mustachians whom want to plan for Extreme Early Retirement and/or Financial Independence in 10 years or by age 40 (some 35 or 55, depending on age, savings, and income, and investment returns)

Thinking about it, this question really really matters a GREAT DEAL to those whom only make around $60k and spend $15k/year/person or lower. For they choose either an after tax savings of like $20,000 or to deposit the $20,000 into non-taxable accounts.

If you make over $60k, and save 60% or more of every paycheck, you will have more savings to invest into taxable investments, and are beyond the taxable accounts questioning because of limits that are rising anyway.


« Last Edit: March 27, 2013, 08:05:20 AM by Freeyourchains »

shedinator

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #23 on: March 27, 2013, 08:00:51 AM »
A side question: Do Index fund's pass on their Capital Gains to their fund investors? If not, does the Fund Management get all Capital gains, or the majority of them?

I don't want to be a jerk or anything, but... really? This question has been answered on this thread, and even if it hadn't, it seems as though someone who's ready to condemn an entire segment of investment vehicles should know what he or she is talking about... That seems like a very facepunch-worthy action.

Index funds do not have 'Fund Management.' they invest your money in the stocks which make up the given index (S&P 500, DJIA, etc). There are small fees (ie, FUSEX has a 0.095% fee) for the actual trading of the fund, and I imagine a certain portion of that goes to pay the people who punch the numbers and click the buttons to make those trades happen, but that's it. Capital gains, minus the small fee, are all kept in the investment account. If the index makes money, you make money. If the index loses money, you lose money. But the actual cost of having such a fund is ridiculously low. The amount it costs to make a single trade on ETrade or ScottTrade would cover the carrying costs of $1,000 in FUSEX for 7 years, as a for instance.

arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #24 on: March 27, 2013, 08:18:03 AM »
I guess i will have to look at all the tax codes and do the hard situation income mathematics to see if the tax savings is worth the restrictions, fees, their control over your money for years and years, risks passed on to you money, plus they control buying and selling positions like clock work, which may not be ideal to the "Buy low and sell high" investment strategies you like.

But again, i feel as though nothing has really convinced me it is worth it

Maybe it hasn't convinced you because you aren't listening or don't understand.

That paragraph you posted that I quoted Is not true.

Hell, here's a simple fact: there's a thing called a self directed IRA, where you completely control it, same as a taxable account.  What's your thoughts on that?

At this point, based on your complete ignoring of the replies in this thread, it feels like you're basically trolling.  Are you genuine with this concern, because I feel like if you were, you'd be trying to learn, instead of insisting it's "not worth it."

If it isn't worth it for you, don't do it. 

Don't invest in any retirement accounts.  Best of luck, you'll be just fine, it'll just be slightly inferior and longer time to FI.  No big deal.
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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #25 on: March 27, 2013, 08:19:59 AM »
You don't really seem to understand what the distinction between a 401k plan and a hedge fund and a mutual fund is. I will try to be extremely clear about the distinction here.

Hedge fund / Hedge fund managers:
Don't worry about them you don't have one. Hedge funds are by definition private, aka not open to the public, aka you have to be really rich before you have to start thinking about this as an option.

Managed mutual fund:
There is a manager and team of investors that pick what stocks / bonds / whatever to invest in. The manager / investors have to get paid, so managed mutual funds have annual fees associated with them that can eat your potential profits. By investing in a managed mutual fund you are betting that the manager / investors are able to outperform the market by more than the fees they charge. Not usually true. You can buy these with or without having a 401k.

Passive mutual fund / index mutual fund:
There is no manager, no team of investors. Instead the mutual fund simply tracks an index, like the S&P 500 or DJIA or other. They generally have very low fees and perform better on average than managed mutual funds anyway. By investing in a index fund you get automatic diversification across many stocks. You can buy these with or without having a 401k.

Individual stock investing:
What you apparently do. In order for this to be profitable you have to have better-than-average returns on the stocks you pick by the amount of whatever trading fees you incur. Not usually true. You can buy these with or without having a 401k.

401k:
A tax-advantaged investment account. In exchange for the tax advantage they want you to actually save the money for retirement (which for most people comes after they are 60) so there is a penalty (which is avoidable if you are careful) for withdrawing earlier than than that. It is still your money, there is no "their control over you money for years and years", you simply get reduced taxes in exchange for saving long-term. Depending on your company's options you may be able to invest in managed mutual funds, index mutual funds, and/or individual stocks / bonds / whatever with the money in your 401k.

With all that being said a lot of your "objections" to 401ks are pure nonsense. Don't like managed mutual funds because of the higher fees? Fine, I don't either, invest in passive funds or (if your company 401k plan allows it) individual stocks. No one controls your ability to buy and sell positions in a 401k, nor are their additional risks passed on to your 401k portfolio. Yes, you employer may limit the number of choices you have available to you (mine for example has about 30 mutual funds I can choose from, no individual stocks) but generally the options are pretty reasonable. If they aren't you can take it up with your employer.

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #26 on: March 27, 2013, 09:08:29 AM »
A side question: Do Index fund's pass on their Capital Gains to their fund investors? If not, does the Fund Management get all Capital gains, or the majority of them?

I don't want to be a jerk or anything, but... really? This question has been answered on this thread, and even if it hadn't, it seems as though someone who's ready to condemn an entire segment of investment vehicles should know what he or she is talking about... That seems like a very facepunch-worthy action.

Index funds do not have 'Fund Management.' they invest your money in the stocks which make up the given index (S&P 500, DJIA, etc). There are small fees (ie, FUSEX has a 0.095% fee) for the actual trading of the fund, and I imagine a certain portion of that goes to pay the people who punch the numbers and click the buttons to make those trades happen, but that's it. Capital gains, minus the small fee, are all kept in the investment account. If the index makes money, you make money. If the index loses money, you lose money. But the actual cost of having such a fund is ridiculously low. The amount it costs to make a single trade on ETrade or ScottTrade would cover the carrying costs of $1,000 in FUSEX for 7 years, as a for instance.

This FUSEX Fund seems noteworthy:

Fees & Expenses   
Expense   FUSEX                                         Category Avg
Annual Report Expense Ratio (net):   0.10%   1.12%
Prospectus Net Expense Ratio:   0.10%   N/A
Prospectus Gross Expense Ratio:   0.10%   N/A
Max 12b1 Fee:                                   N/A           N/A
Max Front End Sales Load:   N/A                  5.28%
Max Deferred Sales Load:   N/A                   2.39%

Category:   Large Blend
Fund Family:   Fidelity Investments
Net Assets:   53.36B
Year-to-Date Return:   6.58%

Performance Overview   
Morningstar Return Rating:   4.00
Year-to-Date Return:   6.58%
5-Year Average Return:   4.89%
Number of Years Up:   19
Number of Years Down:   5
Best 1 Yr Total Return (2003-12-31):   28.50%
Worst 1 Yr Total Return (2008-12-31):   -37.03%
Best 3-Yr Total Return (N/A):   14.26%
Worst 3-Yr Total Return (N/A):   -14.67%


Fund Summary   
The investment seeks to provide investment results that correspond to the total return performance of common stocks publicly traded in the United States. The fund normally invests at least 80% of assets in common stocks included in the S&P 500® Index, which broadly represents the performance of common stocks publicly traded in the United States. It lends securities to earn income.

Most subadvisors are from below:

Geode Capital Management is an investment management boutique employing a disciplined and risk-controlled framework to its quantitative investment solutions within the equity, commodity, and credit markets. Geode manages assets for institutional clients in passive, alpha, and absolute-return-driven strategies targeting a range of performance objectives with a focus on transparency, liquidity, and daily valuation. Since 2003, assets under management have grown from $44 billion to nearly $120 billion. Geode is headquartered in Boston, Massachusetts and currently employs approximately 55 people.

$120 Billion * 0.10 fund expense fee = $120 Million in Revenue with 55 people. I hoped they profit shared...

Top 10 holdings
Security   Net Assets   
Apple Inc (AAPL)   3.08%   
Exxon Mobil Corporation (XOM)   2.95%   
General Electric Co (GE)   1.68%   
Chevron Corp (CVX)   1.62%   
International Business Machines Corp (IBM)   1.55%   
Microsoft Corporation (MSFT)   1.50%   
Procter & Gamble Co (PG)   1.48%   
Johnson & Johnson (JNJ)   1.47%   
Google, Inc. Class A (GOOG)   1.45%   
Pfizer Inc (PFE)   1.45%   

All above avg return of 1 yr Capital Gains + dividends = roughly FUSEX's 1yr returns from date, though only 20% of their holdings during that yr.

A great Bull market for Large Cap companies.

Which is accurate and nice for being a passive index fund.

So if your IRA has this fund as an option, then go for it with the $5,500/yr.

I can't deny at all that looks promising, if it is an offered option to your 401k, or IRA account. But in my particular case, It isn't offered in my 401k account. In fact, some really not so good funds are my only options in 401k offered by my employer, and I only have 30 choices total varying between cash funds, low cap, mid cap, high cap, bonds, and international .

If this is your case, you could lose lots of money because of limited options chosen by your employer and their 401k provider.

Giving another reason, some don't invest in restricted by employer & provider  401k's. Not enough good choices in non-taxable accounts.








« Last Edit: March 27, 2013, 09:18:26 AM by Freeyourchains »

COguy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #27 on: March 27, 2013, 09:27:16 AM »
I told myself I wouldn't post again on this thread because it is so ridiculous.  But, Freeyourchains, if you don't mind sharing, can you post your mutual fund choices?  It is possible that your 401k could have terrible choices.  Maybe we can help you out there.

GreenGuava

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #28 on: March 27, 2013, 09:31:11 AM »
So if your IRA has this fund as an option, then go for it with the $5,500/yr.

If you want your IRA to have this fund as an option, it will.  That's a beauty inherent in an IRA.

I can't deny at all that looks promising, if it is an offered option to your 401k, or IRA account. But in my particular case, It isn't offered in my 401k account. In fact, some really not so good funds are my only options in 401k offered by my employer, and I only have 30 choices total varying between cash funds, low cap, mid cap, high cap, bonds, and international .

Maybe post the choices here and get people to comment on them?  If you post the fund name, ticker symbol, expense ratio, and category, we might find a few good ones for you.

Alternately, how long will you be at your employer?  You know that, once you leave, you can move the 401(k) money to an IRA (either rolling it over to a traditional IRA, or paying taxes on it to move it to a Roth IRA;  I suggest the former until you're in FI). 

If this is your case, you could lose lots of money because of limited options chosen by your employer and their 401k provider.

Giving another reason, some don't invest in restricted by employer & provider  401k's. Not enough good choices in non-taxable accounts.

There are definitely poor 401(k) choices at many companies (this is one criteria I use to screen potential employers during my current pre-FI phase).  But even with poor choices, you get some immediate benefit from the tax reduction and tax-deferred growth;  even though that money isn't available to you until 59.5, you do intend to live that long, right?  I plan to retire long before 59.5, but one of my top priorities in my pre-FI phase is to put enough into "normal" retirement accounts to be fine after those ages.  This helps to figure out what I'll need until then and reassures me that, when my human capital is less than it is now, I will have less to worry about.  If I mess up on my FI and discover at age 40 that I need to go back to work for a year or two, well, that sucks but at least I'll be capable;  after 60, less likely.

JohnGalt

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #29 on: March 27, 2013, 10:38:00 AM »
My company's 401k offers terrible choices (been working for a year to get our provider changed) - but I still decided it was worth maxing it out every year for the following reasons:

1. 28% current marginal tax rate, vs 10%-15% expected rate when withdrawing.  Even if I have to take the 10% penalty instead of pipelining it, I still come out ahead.  If this wasn't the case, my company offers a roth401k that would have been a good alternative.
2. I don't plan on having the 401k long enough (<5 years) for the returns to matter all that much.  When I leave the company, I can roll it into an IRA and invest in whatever I want (for the most part). 
3. Company match - doesn't justify maxing out, but even if I wasn't maxing out, I would still at least get the full match.
4. Even the "terrible" fund options, aren't that bad.  Sure they have an average of about a 1% fee, but they're still diverse enough to be sound investments. 


Between 401k and IRA contributions, I will probably have close to half my net worth in retirement accounts when I retire (long, long before I'm eligible for standard withdrawals).  However - I will have full control on where I invest them money (at least from a market perspective), will not have to pay taxes on transactions as the money grows, and will be withdrawing it at a significantly lower tax rate than what I would be paying now were it just going into a taxable account. 

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #30 on: March 28, 2013, 07:57:05 AM »
Another HUGE HUGE Reason that I have seen why NOT to invest in 401k's.. besides the last unsolved (for now) feature of not great options to choice from is...

Control of Capital Losses, and the Learning Experience from your own Portfolio.

I really enjoy having the ability and freedom to control my own losses in a taxable account, especially since i don't like taking losses.

I mean if i want to hold a stock for just it's dividends from now until the end of time, do 401k Fund Managers do this? Or do they sell it like policy clockwork, even if it might generate -28% losses for his customers?

I know most Fund managers try to control their billions in assets well, because if they don't they will be fired. But the proprietary information of when they buy and sell is behind closed doors to the customer's eyes, or if it is shown, it is like clockwork to the fund's policy.

With my own Portfolio, I control all my strategies, both for Capital Gains and dividend growth stocks.

It's not even like i could have lunch with the many fund Managers and talk to them personally about why i should give my Freedom Fund or $17,500 to them every year. They just automate a Prospectus, and say the details are vaguely described in there and wrapped up in labels in there.

I mean i had to do my own research on Google Finance just to see the current top holdings on various Funds and indexs.

One's ability to control your own Capital Losses, also gives you serious learning curve to controlling your own investments for your future self. It's a serious skill not many people appreciate to learn.

Another huge advantage for not contributing to a 401k besides Company matching is:

You learn a lot more controlling your own Portfolio!

You learn a lot more controlling your own Portfolio, then you would picking a fund managed by someone else whom was forced to learn it because it was a high paying salary to them that they may or may not desperately need to stay afloat in their own spending lifestyles.

Yes they have experience in the matter and that's what you are taking a risk on, and paying expense ratio fees for, but during the days they have no choices but to take losses because of their policy strategies, they aren't thinking so much about the impact of passing on the losses to their customers accounts.

Yes, actively monitoring your own 401 portfolio is a wise move, especially if you transferred to a cash fund days before the 2008 market crash, yet you are restricted to 12 transaction a year, 3-4 transactions per quarter.

Which may dwindle at your fund's manager's leisure, as they continuously "Update" their policies like every company in the world is doing right now, usually for the customer's financial/quality of product worse not better, especially during this staling economy.



shedinator

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #31 on: March 28, 2013, 08:28:16 AM »
you know that old saying 'it's not paranoia if they really are out to get you'?

Doesn't apply.

arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #32 on: March 28, 2013, 08:36:19 AM »
Okay, so there's any easy solution to your last problem: did you know you can invest in both a 401k and a taxable account at the same time?

Then you get the mathematical and monetary benefits of the 401k, and you can have fun "learning" and self-managing.  Whee!
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matchewed

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #33 on: March 28, 2013, 08:52:01 AM »
Yeah, Freeyourchains, it seems you have your mind made up. You've asked what other people think and they don't seem to share your concerns. I don't think you're going to convince us that 401ks are bad, and we're not going to convince you that they are perfectly fine and are a good thing for people.

Will

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #34 on: March 28, 2013, 09:18:00 AM »
Another HUGE HUGE Reason that I have seen why NOT to invest in 401k's..

Okay then, don't.

DoubleDown

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #35 on: March 28, 2013, 09:26:08 AM »
WTH? This thread is hilarious.

@Freeyourchains, thank you for your additional (unnecessary) tax contributions to the U.S. Treasury. Speaking for the rest of us taxpayers, we appreciate it! Hopefully the government will use your extra money wisely.

In my case, I will continue dimly contributing to my 401k plan, and will automatically "earn" about $6,000 every year in taxes saved. In my 17 years of contributions, that's added up to an extra  $100,000 or so, not even counting compounded gains.

When I don't like something about a particular fund or segment of my plan, I will move money from one fund to another (I could do it daily, but I usually do it every 2-3 years). And I will withdraw from it penalty-free and at a much lower tax rate when I please, using the different methods already covered. But I suppose all of that is somehow inadequate control. I'd stupidly do an IRA too, if I could just qualify for the tax advantages offered.

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #36 on: March 28, 2013, 10:52:25 AM »
WTH? This thread is hilarious.

@Freeyourchains, thank you for your additional (unnecessary) tax contributions to the U.S. Treasury. Speaking for the rest of us taxpayers, we appreciate it! Hopefully the government will use your extra money wisely.

In my case, I will continue dimly contributing to my 401k plan, and will automatically "earn" about $6,000 every year in taxes saved. In my 17 years of contributions, that's added up to an extra  $100,000 or so, not even counting compounded gains.

When I don't like something about a particular fund or segment of my plan, I will move money from one fund to another (I could do it daily, but I usually do it every 2-3 years). And I will withdraw from it penalty-free and at a much lower tax rate when I please, using the different methods already covered. But I suppose all of that is somehow inadequate control. I'd stupidly do an IRA too, if I could just qualify for the tax advantages offered.

You now have an additional $100k + gains tied up for another 20 years of gradual withdraws least you get taxed more. Gains controlled till withdraw at age 59.5 minimum then taxed accordingly at future tax rates, granted reduced because of reduced income.

Since U.S. income taxes are the lowest they have ever been in history for now, you think they will stay low for another 40 years while National debts accumulate to sky high limits? At least in the present i know my taxes. Hate to speculate but the Obamacare law is a great example of other "taxes" that will take a bit out of future 401k withdraws.

What scares me is the same media outlets that say to invest in 401k's also say to go out and get the biggest house you can afford with a 30 year mortgage, and that you can't retire unless you have a $4Million in the bank.

Plus whose to guarantee me that I can continue to Rollover my 401k into an IRA in 10 years for a planned no 10% penalty reduction? This is a new temp benefit, that can be taken away at will by the Fund Managers' decisions.

Not to dive into the zone of " Can you trust the fund managers and Government with your money", but i think that's what most issues come down too.

I admit the savings sounds wonderful from tax reductions (about $2,800 for me a year + no additional double taxes on any gains the funds make), but I don't trust the Media, Fund Managers, and the Government with my Freedom Fund.

For example:

This situation resembles Credit Card bonus Rewards to me..

Media hypes you need a really really good credit score to be able to buy that McMansion you want, so you should get 6 credit cards, and collect the flyer miles everytime you swipe plus the $100 sign on bonuses upfront!

Financial "experts" say you should open up credit cards and pay them off right away to collect $100 upfront, and build you credit card score because you will "need" it later on in life, and can get many many more loans in the future.

MMM recommends getting a credit card with the best offer, no annual fee, for the rewards on monthy necessities. (like 1% cash back on everything.)

I say, Emergency fund money + Freedom fund money + money = Power, allows you to not need any Credit card what so ever your whole life.

It's a form of Badassity.

Media: " But but what about that Mcmansion you need!"    --- Mcmansion not needed
Financial "experts: "But what about your credit score for loans?" --- Loans not needed, and whom are you saying a need some controlled matematical formula to determine how good i am with money? See my Freedom Funds if you need evidence of Cash statement.

MMM: "not needed, but fun to get free rewards" ---- Agreed, but at risk of having that temptation there all your life. Like having a Financial Slave Master with chains following you around daily saying how easy it would be to spend his money, so he could shackle you up.

To me: 401ks shackle up your Freedom/FI fund, with time delays, Age restrictions, Penalties they control the rate of at will with as simply as an "update", Risks passed straight onto your accounts, policies the fund managers follow to keep their jobs, government controlling future tax rates, etc. Whole Cash now is better concept.

Hmm, Rewards of $3k per year are mighty tempting though for investing $17,500/year.
« Last Edit: March 28, 2013, 11:16:38 AM by Freeyourchains »

matchewed

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #37 on: March 28, 2013, 11:00:48 AM »
Um the ACA isn't going to tax your 401k. Now I just think you're trolling. You should really do some more reading and educate yourself on financial matters instead of spouting random things and hoping they stick.

Also DoubleDown will still be up 100K. Regardless of future taxes, meaning he can FIRE that much earlier.

unitsinc

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #38 on: March 28, 2013, 11:21:11 AM »
This troll is mediocre at best.
4/10

shedinator

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #39 on: March 28, 2013, 11:23:20 AM »
This troll is mediocre at best.
4/10

Idunno, I kinda like the part where he went after MMM using MMM language and Dave Ramsey Logic :D

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #40 on: March 28, 2013, 11:30:09 AM »
Um the ACA isn't going to tax your 401k. Now I just think you're trolling. You should really do some more reading and educate yourself on financial matters instead of spouting random things and hoping they stick.

Also DoubleDown will still be up 100K. Regardless of future taxes, meaning he can FIRE that much earlier.
Intersting but doesn't this only work, with only a carefully withdraw planning of 100k over 5 year period from a IRA rollover to reduce withdraw penalities and taxes; if they don't change their policy at will to 10-100 years from now till then; or worse yet, completely stop rolling over to IRA from now to 10 years from now?

It's literally out of your control then. It's a bigger risk for a big tax reduction reward.

BTW, Just debative, constructive conversation for mustachian educational purposes only. Not trolling.

You all are really helping here.

Just trying to realize the risks involved in giving $17,500/year to a group of managers who are paid to control the general portfolios.







matchewed

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #41 on: March 28, 2013, 11:39:42 AM »
Quote
Intersting but doesn't this only work, with only a carefully withdraw planning of 100k over 5 year period from a IRA rollover to reduce withdraw penalities and taxes; if they don't change their policy at will to 10-100 years from now till then; or worse yet, completely stop rolling over to IRA from now to 10 years from now?

Do you know how 401k's work? In the grand scheme of things it is pre-tax contributions thereby reducing the amount of tax you pay now and deferring it to when you withdraw at a later date. Given 401k's, IRA's, Roth options, personal investments, rental incomes, and part/full time work...etc. you can weather any changes to taxes in the future. If all I did was think up scenarios that may happen in the future I'd be paralyzed. I can only look at my current options now, use them to my advantage, make plans for the future, and if the future is different (which it will be) then I adjust the plan.

You can be FI by 40 and not investing in a 401k until you FI, but that kind of defeats the purpose of the 401k. So earn 100k more within the next 10 years by using a 401k and worry about the rules and taxes when I'm ready to worry about them; or worry about what doesn't exist now and miss out on the 100k. Hmm a bird in hand comes to mind (English idiom: A bird in hand is worth two in the bush).

shedinator

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #42 on: March 28, 2013, 11:41:10 AM »
See, you say this:

BTW, Just debative, constructive conversation for mustachian educational purposes only. Not trolling.
But then you say this:
Quote
Just trying to realize the risks involved in giving $17,500/year to a group of managers who are paid to control the general portfolios.

When several people have already said this:

Quote from:  everybody
401(k)s do not require you to invest in managed funds. If yours does, maybe it's not a good investment, but ours let us invest in index funds

Which makes it difficult to believe you are, in fact, trolling.

Also, your rant above about MMM seems a bit trollish.
« Last Edit: March 28, 2013, 12:07:59 PM by shedinator »

Undecided

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #43 on: March 28, 2013, 11:53:14 AM »
Just trying to realize the risks involved in giving $17,500/year to a group of managers who are paid to control the general portfolios.

As shedinator reminds you, there's no requirement that 401(k) investments be made in "managed funds" or even "funds". My 401(k) plan offers several passive index funds and brokerage trading in individual stocks.  What are the investment options in your 401(k)?

arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #44 on: March 28, 2013, 12:06:12 PM »
Further proof of it being a troll: OP completely ignoring this whole post quoted below.

I do like how the second half of the post - OP ignoring replies - is validated as that reply is ignored.  Hilarious.


I guess i will have to look at all the tax codes and do the hard situation income mathematics to see if the tax savings is worth the restrictions, fees, their control over your money for years and years, risks passed on to you money, plus they control buying and selling positions like clock work, which may not be ideal to the "Buy low and sell high" investment strategies you like.

But again, i feel as though nothing has really convinced me it is worth it

Maybe it hasn't convinced you because you aren't listening or don't understand.

That paragraph you posted that I quoted Is not true.

Hell, here's a simple fact: there's a thing called a self directed IRA, where you completely control it, same as a taxable account.  What's your thoughts on that?

At this point, based on your complete ignoring of the replies in this thread, it feels like you're basically trolling.  Are you genuine with this concern, because I feel like if you were, you'd be trying to learn, instead of insisting it's "not worth it."

If it isn't worth it for you, don't do it. 

Don't invest in any retirement accounts.  Best of luck, you'll be just fine, it'll just be slightly inferior and longer time to FI.  No big deal.
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Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #45 on: March 28, 2013, 12:13:31 PM »
See, you say this:

BTW, Just debative, constructive conversation for mustachian educational purposes only. Not trolling.
Quote
But then you say this:
Quote
Just trying to realize the risks involved in giving $17,500/year to a group of managers who are paid to control the general portfolios.

When several people have already said this:

Quote from:  everybody
401(k)s do not require you to invest in managed funds. If yours does, maybe it's not a good investment, but ours let us invest in index funds
Quote

Which makes it difficult to believe you are, in fact, trolling.

Also, your rant above about MMM seems a bit trollish.
I have no options to invest in index funds in my 401k. So I have a special case, and the investment in my 401k chosen by my employers has bad options, thus i will not invest.

I have learned a lot about Stock investing on my own with my own cash at hand under nobody else's management. It is a fun learning experience.

However, if i do find better employment with the options of passive index funds in my employer sponsored 401k, i now know it is beneficial to reduce my taxes and possible to withdraw my accounts without penalties with some advanced 401k to IRA rollover planning.

All thanks to the readers help from this thread. Thanks again everyone.

*And side note, as I am writing replies, and getting 20 views within 20 min, other people's replies are happening in real time. So even if I stop to read replies, i would have to continually extend my replies to answer all replies/new topics as they come in.
Thus none of my replies would ever be posted. So for those that think i am trolling because of this Forum phenomenon, I am not. Just trying my best to type, talk, debate, think, educate myself, etc all at the real time speed of the internet and it's readers.
« Last Edit: March 28, 2013, 12:21:03 PM by Freeyourchains »

DoubleDown

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #46 on: March 29, 2013, 09:24:06 AM »
@Freeyourchains: Sorry if it's been covered already, but does your employer offer matching funds with your contributions? If so, the tax advantages plus matching contributions will wipe out, many times over, any administrative fees to manage your invested funds or taxes later on. For example, my employer matches 50% of my contributions. I do not know any other investment where I can get an automatic, guaranteed, 50% rate of return. Add to that the effective 28% tax savings rate on my amount invested. To turn that down would be foolish.

If I added up the tax savings, employer matching funds, and compounding returns on the tax savings and matching funds, that extra $100k is probably more like an additional $200k that I would have missed out on had I invested that money elsewhere (outside my 401k plan). Keep in mind, that is $200k extra from tax savings and employer matching funds over 17 years, beyond any base amount I am investing and getting compounding gains on.

Good luck.

Freeyourchains

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #47 on: April 03, 2013, 11:26:12 AM »
@Freeyourchains: Sorry if it's been covered already, but does your employer offer matching funds with your contributions? If so, the tax advantages plus matching contributions will wipe out, many times over, any administrative fees to manage your invested funds or taxes later on. For example, my employer matches 50% of my contributions. I do not know any other investment where I can get an automatic, guaranteed, 50% rate of return. Add to that the effective 28% tax savings rate on my amount invested. To turn that down would be foolish.

If I added up the tax savings, employer matching funds, and compounding returns on the tax savings and matching funds, that extra $100k is probably more like an additional $200k that I would have missed out on had I invested that money elsewhere (outside my 401k plan). Keep in mind, that is $200k extra from tax savings and employer matching funds over 17 years, beyond any base amount I am investing and getting compounding gains on.

Good luck.

Well to update everyone, I did my 2012 taxes, and am doing the Tax Math for if i would have invested the Max 401k with NO matching from employer (none offered).

Plus the math of future projections on both sides of the equations, plus the pros and cons politically/employer control or investment related.

There is one big elephant in the Room that is a bottleneck power switch to the before Age 59.5 withdrawal.

The very new, and maybe temp, Rollover from 401k to IRA options. If this goes away, you will have to take a 10% penalty + normal income taxes(besides the 72(t) grocery loophole)

"Tax on early distributions. If a distribution is made to a participant before he or she reaches age 59, the participant may be liable for a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income." IRS


arebelspy

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #48 on: April 03, 2013, 03:46:33 PM »
There is one big elephant in the Room that is a bottleneck power switch to the before Age 59.5 withdrawal.

The very new, and maybe temp, Rollover from 401k to IRA options. If this goes away, you will have to take a 10% penalty + normal income taxes(besides the 72(t) grocery loophole)

You talk about a problem, then present multiple solutions: Rollover, and 72t.

Both work great!

Here's another one: put some in taxable (and Roth) and some in tax free, which you use as "after 59 1/2 money."  You don't have to go all out one way or the other, a balance may in fact be best, depending on your circumstances.

Here's another one: shrug, say "okay" and pay the 10% penalty.  If you're at a 25% tax rate now, and will be at 0% when you retire, even paying a 10% penalty will save you 15%!  That's a worst-case scenario of having to pay it (and not using the many alternatives to avoid paying it).

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

brewer12345

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Re: Goal: FI by 40, and not investing in 401k till FI'd.
« Reply #49 on: April 03, 2013, 04:07:17 PM »
Well, I was thinking FYC might be that mountain man dude they just caught in the wilds of Utah, but since he is still posting today, I guess not.  FYC, you might want to stock up on tinfoil when you get the chance.  You need to add a few more layers to your hat.