Time to stop contributing to the 401k?

[Ashyukun]

With the start of a new year, I'm looking to overhaul my investments. They've been kind of haphazard for the last year or so since things got shook up a bit with selling my old house and buying another, but things are more stabilized now so it seems like a good time to take stock (no pun intended...) and see what needs to change.

Some background: I'll turn 40 in a few months, and am relatively recently re-married- we currently have no children, but that (and where my money goes :P) may change down the line. I have a fairly well-paying job as an engineer making roughly $100k a year; my wife teaches dance and I'd say probably adds another $30k to the pot. One slight twist is that she's only 32- so our retirement funds need to stretch out a bit further on the expectation that she'll likely be around for at least a modest while longer than I will. Our new (to us) house was bought with a 15-year mortgage with a very low rate, so should easily be paid off before at least 'traditional' retirement age. All of our cars (yes, we have too many for most here's taste, but working on them is my hobby and somewhat of a side hussle...) are paid off. We don't have any specific plans regarding retiring early- I'd love to and be able to work at repairing cars all the time, but my wife just started a non-profit and will probably always be doing at least something involving it as long as it is around (which will hopefully be longer than either of us...).

Thanks to a very financially-savvy grandfather's advice, I've been investing at least a little money since I first started actually getting paid in grad school and have kept that up over the years, putting at least a little into a Roth IRA and putting in the max match amount in the company's 401K. Thanks to the company match, the 401K has grown a fair bit more than the IRA- the rough amounts are listed below. The wife unfortunately does not have any investments currently- she did a while back, but a bad previous marriage & divorce wiped those out. This is something we intend to change.

I had been planning to just continue on pretty much as I have been with the 401k except perhaps adjusting the investments a bit, but after reading MMM's 'How much is too much in your 401k,' it seems that I already have too much in mine- assuming starting to pull from it at 60 (for me) I'd have a hair over a million in it assuming 5% growth, pushing twice what the same article posits would be necessary (and I think is fair enough- with a paid-off house and cars $30k/year should be MORE than enough, especially since I know neither of us won't be doing SOME kind of side-hussle that we love).

So, that brings me to figuring out where to go. As I said, I'd planned on keeping on contributing to the 401K, but I now wonder if I should instead be using that money to put more into a different kind of retirement fund, like (for now, I believe shortly we'll hit the point where we're not allowed to contribute to a Roth...) my Roth IRA or some other investment account.

So, what advice do you all have? Does it make sense to keep contributing to the 401k? Or would it be smarter to drop the amount down (or completely drop contributions) in favor of something a bit more flexible? And if so, what would you recommend and why? Thanks!

Current Balances:
Roth IRA Balance: $80,000
401K Balance: $240,000

[MDM]

With the higher contribution limits, it is not surprising to have a higher balance in one's 401k than in one's IRA.

Regardless of MMM's blog post, in your case ("don't have any specific plans regarding retiring early") it makes sense to use tax-advantaged investments to the maximum extent possible.  In other words, why would you want to have a smaller stash than you could, simply based on a known choice of tax treatment?

[Gone Fishing]

Did you put a pre-nup agreement in place?  If so, would it have any bearing on how you save?

[DrF]

Unless your options in your 401k are garbage, the smart money would be to contribute MORE to your 401k.

Since your wife is now contributing to expenses you should have more available to contribute. In fact, you should be able to max out your 401k and your IRA. I would stop contributing to your Roth and open a traditional IRA instead. Max out the tIRA, and open one for your wife and max that out too.

If you retire from your job where you have the 401k and you are at least 55yo, you are eligible to start withdrawing from your 401k penalty free.
http://www.forbes.com/sites/advisor/2012/05/09/did-you-know-you-can-access-your-401k-penalty-free-at-age-55/

[dandarc]

Don't think OP actually read the article, at least not past the headline.  [edit - sorry OP I was unecessarily snarky here].

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

outlines several reasons the answer to the question is "there is no such thing as too much in your 401k".

[edit - adding quote from near end of article]

So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously.

[Ashyukun]

That's OK- I didn't read it in its entirety, I skimmed it and so missed that. I obviously am not going to try and move money OUT of it, I was just curious if going forward it would be smarter to do something else with my investment dollars. And it sounds like at most I just need to do some shifting around of my non-401K contributions.

The options for our 401K aren't the greatest- I originally had all of them included in the post but decided they weren't necessary- but from what I can find at least the fees on them aren't bad. About 1/3 of my total in the 401K is in the company stock since that's where the employer match comes from and I have a portion of new contributions going there too. It may not be a bad idea to drop the 401K contribution down to what the company matches (I think they only go up to 6% and I'm putting in 10%) and put the difference into the IRAs.

[dandarc]

About 1/3 of my total in the 401K is in the company stock since that's where the employer match comes from and I have a portion of new contributions going there too. It may not be a bad idea to drop the 401K contribution down to what the company matches (I think they only go up to 6% and I'm putting in 10%) and put the difference into the IRAs.

Do what you want, but maxing out both the 401K and the IRAs will save you quite a bit on taxes (25% bracket, yes?).  Also - you've got 25% of your retirement money in company stock - not as bad as 100%, but be wary of an Enron situation.  If / when you can, I'd move that into more diversified funds, even within your 401K.

Some 401Ks allow in-service rollovers, so if you're unhappy with the funds ask about that.

[wild wendella]

I agree that with your current retirement savings, you *may* be in decent shape for retiring at 60, but there are many future unknown factors that could change that reality.  If I were you, I would at least contribute the amount to your 401K to get the max company match.  Beyond that, I would probably give myself more flexibility and add the remaining savings to taxable accounts or other non-retirement investments.

Edit: I just read the comment about retiring from a job at 55 and immediately tapping a 401K.  Yeah, if I thought that were a possibility, I would probably continue to max out my 401k.

[FrugalSpendthrift]

I had been planning to just continue on pretty much as I have been with the 401k except perhaps adjusting the investments a bit, but after reading MMM's 'How much is too much in your 401k,' it seems that I already have too much in mine- assuming starting to pull from it at 60 (for me) I'd have a hair over a million in it assuming 5% growth, pushing twice what the same article posits would be necessary

30 years of 5% growth would make it a hair over a million, but you are only talking 20 years from age 40 to 60.

I would be more concerned with the concentration of company stock than having too much in the 401k.

[wild wendella]

30 years of 5% growth would make it a hair over a million, but you are only talking 20 years from age 40 to 60.

I think most people who keep investments primarily in stocks estimate higher than 5% growth per year on average. 

[DrF]

That's OK- I didn't read it in its entirety, I skimmed it and so missed that. I obviously am not going to try and move money OUT of it, I was just curious if going forward it would be smarter to do something else with my investment dollars. And it sounds like at most I just need to do some shifting around of my non-401K contributions.

The options for our 401K aren't the greatest- I originally had all of them included in the post but decided they weren't necessary- but from what I can find at least the fees on them aren't bad. About 1/3 of my total in the 401K is in the company stock since that's where the employer match comes from and I have a portion of new contributions going there too. It may not be a bad idea to drop the 401K contribution down to what the company matches (I think they only go up to 6% and I'm putting in 10%) and put the difference into the IRAs.

I would sign in to my 401k TODAY and transfer all the company stock into a different option. You should be allowed to do that at any time. Then, most companies have an option to set up automatic rebalancing in your 401k. Set this up right now so that every quarter your company stock gets transferred into your index fund.

I would bet that your company stock has lagged behind the rest of your investments, pulling down your return. I could be wrong. You do not want to be 1 year from retirement and find out the CEO of your company has been running a ponzi scheme, etc.

[Ashyukun]

Interestingly, looking at the performance over the last 10 years (the most the company's site will give me...), the company stock (both common stock, which a small portion of my own contributions has been going into, as well as the company match ESOP) have the highest average annual rate of return at about 10.5%. The only options that have a annual rate of return higher over the previous 3-year & 5-year periods are the Large US Equity Fund (S&P 500) and the Small US Equity Stock Fund- and those are only a percent or so higher over the 3- and 5-year period. The full date from the performance table is below- hopefully it's halfway readable!

Code: [Select]

Current Price Cumulative Prior Qtr Prior 12 3 years 5 years 10 years
2011-present Months
Your Personal Rate of Return N/A 59.47% 6.77% 4.66% 18.18% N/A N/A
Fund Rate of Return
"LIS Bond Sub-Fund (PDF, 191 KB)" $10.57 N/A 1.81% 5.91% 2.56% 4.52% 4.62%
"LIS Equity Sub-Fund (PDF, 193 KB)" $15.51 N/A 1.04% 4.49% 15.76% 10.98% 6.87%
"Secure Income Sub-Fund (PDF, 191 KB)" $13.09 N/A 1.73% 4.28% 9.64% 7.96% 4.98%
"Target Retirement 2005 Fund (PDF, 205 KB)" $12.46 24.35% 0.47% 3.20% 6.60% N/A N/A
"Target Retirement 2010 Fund (PDF, 205 KB)" $12.83 28.10% 0.54% 3.53% 7.88% N/A N/A
"Target Retirement 2015 Fund (PDF, 205 KB)" $13.20 31.85% 0.61% 3.84% 9.25% N/A N/A
"Target Retirement 2020 Fund (PDF, 205 KB)" $13.55 35.52% 0.76% 4.17% 10.74% N/A N/A
"Target Retirement 2025 Fund (PDF, 205 KB)" $13.86 38.72% 0.95% 4.48% 12.23% N/A N/A
"Target Retirement 2030 Fund (PDF, 205 KB)" $14.15 41.79% 1.14% 4.76% 13.40% N/A N/A
"Target Retirement 2035 Fund (PDF, 205 KB)" $14.30 43.43% 1.22% 4.85% 14.12% N/A N/A
"Target Retirement 2040 Fund (PDF, 205 KB)" $14.41 44.64% 1.25% 4.86% 14.54% N/A N/A
"Target Retirement 2045 Fund (PDF, 205 KB)" $14.44 44.95% 1.31% 4.97% 14.58% N/A N/A
"Target Retirement 2050 Fund (PDF, 206 KB)" $14.44 44.99% 1.31% 4.97% 14.58% N/A N/A
"Target Retirement 2055 Fund (PDF, 206 KB)" $14.42 44.74% 1.29% 4.94% 14.57% N/A N/A
"Income Fund (PDF, 160 KB)" $157.13 14.99% 0.87% 3.37% 3.45% 3.58% 4.57%
"Transitional Money Market (PDF, 21 KB)" $142.75 0.30% 0.00% 0.00% 0.05% N/A N/A
"Government/Credit Bond Fund (PDF, 191 KB)" $11.77 16.74% 1.82% 5.98% 2.66% 4.50% 4.66%
"Equity Fund (S&P 500) (PDF, 193 KB)" $61.33 77.92% 4.92% 13.64% 20.38% 15.41% 7.67%
"Small Company Stock Fund (PDF, 193 KB)" $43.89 68.31% 6.41% 7.49% 20.65% 16.41% 8.23%
"International Equity Fund (PDF, 188 KB)" $22.28 20.67% -3.62% -4.70% 11.24% 5.28% 4.49%
"Emerging Markets Equity Fund (PDF, 188 KB)" $9.16 -9.33% -4.72% -2.77% 3.77% 1.35% 7.97%
"Inflation Sensitive Assets Fund (PDF, 28 KB)" $9.83 N/A -1.91% N/A N/A N/A N/A
"Multi-Market Risk Parity Fund (PDF, 28 KB)" $10.19 N/A -0.08% N/A N/A N/A N/A
"Common Stock Fund (PDF, 160 KB)" $76.25 58.36% 9.20% 3.11% 18.40% 12.87% 10.47%
"ESOP (PDF, 160 KB)" $25.68 59.29% 9.35% 3.14% 18.73% 13.05% 10.60%

[J'onn J'onzz]

To me one of the main reasons to not keep money in your company stock is that it is a diversification issue. If something were to happen and your company went under not only would you lose your paycheck but you would also be out the savings that you had invested in your companies stock. I like the company I work for pretty well but I just do not like to rely on them that much, to many eggs in one basket.

If you get a discount on the company stock purchase I would probably go ahead and take advantage of that but I would sell/transfer out of the company stock as soon as they allow and get that money into other investments.

[Ashyukun]

OK, that does make good sense. Looking into it though, at least for the moment I can't find how to move funds from the ESOP (matched funds in company stock) to other investments. Did reallocate it though, moving to about 50% in the Large US Equity Fund (which has about a 10% annual growth record for the last 20 years), about 40% in the Small US Equity Fund, and 5% each in the International and Emerging Markets funds. The Large Equity fund seems to have done the best for a while of the non-company stock choices for quite a while now, with the Small Equity fund doing better on occasion.

[rmendpara]

OK, that does make good sense. Looking into it though, at least for the moment I can't find how to move funds from the ESOP (matched funds in company stock) to other investments. Did reallocate it though, moving to about 50% in the Large US Equity Fund (which has about a 10% annual growth record for the last 20 years), about 40% in the Small US Equity Fund, and 5% each in the International and Emerging Markets funds. The Large Equity fund seems to have done the best for a while of the non-company stock choices for quite a while now, with the Small Equity fund doing better on occasion.

Please do a bit of reading around how to develop an asset allocation. 50% large cap, 40% small cap and 5% international is a bit strange.

Simply looking at historical returns is not how you choose which funds to invest within... you are managing risk not maximizing return.

Bogleheads (search Google) is a good place to start to learn some basics on investing.

[soccerluvof4]

I would max out your 401k and for sure drop your company% to less than 10% and probably closer to 5%.

[DrF]

OK, that does make good sense. Looking into it though, at least for the moment I can't find how to move funds from the ESOP (matched funds in company stock) to other investments. Did reallocate it though, moving to about 50% in the Large US Equity Fund (which has about a 10% annual growth record for the last 20 years), about 40% in the Small US Equity Fund, and 5% each in the International and Emerging Markets funds. The Large Equity fund seems to have done the best for a while of the non-company stock choices for quite a while now, with the Small Equity fund doing better on occasion.

Call your benefits dept. to see about moving the esop funds.

You may think that you work for a great company, but you never know if something is lurking around the corner. If you would invest in your company if you didn't work for them, then (and only then) would I recommend leaving 5-10% in company stock. If you don't know how to tell if you would invest in your own company, then I would definitely not leave ANY money in company stock.

This is about your future. Keep it safe.


Edit: Most/all company matching contributions go to the company's stock (not sure if this is true for all companies, true for my wife's). So, you have to do what I said and set up auto rebalancing every quarter/6mo/year???? Whatever you are comfortable with. I have my wife's set to every quarter.

[J]

If your employer's contribution depends on yours, and it isn't something ridiculous like "for every $10 you put in we'll put in $1", invest the maximum amount that they'll match.

If your employer's contribution is independent of yours, or they don't make one, then forget the 401k and just invest for retirement yourself.

Either way, don't buy any individual stocks, which includes your company's stock; just invest in the lowest-cost index fund you can, either a whole-market fund or a balanced fund depending on your risk tolerance.

[MDM]

If your employer's contribution is independent of yours, or they don't make one, then forget the 401k and just invest for retirement yourself.

Why would you not take advantage of the tax-advantaged nature of the 401k?  Is your answer the same regardless of whether it is a traditional or Roth 401k?