401K Questions for Dummies

[MPHSystems]

The Facts:
-I know nothing about this stuff.
-I'm in my late 40's & never had a 401K.
-I have zero problems saving money.
Got a new job and they offer a 100% match up to 5% of my Contributions.
So, I set it up to take 20% out of my pay checks.

But

My thoughts, after the fact:
I don't really "trust" todays financial world.
It lacks stability for the long haul, in my opinion.
Am I wrong in thinking that maybe I should lower my Contributions back down to 5%? Then take money out of my checks myself and buy gold with it?
Rather then have my money out in the world, where I have no control over it.

What are your thoughts?

Thank you

FT

Do not leave any if the match on the table. Even if the market tanks by 50% you are getting 100% ROI with every contribution, with tax implications, even a loss is a gain.

you are looking at 20-30 years, time in market beats market timing ALWAYS!

 

[Gonefishin5555]

my home equity is a lot higher than my retirement plan balance. Before maxing out your contribution you might want to think about buying a bigger nicer more expensive home to build more equity. Probably not a great time to do this but you are worried about investing and the best (safe and high return) investment is the house you live in.

 

[bocco]

The biggest losses I have ever incurred is back when I used so called financial advisors. When the market collapsed in 2008 I learned that I did not need to pay somebody else to loose my money. I went and got educated, so at least I had nobody to blame, but myself. Geez….. My financial advisor at the time, was with Bear Sterns…… they collapsed! They were a huge company at the time. Those big name companies really don’t have a fiduciary duty to their clients.

Here is advice a financial advisor gave me at a time when I was stupid. He told me about these energy stocks that were trading for approx $20 per share. I buy a bunch. They quickly drop to $11 per share, whereas he convinces me that that is a historic low and talks me into buying a bunch more! How could I loose? I eventually sold the stock for $8 per share. NOW, I see the entire deal in a different light and realize what a patsy I was back then. Common sense should have told me there was no future in coal. Now I make decisions based on reports of future markets. Period

If the Build Back Better bill ever passes…….. which companies stocks will go up? I have some guesses!

I couldn't agree more with this. I always wondered why stock brokers worked for a living when they should be able to just make money trading stocks. Now I know. Most of them just aren't that good.

I have the same opinion of managed investment accounts at some banks. I had some of my mom's money in one at Chase bank a few years ago. I tracked the gains (or lack there of) and compared them to my IRA investments. I was doing just a little better then they were. But also they charged based on the value of the account whether they made money or not. Also they bought and sold a lot inside the account which created a lot of tax events. They were kind of surprised when I pulled the money out. I told them they were making more than my mom was on the whole deal.

 

[badgas]

my home equity is a lot higher than my retirement plan balance. Before maxing out your contribution you might want to think about buying a bigger nicer more expensive home to build more equity. Probably not a great time to do this but you are worried about investing and the best (safe and high return) investment is the house you live in.

Home equity has a lot of variables. What if someone pays cash for a home ? they would instantly have 100% equity.
Do you mean home appreciation ? A lot depends on where you are and the funds are locked up in the house until you sell it.

Having paid off home is huge hedge against inflation and is a great thing but you need retirement income. Many retirees do not want to sell their home and cash out because don't want to move away from adult kids/grandkids etc. It is great to have the option but you don't want the house to be a lopsided percentage in your nest egg.

Buy a home you can afford so it gives you margin to do the other investing.

 

[Tom Slick]

Great topic and perfect timing. Hoping to get some solid advice from my fellow RDPer's.

I'm 49 years old, have been self-employed for 25 years and have very little retirement to speak of. Last year I started a 401K for myself and I also have an IRA. Since I'm self-employed there is no company matching, so whatever goes into the 401K is on me. So my question is: Do I put money into the 401K, or the IRA? Is it best for me to max the IRA at $6,000 annually and put any other funds I can muster into the 401K? What says you?

 

[badgas]

Great topic and perfect timing. Hoping to get some solid advice from my fellow RDPer's.

I'm 49 years old, have been self-employed for 25 years and have very little retirement to speak of. Last year I started a 401K for myself and I also have an IRA. Since I'm self-employed there is no company matching, so whatever goes into the 401K is on me. So my question is: Do I put money into the 401K, or the IRA? Is it best for me to max the IRA at $6,000 annually and put any other funds I can muster into the 401K? What says you?

If your income limit allows a Roth IRA I would max that before the 401K or traditional IRA. I love the Roth because of it being tax free in the future. I would also get council from your CPA becasue that 401K is also lowering your adjusted gross income. Maybe there is sweet spot where you do both ?

Are you married ? if so can your wife be an employee that also has a 401K ? I have some friends who do this.

 

[badgas]

I couldn't agree more with this. I always wondered why stock brokers worked for a living when they should be able to just make money trading stocks. Now I know. Most of them just aren't that good.

I have the same opinion of managed investment accounts at some banks. I had some of my mom's money in one at Chase bank a few years ago. I tracked the gains (or lack there of) and compared them to my IRA investments. I was doing just a little better then they were. But also they charged based on the value of the account whether they made money or not. Also they bought and sold a lot inside the account which created a lot of tax events. They were kind of surprised when I pulled the money out. I told them they were making more than my mom was on the whole deal.

You are wise. It was not just those people at Chase that could not beat the market, none of them can. This book is real eye opener about investing. It will spell out that when you factor in the fees the overwhelming majority of fund managers can NOT beat the S&P

The Simple Path to Wealth

www.thesimplepathtowealth.com

 

[DaveC]

The short answer is you need a comprehensive financial plan. Diversification is part of that plan. Looking at overall savings and other tax deferred strategies and investment mixes both inside and outside retirement plans. Also estate planning. There is no one sized fits all.

With that being said a couple things to note about just 401k’s.

401k’s are a tax deferred strategy and are easy way to save money thru payroll deductions. (Emphasis on easy in our busy world). Set the payroll deductions and it’s automatic. Helps accumulate savings easy and fast.

Also the tax deferred benefit should be viewed separately from the underlying investments. Most 401ks have different investment options so finding something that works for you is possible. Plus there is the ability to change the mix when necessary. Often times there are limitations on the availability of investments but most have a good mix of stuff.

My point is view the contributions separately from the investment. Trepidation over investing shouldn’t hold you back from contributing, just alter your investment style to suit your needs.

Also the tax deferred strategy is a powerful thing for most regular people. One gets a tax deduction when making the contribution and money accumulates tax deferred until withdrawn. One pays tax when money is withdrawn but NOT rolled over.

For most people who live on a budget a pretax deduction results in a larger overall contribution from available money because you contribute the amount that you would have otherwise paid in tax. After tax contributions require you pay current tax which for most is substantial and this generally means a smaller net contribution after tax. Example say your “budget“ determines you can save $10,000 per year. (less than legal limit of $20,500) The pretax contribution is $10,000 while the after tax contribution is $7,500 after paying 25% tax. The opportunity cost of saving the extra $2500 per year to the pretax account is huge.

The above is for mere mortals who live on a budget and don’t have infinite dollars to spend and pay taxes. Bottom line is if money is limited and one has to reduce savings amounts to pay tax on the after tax contributions that defeats the purpose of making the after tax contribution so one is better off with pretax instead. (The opposite is true if one can contribute the max after tax unreduced and still afford to pay the tax)

I don’t wanna get into Roth here because that is a different strategy that is appropriate in certain circumstance. Plus most 401k plans now offer Roth 401k deferrals.

 

[DaveC]

Great topic and perfect timing. Hoping to get some solid advice from my fellow RDPer's.

I'm 49 years old, have been self-employed for 25 years and have very little retirement to speak of. Last year I started a 401K for myself and I also have an IRA. Since I'm self-employed there is no company matching, so whatever goes into the 401K is on me. So my question is: Do I put money into the 401K, or the IRA? Is it best for me to max the IRA at $6,000 annually and put any other funds I can muster into the 401K? What says you?

BTW you can contribute a company contribution up to 25% of payroll Plus the 401k deferral.

You also have to give your staff some money so watch it

 

[Cdog]

Great topic and perfect timing. Hoping to get some solid advice from my fellow RDPer's.

I'm 49 years old, have been self-employed for 25 years and have very little retirement to speak of. Last year I started a 401K for myself and I also have an IRA. Since I'm self-employed there is no company matching, so whatever goes into the 401K is on me. So my question is: Do I put money into the 401K, or the IRA? Is it best for me to max the IRA at $6,000 annually and put any other funds I can muster into the 401K? What says you?

I don’t know the nature of your business but You should be able to set up a self-employed pension (sep) that enables you to contribute up to $56,000/25% a year towards your retirement.

SEP-IRA - Wikipedia

en.m.wikipedia.org

 

[Spudsbud]

Max it out. I’ve been maxing it out yearly since I was 23.

Max it out. Leave it alone.
This market ? Avoid bonds.
Go with Large and Mid Cap aggressive growth funds
Check the 3 and 5 year charts for gains.
Invest inthe highest earners.
Set it and.forget it. Revisit every 6 months or so.

 

[74 spectra20 v-drive]

Take the free money, good on you for being able to save. We have been invested since day one and we did switch overt to the Roth option when it was offered.