Posted: February 23rd, 2011 | Author: Joe | Filed under: Investing, Retirement, Saving | Tags: 401(k), IRA, Retirement, ROTH IRA, Saving | 1 Comment »
I switched jobs last year and along with a better position and bigger salary came a host of benefit changes. One of these changes was my 401(k) plan.
Regular readers know that I’ve been a steady contributor to my 401(k) at every job I’ve had since I started work professionally about 12 years ago.
Consistent contributions (even through employer match cut-backs and the recent Great Recession) an good plans have allowed me to watch my savings cross the 6-figure mark at the end of last year. But I realize now how lucky I have been to have had such good options in my 401(k) plans to date.
I realize this because I’ve hit a problem with my current plan, and I bet I’m not alone.
The problem
The problem is this: The investment options in my current employer 401k plan stink.
The plan is administered through a well known insurance company with a catchy jingle and fees that top the range of what is considered average for the funds.
I’m a big believer in low fees. Research has shown that most portfolios have a greater chance of outperforming their peers and the benchmarks averages when they invest in lower cost mutual funds or ETFs. It’s just common sense that when all other things are equal, the fund that charges less with leave you with more money in the end.
Of course, some funds out perform their peers and have higher fees. That’s OK too, but the key is that you’re getting a demonstrated track record of out performance for that extra cost.
My problem is that few of the funds in my 401(k) out perform their peers, but still have higher fees.
So, I have a few options and if you’re in the same situation, you do too!
Retirement plan options
The 3 basic retirement plans available to me in my career are:
- Traditional IRA
- Roth IRA
- Employer’s (lousy) 401(k) plan
Each one has benefits and drawbacks, but the Traditional IRA and Roth IRA are slightly different beasts given that the Roth contributions are after tax, while the tradition are pre tax.
I don’t want to roll over my 401(k) to a Roth, because I don’t want to pay the taxes on the conversion. I’m considering opening up a Roth in addition to pre-tax retirement plans in the future, but the Roth is not being considered by me at this time.
That leaves the Traditional IRA and the crappy 401(k).
Rolling over my 401(k) to a traditional IRA seemed liked a no brainer – I would be able to invest in a wider range of funds, stocks and bonds – but then I realized this startling discrepancy:
The contribution limit for a traditional IRA is only $5,000!
By contrast, the limit on a company sponsored 401(k) plan is a whopping $16,500!
With all the talk of financial reform in Washington D.C. over the past two years, and all the discussion about ending the 401(k) plan in favor of another social security style plan, I wish Congress would just make the contribution limit of the IRA as large as the 401(k)!
The total solution
Well, this left me with the choice of saving less in my IRA but paying less fees, or paying higher fees and potentially saving more by using my 401(k).
After much pondering, and poking around the Internet (to no avail), my solution is this…
I will rollover my old 401(k) to a new IRA. I will make the maximum contributions per year ($5,000) to that plan and any remainder I will contribute to the least offensive options in my 401(k).
For example, I’m used to contributing about $7,000 a year to retirement. I will be splitting up that amount like so:
- $5,000 to funds in my IRA
- $2,000 to funds in my 401(k)
I call this the “total solution” because it reminds me to consider the total holding in these two accounts as my portfolio – I have 1 unified portfolio instead of 2 portfolios.
The trick is determining which holding to keep in my 401(k) considering that an future increase in contributions will need to go into those funds. I’m tempted to hold my bond allocations in my 401(k). That way I will automatically increase my bond exposure over time as my contributions increase and I get closer to retirement age.
It’s not an ideal solution by far, but it’s the best I could come up with and I couldn’t find a better one. If you have any suggestions, I would gladly welcome them! 
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Posted: January 5th, 2011 | Author: Joe | Filed under: Debt, Retirement | Tags: government, news, Retirement, Saving, social security, welfare state | 1 Comment »
What happens when the welfare state begins to collapse, and the government can no longer print its way out of fiscal irresponsibility? Well, in the case of five European nations, you start confiscating the citizens’ savings!
Apparently, the politicians in Hungary, Poland, Bulgaria, Ireland and France view private savings accounts as their own personal piggy banks. I can’t begin to express how disgusting (and frightening) I think this is.
In Hungry, the government is resulting to extortion to gain access to over $14 billion in individual retirement savings:
“The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). “
In Bulgaria, the government seized $60 million in private accounts. The Polish government wants to transfer a “1/3 of future contributions from individual retirement accounts to thestate-run social security system.” Ireland and France are a bit less dramatic in that they have thusfar only raided the public pension funds to bail out the rest of the government, and not yet confiscated any current savings plans.
Beside the outrage of outright theft of private property (i.e. retirement savings) of the Bulgarian, Hungarian and Polish people, even the Irish and French governments raid on public pension plans must lead its citizenry to wonder if there is even any point in saving or planning for the future.
Once the people lose hope and the ability to plan their own destiny, the system collapses.
Could this happen in the United States?
It probably won’t reach the level of depravity of the Hungarian and Bulgarian governments, but the current administration and the 111th Congress racked up record deficits and created the largest new entitlement (heathcare) in generations.. And some have already hinted at back door methods of the kind of confiscation seen in Bulgarian (see how George Miller, Teresa Ghilarducci and the End of Your 401k. ) . And the Social Security “trust fund” has long since been raided, resulting in the system we have today – people paying into the program are essentially supporting those collecting from it today.
I would argue that this is no different than forcing people to pay into the system even though they are not going to benefit from it when they retire. This is likely true for younger generations of worker, though no public official would dare to state this.
Source
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Posted: January 4th, 2011 | Author: Joe | Filed under: Retirement | Tags: 401(k), Retirement, Saving | No Comments »
Gen Y often gets a bad rap from Boomers and Gen X-ers for being entitlement minded and lacking ambition. I suppose it’s due at least in some part to the natural tendencies of each generation thinking the next has it easier than they had it, but if this article from The Street is any indication, Gen Y is not on track to show they’re any better at saving for retirement than previous generations.
According to the study, 80% of Generation Y workers (defined by the study as roughly 18-30 year-olds) will fall short of having sufficient funds for retirement by the time they get their last paycheck.
“After factoring in inflation and post retirement medical costs, its researchers project Generation Y workers will need to save 18.7 times their final pay in retirement resources — including Social Security, employer-provided defined benefit and defined contribution plans and employee savings — to maintain their current standard of living in retirement.”
I think there’s a lot of truth at the heart of the study, but not just for Gen Y-ers, but there are also a host of assumptions at play here too – most of which make the picture even more bleak!
For example, does anyone really expect Generation Y members to be able to collect Social Security by the time they retire? If the system isn’t completely bankrupt by that time, it will likely be reduced to something akin to retirement welfare – providing simple subsistence to those below the poverty line who never saved anything for retirement. Like many of Generation X, Generation Y retirees will face saving for their own retirement in their private accounts (401ks, etc..) while funding the retirement of others through the social security tax.
Another point that isn’t made clear in the article is how the unemployed factored into the results. A large portion of the nearly 10% unemployed are in this generation.
The article goes on to point out that 41% of workers with access to 401k plans do not save enough to get the company match (free money people!) I think this highlights another underlying problem – younger workers lack a saving mindset.
It’s not a Gen Y thing, I can remember when I got my first real job out of college and was making what was big money to me at the time, I didn’t think anything about retirement savings. My parents never talked to me about such abstract things, and it seemed a lifetime away at the time. Fortunately, I had a manager who took me aside and told me – in no uncertain term- that I was going to set aside at least 10% of my salary and increase that by 1% every year.
Thanks to her, I had 6 figures in my 401k by the time I was 35.
I didn’t fully understand the Importance of what she did for me until many years, and a few jobs later, but I see the difference it made in my life and I wonder how many in my generation and others never had the same kind of retirement guardian angel I had.
One thing is clear, without sufficient savings rate the standard of living for Gen X and Gen Y retirees will be significantly lower than previous generations.
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Posted: September 17th, 2010 | Author: Joe | Filed under: Debt, Retirement | Tags: 401(k), 401(k) loans, Debt, Retirement | 2 Comments »
Many Americans may find themselves asking this question in today’s economy. The Great Recession and its historically high level of unemployment have left many with few other options. In the past, people could refinance their mortgage or take out a home equity loan but the collapse of the housing market has left many underwater. So it may seem like a last resort, but is a 401k loan a good idea?
Photo by {Guerrilla Futures | Jason Tester}
A BankRate reader recently asked Don Taylor just this question. Here’s the gist of don’s reply.
Don points out that it’s notoriously difficult to “run the numbers” to compare the cost of a 401k loan vs. other debt (ex: will you save money borrowing from your 401k to pay down your car loan) because it’s impossible to know for sure what the 401k loan will really cost you in the end. It’s easy to compare interest rates, and the financing cost of the loan, but you can never truly account for the lost compounding effect from having that money continuously invested (and any dividends re-invested). In short, you can’t know for sure what the cost of having that money side on the sidelines is going to be.
Still, there are some situations where it can be less of an impact, if not an actual benefit to borrow from your 401k.
Here’s a list of when it might be beneficial to borrow from your 401k:
- If you would need to borrow the money anyway from another source, if not your 401k.
- If the after-tax interest rate on that other loan would exceed the “reasonable return” you can expect from your 401k over the term of the loan.
- If you can make your 401k loan payment without reducing current 401k contributions.
- If you accept the terms that you will need to repay any outstanding portion of the loan within 90 days of leaving your job or pay income tax on that balance along with a 10% penalty.
- If the borrowed money is going toward repayment of a loan with no tax deduction (i.e. credit card debt).
- If you get your financial ship in order to avoid the need to borrow so much in the future.
I added those last two points because I feel they’re important. I also don’t think it’s ever really a good idea to borrow from your future like this unless your present way of life is really in danger of ending. In other words, you have exhausted all other avenues and bankruptcy is not a way out.
I’ve had friends who have borrowed from their 401ks and never been able to pay them back because they never got their spending habits under control. This only serves to set them back financially in a big way.
In my own experience, when I’ve had to come up with some extra money to pay off debts, I’ve stopped contributing to my 401k and diverted that money toward the debt as extra payments. It’s painful at the time, but less painful than borrowing from my 401k, which only shifts the debt around and ends up costing much more in the long run.
It’s important to note that Don bases these points off of a paper by members of the Federal Reserve Board titled “New Evidence on 401(k) Borrowing and Household Balance Sheets.” This paper is also referenced by the Wall Street Journal article, “Rethinking Conventional Wisdom About 401(k) Loans.”
UPDATE: Thanks to NerdWallet for featuring this post it its Carnival of Money Stories – Oktoberfest Edition, and Personal Dividends for featuring this post in their Carnival of Wealth #4 – The Family Finances Edition.
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