401K Questions

[THE HCP]

Yo yo yo........... I didn't get my shit together until a little later in life, so I now officially have a 401K plan. Wondering what I should do with it. Or how! I am as clueless about this as I am about your video game and D & D threads. Honestly if somebody has experience with this stuff would you mind hollering at me?

 

[MARIS61]

If you get a match from your employer, contribute the max amount that they will match. It's like free money, or a raise. Above that point I'd put my money somewhere else that has a chance to increase at a higher rate over the long term. Somewhere that doesn't involve a financial institution, as the chances for a total nationwide collapse, or the pretense of one, seem to be multiplying daily.

Historically, Real Estate outpaces most other investments over the long term. Plus, it is one of the few investments that is currently at a low value (buy low, sell high) as opposed to precious metals for example which are at an alltime high. It also has the added benefit of being something you can use and enjoy as opposed to being just numbers on paper. It can also bring in additional income through rent.

 

[espn_hall_of_famer]

Seems like more and more 401K's aren't matched by an employer (especially if you didn't know to have one and are just getting into one now since as the previous poster said, it's free money and those situations should be taken advantage of).

My "readers digest" for you is this:

Since social security and even some pensions aren't enough to allow a person to retire with their same wages at an early time in their lives, the 401K allows a person to set aside X% of their income for years, and have that income not only deferred until you retire (to help fill that gap) but also hopefully to earn money a little bit above the rate of inflation in our country and thus turn that amount that would have bought you a Honda Shadow into a Harley 20 years later.

The basic premise is if you make $60,000 a year today, say you put $6,000 away in a 401K, then you get to write it off on your taxes. So it makes your taxable income $54,000 a year and thus puts you in a lower percentage tax bracket so you're giving Uncle Sam less % of your income out of each paycheck. Then you hope that $6,000 earns about 5-7% ever year over time, so by the time you retire, that $6,000 is worth much more than that $6,000 even with inflation added on (IE - you would have bought six months worth of groceries with it today, but when you actually use it in retirement you get a year's worth of groceries out of the same money). So you get a higher percentage of take-home pay now (although less money because you are stashing money away in the 401K) and then your money will be worth more when you use it (and you likely won't just blow it as easy when you stash money away in a 401K).

One key is to make sure you can afford it. They'll penalize you 10% of it to draw against it before you're 59 1/2 in most cases, and you don't want to do that. So it's a good idea to stash money away as you make more money or get raises, so you don't miss the money and still are used to making the same payments. So you know you won't need it until you're 60 years old.

Another thing I tell folks now is to be aggressive. Normally if you've been paying into something for 20 years already and you're in your 50's, probably not quite as smart. But you're just getting into now, so that's not the case. You don't have to be too conservative with it.

But the economy is really low right now, so there simply isn't much room to lose money. Most of the people lost their money over the last 2-3 years when the bubble burst. Now it is steadily climbing and will for years to come. So getting into the aggressive stuff now will see some spikes up and down, but you're almost guaranteed to gain like 6-10% a year now over the next decade or so. So just plug money in there now and be happy you weren't there when they dropped 50% in value. You now get to hop on board while the market is going to start steadily seeing big spikes going up and little small spikes down because there is just so much room to go back up and so little room down to the floor.

I'll just add that I would stay away from Real Estate. You can't write it off and the bubble burst so bad I don't think it will ever get 10% annual gains again like it did in the past until long after you retire (which is of course what caused the big burst in the first place).

 

[THE HCP]

Thanks guys. This is very important to my wife and I. She doesn't work, so we want to do this right! Thanks again for your help.

 

[espn_hall_of_famer]

As a side note, don't get caught up in the percentage gains that some of the individual funds show. Just stick with Aggressive Growth and go with something fairly straight forward or a handful of Aggressive Growth choices to spread you portofio around a little.

These retirement fund companies have a little game they play where if a fund is losing money over their competition, they "re-org" the fund and add a couple companies and take a couple out. Then they re-name it and it starts its life over. So it allows you to only list the funds performing good since you're always taking out the bad ones. Makes it look like everything is making more money than your neighbor (IE - making Vanguard's Aggressive suite looking better than JP Morgan's, etc.).

It reminds me a little of the handicapping "experts" that send mass emails with a guaranteed winner this week for $100. Basically they give half of their suckers Oregon and the other half UCLA for their guaranteed Thursday Night lock of the week. Then being people of their word, they'll refund the half that that missed, and just pocket the half that won and get easy money for doing nothing. Then they'll give split picks for their clients for the rest of the season and create a lot of combinations that they've given. So when they hang their hat on how "successful" their handicapping has been, they can say their picks for client X have gone 6-1 over the last 7 weeks (of course they did because they used like 100different combinations of picks over those 7 weeks with all their clients).

Anyway, point is those firms are just scams and don't count their losses in order to inflate the numbers they advertise. That's what mutual funds do as well.

 

[mook]

Great posts, EHOF. Only thing I'd add is that I like index funds. Those are funds that aren't really managed by anybody, but just own small pieces of well-known stocks. S&P 500 index fund is a pretty basic. They tend to match or outperform most managed funds, but you aren't paying the extra cost of having somebody manage it. Can save tens of thousands of dollars over decades.

Maris is a realtor, so take what he says about investing in real estate with that grain of salt. He makes his living off of people spending money on real estate. Personally, I thought it was nuts to invest in real estate 5 years ago, and I think it still is for small-time investors. I look around and see so much property available and so little demand. I guess if you want to get in the landlord game it's not a bad time to start.

 

[mook]

One other thing--get as much money into your 401k as you can now. Compounding interest is your friend. If you are 36 years old and you have $60k in your 401k, if it earns 7% from now until 65 you'll have $400k waiting for you.

 

[THE HCP]

It's thru Prudential. Thanks again guys, I'm still learning the terminology.

 

[THE HCP]

Maybe you can apply this stuff to basketball then I'd understand.

 

[andalusian]

Maybe you can apply this stuff to basketball then I'd understand.

Think of it this way, if instead of killing the Lakers by 30 during the regular season the Blazers only won by 20 leaving 10 they could use in the Playoffs when the refs are extra "preachy". That's a 401K for you in a nutshell.

 

[BLAZER PROPHET]

With all due respect to EHOF and his excellent post, the one thing I disagree with is I strongly recommend placing money conservatively as investment that average a gain of 10% per year make often make more money than aggressive investments making an average gain of 20% per year. The principle if called Preservation of Capitol. Here's an example...

In a highly aggressive investment yields go way up and way down. Let's say you have $100,000 invested in year one. The first year the investment drops 40%, not unusual for aggressive investing. Now, the $100,000 is $60,000. The next year it gains 80%. You now have, after year 2 a total investment of $108,000 and an average yield of 20%.

Now, look at a conservative investment designed to conserve your money. Take the same base year investment of $100,000 and let's say in year #1 the fund gains 10%. You now have $110,000. If the fund gains 10% again in year two, you now have a total of $121,000 with an average yield of only 10%. After two years you have in the fund averaging 10% $13,000 more than the one averaging 20%.

And right now, with Obama-economics, this is a difficult time to be in a risky/aggressive fund.

 

[maxiep]

Maybe you can apply this stuff to basketball then I'd understand.

At this stage of investing, you're more interested in investing in players with upside than the finished products. For example, you draft a Dwight Howard over an Emeka Okafor or Jermaine O'Neal over Kerry Kittles (even though at the time Emeka and Kerry were the superior player). Occasionally you'll end up drafting a Nikoloz Tskitishvili, but you have time to recover.

As you get older, you draft guys like Brandon Roy and Kevin Love over Rudy Gay and Danilo Gallinari because you're interested in getting solid play and not looking for massive upside.

 

[THE HCP]

Thanks again guys!

 

[ABM]

One thing I had always done, and it's paid off quite handsomely (that is, until the divorce...but that's an entirely different can of worms), is split my raises with my 401k contributions. In other words, if I received a 4% raise, I had the HR 401k admins up my 401k contribution by 2% and I took the remaining 2%, an so on.

 

[THE HCP]

So I need to tell my financial planner that I don't want to walk the ball up the court and run a pick n roll with Adam Morrison and Randy Foye! I need a fast break led by Nash with Rudy Gay and Josh Smith on the wings!

 

[espn_hall_of_famer]

With all due respect to EHOF and his excellent post, the one thing I disagree with is I strongly recommend placing money conservatively as investment that average a gain of 10% per year make often make more money than aggressive investments making an average gain of 20% per year. The principle if called Preservation of Capitol. Here's an example...

In a highly aggressive investment yields go way up and way down. Let's say you have $100,000 invested in year one. The first year the investment drops 40%, not unusual for aggressive investing. Now, the $100,000 is $60,000. The next year it gains 80%. You now have, after year 2 a total investment of $108,000 and an average yield of 20%.

Now, look at a conservative investment designed to conserve your money. Take the same base year investment of $100,000 and let's say in year #1 the fund gains 10%. You now have $110,000. If the fund gains 10% again in year two, you now have a total of $121,000 with an average yield of only 10%. After two years you have in the fund averaging 10% $13,000 more than the one averaging 20%.

And right now, with Obama-economics, this is a difficult time to be in a risky/aggressive fund.

I won't say you're wrong as there are more opinions on this than there likely are on why Greg has been injured a few times.

But I will say in all my years of following mutual fund (401K) investment funds. I've never seen one called "conservative" that made 10% annually. In fact, most aggressive funds make 10-15% in a good year and lose some in bad years, but come out equivalent of around 6-8% annually compounded from year 1 to year 20 for someone HCP's age until he retires.

Most funds that follow your example where an aggressive fund loses 40% (which has only happened in a unique calendar year a couple times in most people's lifetimes) but even using that example, even the safest investment would only make like 1-2% annually in that bad year, then in that same example of that same aggressive investment gaining 80% the next year, your example would really only gain 2-3% at best.

Remember, the nature of conservative is it never goes up or down more than 2-3% one way or the other. Your example of something that gained 10% would have lost 10% when the aggressive mutual funds were losing money, and now while the aggressive funds are making returns again around 30-40% annually, those same "safer" 10% funds are only gaining 10% back.

So long story short, over the course of 15 years in the middle of any economy, aggressive funds will beat out conservative funds 100 times out of 100. In an "up" economy, you may need to be in it for 15-20 years to ensure 100% guarantee that the aggressive portfolio will outperform the conservative one. And in a down economy like today, you only need to retire in 3 years or more before you know you'll be making money.

No amount of Obama impact or volitility could happen so much in a market so close to the floor like we have now in 2010 that would now allow the aggressive funds to out perform the small 3-5% mdoerate stuff over the next 5+ years as those big gains will blow the small gains out of the water over time.

 

[ABM]

And right now, with Obama-economics, this is a difficult time to be in a risky/aggressive fund.

Dollar cost averaging, dude. Dollar cost averaging is the key component.

 

[BLAZER PROPHET]

I won't say you're wrong as there are more opinions on this than there likely are on why Greg has been injured a few times.

But I will say in all my years of following mutual fund (401K) investment funds. I've never seen one called "conservative" that made 10% annually. In fact, most aggressive funds make 10-15% in a good year and lose some in bad years, but come out equivalent of around 6-8% annually compounded from year 1 to year 20 for someone HCP's age until he retires.

Um, those were just examples to explain the fact that over time it's easier to make money when protecting assets rather than being aggressive. The aggressive approach takes timing and careful asset management.

 

[maxiep]

HCP, the best thing for you to do is to take the pool of investments available to you through Pru to an investment professional. Sit down with them, assess the risk you're willing to take and then have him calculate the blend of betas that puts you on the tangent to your risk level. It sounds complicated, but it's nothing more than simple math.

 

[mook]

Um, those were just examples to explain the fact that over time it's easier to make money when protecting assets rather than being aggressive. The aggressive approach takes timing and careful asset management.

Just the opposite. An aggressive approach over 25 years will kick the ass out of a conservative approach over 25 years. Nearly any adviser worth his salt will tell you to be as aggressive as you can stomach if you are over 10 years away from retiring, because even if things go in the shitter you've got plenty of time to recover.

Also, you are better off NOT carefully managing it, because if you pull out money in more risky situations, you will miss out on big spikes. This is because most major surges in stock prices historically have happened over only a handful of days. So if you miss out on those handful of days because you were too cautious, you can get hosed. Assuming you go with a well-regarded (but aggressive) fund, you are much better off just leaving it in there and forgetting about it for five or ten years, no matter what the stock market does.

The time to invest conservatively is when you approach retirement (or foresee some other reason to need money). People who say they lost half their life savings and all the value in their house so now they can't retire this year were just stupid. The should never have tied up so much of their net worth in something so volatile so close to retirement.

Conservative investing can also be effective if you happen to time the market perfectly. Say you yanked all your money out of stocks and put all your investment in t-bills right before the Great Recession. (I wish I had.) But that takes insanely good timing that's impossible to pull off consistently in the real world.

 

[THE HCP]

God damn, this thread is worse then the Greg or Durant threads!

 

[THE HCP]

HCP, the best thing for you to do is to take the pool of investments available to you through Pru to an investment professional. Sit down with them, assess the risk you're willing to take and then have him calculate the blend of betas that puts you on the tangent to your risk level. It sounds complicated, but it's nothing more than simple math.

I think that is my plan. Prudential says they have a program where somebody will constantly move stuff around and babysit it for me. I am clueless when it comes to this stuff, so I am excited about learning about it. Can't thank you guys enough for your help.

 

[BLAZER PROPHET]

God damn, this thread is worse then the Greg or Durant threads!

Yeah, every guy thinks they're God's gift to investing.

 

[THE HCP]

^Like I do with hoop knowledge!

 

[maxiep]

Yeah, every guy thinks they're God's gift to investing.

Actually, I know nothing about investing. And it's because I know that I know nothing, that I have an advantage.

 

[mook]

I really think you might want to check out syndicated columnist/radio guy Dave Ramsey. I've read some of his stuff and heard his radio program, and he's got some great financial advice for noobs. (He tends to inject a little Christianity into it here and there, which I don't really care for. But whatever.)

I happened to look up his site and noticed he's giving a lecture in Portland in April for $20, which seems reasonable: http://www.daveramsey.com/live/city/city/Portland/date/20110409

Anyway, maybe check out his book. I haven't read it, but I've heard some good things about it.

 

[mook]

Yeah, every guy thinks they're God's gift to investing.

I don't think I am. But I've researched it over the years and studied it in college a little, and the basic principles are pretty much universally agreed on, as far as I can tell:
1. Don't put it all in one basket. Diversify. That includes not just stocks, but real estate. If you have $100k in equity in your house and $3k in your 401k, you are not diversified.
2. Invest conservatively if you need access to money in the short-term.
3. Go aggressive if you are a long way away from needing your nest egg.
4. Nothing is a "sure deal." When you hear a lot of people saying that, it's probably time to worry. Nobody notices a bubble until it explodes.
5. Index funds match/outperform managed funds over the long haul, but have much lower fees and so are generally a better deal.
6. When the stock market takes a dump, think about other things and leave your money where it is. Think 20 years, not 2 days.
7. Buy low, sell high. But it's hard to know what "low" and "high" really were until it's too late, so again think long term.

None of those concepts are really that controversial in the investment world, I don't believe.

 

[Denny Crane]

Sshhhhh. Don't tell him about the 402K program we all really have.

 

[MARIS61]

I think that is my plan. Prudential says they have a program where somebody will constantly move stuff around and babysit it for me. I am clueless when it comes to this stuff, so I am excited about learning about it. Can't thank you guys enough for your help.

It's a lot like running a Fantasy Sports team, and just as fun or frustrating.

 

[espn_hall_of_famer]

It's a lot like running a Fantasy Sports team, and just as fun or frustrating.

Great way to put it into basketball terms for the HCP! LOL.