401(k) Vs. Traditional Bank Account

[borgzman]

I know there are many stories online, but it looks like its just conflicting ideas of rival financial institutions. Companies have different 401 k policies, But by simple thinking,..

Is 401k a good investment? some employers will % match the amount upon retirement.

What about taxes in the long run?

What are possible hidden holes that you might fall into, where 401k plan administrators will not tell.?

How is 401k compared to a bank account, or other retirement plans(in general)?

Its better to get ideas from real people, than reading internet stuffs and which planet did those virtual advisers come from.

Thanks...thanks! :driving:

 

[Jeff Kleb]

Investments


They are two entirely different things.....and any good retirement plan should have some money in BOTH venues.

A 'traditional' bank is for funds that are more liquid, such as checking or savings accounts - money to which you can have immediate or fairly quick access. A 401(k) plan is for your long-range financial stability - particularly retirement. Under most circumstances, you and your employer will put xxx number of dollars - or xxx percent of your gross pay - into a retirement account. You probably will not be able to access these funds until you reach a certain age (65, perhaps). Most banks to offer retirement fund management or other investment venues besides just making loands or making checking & savings available.

The greatest advantage of a 401(k) or IRA (Individual Retirement Account) is that the amount you pay into it through payroll deduction is tax-deferred. You don't pay tax on the weekly contributions/deductions, but do pay taxes on whatever stipend you get from your account after you retired. The idea is that you'll be in a lower tax bracket by then (which is purely a guess in today's political climate) and that your accumulated savings will build up over time throughout your working years. Most employers also offer a "match" on your contributions, which amounts to free money for you!

My employer has a fifty percent match on up to eight percent of my gross pay. Basically, if I were to earn $1,000 {for example's sake} gross in a week and put away eight percent of it ($80.00 for one week) into my retirement fund, they match half of it and contribute another $40.00 to my account - which makes a total of $120 - all of it tax deferred!
:frog:

In a typical 401(k) plan, the funds are usually administered by a financial institution - such as a bank or brokerage house, which is selected by your company's management. Some are better than others, of course, but you are pretty much stuck with whichever one they choose.....at least if you want the "match" on your contributions. Most administrators allow you to choose from several funds or groups of funds, depending upon the risk tolerance you have and how close you are to retirement age.

In addition to whatever retirement plan you have at work, I would recommend establishing an IRA somewhere else. You don't want to have all of your eggs in one basket, though, and it is prudent to keep a mixture of investments. I am in my forties and also set up a ROTH IRA a few years ago. The money you put into it is from your "after tax" money (which means you cannot deduct today's contributions), but it is NOT taxed later. Google "ROTH IRA" to learn more about how they work.

Provided you are under the age of 45, which I assume you are, do not ever plan on getting any money from Social Security. That government-run Ponzi scheme is going "tits up" in about 20 to 25 years (when I retire....DOH!) and it is unlikely that any younger people will ever see anything close to what they paid into the program. The government sends out those statements saying what you "might" get in payments.....but there is a big asterisk (*) next to the dollar figure, and that is dependent upon Congress finding a way to fund the program - which depends upon younger workers being willing & able to foot the bill.
:nono:

Okay, that is enough rambling for me. I am certain you will get more and better replies as others view your original thread.
:trophy:


EDIT FOR 1-16-11: You might also consider investing separately in precious metals (gold, silver, platinum, etc.). Some will say that it is a good hedge against inflationary pressures brought about by excessive government spending and "printing money" that we just don't have.

DISCLAIMER: The aforementioned post is my off-the-cuff personal opinion and should not be construed as any type of professional financial advice.

 

[borgzman]

Thank you jeff
All I worried is the tax later. It did not come into my mind that I will be in the lower tax bracket by that time.

Also, thanks about the IRA.

and hey...its your 1,000th post :bravo:a very informative one

 

[ran]

Might be worth talking to your company/401 guy. I was able to roll my vacation time over into the 401k at years end. little know to anyone else. I was single then, it made sense.

 

[GMZ]

I would never do a 401k. I estimate that the govt will seize private retirement accounts and "nationalize" them by putting the money into Treasuries. It will be under the guise of protecting the retirement savings of the nation from evil wall street but the real reason will be to kick the can of govt default a little further down the road. About half a dozen countries have done this over the past couple months and it will only get worse as tax receipts continue to plunge while entitlement outlays increase.

 

[Jeff Kleb]

I would never do a 401k. I estimate that the govt will seize private retirement accounts and "nationalize" them by putting the money into Treasuries. It will be under the guise of protecting the retirement savings of the nation from evil wall street but the real reason will be to kick the can of govt default a little further down the road. About half a dozen countries have done this over the past couple months and it will only get worse as tax receipts continue to plunge while entitlement outlays increase.

I share your trepidation about the possibility of the government seeking to 'nationalize' private retirement accounts. No doubt that Social Security (and other entitlement programs) are going to go tits-up; as they are mathematically doomed to failure.

That being said, keep in mind that the best thing about a 401(k) plan is that you - the worker - have a voice in how the money is invested and what level of risk you are willing to take (aggressive, moderate, conservative, etc.). Along with the fact that your employer may match your contribution, a 401(k) can be a valuable tool for planning your financial future.

Don't put all your eggs in one basket, however. Spread your assets around a bit. I have a 401(k), a traditional IRA and a Roth IRA. No way I will ever have the financial acumen of Warren Buffett or Donald Trump......but it is inconceiveable to rely on the bogus Social Security system that will go broke just about the same time I will be ready for retirement.

 

[durrell]

I would never do a 401k. I estimate that the govt will seize private retirement accounts and "nationalize" them by putting the money into Treasuries. It will be under the guise of protecting the retirement savings of the nation from evil wall street but the real reason will be to kick the can of govt default a little further down the road. About half a dozen countries have done this over the past couple months and it will only get worse as tax receipts continue to plunge while entitlement outlays increase.

I'm really very concerned about this, but since I'm just getting started out, I'm not as concerned. Especially since they are matching me up to 5%. Once I leave my current employer, I am going to roll over to a Roth IRA.

 

[GMZ]

I share your trepidation about the possibility of the government seeking to 'nationalize' private retirement accounts. No doubt that Social Security (and other entitlement programs) are going to go tits-up; as they are mathematically doomed to failure.

That being said, keep in mind that the best thing about a 401(k) plan is that you - the worker - have a voice in how the money is invested and what level of risk you are willing to take (aggressive, moderate, conservative, etc.). Along with the fact that your employer may match your contribution, a 401(k) can be a valuable tool for planning your financial future.

Don't put all your eggs in one basket, however. Spread your assets around a bit. I have a 401(k), a traditional IRA and a Roth IRA. No way I will ever have the financial acumen of Warren Buffett or Donald Trump......but it is inconceiveable to rely on the bogus Social Security system that will go broke just about the same time I will be ready for retirement.

Not to go off on too wide a tangent, but SS was estimated to go into the red in 2016 or 2017 but instead it went red this year. All the prognostications are occurring more rapidly than prognosticated! To me it doesn't matter if you are just getting that first job, getting ready to retire, or already there. The time to worry about it is now. No one worried about the "subprime" problem until it set off a nuke in the world financial system, and by then it was too late to get out intact.

The problem I have with most traditional investment strategies is the downside. When I say traditional I mean 401K, IRA, stocks and bonds type of thing. Sure you have a voice but no control. Everybody saw what happened the last few years, the old way is out and the new way is not what we're accustomed to. The relative stability we thought was an American birthright just isn't there, and I don't know if it will ever come back.

OP the main thing is this: Are you looking for a percentage gain? There are %'s to be made depending on your risk appetite and desired level of involvement.

Do you want to be checking on your portfolio all day or do you want to just park some money somewhere where you wont be inclined to spend it?

Do you want to risk losing everything for the chance of the big hit and never having to work again or are you concerned more about the return of the investment than the return on the investment?

The first thing I always recommend is to get out of debt. Now this presupposes that you have at least several months expenses saved in an emergency fund (It always amazes me that people will save money for something that wont happen for decades (retirement) but will not first save for something emergent like car repairs, medical bills, job loss, etc.). Credit cards first, then car/student and other types of non revolving debt finishing with mortgage debt. Think of the APR you're paying as the ROI as you extinguish that debt. Being debt free will not only give you a large amount of freedom, but it will give you flexibility as well.

 

[Jeff Kleb]

Being debt free will not only give you a large amount of freedom, but it will give you flexibility as well.

If this were a Facebook post, I would click on the "Like" button!
:girl:

I am doing my best to work on being 'debt-free' by the end of this summer. My 2002 Nissan Sentra has been paid for since early 2004 and my 2004 Silverado pickup truck (bought used a year ago) will be paid off free and clear by August or September of this year if things go the right way.

Once I get to that point, all I will have is a modest mortgage payment (and five more years of child support). All I can hope to do is keep "new car fever" from nipping at my heels. I will have to keep my fingers crossed!


"It is impossible to borrow your way out of debt!"

 

[borgzman]

OP the main thing is this: Are you looking for a percentage gain? There are %'s to be made depending on your risk appetite and desired level of involvement.

Do you want to be checking on your portfolio all day or do you want to just park some money somewhere where you wont be inclined to spend it?

Do you want to risk losing everything for the chance of the big hit and never having to work again or are you concerned more about the return of the investment than the return on the investment?.

"do you want to just park some money somewhere where you wont be inclined to spend it?" > I am here at this time.
Ofcourse, if there is a program designed to maximize the return on investment, and such tested program where the concern is honestly structured towards retirement(where we are all going to)... then, might as well avail with it. But it looks like they are all proportional to risk.

Keep those advices/ideas coming guys.
Topic
- Retirement
- 401K, IRA, ROTH IRA
- ^^ Vs Bank account including time deposit.

and LOL! we're no Donald Trump, just a dedicated employee/worker/tax payer - family(wife & kids) with average income.

Thanks

 

[DocMT]

I would never do a 401k. I estimate that the govt will seize private retirement accounts and "nationalize" them by putting the money into Treasuries. It will be under the guise of protecting the retirement savings of the nation from evil wall street but the real reason will be to kick the can of govt default a little further down the road. About half a dozen countries have done this over the past couple months and it will only get worse as tax receipts continue to plunge while entitlement outlays increase.

That will never happen. If that ever even came close to happening, they'd have to turn the US into a police state because there would be riots in the streets. The politicians who voted for that would be assassinated and they know it.

In the meantime, you're missing out on one of the greatest ways to grow your retirement account even known, even more so if you work for an employer who matches your contributions. It's free money and it compounds exponentially.

 

[DocMT]

borgzman,

You should really find some decent financial message forums to answer your questions. Just like you wouldn't ask financial guys for advise about a 4Runner, you probably shouldn't put too much faith into asking 4Runner guys for advice on a 401K. No offense to anyone, but some of the replies here are just conspiracy theories and following that advice will most likely hurt you in the long run.

 

[brian2sun]

Have you considered an annuity for retirement? Tax-deferred and typically much higher interest rates.

 

[durrell]

Lots of good advice in this thread.

I'm working on getting out of debt right now, as I can see that being the single largest obstacle to actual freedom. I don't have any problem with a small car payment or a mortgage, but everything else is just un-necessary to me.

 

[Jeff Kleb]

Retirement, Debt, etc.


Some would say that ALL DEBT is bad.....but I believe that there is "good" debt and "bad" debt - and it is quite easy to rack up both kinds.

The good (or at least not as bad) debt is a home - which in all likelihood will involve a monthly mortgage payment. Most homes are financed at either 30 years or fifteen years. Rates can be variable or fixed. I just recently re-financed my house (rented for two years and then I bought it) at a lower rate. My loan went from 30 years down to fifteen years (saving me ten years of payments, as I had already owned it for five years), with my monthly payment staying almost the same.

Buy LESS of a home than you can afford - as you don't want to be "house poor" under any circumstance and to allow for wiggle room in your monthly budget. Too many McMansions out there with no furniture, you know? In most cases, buying is a better deal than renting - especially if you will be there at least three years or so and if you seek a tax write-off for the interest you will pay.

More good debt could involve a car payment - provided you are not "in over your head" or trying to afford more vehicle than your wallet can handle. You'll build equity in an automobile, but not very quickly because it will depreciate. Consider buying a late-model used car and financing it for a shorter term than you would have to for a brand-new model. There are a lot of great deals on 2006 to 2010 cars; which will still be in decent condition and the first owner ate most of the depreciation. If your credit is EXCELLENT and you drive fewer than 15,000 miles a year, leasing might be for you. Keep in mind that your payment will be lower than if you buy the car, but you will never build equity in the vehicle!

BAD DEBT is when you owe a lot of money on charge cards, have to make installment payments on furniture, short-term or 'payday' loans, department store revolving payment plans, etc. Really bad debt is when you borrow money to take a vacation - a definite no no in anyone's book - or when you are behind on credit card payments for dinners you ate long ago or gifts you purchased last Christmas. Bad, bad, bad, bad! Nothing to show for all those payments you must now make.
:infidel: :gun5:

Well, that is just my opinion....but I try to live within my means as much as possible. Credit cards should pretty much be for emergencies or to "hold you over" until the next paycheck. I just had to spend $800 on one vehicle and $400 on the other one, just to pass state inspection. Yep; I put both on the plastic - but I know the bill is coming and will be able to pay it in full when it arrives after my next paycheck. Avoid paying interest on those damn things, as they can often sock you for 12 to 18 percent if you carry a balance.
:ybrick: :hunter:


** NOTE: The aforementioned post is just my personal opinion and may or may not work for you, depending upon your income, credit rating, spending habits and financial management skills. Take my advice at your own risk. **

 

[larrylegend]

There are some good points above. I would like to add my 2 cents to the discussion. First, it is good to pay down debt that you owe. However, it only makes sense to pay down debt that is at a higher interest rate than you could be earning elsewhere. For example, if you have a credit card with a 20% interest rate you want to pay that off ASAP. However, if you have some other kind of debt that the rate is only say 6% on, you can pay it off or consider reallocating some money to your retirement. Especially if your company matches your funds, as others have said it is free money.

The biggest thing to think about regarding your retirement is that if you don't plan and save for it, nobody else will either. As others have said, social security is going to be bankrupt in the near future. Even if it is not, most people would not earn enough just from social security to live comfortably. It is good to save into some sort of retirement account.

Finally, if you are saving your money into a "traditional" bank account all you are doing is losing money to inflation. Now it is good to have an emergency fund for sure but excess funds should be someplace where they can earn more interest.

 

[Ross]

Getting out of debt is a good way to help insure financial freedom.
People will say real estate is "good debt". And is compared to other debt but you will still be better off if you pay off your home and don't have that debt. renting a home would be even worse than taking a long time to buy one. You can pay an extra payment or two every year you will cut down the time you have to pay on your hoe significantly. Let’s say your mortgage payment is 1,500 a month. If you can pay your home off before you retire that is basically the same as having an extra 1,500 a month coming in. You can save about 6 years on your mortgage by paying an extra payment. If you payment is 1500 a month that is about an additional $125. It is doubtful that you could invest $125 a month and come out better than you can buy paying you home down. Having no debt and less income is safer than allot of debt with higher income. You have to figure out your comfort level.

I do invest in real estate; I currently have 3 rentals and other properties. I have had these homes since 06 and have not paid one red cent for them. To me the only good debt is dept that pays for itself, even then if the debt is paid off it would be even better.

A vehicle is never good dept unless it is something rare and sought after. You would have to properly store it to protect the investment. Any driving or use will create wear and tear and will bring down the value. If you decide drive it and it gets into an accident you could basically lose your entire investment in a split second

Car debt may be unavoidable but should be kept to a minimum if you are looking to the futre.

You can choose vehicles that are less expensive to buy and operate and that will help with you cash flow and allow you to pay debt quicker.

 

[JackOSU]

401k's are probably one of the most misunderstood "investment" deals out there. To me there are a lot better ways to save your money and most importantly keep it LIQUID! Liquidity is king, especially in markets such as these.

In my opinion you should rollover any current 401k into a Roth and contribute accordingly. This should not be your biggest savings vehicle however. What most people don't understand is that the thought of the 401k etc is that with the deferring of the taxes until later in life that you will be in a lower tax bracket and will have made out better. Most of folks will never be in a lower tax bracket in retirement. Look at how the brackets have become over the past 70 years. Uncle Sam keeps raising taxes and they continue to want to push everyone further up the scale.

Again keeping your money liquid is king. I would suggest looking at a portion of your savings vehicle being into a UL policy where not only do you have a decent earnings of say 4.5% ALL of the money is tax deferred and you can borrow against it at any time up to the amount available. You also then have a death benefit in the life policy to put towards off setting any taxes when you die and/or helping your family if you happen to die earlier than normally expected.

Look at what some of the wealthiest people in the world do. Most of them buy huge life policies to offset taxes on their estates when they pass their legacies down to their heirs. Sure a spouse gets a break, but after that you have a state tax level and the federal is anything more than a million unless you died in 2010 with the freebee year (good example the Steinbreners w/ Yankees).

I suggest two books to better help you plan for a proper debt free life as well as coming up with a plan in retirement where you don't have to count on certain federal programs to or not to be there if/when you need then. This is true freedom. Nelson Nash's "Becoming Your Own Banker" and "Missed Fortune" by Douglas Andrew.

Disclaimer: I have no involvement or gain of anything from mentioning these books nor do I want to be responsible by any methods implemented by anyone here in their use. They have just helped me in my earlier years to understand the fundamentals of money and how things "really" work and how to benefit the most by the strategies one uses. They are not for everyone and are more geared towards the conservative and saver type person(s).

Good luck to the OP.