Why 401k's are evil...

[^eagle^]

I find interesting that most people here hate 401(k) so much. The way I see it, it is just another tool or vehicle. Same with Compound interest. Or 1031 exchanges. Or Business Creation. Or investing in the market. Or buying an investment property.

I understand what you are saying, and probably the issue is that, for many, 401(k)s are the only tool that they know/use. But again, I do believe they do have a valid use to make money.

... or maybe my mindset is just too slowlane :smx4:

I wouldnt call an instant 50% return slowlane.My company matches 50 cents for every dollar guaranteed. right now I have my money in stable value which has a minimum of 2% return with little risk.

So 52% with almost no risk?

I'd hardly call that slow.

Now I take that money out on a loan and buy other investments thereby leveraging it.

Using my 401k to fire my employer.

That looks like an on ramp to the fastlane to me.

 

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[kwerner]

I find interesting that most people here hate 401(k) so much. The way I see it, it is just another tool or vehicle. Same with Compound interest. Or 1031 exchanges. Or Business Creation. Or investing in the market. Or buying an investment property.

The problem as I see it, is that in most 401k plans you're limited to only purchasing mutual funds / bond funds, of which I'm not a big fan of at all.

I'd rather have the freedom to purchase individual stocks that I feel are undervalued at any one time; and possibly create my own mini-mutual fund of a few, select, stocks. With the institutional funds, the most they can allocate to any one stock is something like 3%; so by over-diversifying to protect themselves from losses in any one particular stock, most limit themselves to just getting overall market averages in my opinion.

...probably the issue is that, for many, 401(k)s are the only tool that they know/use.

Exactly.

Now I take that money out on a loan and buy other investments thereby leveraging it.

Using my 401k to fire my employer.

That looks like an on ramp to the fastlane to me.

LOL, I love the line "Using my 401k to fire my employer.", and that's not a bad strategy to use either. Best of luck to you! :smx9:

 

[SteveO]

LOL, I love the line "Using my 401k to fire my employer.", and that's not a bad strategy to use either. Best of luck to you! :smx9:

This is what I did.

Back in the hayday of the stock market, I set a target for what I needed in order to shift gears and change lanes. In 1999, I devised a plan to cash out my 401k. What I needed was enough after taxes and penalties to buy an apartment with enough cash flow to allow this to happen. I had some money coming in from an investment already but it wasn't enough. When my portfolio hit the magic number, I moved all of it into the money market account in 2000 and went shopping. Once I locked up a deal and worked through the due diligence, I was set.

It was a happy day when I asked my boss how much time he needed to find my replacement.

As a side note. It was almost impossible for me to take all that money that was flying upwards so fast in the stock market and move it to the safety of a money market account. But as it turned out, volatility struck the next week. I saved my investment by taking the safe route.

 

[andviv]

It was almost impossible for me to take all that money that was flying upwards so fast in the stock market and move it to the safety of a money market account. But as it turned out, volatility struck the next week. I saved my investment by taking the safe route.

I understand that. Funny that you say you took the "safe route", especially when everybody was sure that the market would continue to go up, so it was a "safe bet" to keep investing in the market at that time.

Rep++, very good strategy to keep in mind.

 

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[Runum]

I am one of those that has been demonizing 401K's. The more I think about it though the more I do realize it's a tool to be used for building wealth as Andres has suggested. The problem, in my case, was my lack of education.

The employee match is a plus and not to be taken lightly.

The negatives are several:

1. The employee is usually sold on the "buy and hold for the long term" mantra. Nothing is said about planning to retire during a down cycle. You lost 40-50% of the value of your retirement funds in one year and now you cannot afford to retire.

2. There is not enough control. You can't put stops on the downside.

3. If you want to move to "safety" because the market is losing 500 points in a day, your moving order is executed at the end of the day, after you have lost another 10%.

4. When you are losing 50% of your value, even the employer match isn't going to help.

5. The loss and gain percents are not with you. Example: you have 100,000 in the 401K. In one year you lose 50% so now you have $50,000. The next year you gain 50%. Now your even, right? Nope. You only gain 50% of $50,000 and that gain is $25,000. So now your total is $75,000 and you're still in the hole $25,000.

The 401K can be used effectively to achieve your goals. Many successful people do it each year as demonstrated by SteveO. The problems for most people, though, are lack of education, lack of desire to learn, lack of understanding, lack of controls, etc.

I still look at the 401K as slow but, for some, it's a good beginning. However, most people look at the 401K as the solution to old age, the ending not the beginning.

So, for me, I guess I'll get off my war horse when talking about 401K's. The correct solution when dealing with 401K is being educated about this tool, having a plan, and using it to achieve that plan. :cheers:

 

[GlobalWealth]

I did covered calls for a while and I don't like them one bit. If you want to know why, just ask.

.

I would like to know why.

 

[Kung Fu Steve]

Global,

Interesting you bring back this thread. I am trying to figure out what I should be doing to avoid a lot of taxes this coming year. The two S corps funnel to my personal taxes if I remember right which means I will have to pay quite a bit in taxes personally. I am trying to remember what all this means but I have been told (by some not-so-bright people) to max out IRAs and 401ks... but there has to be a better way! I don't want money just sitting there... it seems dumb to me!

I have started to look into real estate investing (which is why I originally joined the forum surprisingly!) and that seems to be a better way to stave off the taxes...

But are the 401ks really the way to get the deductible?

 

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[GlobalWealth]

Global,

Interesting you bring back this thread. I am trying to figure out what I should be doing to avoid a lot of taxes this coming year. The two S corps funnel to my personal taxes if I remember right which means I will have to pay quite a bit in taxes personally. I am trying to remember what all this means but I have been told (by some not-so-bright people) to max out IRAs and 401ks... but there has to be a better way! I don't want money just sitting there... it seems dumb to me!

I have started to look into real estate investing (which is why I originally joined the forum surprisingly!) and that seems to be a better way to stave off the taxes...

But are the 401ks really the way to get the deductible?

With the Scorps, just pay yourself the smallest salary you can get away with that way you save on the 15.3% SE tax. You could also set up a SEP IRA or individual 401k and contribute a fairly large amount of your pretax earnings to your retirement plan.

RE is also a good way to get tax deductions as the depreciation expense usually offsets any income and creates a paper loss for you to reduce your taxable income. However, this comes at a cost. You will have to manage your properties. You can decide if its worth it.

I started investing in RE with my first company when I bought the office building I was renting from. The owner wanted some free cashflow and I was one of 4 tenants. I bought it and rented the remainder. I then started picking up other properties and gave the management role to my PA. It went smoothly at the time, but I am not in the same situation now so it isnt very practical.

You could always buy a vacation rental somewhere and rent it out most of the year and then have your annual board meeting at the place to write off the travel expenses. You may even find it necessary to have a quarterly board meeting.

If you have enough assets you could also consider PPLI (private placement life insurance). You could sell your company to the policy and basically live tax free forever.

 

[Bobo]

I do mine differently. I get a certain percentage matched dollar for dollar so I contribute that percentage thinking that buying for half off and holding it longterm is probably not awful. I also have no plans of touching that money for several years so I direct it to some pretty lame, boring, spread out funds.

401K isn't for day trading, it's for periods of 5-10 years and only makes up a small part of our retirement strategy.

...because I don't trust the market one damned bit but if you are buying $2 stocks for a buck it seems like a more reasonable bet.