Don’t Max Out Your 401k Annually

These days, every time I read a blog or some online article where people simply preach about 401k or are celebrating their annual max out of 401k contribution, I… just chuckle. That’s me being polite.

chained-money

People, please stop blindly echoing and following each other. Do some studying, learning, thinking for yourself. There are certain things you need to consider, keep reading.

First thing first, if your company provides 50% or 100% matching of certain amount or percentage of your contribution, by all means, take advantage of it. Beyond that, perhaps you should re-consider the benefits and the (over)hype of 401k.

Now, pay attention to the points below. For each, take a minute and pause and see if it makes sense. Don’t just take my words for it.

  • The MAJOR premise of using [traditional] 401k is for the delay of income tax so that more of our money can grow until we withdraw. However, at the rate our national debt is going, do you think a bet on having low income tax rate in the future is a smart bet? Especially when income tax rate for low to medium income households are very low currently.
    Update 03/24/2012: A counter to this point would be to use Roth 401k if that’s available in your plan
  • Following previous point, withdrawal from 401k account is taxed at income tax rate, versus, withdrawal from taxable account and only its gain is taxed at capital gain tax rate. If government must raise taxes, which is likely to be increased more? Which is likely to be lower in the future? Seeing the trend of the United States government, the answer is that income tax rate will likely increase more while capital gain tax rate remains lower.

    “But 401k grows with pre-tax money, blah blah blah…” Yes I know. But with 401k, we are trying to plan for a future that is VERY far down the road, and therefore, we should make a more conservative plan. I would rather bet on the a taxable account outside because there is less variables, meaning, I know the taxed principal will be there (I should have a good percetage back to “cash” near “old age”). Better to overestimate than underestimate.

  • Depends on the 401k account management, the chance for shady, kick-back, and “hidden” fees is not negligible.
  • Many 401k accounts do not provide “good” selection of funds.
  • A common argument for 401k is that it’s forced-saving. BUT! Generically speaking, if you need you money to be locked up in order to save, there is a bigger situation about yourself that you need to confront and handle. Namely, responsibility, discipline, foresight…
  • The population is aging. More people are retiring than people joining the workforce. That means likelihood of more people selling (whatever that’s left in the account) stocks and bonds in the 401k than people buying in. This adds more downward pressure against future stock growth. Plus, we have to be cautious with our belief in future growth in general.
  • Lastly, we don’t live forever and can very well die before 60s. I am not sure about locking up all that money, that I cannot access and use without penalty except for some very “dire siutations” (ahem, hardship withdrawal…). There can be good argument against this, but I still think there is value in this thought. Mainly, we are not immortal. Stop living and behaving like we are.

So now you have my skepticism with 401k. Again, if there is matching from your company, get it. That’s “free” money. Otherwise, it would be a good idea to spread things out some in taxable accounts than having full belief and your $$$ in the 401k basket. It’s not that difficult… just following the same allocation in both places. You do have some ideas of your portfolio allocation, right?

Meanwhile, I contribute to my company’s matching. Maxing out my 401k yearly? I’ll pass.

Update: Thanks Meg for pointing out my confusing comments with Roth IRA which is corrected. It is my own decision not to. If interested why I don’t, read comment.

Originally posted 2012-03-24 23:33:23. Republished by Blog Post Promoter

Americans Spending More Than They Earn on Average

So based on a goverment study, we are spending above our mean on average o.O That’s definitely not a good thing!

Based on the article Americans spend every cent – and more:

Friday morning the government will report on personal income and spending for November. For the last 19 months, the report has shown a negative savings rate. That means American consumers are spending more than they’re taking home after taxes. The savings rate was a negative 0.6 percent in October. In other words, the typical American spent $100.60 for every $100 of take home pay.

But things aren’t as grim as the article says based on Personal Saving Rate is a Misleading Indicator, which has a lot of truth in it:

To calculate the personal saving rate, government statisticians subtract taxes and spending from personal income. Income includes wages, salaries, interest, dividends, rent received, small-business profits, and some government benefits. Excluded are withdrawals from IRAs and 401ks, as well as capital gains. This is inconsistent with how most people measure their private fiscal health.

I think whether the situation is as bad as it sounded at first. We needs to go back to the most basic rule of personal finance, to keep ourselves under control :P Keep it in mind!!

Originally posted 2007-03-06 23:33:31. Republished by Blog Post Promoter

Look Into Ourselves and Care for Others (about Virginia Tech shooting)

The days have gone, and we all know about the Virgina Tech shooting. Now we are asking ourselves, “How do we deal with the tragedy?”

Here’s my interpretation and observation. The event is a tragedy by itself, and no doubt each and everyone of us are saddened by it to different levels depending on how closely we are related to the event.

But you know what? I am saddened. I am VERY saddened, and troubled. TRULY! Not by the tragedy itself, but by a bigger tragedy the way I see it.

Glancing over many the media coverage about the event, I have a tough time accepting the topics of the coverage. It just seems to me that people are just pointing fingers, blaming any fact/person (gun-seller, video game, movie…) they can lay their eyes/hands on, or just having their own political agenda (eg. school safey, security, gun control…).

Instead, I would like us to pause and take the chance to ask ourselves some questions and look into ourselves. I tried to find some articles, online discussion, etc. that’s similar to what I propose here, but to no avail… If only we can stop pointing fingers for a moment and think? That maybe Seung-Hui Cho would not have done so if he was shown some caring and kindness along the way he was growing up. How could he ever get so angry? Maybe a few sincere simple words were all he needed… like in one of the last scenes in American Beauty, where Mena Suvari asked Kevin Spacey “How are you?” and meant it.

He has come from Korea with his family and appeared to have lived a very modest life style. Two things come to mind – the difficulty of adjusting to a completely new country and environment, which I myself has experienced and can relate to and plus the difficulty of living perhaps a more modest life. On top of those, who knows what kind of treatment his family received and himself received in school in a younger age. And then there’s also the treatment and condition amongst his family. I think if they look into his history, they can most likely find something starting from there. (they probably have already but who want such boring story anyways) These are speculations, but whatever his experience was… all together have turned him into such a lonely soul… so isolated, so lonely and it hurts so bad…

The problem with this approach is that it requires us to stop blaming others and take the blame ourselves, that “we are bad ‘friends’ (quote and quote)”, “we are bad parents”, “we are not kind enough”, or even “we don’t really give a damn about other people anymore”. It is obvious that no one would want to admit to those, and it is pretty hard to swallow. Therefore, we people are more prone to take the easy way out by pointing fingers.

The problem is that if we just blame other people and things, we fail to accept the flaws in us and try to correct. I propose that we are to consistently evaluate ourselves and to pay attention if we’re showing kindness to others. We are all human beings living under the same sky, on the same earth, breathing the same air, so I think it’s fair to all of us to spend effort to reach out to others when they need it. And also communicate to people, among family, and I mean “real” communication. Throw away the sexiem, racism, discrimination, skin color difference, sexual orientation diversity, religious bias, age gap, principle difference… all that crap and stop alienating ourselves among ourselves. Show kindness and love, shed some light on others, care, and most importantly, these should all come from the heart and that we really mean them.

I would like to ask us all to stop and think about this for a moment. It gives me bigger chill that none of us seem to think like this… Let’s end “this” tragedy…

PS. I sincerely wish I have a better way to scream to the world about this.

Originally posted 2007-04-18 15:25:49. Republished by Blog Post Promoter

The Sky is Collapsing on Wall Street and…

…stop checking your portfolio! You heard me right. Stop checking your portfolio. I know you are very tempted to keep checking it these days. But stop. If you must, move away from the keyboard and mice so you can’t log into your account. I tell myself the same.

Unless you are extremely smart or extremely lucky or simply clairvoyant to have bought ONLY in the last 1 months (last few days?), your portfolio is likely in the red. Bloody red. It’s a disturbing image that can turn your stomach inside-out and very tempted to sell to cut the losses. Perhaps I will sell and wait out the downturn and recession, you think. Perhaps that is true for particular individual stocks you own. But otherwise…

Au contraire, you should keep contributing into the solid investments that I’m confident you have selected (need I say index funds?) and keep looking into the long-term. The long-term is that the downturn will last couple months, a year, or even a couple years, and who knows, but for sure, it will eventually go back up. Why not just keep contributing regularly, buying investment on bargains available now, and wait for the upturn to happen? Assuming you listened when I said you are best to have at least 5 years time horizon for your investing money.

Even better would be if you have extra cash and a stomach for volatility to pick up more bargains this year.

One more thing is, if you sit on the sideline and wait, the upturn will likely happen before you know to jump back in. And if you can’t handle the volatility and risk, perhaps it’s best to stick with high yeild savings/CDs and bonds or… your mattress… just kidding.

Originally posted 2008-03-10 11:10:10. Republished by Blog Post Promoter

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