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Kill the 401(k)?

I read an article in last Sunday’s Boston Globe titled “During a bear market, future of the 401(k) is questioned.” The author gives us some data points such as “about one in four 401(k) participants ages 56 to 65 had more than 90% of their money invested in stocks.” Now, this is just one data point, which can alternately be stated,”fewer than one in four pre-retirees had more than 90% of their money in stock.”

The article goes on to suggest that “the 401(k) has shifted all the responsibilities for retirement investment from the firm to the individual.” Well, when did one’s employer become our caretaker? An employee with a defined benefit plan could work six jobs over thirty years and find that the individual pension didn’t add up to much when compared to the employee who stuck it out with one company for twenty plus years. A 401(k) with some matched employer money provides a nice portable plan that one should contribute to over their working life.

Why is it that when the market was flirting with its all time high, there were calls to invest the social security trust fund in stocks, but now that we are nearly 50% off that high, even 401(k)s are too dangerous and we need the government to take away our choices?

Disclosure – I am down in my retirement accounts by about the same amount the S&P is down, a bit less as there’s a bit of cash there. In my mid-40’s I am still nearly 15 years from retirement. As I aproach the 10 year mark, I’d start to rebalance and be about 50/50 as I’d intend to be during retirement. Keep in mind, 401(k) does not mean stocks. It’s simply a wrapper, tax deferred, into which you can put stocks, bonds, cash, etc.

I hope this movement doesn’t gain any popular momentum. Bad idea.

Joe

  • Augustine April 17, 2009, 2:38 pm

    That’s the kind of suggestion by the puppet media that I’m afraid of, probably just priming the populace after their ideological fellow travelers.

    What’s next, the America follow the example of Argentina which seized the retirement accounts and left an IOU in place of the citizens’ money?

  • John April 20, 2009, 9:46 am

    Joe,

    I have had 401(k)s at my last few jobs and always rolled my old job 401(k) into the new job 401(k) plan. Recently I’ve been advised that instead of doing this I should put it into an IRA instead. Admittedly I don’t know enough to make an informed decision, so could you please comment on that strategy? And if you think there might be a better one then that?

    Thanks

  • JOE April 20, 2009, 2:00 pm

    Hey, John, thanks for the question. See my post “401(k) vs IRA Deathmatch.” If you still have a question, let me know.

  • Darrell July 28, 2009, 5:27 pm

    Joe,

    I have a 403(b), which is the same as a 401(k) except it is for employees of schools and non-profits. I’ll be turning 59 1/2 next month. I can keep adding to my account as I have been and letting it grow or I can start withdrawing. Tell me if this makes sense. Withdraw roughly the same amount that I earn each month, maintaining my contribution at the level of my company’s match. This way the balance stays the same. Take the money I withdraw each month and apply it my house payment. If my figures are accurate I’ll have my house paid off in six years when I retire and though I won’t have additional funds in my 403(b) retirement account I’ll be holding my own and have no house payment. Thanks for taking the time to address this.

  • JOE July 29, 2009, 9:33 am

    Darrell, thanks for writing.
    I agree the method you suggest to continue to get the match will work and is preferable to missing that match.
    I certainly like the idea of having no mortgage once you retire. There are two thoughts I have on this plan. First, given where the stockmarket is, do you feel the potential 6 year return exceeds your mortgage cost? (S&P passing 1400 or so.) If you are conservative and risk adverse, this is not a good choice for you.
    Next, what is your current marginal rate vs where you expect it to be in retirement? See Fairmark to help understand this. If you can save into the 403(b) at 25% but pull it out at 15%, it may make sense to choose a safe option within the 403(b) or to use a traditional IRA for some money. Note, with CD rates (and all short term rates) so low this may not be a good idea now, but only in the year or two prior to retiring.

  • Darrell July 30, 2009, 9:41 am

    Joe, to answer your question about the 6-year return, my 403(b) funds are invested in a select income fund (my choice to do so) with a fixed rate of 5%. The rate is subject to change quarterly. This is the lowest it has been since I have been participating in it, about 12 years. I currently have $168,000 in the fund and contributing (including company match) $142.08 weekly. I hope this helps.

  • Darrell July 30, 2009, 11:42 am

    Joe, I had another thought. What if I took out enough to pay off my mortgage – $130,000 and then started adding what I had been paying to mortgage to my 401(b) contribution? I wouldn’t exceed the $22,000 allowed annually. The math suggests that I would be better off after 6 years than by making my mortgage payments and putting what I am now into my 403(b).

  • JOE July 30, 2009, 8:04 pm

    Here’s my concern. Taking out that sum all at once will push you into the next tax bracket. If you are in the 15% bracket, you’ll bop right past 25%. See the Fairchild link, and determine how that impacts you. I liked the idea of withdrawing only what you are putting in, I’d not suggest the larger withdrawals, but if you are risk adverse, and will have it all replaced by retirement, I’m hard pressed to argue against it.

  • Darrell July 30, 2009, 8:37 pm

    OK. I’ve done some more thinking on this. I should not pay off my mortgage until I reach retirement age or I will lose the interest tax deduction. So you like my original strategy? See any downsides? Thanks.

  • JOE July 30, 2009, 9:19 pm

    I like the original strategy. And, not knowing anything else, I’d suggest that if you are MFJ (married filing joint) and have taxable income in the 15% bracket (up to $67,900 taxable), it’s not a bad idea to withdraw or convert to Roth an amount to get to exactly the $67,900 or as close as you can get. This strategy will keep as much as possible in the 15% bracket.

  • Darrell July 31, 2009, 7:32 am

    Thanks Joe. By they way thought you might like to know this. I’ve sought advice in other financial blogs. You are the only one who has actually responded. I appreciate it.

  • JOE July 31, 2009, 8:52 am

    Thanks for the note. I am glad to have helped you.

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