JoeTaxpayer

Have I lost my marbles? I hope not. Let me explain by starting with an analogy.
There’s a difference between treasure and a treasure chest. It’s not just a pedantic picking apart of words. Not understanding the  distinction is costing people a lot of money.

A 401(k) is a retirement account typically sponsored by an employer, although there is also a solo-401(k) option that self employed individuals can take advantage of. Until 2006, the 401(k) was strictly a pretax account, deposits from the employee would be deposited and save the tax at the time, grow tax deferred until retirement and withdrawn at (potentially) a lower tax rate. Employers’ matching deposits are also pretax and taxed on withdrawal. In 2006 the Roth 401(k) was introduced, allowing deposits to be made post tax, with the growth tax free if withdrawn after 59-1/2 or after separation from your employer after age 55.

This is a high level overview but you see what’s missing? The Investment. I’ve only described the nature of the account, not the investments it contains. A 401(k) can have a variety of choices of investments. You may pick from a money market fund, short term bond fund, various stock funds including domestic and international. Some even allow you to shift funds to a broker portal where you can invest as you wish in individual stocks.

The distinction here is that the risk or reward has little to do with the 401(k) per se, and everything to do with how you choose to invest. In fact, you can made the same good or bad decisions in a regular brokerage account as you can in a 401(k).

This is my long-winded way of saying not to let the market volatility scare you out of proper long term retirement investing. I’ve had dialog with people who choose prepaying their 5% mortgage over making a matched 401(k) deposit, and when I point out the instant 100%  gain they can see in their retirement account, I hear they’d prefer the certainty of the 5%/yr interest saved over the risk their retirement account loses half its value as it did in the months leading up to March, 2009. The flaw in their reasoning is twofold. First, as I discussed, they need not be fully invested in stocks. The litmus test for how much of your account you should allocate to stock is to answer the question – If the market fell 50% over the next year, how would you react? If the answer is to sell at the bottom, you are too high in stocks. Second, your investments aren’t made all at once, but over decades. When you are buying into the market with each paycheck, your average cost is the average not last week or year, but the average over the last decade or more. And hopefully your sale price isn’t at the next bottom, but a few percent each year starting decades from now.

Let’s start this week’s roundup at Mighty Bargain Hunter’s blog. He posted Money Smart Guide’s scariest money mistake. It’s great to learn from someone else’s mistakes and avoid making your own.

Next, Kristina at Dink’s Finance just saved me $10. In her Weekly roundup: Sugar Daddys, Apple and Unwinding for Free, she explained that the movie Jobs was just awful, and I’ll take her word for it. Too bad, it had potential. I guess I’ll catch it on DVD.

At Surviving and Thriving, Donna Freedman wrote Termination Dust, a piece on how she lost her writing gig with MSN money. It wasn’t personal, so did all the other finance writers, but I liked Donna and her writing. looking forward to finding her works at other sites.

Money 101: How to Measure and Track Wealth was the subject at Free Money Finance. People tend to focus on income, but as FMF points out, wealth is the key number to determine if one is rich or not.

At My Personal Finance Journal, Travis asked How Much Should Children Know About The Family Finances? A great question, one I often ponder, myself. How much do your kids know about your finances?

And we’ll wrap up the week with How Much to Budget: Do Household Budget Percentages Work, I like Andrea’s line “The only “rule” you should be following is that you do not spend more than you make.  All other budget decisions are up for debate” A budget is a tool to help guide but not so rigid that it can’t be adjusted along the way. A nice article which offered a sample budget that makes a great starting point.

It’s not a date any over 16 is likely to ignore. This week we remembered those who were killed and the heroes who lost their lives on 9/11.

This week Len Penzo talked about fruit juice, unemployment, and asked that his readers Guess Which Stock Market Index Is Up 212% This Year. I wouldn’t have guessed right. Did you?

At Financial Finesse I learned The 3 Most Important Words in Financial Planning. “Margin of Safety.” You see, we tend to miss on forecasts every day, overestimating returns, underestimating expenses, etc, so that over the long run these errors are cumulative and we may miss our target by a great number. Understanding these errors helps to manage that margin of safety.

Jackie at Money Crush talked about how to Slay the Green-Eyed Financial Monster. It’s easy for us to envy our neighbor for their cars, vacations, houses, etc. It’s a slippery slope and when you feel that way, it’s time to slay the monster.

Saving Too Much For Retirement? Is It Really Possible? At Generation X Finance, Jeremy asks and answers this interesting question. It’s not just possible, it actually happens, and Jeremy will explain the warning signs.

And last, at How I Save Money, The Importance Of Having A Buffer. This isn’t an emergency fund, but the normal extra you should keep in checking just in case payday comes a day or two last due to weekends or holidays. A great way to avoid the bounced checks.

On a somber note – President Obama will address the nation Tuesday and ask congress for support to strike Syria for its use of chemical weapons. Can we turn our backs while innocent people are being slaughtered? Can we afford to police the world? Why isn’t the rest of the Mid-East showing outrage for what Syria is doing?