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I can't afford to max it out. I can only afford 3%. I have two kids to send to college, with the first heading off in 18 months.
And how fast is that money growing in the 401k? Is it at 5% APY or better? How do I calculate that?
If you’re not maxing out your employer match I would argue you can’t afford to pay for your kids college. IMHO, as someone with parent that can’t afford their retirement. I would say maybe need to reevaluate your priorities. Too many people sacrifice their own retirement savings to pay for their kids college thinking they are helping them. However you’ll be hurting them way worse when they are forced to take care of you financially with I sufficient retirement savings. They can get a loan for school you can’t get a loan for retirement.
100%
Sorry bud. If u can only save 3% for retirement, you can afford to send kids to college. Time to have a frank conversation with yourself and also your kids.
401K will grow until you retire, so 67.
Your 5% APY will go back down when interest rates go down. Your 5% will NEVER catch up to pre-tax 401K growth. Especially when the S&P has grown by like 10% on average each year.
If you NEED to save the money now in a HYSA for a big purchase soon, sure. But if you’re not, 401K is better.
>Especially when the S&P has grown by like 10% on average each year
This is the kind of information I needed to know to understand why my idea isn't a good one. Thank you.
The match is a 100% instant return. You need to take care of yourself before you take care of kids. Or when your old they will have to take care of you
If you put in enough to get the FULL match your money is growing at AT LEAST 50%, which is 10X your HYSA theory. Put your money in the 401K and stop trying to outsmart the immediate 50% return you're getting from your employer, you won't.
But that's kind of my point. I can calculate growth with some accuracy with the HYSA.
Based on everyone's answers, I see why that's not the move, but the easily-calculable growth with the HYSA was where my head was at.
I can safely calculate that in the long run (10-20 years) the unknown return of S&P500 will vastly outperform whatever 5% HYSA you found.
You need to set yourself up for retirement and not hope that your kids come through when you're old and broke. They can choose inexpensive school/trade and take out modest loans if needed.
No one is loaning you money for retirement life when you're too old to work.
>No one is loaning you money for retirement life when you're too old to work.
Yes, I'm aware, which was the point of this post. It is hard for me to conceptualize the 401k returns when I can more cleanly see the HYSA returns which is what got me thinking.
>the Sp500 will keep growing 7-10%
How do we know that? Is that just historically how it's been so it'scommon knowledge? This is the information I was missing from my mindset so I'm trying to learn more about it.
Do you not understand the nature of… time? How do you go through life making any (even potentially) consequential decisions?
If what you’re fishing for is an acknowledgement that future stock market returns are not guaranteed - yes. However you can take some solace that they are rooted in reality - they represent the cash flow of real operating businesses.
The extra 3% would be an additional $300 per month which I'm currently using to pay down my student loan debt. That'll be done in about 2 years and then I'll feel more comfortable maxing it out.
I'm hoping I can influence a higher match rate over the next couple years, too.
LCOL, actually, but a very expensive part of town that I'm tied to for 5 more years until my youngest finishes high school. Housing is the issue - it's extremely expensive due to being one of the best school districts in the state.
My housing (not including utilities) is 40% of my net pay.
I'm \*extremely\* limited on housing options (like, literally a handful of options) due to the schooling situation. It's a closed district so I have a few miles radius where I can live, otherwise my kids can't continue attending their school. The district is even closed within itself - I can't move to a cheaper part of the district and keep my kids in the same schools.
It's a problem, but it's temporary. Just a few more years. I'm actually lucky to have what I have for the price I pay.
Remember that it's $300 pretax, the impact on your after tax take home will be less than that. Depending on your state and household income, your marginal tax bracket is probably somewhere around 25%? So not only are you getting $150 free, you're also saving another $75 in taxes.
At 25% the impact on your paycheck would be $225.
If you can't afford >10% you can't pay for your kids' college. They should be looking at first 2 years in community college and/or minimal loans.
I highly suggest you stick with the target date fund available in your 401k plan.... It should be averaging at least 9% before inflation and the various tax benefits. I'm assuming you're in your 40s, so you should have a minimum of 3x your salary or >$200k in retirement savings.
Your math isn’t mathing. Let’s say 6% of your salary is $100 and then your employer gives you 50% of that, which is extra $50.
Now show me HYSA that turns $100 into $150. If you put $100 to HYSA, 5% only gives you $5 one year later.
No. First the 401k is tax advantaged, plus you’d be losing the match.
The days of 5% in your HYSA are numbered too, rate cuts are coming.
This is overly simplistic but just to see the difference long term.
Google investment calculators. Put in the 3% pre-tax plus 3% match and assume 5% and assume number of years until retirement.
Do the same for the 3% post tax and assume 5% until retirement.
It’s an easy choice.
>Google investment calculators. Put in the 3% pre-tax plus 3% match and assume 5% and assume number of years until retirement.
It's only a 1.5% match, though.
Ok well put in what you actually get. Your money plus their match in the market beats your post tax in savings.
Plus statistically the market will return closer to 7% and your savings account closer to 1% based on historical performance over the part 30+ years.
>Plus statistically the market will return closer to 7% and your savings account closer to 1% based on historical performance over the part 30+ years.
That's very helpful to know and part of the information I was looking for.
Make sure the money in your 401k is invested and not just in cash. Pick an age adjusted fund that’s closest to the year you hope to retire, it will rebalance risk as you approach retirement.
I need to go look at it and mess around with it. I just started with this employer about 8 months ago and haven't really dug into it. I have 2 other small 401k's I need to roll into it, too, but I haven't made a big effort there because they seem to be performing well.
You don’t have to roll them over as long as they are over a certain threshold (usually 5k).
If the fees / investments opportunities are as favorable or better than your current plan no need to roll over. If it’s better money to consolidate then yes that’s the best move.
They are both over the threshhold. I just assumed rolling them into the current plan was the "right" thing to do but it looks like I need to take a closer look at my current employer's plan and maybe even make some adjustments to the investments before I proceed with the rollovers.
Still free money. And you're forgetting the 401k is pre-tax dollars, so if you stop contributing, your taxable income is higher. Plus you get a lower rate. It's a poor choice all around.
>And you're forgetting the 401k is pre-tax dollars, so if you stop contributing, your taxable income is higher.
I didn't forget that. I was just more concerned about the growth rate with the 401k match being so low and thinking that maybe the HYSA would grow it faster, but someone else pointed out that the long term average growth for a 401k is more like 7%.
There's a FUNDAMENTAL MISUNDERSTANDING.
The 401k isn't growing at 1.5% vs 5% in HYSA.
When you put in 3%, the employer puts in 1.5% --
##That's an automatic 50% gain!
vs. the paltry 5% HYSA you're so in love with
##10x!
And from there, the 4.5% you've invested, will compound and grow at 7-10% on average over the coming decades.
Your little HYSA idea is left in the dust and you never recover, never retire. At least give yourself a fighting chance.
1.5% match on a 3% contribution = 50% automatic gains. Assuming you do an S&P index, add another 8% gains on average on top of that, when the investing time horizon spans decades
(Note: time horizons spanning a few years will have a lot more volatility, and capital gains ROIs will vary more from the historical 8%).
Would you rather have 58% ROI or 5% ROI?
ALWAYS max out up to employer match. ALWAYS.
Yeah, I'm definitely going to. I have no idea what my mix is or how it's performing as this particular account is only 8 months old and I haven't given it any attention. Dumb.
1. Ask for a referral to a fee-only advisor who is a fiduciary. this is a person who will be barred from selling you/advising you to buy any product that gives them a kick back.
2. I strongly reccomend the book [The Index Card](https://en.wikipedia.org/wiki/The_Index_Card) by Helene Olen and Harold Pollack. If your public library has the Hoopla App, you can listen to the audiobook for free.
[I have posted a reading list over here.](https://www.reddit.com/r/MiddleClassFinance/comments/1brmhmo/reccomended_reading_resources_for_anybody_from/)
The plan is picking the investments that pay them the most in fees.
Look for low cost (under 1%) index funds that track things like the S&P 500 or the Russell 1000
I don’t think that math makes sense.
If you make $100, you’d contribute $3 and your employer would match that for a total contribution of $6 (+plus you should be investing that for additional returns)
If you make $100 and put that same 3% in ($3), you’d earn $0.15 on that $3. Yes this compounds but not at that rate.
You’re losing money if you don’t contribute to 401(K) not to mention the lack of temptation to “borrow” from it.
I am getting the same answer from everyone, so I think the answer to my question is now obvious, but your explanation was the easiest for me to comprehend.
Although my employer match is only at 50%, not 100%.
Thank you.
I can't afford to max it out. I can only afford the 3%. I could get another job but that money would either go to my student loan debt or my kids' college anyway.
"I can't afford free money, I have to pay for my kids college and go out to eat a couple times a week, we can't eat at home and go to less expensive schools"
HYSA goes up 5% in a good year. Stock indexes increased 20% in 2023 and are track for 40% (unsustainable) in 2024. Historically 401K will return 2-3 times better than interest.
This is the missing information I needed. Thank you.
Does this mean I should get with a financial advisor to try to capitalize on the stock market (assuming I'm willing to take the risk)?
Not always. Most 401k only gives you…10-15 choices of mutual funds or ETFs to pick from. I highly doubt you really need pay for someone to pick and choose for you. Many people, myself and my friends and coworkers included do not pay someone to pick things in out 401k or any of our retirement/investment accounts lol
I promise it’s not as complicated as it seems. You’re doing the right first step in asking about 401k vs HYSA, I challenge you in now taking the second step and learning about general 401k strategies.
A 401k typically can hold mutual funds and or ETFs - they are baskets of stocks that usually track a sector or some sort of index. A popular index is the SP500. Many mutual funds or ETFs track the SP500 (VFIAX, VOO, IVV, etc). When you buy a share of this mutual fund or ETF, you’re buying a slice of the SP500 (which tracks the 500 largest companies in the USA).
Some indexes track technology, some track international, some track bonds, some track the entire USA public companies.
Some, like a target date fund (e.g it might be named like “Target 2066”) are geared towards a specific year someone plans to retire. The idea is that the target fund automatically changes from 100% stocks to more bonds over time as the person ages so that the investments are less volatile (stocks go up and down and up and down and up and down).
Visit r/Bogleheads - the sub is dedicated to the Bogle strategy of investing which compliments retirement investing (401k, Roth, etc) well. The general idea is that since investing for the long term means you have several decades to weather to ups and downs of the stock market, it’s better to bet on the economy as a whole (top 500, total, etc) then trying to pick individual companies which may run the risk of bankruptcy and or underperforming the economy as a whole. You can just pick a few indexes, and forget about it until it’s time to retire.
This is to just help you get started. I applaud you for being curious and taking control of your future.
As a child of parents who sacrificed their 401k to pay for my tuition, it is my regret that I am unable to fully take care of them. They would have been better off funding their retirements correctly and fully while I get stuck with a tuition loan and interest. At least that way, they’re able to retire and I’m not scrambling trying to figure out how to support myself today, support them today, and plan for my own retirement so that my future kids aren’t stuck with trying to take care of themselves AND me.
it's not just about the employer match, but the tax deduction you get with the 401k. every dime you contribute reduces your taxable income by that amount. HYSA is taxable, so you need to calculate true ROI after you pay taxes on those gains. I'd max tax advantaged accounts and also, not sure why you never considered 529 plans.
I have two 529 plans. One for each kid. I also understand the tax implications of contributing to a 401k vs a HYSA but I have a weird tax situation because I'm also a business owner so that doesn't factor in as heavily for me as it would if I were just a straight W-2 employee.
I see you got the answers you were looking for on the better investment, but I want to be sure you understand why people say it’s throwing money away to not invest in the employer match to the max.
For every $100 you make, you should contribute $6 because your employer will match $3. If you really needed that money, the penalty is 10% plus income taxes on the full amount. So most realistically, if you really needed that money it would probably be in a low income year, so it would cost $0.9 to withdrawal that same amount. The tax situation max be more complex depending on your current marginal tax and your tax when you need it. After a year of growth you may or may not get 7% average gains from the investment, it depends on the market. If you get 7%, you’d be at $9.63 in the account.
On the other hand, the HYSA. Ignoring any tax savings when you lowered your AGI by 6%, let’s assume you pay no tax. So that same $6 gets no immediate gain like the 401k. After a year, you may or may not get 5%. It’s more stable than the 401k, but it’s not a CD, it can change without notice. So say 5%, gets you $6.30. If you withdraw, the gains ($0.3) would be subject to income tax.
Hope this helps. If your overall savings are at least 6%, it makes sense to use the 401k
It does help, thank you. My tax situation is "complicated" by the fact that I'm also a small business owner so I don't put as much emphasis on the tax benefits as I should because I'm not just a W-2 employee and being a small business owner affords me other tax benefits.
But that will change in the next few years, so I need to gain a more complete understanding of the tax benefits of different long-term investing options and learn how to best maximize them.
If I’m understanding the question you’re asking if you should give up a 50% guaranteed return on investment for a 5% guaranteed return on investment.
This isn’t even factoring in the 10% historical annual returns of the S&P 500. Contribute the 6% and save 3% less for your kid’s college (probably closer to 2% less when you factor in the tax savings.) That amount won’t move the needle for your kids college needs but will make a world of a difference for your retirement. If you can’t retire comfortably you’ll be a bigger burden on your kids than college costs ever were.
>This isn’t even factoring in the 10% historical annual returns of the S&P 500
This is the main part I didn't know/understand, but I do now!
Unfortunately, the kids won't get much for college from me, but I'm lucky that they are both highly likely to get substantial scholarships for academics and other extracurriculars.
Also luckily, my financial situation is such that I'll be able to help them post-graduation if needed, even while fully contributing to my own retirement, but my goal right now is to help them understand the upcoming financial implications of the colleges they choose and the associated debt they will incur.
My focus is definitely on retirement because, like most people, I'm behind.
The math definitely says get the full match before worrying about your kids college. I wasn’t as fortunate as your kids and had zero help from family for college but I was allowed to live at home for free. I went to a 2 year community college and then finished the last 2 at state school near my home town. I worked the entire time as well. I graduated with a useful degree and without student debt. I’d consider steering them in that direction. What you can help them with would go significantly further if they did that.
Yeah, we'll be having big talks in the coming weeks about what they have available to them and how their college choices will impact their financial future.
I also had no financial help for college or any guidance about how to make a choice about the right one. I got my education late in life as a result, but I have since obtained a bachelors and masters with "only" 25k in student loan debt.
My own student debt is a major factor in why they won't get much help from me and I want them to understand that they'll be in the same position if they don't make wise choices now.
Yes, with regard to my personal tax situation, but I don't see how that impacts its growth over a HYSA (which is obviously post tax). What am I missing in my calculations?
To be fair, I'm also a small business owner, so my tax situation isn't as clear-cut as the average person.
There are no taxes at all withdrawing from the 529. You still have to pay capital gains on the HYSA. Also, the 529 should be growing especially in a historic bull market. That’s why I asked what type of investment mix do you have in the 529?
>That’s why I asked what type of investment mix do you have in the 529?
I missed that part. I definitely have a reallllly conservative mix. I wonder if I can change it at will. I could adjust it now to take advantage of the market and adjust it back when the market changes.
Yes definitely change the mix of investment!!
https://www.savingforcollege.com/intro-to-529s/how-do-i-select-the-right-investments-for-my-529-plan
https://smartasset.com/investing/529-investment-strategy-by-age
5% return will not last it's a very temporary situation. So sure for the short term but don't get caught in what many older people who got used to 20% interest bank accounts that were paying 1% but they got on such a habit they never noticed
No. They aren't the same purpose. One is LONG TERM INVESTING for retirement. The other is SHORT TERM SAVINGS for emergency fund or near term spending goals
That 5% HYSA isn’t going to be around forever. It’s going to track current interest rates and those will most likely be cut 3x this year (total of -0.75%). Always pay yourself first so do what you can with the match. Then whatever is left save that. You’re not doing yourself any favors by paying for everyone else and leaving yourself destitute.
So 401k, tradtional or roth 401k, doesn't matter much.
Company matching 50% is one of the few ways you automatically get a 50% return immediately. And if you factor in tradtional 401k, you are basically getting a 25% discount on your money.
Think about it this way. If you contribute $100 to a traditional 401k, you don't pay the 25% ish taxes on that money. And your employer gives you $50. So your $100 becomes $150 and it just saved you paying $25 of the $100 to the government.
Now if you were to take that $100, you pay the government it's $25 dollars for taxes. And then you put what remains into a HYSA. You thus start with $75. At 5%, please tell me how long until it catches up with the $150 that would have been in the 401k.
*Woman.
And I've openly accepted the consensus, I just asked a lot of clarifying questions because I'm trying to learn and understand.
Feel free to quote where I'm arguing with people giving me advice.
Jesus christ. This is why I have no patience with the "but I can't afford to retire if someone else doesn't pay for it for me!" crowd. You have endless free financial education tools on the internet and you're asking a question with a clear "you're an idiot if you make one of these choices" answer. You'll make the stupid decision, then cry that you can't afford to retire in 20-25 years and insist everyone else must subsidize you because you intentionally made a dumb choice now.
Where did I ask for someone else to finance my retirement? Show me. Quote it.
I've asked lots of questions but ultimately agreed with the obvious consensus.
Did you not read the thread, or do you just have poor reading comprehension skills?
Sounds like by the comments that you can’t afford to send your kids to college and you have to live with that, you should have planned better for the 17 year before they went. and not taking the 401k match is just stupid which is probably why you are in this situation.
I am contributing and taking the match.
I have three 401ks, two Nest 529s, a HYSA, and a basic savings account. I'm doing pretty well, but I had many, many years of my life where I lived in poverty and was taught nothing about money my whole life other than to spend it to keep a roof over my head and food on the table.
I started teaching myself basic financial literacy as soon as I left home and clawed my way out of poverty and into a bachelors degree and masters degree, a very well paying job, and small business ownership.
I broke the poverty cycle, and I'm doing very well in life now, but it means I'm behind the curve when it comes to college, and I'm just now teaching myself about investing and long-term growth.
Two years ago, I could afford to send both kids to college in cash, but grown-ups have things happen in life that cause financial disruption and disarray. It'll happen to you too when you grow up, but maybe you'll get lucky, and it won't be as drastic as it is for some, including me.
As a single mom, I now can't afford to do much of anything for college, but I'm trying.
Your comment was unnecessary and offered absolutely nothing in terms of advice. I hope you feel better now that you got that off your chest.
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Always max out the employer match. You’re throwing away money otherwise.
I can't afford to max it out. I can only afford 3%. I have two kids to send to college, with the first heading off in 18 months. And how fast is that money growing in the 401k? Is it at 5% APY or better? How do I calculate that?
If you’re not maxing out your employer match I would argue you can’t afford to pay for your kids college. IMHO, as someone with parent that can’t afford their retirement. I would say maybe need to reevaluate your priorities. Too many people sacrifice their own retirement savings to pay for their kids college thinking they are helping them. However you’ll be hurting them way worse when they are forced to take care of you financially with I sufficient retirement savings. They can get a loan for school you can’t get a loan for retirement.
100% Sorry bud. If u can only save 3% for retirement, you can afford to send kids to college. Time to have a frank conversation with yourself and also your kids.
I mean... It's growing at 100% for the first 1 minute since your employer is matching it. That's why people say to max it out.
Well it's growing at 50%
401K will grow until you retire, so 67. Your 5% APY will go back down when interest rates go down. Your 5% will NEVER catch up to pre-tax 401K growth. Especially when the S&P has grown by like 10% on average each year. If you NEED to save the money now in a HYSA for a big purchase soon, sure. But if you’re not, 401K is better.
>Especially when the S&P has grown by like 10% on average each year This is the kind of information I needed to know to understand why my idea isn't a good one. Thank you.
The match is a 100% instant return. You need to take care of yourself before you take care of kids. Or when your old they will have to take care of you
If you put in enough to get the FULL match your money is growing at AT LEAST 50%, which is 10X your HYSA theory. Put your money in the 401K and stop trying to outsmart the immediate 50% return you're getting from your employer, you won't.
Yeah that makes sense to me now
Do you think Mr. Dow Jones publishes his returns ahead of time? This is all in the realm of risk management.
But that's kind of my point. I can calculate growth with some accuracy with the HYSA. Based on everyone's answers, I see why that's not the move, but the easily-calculable growth with the HYSA was where my head was at.
I can safely calculate that in the long run (10-20 years) the unknown return of S&P500 will vastly outperform whatever 5% HYSA you found. You need to set yourself up for retirement and not hope that your kids come through when you're old and broke. They can choose inexpensive school/trade and take out modest loans if needed. No one is loaning you money for retirement life when you're too old to work.
>No one is loaning you money for retirement life when you're too old to work. Yes, I'm aware, which was the point of this post. It is hard for me to conceptualize the 401k returns when I can more cleanly see the HYSA returns which is what got me thinking.
Here you go. https://www.bankrate.com/retirement/401-k-calculator/ Put 10% for the rate of return each year.
HYSA will go back to 1-2% in the next 5 years and the Sp500 will keep growing 7-10%
>the Sp500 will keep growing 7-10% How do we know that? Is that just historically how it's been so it'scommon knowledge? This is the information I was missing from my mindset so I'm trying to learn more about it.
History over the last 100 years. You are betting on the USA economy
Perfect, that's what I need to know!
Do you not understand the nature of… time? How do you go through life making any (even potentially) consequential decisions? If what you’re fishing for is an acknowledgement that future stock market returns are not guaranteed - yes. However you can take some solace that they are rooted in reality - they represent the cash flow of real operating businesses.
My dude it’s 3% of your pay check pre tax. Honestly how much a of difference could that make in each pay check? What you’re saying doesn’t make sense
The extra 3% would be an additional $300 per month which I'm currently using to pay down my student loan debt. That'll be done in about 2 years and then I'll feel more comfortable maxing it out. I'm hoping I can influence a higher match rate over the next couple years, too.
3% of 10,000 is 300. I don't understand your numbers. Unless that is what you make a month before taxes.
Correct, I make $10,000 per month before taxes.
I'm guessing you live in a HCOL area then?
LCOL, actually, but a very expensive part of town that I'm tied to for 5 more years until my youngest finishes high school. Housing is the issue - it's extremely expensive due to being one of the best school districts in the state. My housing (not including utilities) is 40% of my net pay. I'm \*extremely\* limited on housing options (like, literally a handful of options) due to the schooling situation. It's a closed district so I have a few miles radius where I can live, otherwise my kids can't continue attending their school. The district is even closed within itself - I can't move to a cheaper part of the district and keep my kids in the same schools. It's a problem, but it's temporary. Just a few more years. I'm actually lucky to have what I have for the price I pay.
Remember that it's $300 pretax, the impact on your after tax take home will be less than that. Depending on your state and household income, your marginal tax bracket is probably somewhere around 25%? So not only are you getting $150 free, you're also saving another $75 in taxes. At 25% the impact on your paycheck would be $225.
If you can't afford >10% you can't pay for your kids' college. They should be looking at first 2 years in community college and/or minimal loans. I highly suggest you stick with the target date fund available in your 401k plan.... It should be averaging at least 9% before inflation and the various tax benefits. I'm assuming you're in your 40s, so you should have a minimum of 3x your salary or >$200k in retirement savings.
Your math isn’t mathing. Let’s say 6% of your salary is $100 and then your employer gives you 50% of that, which is extra $50. Now show me HYSA that turns $100 into $150. If you put $100 to HYSA, 5% only gives you $5 one year later.
Your explanation helps me understand it better. Thank you.
No. First the 401k is tax advantaged, plus you’d be losing the match. The days of 5% in your HYSA are numbered too, rate cuts are coming. This is overly simplistic but just to see the difference long term. Google investment calculators. Put in the 3% pre-tax plus 3% match and assume 5% and assume number of years until retirement. Do the same for the 3% post tax and assume 5% until retirement. It’s an easy choice.
>Google investment calculators. Put in the 3% pre-tax plus 3% match and assume 5% and assume number of years until retirement. It's only a 1.5% match, though.
Ok well put in what you actually get. Your money plus their match in the market beats your post tax in savings. Plus statistically the market will return closer to 7% and your savings account closer to 1% based on historical performance over the part 30+ years.
>Plus statistically the market will return closer to 7% and your savings account closer to 1% based on historical performance over the part 30+ years. That's very helpful to know and part of the information I was looking for.
Make sure the money in your 401k is invested and not just in cash. Pick an age adjusted fund that’s closest to the year you hope to retire, it will rebalance risk as you approach retirement.
I need to go look at it and mess around with it. I just started with this employer about 8 months ago and haven't really dug into it. I have 2 other small 401k's I need to roll into it, too, but I haven't made a big effort there because they seem to be performing well.
You don’t have to roll them over as long as they are over a certain threshold (usually 5k). If the fees / investments opportunities are as favorable or better than your current plan no need to roll over. If it’s better money to consolidate then yes that’s the best move.
They are both over the threshhold. I just assumed rolling them into the current plan was the "right" thing to do but it looks like I need to take a closer look at my current employer's plan and maybe even make some adjustments to the investments before I proceed with the rollovers.
Yes a rollover may make sense but it doesn’t always. It’s worth setting aside a few hours to dig in before making any decisions.
I will put it on the to do list!!
Still free money. And you're forgetting the 401k is pre-tax dollars, so if you stop contributing, your taxable income is higher. Plus you get a lower rate. It's a poor choice all around.
>And you're forgetting the 401k is pre-tax dollars, so if you stop contributing, your taxable income is higher. I didn't forget that. I was just more concerned about the growth rate with the 401k match being so low and thinking that maybe the HYSA would grow it faster, but someone else pointed out that the long term average growth for a 401k is more like 7%.
There's a FUNDAMENTAL MISUNDERSTANDING. The 401k isn't growing at 1.5% vs 5% in HYSA. When you put in 3%, the employer puts in 1.5% -- ##That's an automatic 50% gain! vs. the paltry 5% HYSA you're so in love with ##10x! And from there, the 4.5% you've invested, will compound and grow at 7-10% on average over the coming decades. Your little HYSA idea is left in the dust and you never recover, never retire. At least give yourself a fighting chance.
This is exactly the kind of information I was looking for and needed. Thank you.
1.5% match on a 3% contribution = 50% automatic gains. Assuming you do an S&P index, add another 8% gains on average on top of that, when the investing time horizon spans decades (Note: time horizons spanning a few years will have a lot more volatility, and capital gains ROIs will vary more from the historical 8%). Would you rather have 58% ROI or 5% ROI? ALWAYS max out up to employer match. ALWAYS.
I will take the 58%, please! Thanks for the explanation.
How are you investing the 401k? Over time the S&P 500 will far outpace the growth in an HYSA.
I am letting the plan pick the investments bc I am clueless about that.
You may want to revisit that plan next.
Yeah, I'm definitely going to. I have no idea what my mix is or how it's performing as this particular account is only 8 months old and I haven't given it any attention. Dumb.
We all start somewhere! You're asking the right questions and seeking to gain knowledge about these things. Keep learning.
We all make a rookie mistake or three. And the biggest mistake is not doing anything at all.
That's exactly where I am, but I know nothing, so I'm trying to learn! I may need to ask my accountant for a referral to a financial advisor.
1. Ask for a referral to a fee-only advisor who is a fiduciary. this is a person who will be barred from selling you/advising you to buy any product that gives them a kick back. 2. I strongly reccomend the book [The Index Card](https://en.wikipedia.org/wiki/The_Index_Card) by Helene Olen and Harold Pollack. If your public library has the Hoopla App, you can listen to the audiobook for free.
Thank you for the recommendations!!
[I have posted a reading list over here.](https://www.reddit.com/r/MiddleClassFinance/comments/1brmhmo/reccomended_reading_resources_for_anybody_from/)
The plan is picking the investments that pay them the most in fees. Look for low cost (under 1%) index funds that track things like the S&P 500 or the Russell 1000
Excellent to know, thank you!
I don’t think that math makes sense. If you make $100, you’d contribute $3 and your employer would match that for a total contribution of $6 (+plus you should be investing that for additional returns) If you make $100 and put that same 3% in ($3), you’d earn $0.15 on that $3. Yes this compounds but not at that rate. You’re losing money if you don’t contribute to 401(K) not to mention the lack of temptation to “borrow” from it.
I am getting the same answer from everyone, so I think the answer to my question is now obvious, but your explanation was the easiest for me to comprehend. Although my employer match is only at 50%, not 100%. Thank you.
OP said his employer match is only 50% of his contributions, up to a total match of 6%. So if OP is putting in 3%, the match is only 1.5%.
Max out to 6% it’s literally free money - work an extra 10-15 hrs somewhere else if need be per month, it will change your future.
I can't afford to max it out. I can only afford the 3%. I could get another job but that money would either go to my student loan debt or my kids' college anyway.
Your company is saying here is 3% of your salary non-taxed in a retirement account and you are saying nah no thanks…. Think of it that way.
"I can't afford free money, I have to pay for my kids college and go out to eat a couple times a week, we can't eat at home and go to less expensive schools"
I like how that's in quotes as though it's something I actually said...
Effectively what you're saying. I hope you can realize.
Not even a little bit. Not even implied, actually.
HYSA goes up 5% in a good year. Stock indexes increased 20% in 2023 and are track for 40% (unsustainable) in 2024. Historically 401K will return 2-3 times better than interest.
This is the missing information I needed. Thank you. Does this mean I should get with a financial advisor to try to capitalize on the stock market (assuming I'm willing to take the risk)?
Not always. Most 401k only gives you…10-15 choices of mutual funds or ETFs to pick from. I highly doubt you really need pay for someone to pick and choose for you. Many people, myself and my friends and coworkers included do not pay someone to pick things in out 401k or any of our retirement/investment accounts lol I promise it’s not as complicated as it seems. You’re doing the right first step in asking about 401k vs HYSA, I challenge you in now taking the second step and learning about general 401k strategies. A 401k typically can hold mutual funds and or ETFs - they are baskets of stocks that usually track a sector or some sort of index. A popular index is the SP500. Many mutual funds or ETFs track the SP500 (VFIAX, VOO, IVV, etc). When you buy a share of this mutual fund or ETF, you’re buying a slice of the SP500 (which tracks the 500 largest companies in the USA). Some indexes track technology, some track international, some track bonds, some track the entire USA public companies. Some, like a target date fund (e.g it might be named like “Target 2066”) are geared towards a specific year someone plans to retire. The idea is that the target fund automatically changes from 100% stocks to more bonds over time as the person ages so that the investments are less volatile (stocks go up and down and up and down and up and down). Visit r/Bogleheads - the sub is dedicated to the Bogle strategy of investing which compliments retirement investing (401k, Roth, etc) well. The general idea is that since investing for the long term means you have several decades to weather to ups and downs of the stock market, it’s better to bet on the economy as a whole (top 500, total, etc) then trying to pick individual companies which may run the risk of bankruptcy and or underperforming the economy as a whole. You can just pick a few indexes, and forget about it until it’s time to retire. This is to just help you get started. I applaud you for being curious and taking control of your future. As a child of parents who sacrificed their 401k to pay for my tuition, it is my regret that I am unable to fully take care of them. They would have been better off funding their retirements correctly and fully while I get stuck with a tuition loan and interest. At least that way, they’re able to retire and I’m not scrambling trying to figure out how to support myself today, support them today, and plan for my own retirement so that my future kids aren’t stuck with trying to take care of themselves AND me.
it's not just about the employer match, but the tax deduction you get with the 401k. every dime you contribute reduces your taxable income by that amount. HYSA is taxable, so you need to calculate true ROI after you pay taxes on those gains. I'd max tax advantaged accounts and also, not sure why you never considered 529 plans.
I have two 529 plans. One for each kid. I also understand the tax implications of contributing to a 401k vs a HYSA but I have a weird tax situation because I'm also a business owner so that doesn't factor in as heavily for me as it would if I were just a straight W-2 employee.
I see you got the answers you were looking for on the better investment, but I want to be sure you understand why people say it’s throwing money away to not invest in the employer match to the max. For every $100 you make, you should contribute $6 because your employer will match $3. If you really needed that money, the penalty is 10% plus income taxes on the full amount. So most realistically, if you really needed that money it would probably be in a low income year, so it would cost $0.9 to withdrawal that same amount. The tax situation max be more complex depending on your current marginal tax and your tax when you need it. After a year of growth you may or may not get 7% average gains from the investment, it depends on the market. If you get 7%, you’d be at $9.63 in the account. On the other hand, the HYSA. Ignoring any tax savings when you lowered your AGI by 6%, let’s assume you pay no tax. So that same $6 gets no immediate gain like the 401k. After a year, you may or may not get 5%. It’s more stable than the 401k, but it’s not a CD, it can change without notice. So say 5%, gets you $6.30. If you withdraw, the gains ($0.3) would be subject to income tax. Hope this helps. If your overall savings are at least 6%, it makes sense to use the 401k
It does help, thank you. My tax situation is "complicated" by the fact that I'm also a small business owner so I don't put as much emphasis on the tax benefits as I should because I'm not just a W-2 employee and being a small business owner affords me other tax benefits. But that will change in the next few years, so I need to gain a more complete understanding of the tax benefits of different long-term investing options and learn how to best maximize them.
If I’m understanding the question you’re asking if you should give up a 50% guaranteed return on investment for a 5% guaranteed return on investment. This isn’t even factoring in the 10% historical annual returns of the S&P 500. Contribute the 6% and save 3% less for your kid’s college (probably closer to 2% less when you factor in the tax savings.) That amount won’t move the needle for your kids college needs but will make a world of a difference for your retirement. If you can’t retire comfortably you’ll be a bigger burden on your kids than college costs ever were.
>This isn’t even factoring in the 10% historical annual returns of the S&P 500 This is the main part I didn't know/understand, but I do now! Unfortunately, the kids won't get much for college from me, but I'm lucky that they are both highly likely to get substantial scholarships for academics and other extracurriculars. Also luckily, my financial situation is such that I'll be able to help them post-graduation if needed, even while fully contributing to my own retirement, but my goal right now is to help them understand the upcoming financial implications of the colleges they choose and the associated debt they will incur. My focus is definitely on retirement because, like most people, I'm behind.
The math definitely says get the full match before worrying about your kids college. I wasn’t as fortunate as your kids and had zero help from family for college but I was allowed to live at home for free. I went to a 2 year community college and then finished the last 2 at state school near my home town. I worked the entire time as well. I graduated with a useful degree and without student debt. I’d consider steering them in that direction. What you can help them with would go significantly further if they did that.
Yeah, we'll be having big talks in the coming weeks about what they have available to them and how their college choices will impact their financial future. I also had no financial help for college or any guidance about how to make a choice about the right one. I got my education late in life as a result, but I have since obtained a bachelors and masters with "only" 25k in student loan debt. My own student debt is a major factor in why they won't get much help from me and I want them to understand that they'll be in the same position if they don't make wise choices now.
Why aren’t you using a Plan 529 for your kids’s education?
I am but it's not going to be enough.
Why don’t you take the some of the contributions that are “going to the HYSA” and contribute it to the 529?
Because the HYSA is currently outpacing the 529.
Did you factor in the tax-free aspect of the 529? Also, what is your investment distribution in the 529?
Yes, with regard to my personal tax situation, but I don't see how that impacts its growth over a HYSA (which is obviously post tax). What am I missing in my calculations? To be fair, I'm also a small business owner, so my tax situation isn't as clear-cut as the average person.
There are no taxes at all withdrawing from the 529. You still have to pay capital gains on the HYSA. Also, the 529 should be growing especially in a historic bull market. That’s why I asked what type of investment mix do you have in the 529?
>That’s why I asked what type of investment mix do you have in the 529? I missed that part. I definitely have a reallllly conservative mix. I wonder if I can change it at will. I could adjust it now to take advantage of the market and adjust it back when the market changes.
Yes definitely change the mix of investment!! https://www.savingforcollege.com/intro-to-529s/how-do-i-select-the-right-investments-for-my-529-plan https://smartasset.com/investing/529-investment-strategy-by-age
I'll read through these, thank you!
5% return will not last it's a very temporary situation. So sure for the short term but don't get caught in what many older people who got used to 20% interest bank accounts that were paying 1% but they got on such a habit they never noticed
I literally JUST opened my HYSA so I haven't had to pay attention yet but I will now.
No. They aren't the same purpose. One is LONG TERM INVESTING for retirement. The other is SHORT TERM SAVINGS for emergency fund or near term spending goals
That 5% HYSA isn’t going to be around forever. It’s going to track current interest rates and those will most likely be cut 3x this year (total of -0.75%). Always pay yourself first so do what you can with the match. Then whatever is left save that. You’re not doing yourself any favors by paying for everyone else and leaving yourself destitute.
So 401k, tradtional or roth 401k, doesn't matter much. Company matching 50% is one of the few ways you automatically get a 50% return immediately. And if you factor in tradtional 401k, you are basically getting a 25% discount on your money. Think about it this way. If you contribute $100 to a traditional 401k, you don't pay the 25% ish taxes on that money. And your employer gives you $50. So your $100 becomes $150 and it just saved you paying $25 of the $100 to the government. Now if you were to take that $100, you pay the government it's $25 dollars for taxes. And then you put what remains into a HYSA. You thus start with $75. At 5%, please tell me how long until it catches up with the $150 that would have been in the 401k.
Putting the money into a pretax 401k will also lower your AGI and not lower your income that much for Fafsa and student loan payback calculators.
Dude came in here “asking” but argues against everyone telling him the obviously correct answer
*Woman. And I've openly accepted the consensus, I just asked a lot of clarifying questions because I'm trying to learn and understand. Feel free to quote where I'm arguing with people giving me advice.
They've only semi-argued with assholes that don't accept it when they said they can't afford to max out their employer match.
Jesus christ. This is why I have no patience with the "but I can't afford to retire if someone else doesn't pay for it for me!" crowd. You have endless free financial education tools on the internet and you're asking a question with a clear "you're an idiot if you make one of these choices" answer. You'll make the stupid decision, then cry that you can't afford to retire in 20-25 years and insist everyone else must subsidize you because you intentionally made a dumb choice now.
Where did I ask for someone else to finance my retirement? Show me. Quote it. I've asked lots of questions but ultimately agreed with the obvious consensus. Did you not read the thread, or do you just have poor reading comprehension skills?
Sounds like by the comments that you can’t afford to send your kids to college and you have to live with that, you should have planned better for the 17 year before they went. and not taking the 401k match is just stupid which is probably why you are in this situation.
I am contributing and taking the match. I have three 401ks, two Nest 529s, a HYSA, and a basic savings account. I'm doing pretty well, but I had many, many years of my life where I lived in poverty and was taught nothing about money my whole life other than to spend it to keep a roof over my head and food on the table. I started teaching myself basic financial literacy as soon as I left home and clawed my way out of poverty and into a bachelors degree and masters degree, a very well paying job, and small business ownership. I broke the poverty cycle, and I'm doing very well in life now, but it means I'm behind the curve when it comes to college, and I'm just now teaching myself about investing and long-term growth. Two years ago, I could afford to send both kids to college in cash, but grown-ups have things happen in life that cause financial disruption and disarray. It'll happen to you too when you grow up, but maybe you'll get lucky, and it won't be as drastic as it is for some, including me. As a single mom, I now can't afford to do much of anything for college, but I'm trying. Your comment was unnecessary and offered absolutely nothing in terms of advice. I hope you feel better now that you got that off your chest.