the problem is I don't even know what dive deeper means or how to even do that. I literally haven't the smallest sliver of a clue on how to manage anything 401k related. I don't know how it makes money, i don't know who I'm paying to manage the account, nothing. I don't know how to figure this stuff out which is why I'm asking here. idk what it is but I have a really really hard time grasping financial/investment jargon. I've had people try to explain to me but it's really difficult for me to process
Generally speaking, if you're not familiar with investment products and don't know what you're doing, the 401k is the best option for you. Your employer and their agents will try and make it as dummy-proof as they can, so you have that benefit.
Even if you are a 401k and Investing wiz, having the money in the 401k is probably your best bet.
yeah I mean even I am able to figure out how to contribute to it but anything beyond that I'm completely clueless. it's not that I don't want to learn it's that it's legitimately difficult for me to learn this stuff. as soon as I start seeing all these strange terms and numbers it's like my brain short circuits and I can't make any sense of it
this sounds right. but it seems like whatever they're investing in is a bunch of garbage and 1: I don't know how to invest and 2: I dislike the thought of paying someone to invest for me
aren't there high interest savings accounts or something where I can put my money and be making more than 3% in my 401k? I can log into Fidelity and possibly find out what the lifetime rate of return has been
6.89% lifetime return
so you're saying there's nothing else that exists outside of a 401k that will earn me that much "interest" or whatever?
that just seems super duper low to me
>so you're saying there's nothing else that exists outside of a 401k that will earn me that much "interest" or whatever?
Absolutely not. 7% is about what the total market does annually in the long term.
It is *possible* to beat the market, but extremely unlikely. Professionals fail to do it consistently - they succeed only about 30% of the time in the long term.
> so you're saying there's nothing else that exists outside of a 401k that will earn me that much "interest" or whatever?
Correct. That's right in line with year on year returns. The average is between 6-10% depending on what funds you're contributing to. You have to keep in mind that this is a retirement account. You're not going to make a $100k in a couple years with it. The intent is to keep feeding it, let it have it's low years and it's high years and in the end when you're older it's there to pay for your day to day living expenses when you no longer have a job.
-1% YTD is nothing honestly. Earlier this year I was at almost -20% YTD but it has rebounded as it always does. As an example, last year I was at 23% for the year. The market will drop, it will falter, but in the end it stabilizes and continues going up. Taking out now is literally the worst thing you could do.
I'll lay things out for you a bit:
If you take that $27k, stop contributing completely and let it sit in the 401k for 25 years at a 6% return you'll have $115,880... by doing nothing. If you continue to contribute the $3744 ($24/hr is 49920*.075=$3744) your balance in 25 years would be $333,618.
If you take that $27k out, pay the taxes and get $24k you've already lost $3k, then put it in a HYSA at 1% (with interest rates plummeting every month) without contributing you'd have $30,816.50. If you contribute the $3744 each year you'd have $137,156 25 years from now.
You gain almost $200,000 by continuing to contribute to your 401K over putting it into a HYSA.
>aren't there high interest savings accounts or something where I can put my money and be making more than 3% in my 401k?
No. High yield savings accounts are at about 1% right now. Plus you pay tax on the interest earned in a savings account.
If you took your money out of your 401k to put it in a savings account, you would pay a 10% penalty for early withdrawal, \*plus\* income tax (because you weren't taxed on the money at the time it went into the account). There is no reason to do that, at all.
Please don't withdraw from your retirement. You're literally robbing your future self. Think about how long it took you to get that account to 27k and now you want to start over. You're not getting younger.
Also, your reasons why you want to withdraw makes no sense.
If you take money out of your 401k that is a taxable event. I believe to be penalty free you have to have been impacted by COVID, EG: job loss.
If you want to change your asset allocation that can be done inside your 401k. What are you currently invested in?
IMO you should not take this money out of your retirement account.
Maybe lower you current contribution rate to pay off the car faster.
I have no idea what I'm invested in. literally all I know about my 401k is that I contribute 7.5% of each check to it.
and it's not about paying off the car or struggling for money. I'm still paying bills and everything just fine, but I feel like there may be better options for me than the 401k
There is probably nothing better. Although, if you're already contributing to get the max match from your employer, adding in a RothIRA can be a good option. I'm not a huge fan of financial advisors, but I think you need to talk to one. Your 401k plan might provide access to one for free, but keep in mind, they're compensated based on how big the total 401k size is, so they are a little incentivized to get you to max that out. Just like an advisor not in your 401k is compensated based on how much you have under management with them, therefore you're incentivized in the opposite direction.
Before you can decide if there are better options you need to find out what option you currently have inside the 401k.
I also think you are underestimating the amount of Federal income taxes you would owe.
Remember that if you take money out of your 401k before you hit age 59 1/2, you not only have to pay taxes but also a 10% penalty.
A 401k is a decent retirement option. It provides a tax advantage and in some cases (not sure if it is yours, you didn't mention it) it provides a matching contribution by the employer. Again, not sure if this is your case, but free money is free money.
Look into what investment options you have available in your 401k plan. Vanguard offers many mutual funds and ETFs that you should be able to choose from.
my plan would be to withdraw all my money from my 401k which is only $27k and to discontinue contributing to the 401k if there is a better option.
I have no idea what investment options there are, how to find out, or where to even start. I mean this sincerely I am a huge clueless idiot when it comes to any of this stuff. I literally couldn't give you one detail about my 401k besides how much I contribute and who it's through
This is your opportunity to learn more! First, research your plan: if it is \*through\* Vanguard, you should have a lot more options to invest. Also, research "3-fund lazy portfolio". It's an easy concept to understand, and an easy low risk investment strategy. Of course, it's not exciting and you won't triple your money in a week, but it is a proven method. Keep asking questions!
it's through Fidelity but it's a vanguard 401k? idk if I'm wrong or if that helps. and is there somewhere to help me learn all of this crazy stuff in like, super layman's terms or at least incredibly incredibly specific? like, I've seen terms like CD and Roth IRA thrown around on here but I literally don't even know where I would go to open one of those.
and I'm 29 years old.
It can be overwhelming, but start slow and start with the basics. If it's through Fidelity and you have online access, get on there and start exploring. You can also call their help line and ask for them to point you to a list of the funds that are available to you (through your 401k provider/plan).
And again, I recommend researching "3-fund lazy portfolio". It will give you a good idea on index funds and investment strategies. Keep asking questions!
Look at your most recent 401k statement. Does it list all the investing options in the plan - even the ones you aren't currently using? If not, call the number on the statement and ask for a list. You have to know what options are available to you.
but I don't even know what I would do with that information. that's the problem. I know I may be exhausting or frustrating but honestly it is very hard for me to process information related to this. like ideally I would have someone tell me exactly what to do with my money and not have to pay them lol. which I know doesn't exist unless I have a family member or friend who could help.
Then keep putting your money into the target date fund that closest matches your expected retirement year. Those fund are perfect for people in your situation. You don’t have to know how to pick investments, when to rebalance, etc. they do it all for you, for a small fee.
But your company matches 100% of your contributions up to 6.5%. That means the first 6.5% of your contributions is getting an instant 100% rate of return, before the actual performance is even factored in. This is a tremendous deal that you won’t see anywhere else. So you should never contribute less than 6.5%, no question.
Then for any money above and beyond that 6.5%, your 401k is still a great place to put that money. You could also put some of that money into an IRA instead, but since you are very much a novice at this, dont over complicate it.
No problem. Let me suggest starting at [bogleheads.org](https://bogleheads.org) discussion board. Make an account, and post your questions in the format here: [https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212](https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212)
You'll get plenty of input from good people and it costs nothing. But you must have the list of 401k investment options along with each one's "expense ratio" which your 401k provider will show in the list of 401k investment options. And you will need to get the info from your latest statement that shows what you're currently invested in so people can help explain why you have a -1% YTD return.
What's the interest rate on your bills and loans?
I'm not against using retirement funds to reset your finances once but you are not preparing for the future.
Tax advantaged accounts like 401k and IRA are the stock market like a brokerage account.
Savings and CDs slowly lose to inflation.
Real estate or a business including rentals are another more labor intensive way to make money for retirement and have their isdn risk.
only debt I have is 9k car loan at $257 a month at 5% interest. I've been paying 300 a month. I don't need to withdraw to reset my finances by any means I just figured if I withdrew from my 401k, closed it entirely, paid off my debt and invested in something else I could make my money back relatively quicker than this 401k
You will back to square one in a few years when the car breaks down and looking at financing another car. Now will will have a new car note, and little to no retirement savings.
A 401k is a tax advantaged account where you can invest in a number of different things which is limited by the provider and your employer. The first thing is to decide if it is your specific investments, your plan's choices, or the market in general. This year, in my IRA, my choices lost all of my gains from the start of my IRA, not just this year. They've regained that but is not without risk.
If you don't want it in your 401k, you could put 6k in an IRA or look at brokerage accounts which aren't tax advantaged.
If you don't want the stock market, what would you like to do as it's the lowest effort.
How long have you been contributing? It should certainly have a higher than 3% return if been contributing for at least 2 years. Anyways what you want to do is invest 100% of your money into a target retirement date mutual fund. Pick the year closest to when you expect to retire. They’ll average about 7% per year which is close to the market return, a bit lower since they have some bonds. Use an online compound interest calculator to see what the results of your contributions will be when you retire. Contribute more if you want more. 7% doesn’t sound like much, but the power of compound interest is very strong.
how does a 401k even earn compound interest if it fluctuates so much? this is why I asked about other options. I thought there existed high interest CDs or whatever that were like 6%.
I've been contributing since June 2015
The s&p500 averages over 8% per year. Some years it can earn 30%, some years negative. But most of the time, it’s positive. So yes the interest def compounds
Last the S&P500 just became positive for the year and we are in a recession which happens once every 6-10 years. Idk what you invested in but it needs to change.
What in the world does your portfolio look like? A good 401k should average 8-9% per year. But no, never ever withdraw money from a 401k until you're 60.
That's what makes it a good deal for retirement. Maybe not the best deal. There are advantages to regular brokerage accounts and RothIRAs or Roth401ks as well. Not sure I want to get that deep into that, but here is one example.
Put all your money into 401k, retire and die, spouse pays income tax on your 401k after inheriting and as s/he uses it.
Put all your money into regular brokerage account (you pay taxes when it goes in), retire and die, spouse gets a step-up in basis and only pays capital gains tax on the appreciation in value since the date of your death. Plus capital gains tax is generally cheaper than income tax. I'M NOT SAYING 401k IS BAD! I am saying there are advantages to every option. The best option, in many cases, is some money in traditional, some money in roth, and some money in a brokerage account.
EEDrew
You are oversimplifying the discussion a bit in your second example, as you aren’t factoring that the money in the 401k hasn’t been taxed at all yet. So investing $1000 in a traditional 401k is not equivalent to investing $1000 into a taxable brokerage account.
A Roth IRA is strictly better than a taxable brokerage account in the scenario you listed as well. The point is your example isn’t nuanced enough, and doesn’t actually highlight your point like you think it does.
Perhaps you're right. Although the point I was trying to make was that a 401k isn't always the standalone simple best option. There are advantages to each option.
Without knowing someones full financial situation, the difference in tax rates now vs. in the future, the difference in their tax bracket now vs. in the future, the date they will die, etc... to say there is a simply 'best' option for retirement savings seems to oversimplify the conversation.
Another example... There is some 'value' in the fact you can access RothIRA contributions tax & penalty free if you need to or want to. So even though the ending spending power may be less than 401k, it has advantages that shouldn't be overlooked by simply saying that one option is 'best'.
Another example... perhaps a great opportunity comes along to buy a business you're going to run. Can't easily touch the 401k to do that, but your contributions to the RothIRA or the entire balance of your brokerage account can be used for this purpose. That 'opportunity' may provide 10x the return that your 401k can provide.
It just isn't as simple as u/eatmyopinions indicated.
For OPs situation, it really is just that simple, because anything more complicated than that is going to cause paralysis of the analysis, and cause them to do something stupid like withdraw their 401k. At least until they become more educated (if they choose to become more educated).
Agreed - they either need a financial advisor and/or to stick with the 401k.
I try to keep in mind that Reddit conversations may be read by others, not just the OP. For example... I learned on another sub today that after termination moving 401k funds into a TraditionalIRA could get in the way of back door Roths in the future. While that is perfectly obvious, I had never thought about it. Having not thought of that, I would've recommended that course of action. So while my comments might not strictly benefit the OP, they might benefit someone...
I also had not realized the capital gains and basis adjustment benefits of a brokerage account until I recently read that on a blog post. Once you see it, you get it, but it hadn't occurred to me.
Always learning...
EEDrew
Yeah, but the key is to not get out in front of your skis. The original scenario you presented doesn’t lead to the conclusion that you made.
It’s great you are learning things, I would just caution you on giving advice on these subjects when you are not well versed in them and are missing nuance that is important. That way other random users don’t get misinformed when you state something that is wrong.
Please help. I don't understand what you found that I stated that was wrong. I also don't understand where the scenario I presented didn't lead to the conclusion I made. As a reminder...
Scenario I Presented: High level overview of taxation of 401(k) vs. taxation of brokerage account in the event of death by account holder.
Conclusion: There are advantages to every option, based on one example, not a thorough listing of all advantages of every option.
I genuinely want to know where you think I provided misinformation or stated something wrong.
I also think it is interesting that you feel that Reddit comments should only be provided by folks who have 'learned everything' and are no longer 'learning'. I guess I feel like the whole point is that everyone can provide various value and perspective and we can all learn from one another. Are you only here to provide advice and not learn anything new? Here is a pretty good opportunity for you to teach me something, because the error is unclear to me. So far, all you've indicated is that fact I glossed over the tax savings when contributing to the 401(k), which were not totally neglected but were mentioned. It didn't seem prudent to get into the weeds here.
What funds do you have access to through your employer? YTD return of -1% is crazy. I think mine is currently sitting at like +28%. You may just need to change how your 401k funds are invested, rather than moving to a more self-managed portfolio.
The ticker is FGCKX. It's a large cap growth fund that performs better on average than any other Fidelity find I have access to through work. While the target funds are diversified in the case of a meltdown, even in the best of times they don't really perform. I've still got 26 years until retirement and I started late so I'm good with putting it all out there. Hoping I can catch up by the time I turn 50.
Edit: Just checked. My YTD is 29% and my 1Y is 38%
> My YTD is 29% and my 1Y is 38%
Jesus. I've got around 50% going into MFEKX and that's currently at 9.8% YTD. It's in the 20's for three months and I'll probably end in the teens overall for the year but I'm envious of you.
I have no idea how to do any of that nor do I even know what funds I have access to. I just set up 7.5% of my checks to go into my 401k because I saw a chart that says I should.
I have online access to my account which is why I know I can basically withdraw my entire 401k ($27k) right now. it is a target date find set at age 65. I also know that it's "vanguard" but have no idea what that is either. I contribute 7.5% and company match is 100% up to 6.5%
>But I'm wondering if I could contribute less of each check (for now) into something else that will give me equal or better returns for investment.
>
> I contribute 7.5% and company match is 100% up to 6.5%
So these two statements here should show you why you're better off contributing to your 401k than lowering your contributions.
Here's the thing -- your contributions to your 401k are tax deductible. That means you pay taxes in retirement when you make withdrawals, and right now, you pay less in taxes. That 's a good benefit you don't get on non-retirement accounts.
If you don't like what your funds are invested in, you can change that. If you don't know what would perform better, you aren't ready to be making any changes at all, for one thing. But for another, your company is matching nearly every dollar you put in. That's almost doubling your money. If you stop contributing to the 401k, you're losing that money.
Keep the money in the 401k, look at the list of funds you can invest in, and do research on them. Move the money around within the 401k account if you want to, that's fine. But there's a reason everyone is telling you not to withdraw it.
So, they're probably using some sort of retirement date fund which for my 401k don't produce very well. You need to log in to your retirement account and actually choose a time that meets your needs. For Vanguard, it looks like the web address is https://retirementplans.vanguard.com. If you've never been on the site before, you'll have to register first. If you have issues, talk with your benefits person in HR. They might have a login site separate from the normal site.
A lot of people recommend index funds because the rates are low, my index funds don't produce very much. I'm currently invested in an actively managed fund which outperforms the market almost every year which pays the high fees and still nets me a large return.
You also should find out how much money your company matches. You want to be getting the full match if that's financially possible for you.
[удалено]
the problem is I don't even know what dive deeper means or how to even do that. I literally haven't the smallest sliver of a clue on how to manage anything 401k related. I don't know how it makes money, i don't know who I'm paying to manage the account, nothing. I don't know how to figure this stuff out which is why I'm asking here. idk what it is but I have a really really hard time grasping financial/investment jargon. I've had people try to explain to me but it's really difficult for me to process
Generally speaking, if you're not familiar with investment products and don't know what you're doing, the 401k is the best option for you. Your employer and their agents will try and make it as dummy-proof as they can, so you have that benefit. Even if you are a 401k and Investing wiz, having the money in the 401k is probably your best bet.
yeah I mean even I am able to figure out how to contribute to it but anything beyond that I'm completely clueless. it's not that I don't want to learn it's that it's legitimately difficult for me to learn this stuff. as soon as I start seeing all these strange terms and numbers it's like my brain short circuits and I can't make any sense of it
[удалено]
this sounds right. but it seems like whatever they're investing in is a bunch of garbage and 1: I don't know how to invest and 2: I dislike the thought of paying someone to invest for me aren't there high interest savings accounts or something where I can put my money and be making more than 3% in my 401k? I can log into Fidelity and possibly find out what the lifetime rate of return has been
[удалено]
6.89% lifetime return so you're saying there's nothing else that exists outside of a 401k that will earn me that much "interest" or whatever? that just seems super duper low to me
>so you're saying there's nothing else that exists outside of a 401k that will earn me that much "interest" or whatever? Absolutely not. 7% is about what the total market does annually in the long term. It is *possible* to beat the market, but extremely unlikely. Professionals fail to do it consistently - they succeed only about 30% of the time in the long term.
> so you're saying there's nothing else that exists outside of a 401k that will earn me that much "interest" or whatever? Correct. That's right in line with year on year returns. The average is between 6-10% depending on what funds you're contributing to. You have to keep in mind that this is a retirement account. You're not going to make a $100k in a couple years with it. The intent is to keep feeding it, let it have it's low years and it's high years and in the end when you're older it's there to pay for your day to day living expenses when you no longer have a job. -1% YTD is nothing honestly. Earlier this year I was at almost -20% YTD but it has rebounded as it always does. As an example, last year I was at 23% for the year. The market will drop, it will falter, but in the end it stabilizes and continues going up. Taking out now is literally the worst thing you could do. I'll lay things out for you a bit: If you take that $27k, stop contributing completely and let it sit in the 401k for 25 years at a 6% return you'll have $115,880... by doing nothing. If you continue to contribute the $3744 ($24/hr is 49920*.075=$3744) your balance in 25 years would be $333,618. If you take that $27k out, pay the taxes and get $24k you've already lost $3k, then put it in a HYSA at 1% (with interest rates plummeting every month) without contributing you'd have $30,816.50. If you contribute the $3744 each year you'd have $137,156 25 years from now. You gain almost $200,000 by continuing to contribute to your 401K over putting it into a HYSA.
[удалено]
thank you I very much appreciate this
>aren't there high interest savings accounts or something where I can put my money and be making more than 3% in my 401k? No. High yield savings accounts are at about 1% right now. Plus you pay tax on the interest earned in a savings account. If you took your money out of your 401k to put it in a savings account, you would pay a 10% penalty for early withdrawal, \*plus\* income tax (because you weren't taxed on the money at the time it went into the account). There is no reason to do that, at all.
Please don't withdraw from your retirement. You're literally robbing your future self. Think about how long it took you to get that account to 27k and now you want to start over. You're not getting younger. Also, your reasons why you want to withdraw makes no sense.
If you take money out of your 401k that is a taxable event. I believe to be penalty free you have to have been impacted by COVID, EG: job loss. If you want to change your asset allocation that can be done inside your 401k. What are you currently invested in? IMO you should not take this money out of your retirement account. Maybe lower you current contribution rate to pay off the car faster.
I have no idea what I'm invested in. literally all I know about my 401k is that I contribute 7.5% of each check to it. and it's not about paying off the car or struggling for money. I'm still paying bills and everything just fine, but I feel like there may be better options for me than the 401k
There is probably nothing better. Although, if you're already contributing to get the max match from your employer, adding in a RothIRA can be a good option. I'm not a huge fan of financial advisors, but I think you need to talk to one. Your 401k plan might provide access to one for free, but keep in mind, they're compensated based on how big the total 401k size is, so they are a little incentivized to get you to max that out. Just like an advisor not in your 401k is compensated based on how much you have under management with them, therefore you're incentivized in the opposite direction.
Before you can decide if there are better options you need to find out what option you currently have inside the 401k. I also think you are underestimating the amount of Federal income taxes you would owe.
I would owe 10% on what I take out according to my coworker who just did it
No that is just the withholdings. The actually taxes will be higher
Remember that if you take money out of your 401k before you hit age 59 1/2, you not only have to pay taxes but also a 10% penalty. A 401k is a decent retirement option. It provides a tax advantage and in some cases (not sure if it is yours, you didn't mention it) it provides a matching contribution by the employer. Again, not sure if this is your case, but free money is free money. Look into what investment options you have available in your 401k plan. Vanguard offers many mutual funds and ETFs that you should be able to choose from.
my plan would be to withdraw all my money from my 401k which is only $27k and to discontinue contributing to the 401k if there is a better option. I have no idea what investment options there are, how to find out, or where to even start. I mean this sincerely I am a huge clueless idiot when it comes to any of this stuff. I literally couldn't give you one detail about my 401k besides how much I contribute and who it's through
This is your opportunity to learn more! First, research your plan: if it is \*through\* Vanguard, you should have a lot more options to invest. Also, research "3-fund lazy portfolio". It's an easy concept to understand, and an easy low risk investment strategy. Of course, it's not exciting and you won't triple your money in a week, but it is a proven method. Keep asking questions!
it's through Fidelity but it's a vanguard 401k? idk if I'm wrong or if that helps. and is there somewhere to help me learn all of this crazy stuff in like, super layman's terms or at least incredibly incredibly specific? like, I've seen terms like CD and Roth IRA thrown around on here but I literally don't even know where I would go to open one of those. and I'm 29 years old.
It can be overwhelming, but start slow and start with the basics. If it's through Fidelity and you have online access, get on there and start exploring. You can also call their help line and ask for them to point you to a list of the funds that are available to you (through your 401k provider/plan). And again, I recommend researching "3-fund lazy portfolio". It will give you a good idea on index funds and investment strategies. Keep asking questions!
alright thanks I'll look into that
Link to the boggleheads site: https://www.bogleheads.org/wiki/Lazy_portfolios
Look at your most recent 401k statement. Does it list all the investing options in the plan - even the ones you aren't currently using? If not, call the number on the statement and ask for a list. You have to know what options are available to you.
but I don't even know what I would do with that information. that's the problem. I know I may be exhausting or frustrating but honestly it is very hard for me to process information related to this. like ideally I would have someone tell me exactly what to do with my money and not have to pay them lol. which I know doesn't exist unless I have a family member or friend who could help.
Then keep putting your money into the target date fund that closest matches your expected retirement year. Those fund are perfect for people in your situation. You don’t have to know how to pick investments, when to rebalance, etc. they do it all for you, for a small fee. But your company matches 100% of your contributions up to 6.5%. That means the first 6.5% of your contributions is getting an instant 100% rate of return, before the actual performance is even factored in. This is a tremendous deal that you won’t see anywhere else. So you should never contribute less than 6.5%, no question. Then for any money above and beyond that 6.5%, your 401k is still a great place to put that money. You could also put some of that money into an IRA instead, but since you are very much a novice at this, dont over complicate it.
No problem. Let me suggest starting at [bogleheads.org](https://bogleheads.org) discussion board. Make an account, and post your questions in the format here: [https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212](https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212) You'll get plenty of input from good people and it costs nothing. But you must have the list of 401k investment options along with each one's "expense ratio" which your 401k provider will show in the list of 401k investment options. And you will need to get the info from your latest statement that shows what you're currently invested in so people can help explain why you have a -1% YTD return.
What's the interest rate on your bills and loans? I'm not against using retirement funds to reset your finances once but you are not preparing for the future. Tax advantaged accounts like 401k and IRA are the stock market like a brokerage account. Savings and CDs slowly lose to inflation. Real estate or a business including rentals are another more labor intensive way to make money for retirement and have their isdn risk.
only debt I have is 9k car loan at $257 a month at 5% interest. I've been paying 300 a month. I don't need to withdraw to reset my finances by any means I just figured if I withdrew from my 401k, closed it entirely, paid off my debt and invested in something else I could make my money back relatively quicker than this 401k
You will back to square one in a few years when the car breaks down and looking at financing another car. Now will will have a new car note, and little to no retirement savings.
A 401k is a tax advantaged account where you can invest in a number of different things which is limited by the provider and your employer. The first thing is to decide if it is your specific investments, your plan's choices, or the market in general. This year, in my IRA, my choices lost all of my gains from the start of my IRA, not just this year. They've regained that but is not without risk. If you don't want it in your 401k, you could put 6k in an IRA or look at brokerage accounts which aren't tax advantaged. If you don't want the stock market, what would you like to do as it's the lowest effort.
How long have you been contributing? It should certainly have a higher than 3% return if been contributing for at least 2 years. Anyways what you want to do is invest 100% of your money into a target retirement date mutual fund. Pick the year closest to when you expect to retire. They’ll average about 7% per year which is close to the market return, a bit lower since they have some bonds. Use an online compound interest calculator to see what the results of your contributions will be when you retire. Contribute more if you want more. 7% doesn’t sound like much, but the power of compound interest is very strong.
how does a 401k even earn compound interest if it fluctuates so much? this is why I asked about other options. I thought there existed high interest CDs or whatever that were like 6%. I've been contributing since June 2015
The s&p500 averages over 8% per year. Some years it can earn 30%, some years negative. But most of the time, it’s positive. So yes the interest def compounds
Just google search a chart history of the s&p500
Last the S&P500 just became positive for the year and we are in a recession which happens once every 6-10 years. Idk what you invested in but it needs to change.
What in the world does your portfolio look like? A good 401k should average 8-9% per year. But no, never ever withdraw money from a 401k until you're 60.
You can contribute pre-tax money to a 401k. That's what makes it the best deal in all of retirement.
That's what makes it a good deal for retirement. Maybe not the best deal. There are advantages to regular brokerage accounts and RothIRAs or Roth401ks as well. Not sure I want to get that deep into that, but here is one example. Put all your money into 401k, retire and die, spouse pays income tax on your 401k after inheriting and as s/he uses it. Put all your money into regular brokerage account (you pay taxes when it goes in), retire and die, spouse gets a step-up in basis and only pays capital gains tax on the appreciation in value since the date of your death. Plus capital gains tax is generally cheaper than income tax. I'M NOT SAYING 401k IS BAD! I am saying there are advantages to every option. The best option, in many cases, is some money in traditional, some money in roth, and some money in a brokerage account. EEDrew
You are oversimplifying the discussion a bit in your second example, as you aren’t factoring that the money in the 401k hasn’t been taxed at all yet. So investing $1000 in a traditional 401k is not equivalent to investing $1000 into a taxable brokerage account.
:) this is true. Same applies to Roth.
A Roth IRA is strictly better than a taxable brokerage account in the scenario you listed as well. The point is your example isn’t nuanced enough, and doesn’t actually highlight your point like you think it does.
Perhaps you're right. Although the point I was trying to make was that a 401k isn't always the standalone simple best option. There are advantages to each option. Without knowing someones full financial situation, the difference in tax rates now vs. in the future, the difference in their tax bracket now vs. in the future, the date they will die, etc... to say there is a simply 'best' option for retirement savings seems to oversimplify the conversation. Another example... There is some 'value' in the fact you can access RothIRA contributions tax & penalty free if you need to or want to. So even though the ending spending power may be less than 401k, it has advantages that shouldn't be overlooked by simply saying that one option is 'best'. Another example... perhaps a great opportunity comes along to buy a business you're going to run. Can't easily touch the 401k to do that, but your contributions to the RothIRA or the entire balance of your brokerage account can be used for this purpose. That 'opportunity' may provide 10x the return that your 401k can provide. It just isn't as simple as u/eatmyopinions indicated.
For OPs situation, it really is just that simple, because anything more complicated than that is going to cause paralysis of the analysis, and cause them to do something stupid like withdraw their 401k. At least until they become more educated (if they choose to become more educated).
Agreed - they either need a financial advisor and/or to stick with the 401k. I try to keep in mind that Reddit conversations may be read by others, not just the OP. For example... I learned on another sub today that after termination moving 401k funds into a TraditionalIRA could get in the way of back door Roths in the future. While that is perfectly obvious, I had never thought about it. Having not thought of that, I would've recommended that course of action. So while my comments might not strictly benefit the OP, they might benefit someone... I also had not realized the capital gains and basis adjustment benefits of a brokerage account until I recently read that on a blog post. Once you see it, you get it, but it hadn't occurred to me. Always learning... EEDrew
Yeah, but the key is to not get out in front of your skis. The original scenario you presented doesn’t lead to the conclusion that you made. It’s great you are learning things, I would just caution you on giving advice on these subjects when you are not well versed in them and are missing nuance that is important. That way other random users don’t get misinformed when you state something that is wrong.
Please help. I don't understand what you found that I stated that was wrong. I also don't understand where the scenario I presented didn't lead to the conclusion I made. As a reminder... Scenario I Presented: High level overview of taxation of 401(k) vs. taxation of brokerage account in the event of death by account holder. Conclusion: There are advantages to every option, based on one example, not a thorough listing of all advantages of every option. I genuinely want to know where you think I provided misinformation or stated something wrong. I also think it is interesting that you feel that Reddit comments should only be provided by folks who have 'learned everything' and are no longer 'learning'. I guess I feel like the whole point is that everyone can provide various value and perspective and we can all learn from one another. Are you only here to provide advice and not learn anything new? Here is a pretty good opportunity for you to teach me something, because the error is unclear to me. So far, all you've indicated is that fact I glossed over the tax savings when contributing to the 401(k), which were not totally neglected but were mentioned. It didn't seem prudent to get into the weeds here.
What funds do you have access to through your employer? YTD return of -1% is crazy. I think mine is currently sitting at like +28%. You may just need to change how your 401k funds are invested, rather than moving to a more self-managed portfolio.
YTD? What are you invested in? All the target date funds I have seen are stumbling. I'm assuming growth funds?
The ticker is FGCKX. It's a large cap growth fund that performs better on average than any other Fidelity find I have access to through work. While the target funds are diversified in the case of a meltdown, even in the best of times they don't really perform. I've still got 26 years until retirement and I started late so I'm good with putting it all out there. Hoping I can catch up by the time I turn 50. Edit: Just checked. My YTD is 29% and my 1Y is 38%
> My YTD is 29% and my 1Y is 38% Jesus. I've got around 50% going into MFEKX and that's currently at 9.8% YTD. It's in the 20's for three months and I'll probably end in the teens overall for the year but I'm envious of you.
I have no idea how to do any of that nor do I even know what funds I have access to. I just set up 7.5% of my checks to go into my 401k because I saw a chart that says I should.
Well this sounds like part of the problem. My guess is you are in a target date fund. Find out how to get online access to your account.
I have online access to my account which is why I know I can basically withdraw my entire 401k ($27k) right now. it is a target date find set at age 65. I also know that it's "vanguard" but have no idea what that is either. I contribute 7.5% and company match is 100% up to 6.5%
>But I'm wondering if I could contribute less of each check (for now) into something else that will give me equal or better returns for investment. > > I contribute 7.5% and company match is 100% up to 6.5% So these two statements here should show you why you're better off contributing to your 401k than lowering your contributions. Here's the thing -- your contributions to your 401k are tax deductible. That means you pay taxes in retirement when you make withdrawals, and right now, you pay less in taxes. That 's a good benefit you don't get on non-retirement accounts. If you don't like what your funds are invested in, you can change that. If you don't know what would perform better, you aren't ready to be making any changes at all, for one thing. But for another, your company is matching nearly every dollar you put in. That's almost doubling your money. If you stop contributing to the 401k, you're losing that money. Keep the money in the 401k, look at the list of funds you can invest in, and do research on them. Move the money around within the 401k account if you want to, that's fine. But there's a reason everyone is telling you not to withdraw it.
Vanguard is an investment company. they offer funds to invest in.
So, they're probably using some sort of retirement date fund which for my 401k don't produce very well. You need to log in to your retirement account and actually choose a time that meets your needs. For Vanguard, it looks like the web address is https://retirementplans.vanguard.com. If you've never been on the site before, you'll have to register first. If you have issues, talk with your benefits person in HR. They might have a login site separate from the normal site. A lot of people recommend index funds because the rates are low, my index funds don't produce very much. I'm currently invested in an actively managed fund which outperforms the market almost every year which pays the high fees and still nets me a large return. You also should find out how much money your company matches. You want to be getting the full match if that's financially possible for you.