http://money.cnn.com/2008/02/20/pf/retirem...sion=2008022109

Good article. I let my 401(k) contribution hit my bonus hard this year. Going to try to max it out and stay the course. I've vowed to not so much look at the statements until mid-year, and only then for re-diversification purposes if needed.

When your investment horizon is 20, 30, 40+ years you are best off not worrying about the short term ramifications of market volatility and just keep dollar-cost averaging during these periodic downturns.

Worrying? Nothing makes me happier than seeing the market tank: in the words of Warren Buffett, if you are in the mode of generally buying something, you like to see it getting cheaper.

What drives me crazy about the 401(k) is that I can only buy once a month, since I only get paid once a month. Those 4 long weeks of market corrections really try my patience.

That is tough...especially if the market swings upwards toward the end of the month when you are about to contribute to the 401(k). I know it's only my perception, but it always seems like the market rallies the day before my contributions. Frustrating!

Personal story that was especially frustrating- I rolled over my 401(k) this fall after switching companies. Unfortunately, you set your rollover about a week in advance without any real control over the exact date the rollover takes effect (a lot of it depends on when the department receives the rollover check and then trades you into the new plan). Of course, the day before the rollover (when my 401 was out of the money) the Fed announced a 25bps rate cut. The next day my rollover was executed- into a market that was up nearly 3.5% over the previous day's high! I estimated that I lost at least 5k in short term money on that one...

No.......

I agree. I don't think I'm a sucker or stupid for investing in a 401k .. for one thing..............I've saved taxes at a time in my life where I am making quite a bit of money. I daresay I will be in the group of people that are in a higher tax bracket now than when I retire.
Add to that .. the company match 50% up to 6% of my annual income (free money). This is money I am giving up if I don't do the 401k

And above all .. since I have gone through both a divorce AND a bankruptcy...... the only savings that survived was my 401k, everything else wound up depleted and gone. So I am in my mid 40's and have $50k, which probably doesn't sound like much to some people, but keep in mind, up until the last few years ... I was only making around $9-$12 an hour and only doing a small contribution of 1-3%.
I am now making double that and putting in 6%, my company matches another 50% and so I have 9% of my gross annual income going for my future. I figure at bare minimum I'll have $340,000 by the time I can retire at 59 1/2. Even if I never stick another dime in...I'll have around $180,000.
Add that to pension and social security and I know that I'll be OK. I live modest, always have. I bank on having decent health, I take care of myself and come from a family that doesn't have a lot of health issues.

Point being, the only money that's survived everything has been my 401k $$$$$ I am thankful for it!

Not necessarily. Since you can reallocate at any time, just treat your 401k the same way you would treat a regular portfolio...always, always, always keep cash on the sidelines.

Let's say that your 401k is balanced between four funds that you like. Add a fifth fund, the money market, and put at least 10% in it. You don't do this for the paltry gain you'll see in the MM returns, you do it so that when a fund you really like drops 5% you can reallocate some of the MM to that fund. It doesn't matter if payday is 25 day away as long as you have cash to put to work.

I would like to mention my beef with 401k's, however. I know a lot of people who will tell me I'm wrong about not putting every dime I can into my 401k. I hear the info about taxes, etc.

What many people don't stop to think about is that you shouldn't be working and putting all of your capital to work simply to fund retirement. To me that is shortsighted.

I contribute just enough to my 401k to max out the employer match. Additionally I fully fund a Roth IRA. By the time all is said and done I'm putting about 14% of my pretax income away for retirement. (As a side note my self-directed IRA always outperforms the very limited options which I have available in my 401k.)

Then, on top of that I put about another 10% or so into a regular brokerage account, which I use for investing and swing trading.

On top of that a few % goes into an online savings account to act as EF and generally just as a cash reserve.

Then finally I put in about 7% of my income into a business that I own outside of what my day job.

But I've literally had conversations with people who stopped listening right at the time that I mentioned that I don't contribute as much as I could to my 401k.

My goal is to achieve a balance. I want to live well right now. If I need something (like a newer car when the old one dies) I want to make sure I can afford it. If I want something (like an iPod or a Garmin) I want to be able to buy it if I decide that I really do want it after evaluating the benefits vs the liabilities of spending the money on that item.

If all I was doing was fully funding my 401k then I wouldn't have those options.

I wouldn't have the cash to get season tickets for my local hockey team, or to go to 10-15 baseball games a year. Or to travel and go to music festivals and concerts all over the country, etc.

But as it stands now I can do all of those things, and I can do so without altering my retirement savings, and all the while be on track to retire comfortably 10 years early.

And I don't make a huge income. I'm mid five figures.

the need to max pretax vehciles is greater the higher your tax bracket is (IMHO). We've been told that we are not saving enough outside of retirement vehciles. That may be, but we also did not start saving in such products until our early 30s.

It sounds like you are pleased with your approach and that is what matters.

I'm sure my views would be different if my income was significantly higher.

What this CNN Money article fails to incorporate into their calculation is the 401(K) plan fees. All 401(K) plans have fees and most employers will pass these fees on to their participants. Most 401(k) participant have no idea that they are paying for this fee let alone what the amount is. The average fee for a plan is 1%. That may not sound a lot but when you run the calculation, IT IS A BIG NUMBER. Take the following scenario into consideration.

"A 25-year-old employee who currently has around $25,000 in his or her retirement account, and whose annual contributions (and employer matches) total only $2,500, in a plan that is allocated 80% to stocks and 20% to bonds, could forfeit more than $660,000 by age 65 -- if the plan charges fees totaling just 1% a year"

I don't know about you, but if someone is paying $660,000 without even knowing it, he or she seems like a sucker to me.

HHHA, did you bother actually to try to run the math on your little example? The only way you total $660,000 in 1%-fees over 40 years is if the account averages a $1.65 million dollar balance over than time. So if we start at $25,000 and gradually build up to a 1.65 mil. average, then in the latter part of the period there must be several million dollars in the account. If your 401k makes you a reeking multimillionaire you probably shouldn't complain about relatively tiny annual fees along the way.

Over the course of 40 years you'll probably spend $660k on a lot of things that don't make you extremely rich.

Any thing that involves professional money management involves costs, because money management firms are generally not charities. And BTW all fee information in any 401k is disclosed for any investor who cares enough to read it, which most people don't.

The link to the article stating that scenario is right here

I understand the insurance companies/401(k) companies/whatever companies need to make a living and thus they have to charge those fees. I USED to invest in my employer roth 401(k) but after I found out that the plan did charge a 1% annual fee that was compounded on a daily basis, I quickly stopped. Instead I put my money into a roth IRA without the fee. I also invest money into a taxable account. I rather pay a 15% long term capital gains tax on the distribution rather than my plan's 1% annual fee. It just makes financial sense for me.

Kudos to you for reading your 401(k) plan disclosure. You seem like an intelligent person. Most people have NO idea that they are even paying for a fee. The 401(k) companies make this extremely hard to calculate what these fees are. This is why the Supreme Court said a participant can sue the 401(K) company or plan administrator/trustee under "LaRue vs DeWolff".

Now all that being said, I do think most 401ks could be far better and more competitive. They suffer the same problem as employer-provided health insurance: it's not a normal, rational free market because the person buying and selecting the product is not the consumer of the product. The actual consumer has no choice and no ability to shop around. And in general business owners are totally ignorant of financial planning metrics and/or don't care what they give employees, as long as they can claim to offer something.

I think it's amazing that as a small-time individual I can drive a half mile to the nearest Scottrade office, open an account for 500 bucks, and invest in a universe of funds and ETFs practically for free, whereas a company with hundreds of employees and millions of dollars to invest will quickly settle for some totally sucky plan with 12 fund choices that all charge 1-2% management fees.

So yeah it could often be better but you got to remember that's a 1% or 1.5% cost in order to get a 12 or 15% return, tax-advantaged. Benefits way outweigh the costs.

People who obsess about costs lose their way, and I am certain there are plenty of fee-averse people who would to the core rather be poor and never have paid somebody, than be stinking rich but have to share 1% of their assets with "Wall Street". Costs in isolation don't matter, what matters for retirement funds is net after-tax return.

Good for you!

1. 12 or 15% return - What time period are you living in? 1999? Those days of returns are long done, especially in the mutual funds provided in most 401(k) plans.

2. People who obsess about costs lose their way, and I am certain there are plenty of fee-averse people who would to the core rather be poor and never have paid somebody, than be stinking rich but have to share 1% of their assets with "Wall Street" - I don't consider myself fee adverse. I have a HUGE problem with the insurance/401(k) companies charging the fees and make the participant jump through hoops to find them. Also these companies are not "Wall Street". These are private companies.

When someone buys a house he or she will probably spend hundreds of thousand dollars in interest. Does that person have a choice in what interest rate they pay? Of course! They can work on getting their FICO scores higher, shop around for the lowest interest rate, etc. When someone invests money for retirement do they have a choice in the fees they pay? Of Course! They can hound their HR department to move to a less expensive 401(K) plan, invest in an IRA or Roth IRA, put money into a taxable account, etc.

When you say "Costs in isolation don't matter, what matters for retirement funds is net after return", that is an insult to me and most investors. Whenever someone charges me over the life of my retirement fund several hundred thousand dollars or millions it devalues who I am. That money is my time and energy spent.

Back to the article. If you add in just 1% for the typical 401(k) fees, the taxable account comes out ahead.

OK, I'll quit arguing HHHA. I most definitely want you to avoid the 401k and invest your money in unqualified accounts.

how does a taxable account come out ahead if you are in the 33% bracket?

Using the scenario that the article stated “Note: Assumes 28% federal tax bracket, an annualized 8% return and 1.79% dividend yield and a 15% capital-gains tax rate on the taxable account. Year 20 taxable account value reflects annual taxes paid on earnings” and if you incorporate just a 1% fee annual fee (which is the typical 401(k) plan fee), the taxable account plan comes out ahead. You will have $27862 under the 401(k) plan and $28950 under the taxable account.

If you are in the 33% federal tax bracket when you retire you will have $25927 under the 401(k) plan and $28950 under the taxable account.

Kevin - looking back at my posts, I was argumentative and condescending. I apologize. I just get very passionate about this subject!