Thursday, December 20, 2007

401K Discussion

One of the most popular vehicles in so-called investing is the 401 (K). Many people contribute to it, but few of those benefit or will ever benefit. So here is some of the features when digging a bit deeper.

1-It is only tax deferral or even more accurately, income deferral.

2-Do you really want to be in a lower tax bracket in the future, if not, then why defer the inevitable with the tax on your 401 (k).

3- The Goverment can change the rules and has.

4- An exise tax called the Sundry tax was initiated in the 90’s for those that had “too much money” in their 401 (K).

5- Limited investment options.

6- When can you access the money?

7- Does it have anything to do with or does it enhance your Soul Purpose?

8- How does a partnership sound that goes like this: You put in the money, figure out how to make the investment work, if you want out there will be a penalty, and the amount you get to keep depens on your partners economic circumstance? This partner is the government.

Just because it is popular doesn’t make it your best choice.

I'd like to hear your thoughts.

References: Garrett Gunderson



The Creators Corner said...

Finally a controversial article! I love it- How about this argument, Come and work for me and I'll pay you 50 per hour and I'll give you raises every year, but I won't pay you regularly, in fact, I won't pay you until you are 60 years old and oh yeah, I hope to pay you the 50 dollars per hour with raises, but no guarantees. But you don't have to pay any taxes (because you're not getting paid any money) and it'll probably be enough to retire on??? When would you like to start- I mean come on it's free money!!!

Adam said...

Hey....who said that?!?

The Creators Corner said...

You are leaving the most important part of the 401k equation out! YESCO paid $9,000 on a $15,000 contribution last year. Even if you do take the money out early and you get taxed and have a small penalty. You just made 60% on your money. What value could you create with an additional $5,000 next year? ($9,000 minus taxes and penalty) Maybe its a way to make some quick money, even with taxes and penalty's.

I found an article promoting 401k's. I can't quite figure out the math yet but here is what they said: Let's say you pay $6250/year starting at age 25 to a 401k. Not including profit sharing, you will have earned $1.54 million by age 65 (assuming 8% annual return). Your $250,000 investment turned into $1.54 million. Now include a modest profit share of $1,000 per year. Your investment goes up to about $1.8 million. (source: money magazine jan 2007)


The Creators Corner said...
This comment has been removed by the author.
The Creators Corner said...

First off, you can't just take out money of your 401K, when you put money into it, you give up control of it. You can borrow against it, but that's no different from borrowing money from the bank. In the example of putting 15K into a 401K and receiving a match of 60% (9K) all you would be doing is borrowing against 24K at a pretty high interest rate. Again, there are much cheaper and better ways to get money.

#'s can be deceiving and saying that a we received a 60% match last year is very deceiving, here's an example:

If I put 10,000 per year in a 401K plan and my employer matches 50% (which would be a lot higher than the average YESCO yearly match, but we'll use it here). We'll also assume a 10% market rate of return. In 25 years I end up with a gross amount of $1,622,726. That's what is seen. More often than not, what remains unseen is the fact that upon withdrawing that money to use for my retirement income, assuming that I'm in a 30% tax bracket (which is an unknowable assumption), I actually end up with a net amount of $1,135,108. When we do the math we find that my actual rate of return was only 12.51%-much less than the 50% return that was shown in the beginning. The company match only affected my earnings by 2.51%, not 50%.

To debunk the myth that a 50% employer match equals a 50% return on investment, simply do the math to see the error. In the equation above, if you were to actually receive a 50% return on investment, over 25 years, you would end up with over $2.8 BILLION Dollars.

Don't get me wrong, an employer match is definitely better than no match at all, but it's not nearly the benefit that is purported to be. Additionally these types of investments get us stuck in the scarcity mind frame and of accumulation rather than helping us to focus on creating value and abundance long term.


The Creators Corner said...

Matt and I have had some good discussions about this. Sorry for not posting.

We found out that you can withdraw from your 401K plan and you will receive the money you have put in, plus interest, plus the Company match. You will keep 100% 0f the company match if you are fully vested in the plan (which means 5 years in YESCO's case). But, you are taxed on the money and will pay the penalty fee of 10%.