Just started my 401k, thoughts?

[Benben]

Brett, the issue is starting early vs. late and the power of compounding. The S&P is up 21% this year. If you have only been putting into the R401K then you are actually up only 5% from where you could have been (assuming an average tax bracket of 17%...21-17.) You lost out on 17% in this insane bull run we are currently in. If one started early in their lives and didn't wait until they were 50 to start saving, that lost 17% this year alone is an incredible amount of money when you factor in compounding!

The Roth 401K is a nice addition to a savings plan that's been in place for awhile. I started mine last year (already had 6 years savings in the 401K) when the wife informed me we will be taking a very long European trip when I retire. Fine I'll pull out a huge chunk of change 20 years from now for that 1 trip and not worry about taxes that following April. I put in 3% but will probably drop it to 1% in a year or two from now.

Compounding is the name of the game folks!

 

[brett636]

Brett, the issue is starting early vs. late and the power of compounding. The S&P is up 21% this year. If you have only been putting into the R401K then you are actually up only 5% from where you could have been (assuming an average tax bracket of 17%...21-17.) You lost out on 17% in this insane bull run we are currently in. If one started early in their lives and didn't wait until they were 50 to start saving, that lost 17% this year alone is an incredible amount of money when you factor in compounding!

The Roth 401K is a nice addition to a savings plan that's been in place for awhile. I started mine last year (already had 6 years savings in the 401K) when the wife informed me we will be taking a very long European trip when I retire. Fine I'll pull out a huge chunk of change 20 years from now for that 1 trip and not worry about taxes that following April. I put in 3% but will probably drop it to 1% in a year or two from now.

Compounding is the name of the game folks!

Your math is simply wrong, and I can show you why. You are assuming that the contribution amount for a Roth account is based on net pay since its after tax and the contribution for a traditional account is based on gross pay. The truth is both are based on gross pay, but with the Roth the taxable portion of your gross pay remains unchanged while the taxable portion of your paycheck is reduced when contributing to a traditional 401k. So all things equal if I am contributing to a Roth and you are contributing to a traditional 401k my paycheck will be smaller than yours because my taxes are higher, but my 401k contribution will be the same as yours. This means that come retirement 20-25% of your 401k will be going to the government as you withdraw it while I will get all of my 401k contributions back plus growth tax free.

The only real point to argue is whether tax rates will remain the same or will be higher in the future. If tax rates are higher in the future as I believe they will the ROTH will be the account to have, while if taxes remain the same or even go lower(highly unlikely) then the traditional account wins out. When you figure in our pension and the fact that if we get any social security part of that will become taxable, you are adding fuel to the fire by having a purely traditional 401k to draw on since everything taken out goes through the IRS before you see a dime.

 

[Jackburton]

Your math is simply wrong, and I can show you why. You are assuming that the contribution amount for a Roth account is based on net pay since its after tax and the contribution for a traditional account is based on gross pay. The truth is both are based on gross pay, but with the Roth the taxable portion of your gross pay remains unchanged while the taxable portion of your paycheck is reduced when contributing to a traditional 401k. So all things equal if I am contributing to a Roth and you are contributing to a traditional 401k my paycheck will be smaller than yours because my taxes are higher, but my 401k contribution will be the same as yours. This means that come retirement 20-25% of your 401k will be going to the government as you withdraw it while I will get all of my 401k contributions back plus growth tax free.

The only real point to argue is whether tax rates will remain the same or will be higher in the future. If tax rates are higher in the future as I believe they will the ROTH will be the account to have, while if taxes remain the same or even go lower(highly unlikely) then the traditional account wins out. When you figure in our pension and the fact that if we get any social security part of that will become taxable, you are adding fuel to the fire by having a purely traditional 401k to draw on since everything taken out goes through the IRS before you see a dime.

Very well explained.

 

[UpstateNYUPSer(Ret)]

What affect, if any, would rolling your 401k over in to a Roth IRA upon retirement have upon the tax hit?

 

[3838373]

NO matter what investment option you decide with I recommend everyone here MAX out it.... We are fortunate to have high paying careers which should easily allow all of us here to MAX out our 401k.

 

[Brownslave688]

What affect, if any, would rolling your 401k over in to a Roth IRA upon retirement have upon the tax hit?

U would want to roll into a traditional IRA. Otherwise (if even possible) u would take a larger tax hit than you would have time to earn back in growth. This could make sense if you were say 30 and had another job with a 401k that your no longer at. At 30 you would have plenty of time to earn back the tax hit. At retirement age probably not.


Also not a high percentage of upsers but certainly some need to keep in mind with our salaries rising and more spouses working some of us may not be eligible for a Roth IRA. This would make putting some money away in a Roth 401k a very smart decision.

 

[brett636]

NO matter what investment option you decide with I recommend everyone here MAX out it.... We are fortunate to have high paying careers which should easily allow all of us here to MAX out our 401k.

Agreed, regardless of which way you choose to save atleast you, and others here are doing so. Too many people wander into retirement hoping to have an income to sustain themselves when they took little or not action to ensure that they would. A pension isn't good enough, and neither is Social Security for those lucky enough to get it. As long as saving for the future is taking place it makes that future something to look forward to rather than dread.

On another note, I found this Roth versus traditional IRA calculator(Roth vs. traditional IRA calculator) and my findings were interesting. I know its for IRAs and not 401ks, but the tax treatment is pretty much the same. I had a hard time coming up with a scenario where the traditional made more sense. Tax rates can be adjusted both before and during retirement and even when the rate is set significantly lower in retirement the Roth still has move value. I think this goes a long way to settling this debate on Roth versus traditional considering these are the numbers and they simply don't lie.

 

[Squint]

I DO NOT recommend doing what I did, although I made big money doing it. I started in 1991 putting 5% of before tax money into the S&P 500, 100% of my money. When I started the S&P was 397. It was easy at first as the 90's were booming. Does anyone remember the Magellan fund? I remember one quarter I made 9 grand in that fund. Man those were the days. A couple of years I put 11% before tax money in. Yeah, I'm a wild one. I've since scaled back as I've retired but still have 40% in the S&P 500. The last couple years of work I put 2% after tax money away, of course in the S&P 500. I loved the thrill of a 1% rise in the stock market and making boo koo money. I still love to watch the stock market on CNBC and my wife and I have opened up some ETF's. We actually doubled our money on Bank of America in the last few months. We need another new hot tip. We were looking at Twitter but have decided to wait on that and see.

 

[Jackburton]

What affect, if any, would rolling your 401k over in to a Roth IRA upon retirement have upon the tax hit?

If you're converting, you would pay regular income tax for that year. One suggestion that I have heard for people doing it, roll it gradually, especially during years your income is low to avoid being bumped into another tax bracket.

 

[sox]

Go Roth young person!

 

[instantK]

Does anyone rebalance every year or just pick the automatic rebalance?

 

[Just Numbers]

If I had it to do all over again everything would be in a Roth. Just remember that the lifestyle you live when you retire depends upon the investing you did along the way!

 

[Maple Grove MN Driver]

Max it out
Walk at a brisk pace, work safe and work a lot of OT.


Easy Money

 

[morgahorse]

So I just found this thread and read it and now I'm starting to wonder how do you tell if is there something I can read to see which are good investments in the 401k that I should be having my money go to? Is there a good or bad way to spread my money out? I have 10% pre tax going every week but it just seems to be growing slowly or is that normal at first?

 

[pretender]

Hopefully you are still young, since you have just started funding your 401K. If so, that alone will have huge impact on the amount of your fund by the time you retire--putting you ahead of your peers. Your investment options range from one of the Bright Horizon funds, to setting up a Self Managed Account and picking your own stocks/funds. Judging by your question, I would recommend a Bright Horizon Fund, and be patient.

 

[UpstateNYUPSer(Ret)]

The Bright Horizon funds are ideal for those who want to set aside money but don't want to be bothered with having to manage their investments. Choose the BH fund closest to your retirement year. Keep in mind that BH funds tend to be aggressive early and then become more conservative as it nears the target year. I chose the BH 2025 because, even though I will be retiring in 2019, I tend to be more aggressive in my investments. I also chose the BH as I don't have the time, interest or education to manage my investments on my own. "Set it and forget it" is my mantra.

I have 25% going to my traditional 401k.

 

[retiredTxfeeder]

When I started with UPS in 1976 all that was available was "the thrift plan" it was $6.00 a week and it was all the company offered. $312.00 a year. supposedly it was tied into profits from the newly formed air services..next and second day air. Everyone I knew just let it ride. Out of sight, out of mind. Some years that fund paid over 30% of the compounded amount.They did away with that fund many years ago. Can't remember when they first started the 401k availability. I think someone earlier said it was about 1990. I started off easy, I think 6%. I realized quickly that it was a pretty good thing for me. The last 20 years or so I maxed out my deductions. I wish I had done it sooner. Originally I had it all in the S&P 500 till it started going downhill. This from a 38 year employee: deduct as much as you can afford at the time. Keep your eye out when they send you your statement. Look at what is working and what's not. I believe you can change your funds to a different fund every quarter simply by making a phone call. My son is a shifter at our hub. It's the same advice I gave him. Good luck in your financial endeavors.

 

[Jackburton]

You can switch fund allocations online without limit I believe. To actually switch allocations that are already funded do have limits though.

 

[olroadbeech]

3 percent is a good start. you wont even miss it. after 6 months raise it to 5-6 percent. then more and more until you are maxed out. having over a million dollars in your 401k after 30 years is pretty good.

go to the dave ramsey investment calculator to see how much you have. you can press in the amount you invest each month and the investment return ( which has averaged 8% over the last 40 years ) and the amount of years.

mine is maxed out and will be 1.3 million in 11 more years.