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to start a 401(k) or not

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to start a 401(k) or not

 
Old 01-02-2014, 08:23 AM
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If you have large expenses ahead of you putting money in a retirement account may not be the better option if it means you're going to miss out on a good deal for a house because you don't have the cash for a downpayment. Especially considering that your employer doesn't match any contributions. Plugging money in a retirement account is great and all, but your money is essentially trapped there until you retire. That doesn't mean you don't want to save for retirement, my point is simply that "it depends" on your situation.
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Old 01-02-2014, 09:14 AM
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Originally Posted by SlowTeg View Post
If you have large expenses ahead of you putting money in a retirement account may not be the better option if it means you're going to miss out on a good deal for a house because you don't have the cash for a downpayment. Especially considering that your employer doesn't match any contributions. Plugging money in a retirement account is great and all, but your money is essentially trapped there until you retire. That doesn't mean you don't want to save for retirement, my point is simply that "it depends" on your situation.
I understand what you're saying, but be careful with this line of thinking. The vast majority of people put off retirement savings thinking, "I'll start after I buy the house", or "I'll start after the car is paid off". But after you buy the house, you find maintenance is more than you expected, or the car needs a big repair, or you buy a new one. Next thing you know, you're 50 with a big mortgage, two kids in college, and no significant savings.

Seriously, pay yourself first. Start early. If you can't put something aside for retirement, and still afford the house, car, whatever, you need to ask yourself if you can really afford those things. Unless you really want to work for the rest of your life, or scrape by on SS in your sunset years, investing for your future should be a priority.
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Old 01-02-2014, 09:58 AM
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Originally Posted by jeffbrig View Post
I understand what you're saying, but be careful with this line of thinking. The vast majority of people put off retirement savings thinking, "I'll start after I buy the house", or "I'll start after the car is paid off". But after you buy the house, you find maintenance is more than you expected, or the car needs a big repair, or you buy a new one. Next thing you know, you're 50 with a big mortgage, two kids in college, and no significant savings.

Seriously, pay yourself first. Start early. If you can't put something aside for retirement, and still afford the house, car, whatever, you need to ask yourself if you can really afford those things. Unless you really want to work for the rest of your life, or scrape by on SS in your sunset years, investing for your future should be a priority.
Fair point. I agree to an extent, but the downside is that 401(k)s and IRAs are very limited. If the government really wanted people to save for retirement they'd open these funds up to any investments. Depending on what your path is in life, if you need that capital to start your business, having it trapped in a retirement account puts you in a bind. Now however, if you're largely a W2 wage slave then a 401(k)/IRA may be a safe bet. "Saving for retirement" means different things to different people, be it investing in future income/etc. If you're not saving or investing in the future, I'm not advocating that at all. Paying off some debt or a car isn't an excuse not to save for your future/retirement, but saving it for some investment makes sense.

For example, if you're a recent grad who gets out of school and you "max out your retirement" every year you might be stuck and not be able to buy into or start a business. Of course with everything you have hard limits/rules and have to make decisions, but I very much disagree with the default "max out your retirement first" mantra, especially if there's no company matched 401(k). As with all investment prospectuses, I like the line "past results are no indicator of future returns," although many love to tout how X has returned Y% over some cherry picked number of years.
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Old 01-02-2014, 11:06 AM
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There's always an expense on the horizon, so waiting until after it means you never get it started.

As someone said, the after tax change in your check isn't as much as the contribution. You can put away something, and you start to live on your NET pay. Just like today, if you make $50 K, you don't spend $50 K (your GROSS pay), you learn to live on what you have after taxes and other payments, aka your net pay. This is just one more thing that comes out before you have the ability to spend.

If you're in your 20s, I doubt maxing out at $17,500 is an option for many people. However, putting in a few % now is better than nothing. If you get an increase in salary next year, add a %, then another, etc... The union $3, is probably near $6,000 for the year, which is probably more than many matches for a high percentage of the population and in itself is a great start.

I'll also agree with JeffBrig- " If you can't put something aside for retirement, and still afford the house, car, whatever, you need to ask yourself if you can really afford those things." You need personal discipline to make the decisions that meet your goals. They are you're goals, and we can't tell you they are right or wrong. Just make sure your goals, financially, socially, the fun factor, etc... are aligned with how you manage them. We've all seen the commercials-- "This is Barry, he owns way too much house, has 3 cars, an in ground pool... How does he do it? Well, he's in debt up to his eyeballs!"
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Old 01-03-2014, 10:24 AM
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Originally Posted by Heyitsgary View Post
There's always an expense on the horizon, so waiting until after it means you never get it started.
Gary, I'm not referring to an expense, but an investment. Those are two ENTIRELY different things. I think some of the "you need to save for retirement" folks misunderstand this. I have relatives that say the same thing. If you've ever looked into an SBA loan or business loans you'd understand that having more cash up front helps considerably. If you have little cash, they want to collateralize the loan against anything and everything you own (which would keep me up at night). This is the scenario where had someone not stuffed all their money in a retirement account, they would've been better off.

Other things like rental properties to purchase can be a gigantic headache when trying to use IRA funds. I'm all for saving for retirement, be it having a designated retirement account or simply funds "earmarked" for retirement.
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Old 01-03-2014, 02:02 PM
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But you WROTE "expense". If you wrote that having "liquid assets to deal with investment opportunities", I could agree with you in principle.

I think individuals need to examine their own situation to make the decisions you're describing. I could save outside of a 401K or an IRA, and would get taxed at my rate now, which is presumably (and a big presumably) higher than it will be when I retire.

Investment choices also depend on what risk you're willing to assume. I currently have no mortgage, no car payments, and other than monthly payments, live debt free. I could easily mortgage my house at a low rate, and invest that money and (again) presumably make more than the interest expense. However, my risk tolerance is fairly low, so I choose to do investing or experiencing life with the money that would otherwise go to a mortgage and not tie it up in something. Other people are willing to not have the same cash flow, and try to squeak every last % they can with the tradeoff of short term volatility and liquidity.

The OP didn't really describe the 'other ways' he's looking at, so we can speculate all we want. I personally however, will still suggest that putting 'something' into a 401K when in your 20s is well worth it later on.
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Old 01-05-2014, 07:15 AM
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Good point and my mistake. I guess calling it an "expense" isn't accurate but rather for other investments. Ya certainly putting some away is a good idea for everyone in a retirement account, I was simply cautioning about dumping every penny in there because of the tax "benefits."

I'm very risk averse myself which is why I choose to not have any debt outside of my mortgage. Unfortunately in life you often times don't have a choice but to get a loan at certain times in your life. I don't like debt, but the banks run the show, and we play by their rules.
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Old 01-06-2014, 01:17 PM
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401k might be pre-tax but it is taxed once you retire as regular income.

I'd say also open a ROTH IRA and contribute the maximum per year if you can ($5,500/year) Withdrawals are tax free but then again you're investing post-tax dollars. Good to start early though and take advantage of the power of compounding interest.
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Old 01-06-2014, 04:36 PM
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Originally Posted by Heyitsgary View Post
But you WROTE "expense". If you wrote that having "liquid assets to deal with investment opportunities", I could agree with you in principle.

I think individuals need to examine their own situation to make the decisions you're describing. I could save outside of a 401K or an IRA, and would get taxed at my rate now, which is presumably (and a big presumably) higher than it will be when I retire.

Investment choices also depend on what risk you're willing to assume. I currently have no mortgage, no car payments, and other than monthly payments, live debt free. I could easily mortgage my house at a low rate, and invest that money and (again) presumably make more than the interest expense. However, my risk tolerance is fairly low, so I choose to do investing or experiencing life with the money that would otherwise go to a mortgage and not tie it up in something. Other people are willing to not have the same cash flow, and try to squeak every last % they can with the tradeoff of short term volatility and liquidity.

The OP didn't really describe the 'other ways' he's looking at, so we can speculate all we want. I personally however, will still suggest that putting 'something' into a 401K when in your 20s is well worth it later on.
and for the people that are that risk averse, i say that without risk there is no reward. I agree that you should invest as much into your 401k as possible but you need to be liquid enough to also invest in future investments if you are interested in stuff like that. For the non-business/financially inclined people i say do the 401k since you can't make money off your money your self.

For many other people real estate & other investments (some much riskier) will pay out much better even in the long run. IMO your 20s are when you take more risks than the average older investor.
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Old 01-06-2014, 04:37 PM
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Originally Posted by llckll View Post
401k might be pre-tax but it is taxed once you retire as regular income.
People love to mention this, but than fail to mention the fact that your money grows pre-tax (compound interest here) & usually you are in a much lower tax bracket.
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