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Originally Posted by neanderthal
in my companys 401k plan if you do decide to take out a loan from, the interest is payable to you as you are borrowing the money from yourself.
the balance of the acct is still the same, the net resultis you put more in it with the interest.
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Yes, you are paying yourself back the principal amount plus interest.
However, even though you are technically putting more money back in, the end result is that you are left with significantly less money.
Why?
Because the amount that you loaned yourself is not there, so it is not earning interest. You are therefore losing the compounded interest, which in the long run is an enormous amount.
Compounding interest has more of an impact on your return than you can possibly imagine.
Let me point out an example.
Let's say that you have a child, and on the day that child is born, you put aside $1,000.00 into a retirement account.
You never touch the money. Never add to it. You put it into a general stock index fund, i.e. the total stock market index (Wilshire 5000).
You put the money in a trust so that your kid cannot get the money until he or she retires at age 66.
So, you have 66 years of compounded interest.
To make the calculation simple, I am going to use an average return on the money of 12%, which actually is a little higher than the historical average return of the modern stock market, but it makes this illustration easy to figure in my head.
Your $1,000.00 will turn into $2,048,000.00.
Yes, that's right.
You are left with $1,000.00 of principal and $2,047,000.00 of interst.
So the moral of the story is:
DON'T TOUCH THE MONEY.