Can a 401k really be relied on to retire

[E150GT]

"They" all say sock away this much a month for 45 years and by the time you retire you will be worth millions. Is that realistically true? I am 25 now, and have been contributing for over two years now. Is it a realistic goal for me to retire at 65 or whatever and be financially independent, or is this accomplished in theory only? It seems every recession is a major setback to all the gains made in good times. What do you guys think or know about the truths about the 401k?

[TMAllison]

The simple answer is that tax free money is the best type of money to have and that having time on your side historically works in the long term. You'll want to ramp up (or at least NOT slow down) your contributions during every recession in your lifetime.

You'll want to educate yourself as you age to lessen risk as you get closer to retriement. Be smart by 40.

When to retire, and retiring comfy, means something different for every person.

[tankdriver]

What I think is that every decade or so, there will be a market 'correction' wiping out a significant chunk of people's retirement savings. 401ks haven't been around that long, but we've seen it happen twice already.
I suggest you retire before the one that happens when you're getting close to that age.



Seriously, it's all about where you put the money. There's stuff that doesn't return much, but carries no risk, and there's stuff that returns more, but carries risk. Personally, when I gamble (and investing is gambling), I prefer to put my money on my skills, not some so called expert.

[kknudson]

Yes :

Don't go crazy with investments, when unsure used solid fixed income ie money market/t-bills/CDs etc, rather than something you don't understand.
Although the choices are sometimes very limited with the employer 401Ks.

BUT
Don't short change yourself either. Make sure u have enough cash to enjoy life, buying a house, for emergencys, whatever.
God forbid you don't make it to retirement.

Remember for most things you can't with draw from an IRA, once you leave an employer you normally roll the old 401K to the new employer or to an IRA. You can borrow from a 401K (sometimes) but the rules are tough, but not from an IRA.

[Hatterasguy]

They don't look that appealing to me, I doubt I'll ever have one. Here are my 2 cents, and thats probably what its worth.

What gets me with 401k's is the money is taxed on the way out but not the way in. I think its a pretty safe bet that taxes are only going to go up, so I rather pay them now than later. Personaly I think something like a Roth IRA would be a good idea, totaly seperate from your employer. That way as you change jobs it won't be affected.

OTOH one of my uncles has always just bought bonds, he is currantly still doing well. Now you may say the return on bonds sucks, but if you own enough its not bad. He also hasn't lost anything. Eventualy when I get back into the market I'll probably buy bonds too.

[E150GT]

I am too skeptical of 401ks as it seems all your gains just get wiped out by recession
I am sure to keep my 401 as it has an emplyer match and you can't beat that. I was also
Contemplating a roth ira as a supplement to my 401k as well as individual stocks too
You just hear so much about people having to postpone retirement due to economy and then
There's people that do very well on just bonds. I am trying to get a feel for what actually works
And not fall victim to a sales pitch and all the recent ads for investment firms doesn't make it any
Easier to decide what's best.I have read a lot of books and it seems you could rely on cup handles
Or the buffet method. Just trying to decide what's the best way to go about this.

[Skid Row Joe]

Originally Posted by E150GT

"They" all say sock away this much a month for 45 years and by the time you retire you will be worth millions. Is that realistically true? I am 25 now, and have been contributing for over two years now. Is it a realistic goal for me to retire at 65 or whatever and be financially independent, or is this accomplished in theory only? It seems every recession is a major setback to all the gains made in good times. What do you guys think or know about the truths about the 401k?

I opened my IRA with the legal maximum of $600.00 the year when they first came out. I was in my early 20s and self-employed. Today, 33 years later, I'm still self-employed and have a collection of self-directed IRA, SEP-IRA, and Roth IRAs. I'm still dumping in the maximum every year. Workers with 401Ks can have a lot more advantages than an IRA. They are based on your salary as to how much per year you can put away, and of course some employers still match up to an employee's annual contribution. It's a no-brainer, since you are contributing money painlessly a little at a time so to speak. There will always be recessions....this one we're in may not ever go away, who knows. What's certain is that if you don't provide for yourself you will be a ward of the state when you can no longer work if you're broke. There are only two ways to get ahead for yourself over time. One of the ways is to amass a fortune in your savings and investment instruments, and the other is to get ahead with rental real estate property. Investment real estate is now eligible as an IRA. Of course there is a third way, and that is becoming some sort of government servant for most of your life and get a free pension for life.....if you have the stomach to do it. I'm not that servile a person to give up on myself as many do. Frankly, I don't need somebody telling me what to do for a paycheck. LOL!

[unkl300d]

try asking dave shafer 'the coach'

shaferfinancial.com/

anyway its good you are starting young,
once you get an asset base and someone to spend it all (wife) , what left from da thief (gov''t) look into asset preservation vehicles.

[Da Nag]

Originally Posted by Hatterasguy

What gets me with 401k's is the money is taxed on the way out but not the way in. I think its a pretty safe bet that taxes are only going to go up, so I rather pay them now than later.

When working, most folks are in a higher tax bracket than when they pull the money out. Since every nickel you put in a 401k reduces your current taxable income at a likely higher rate, that's often a good thing.

Additionally, one can escape some tax altogether in certain circumstances. I'm earning my pre-tax plan money in CA, but will be living in WA when pulling out these funds...which like several states, has no income tax.

[unkl300d]

Hey koileee, don't worry WA will probably have to bail out CA and incur income tax

[Botnst]

Investing is a risk -- one assumes that the investment income will be there on retirement.

Not investing is not a risk. If we don't invest there is absolute certainty there wont be investment income.

When you invest you are betting that you will live long enough to draw on the fruits of your labor. If not, your heirs will. There are no heirs to social security.

A 401k is a special breed of investment. In which your employer matches some proportion of your investment, tax free on investment. It's tax-free investment money that accrues through compounding to return a lot more money, even after tax on withdrawal, than what was invested.

Go look at any chart of any stock index over any 30 year period and you will see that the market has grown faster than inflation over that period. That means you are better-off sticking the money into an investment than under your mattress.

[SwampYankee]

Originally Posted by E150GT

"They" all say sock away this much a month for 45 years and by the time you retire you will be worth millions. Is that realistically true? I am 25 now, and have been contributing for over two years now. Is it a realistic goal for me to retire at 65 or whatever and be financially independent, or is this accomplished in theory only? It seems every recession is a major setback to all the gains made in good times. What do you guys think or know about the truths about the 401k?

No, Social Security will.








Whew, sorry about that. I'm not the brightest financial bulb on the tree but I like the idea of my 401k contributions coming out pre-tax and many companies match that contribution (our company matches up to 8%). The key is to shift your funds to more secure (less aggressive, lower return) options as you near retirement age. There's some risk in all retirement options unless of course you go the gov't employee route and get a pension because only the gov't can afford to piss away the amount of money a guaranteed pension plan requires.

Unless you plan on cashing out, at 25, they are only losses on paper. Think of them as buying opportunities. At least that's what the Koolaid makes me think.

[beevly]

2 main advantages with a 401K have already been stated:

1. Money going in is deducted from your taxable income. In your later higher-income earning years, this can save a considerable amount on your year-to-year tax obligations.

2. Money coming out is taxed at what is likely to be a lower rate, since you will likely be earning less after retirememnt and thus will be in a lower bracket.

Unmentioned so far is perhaps the best reason:

Your earnings in the 401K are not only compounded, but are tax deferred. Compounded earnings, over the long run, will likely exceed your original nominal contributions, and what you don't pay in taxes on those earnings is free to earn your fund more money, and the cycle repeats over and over. Do that over 30-40 years, and you're talking real money. My 22 yr old daughter has already started.

“The most powerful force in the universe is compound interest”. -Albert Einstein. There is actually a more powerful force: tax-deferred compound interest.

[kerry]

For me, rental properties have been a far superior investment to a 401k plan. Takes more work.
State employees in Colorado created their own retirement plan before Social Security came into effect. Very smart people. The heirs of the plan are future state employees. It's good to have state employees as your ancestors. Not quite as good as having Rockefellers, but damn close. Much better than having corporate managers controlling your pension plan. Little servility involved in my case. So my advice would be to find some good ancestors.

[cjlipps]

Originally Posted by E150GT

"They" all say sock away this much a month for 45 years and by the time you retire you will be worth millions. Is that realistically true? I am 25 now, and have been contributing for over two years now. Is it a realistic goal for me to retire at 65 or whatever and be financially independent, or is this accomplished in theory only? It seems every recession is a major setback to all the gains made in good times. What do you guys think or know about the truths about the 401k?

What many people do is wait until they're 65, sit down and plan for retirement and through the benefit of 20-20 hindsight decide what they should have done for the last 40 years.

Don't be one of those people.

There's a lot of good advice here. By all means, participate in your employer's 401(k) up to the maximum match. Don't leave free money on the table. In answer to your questions, yes, it's a realistic goal to retire comfortably at 65. You are talking about a 40 year span. However, every year you ponder and try to decide what to do is one less year for your money to grow.