When does it (NOT) make sense to utilize a Traditional 401K plan?

[Maggie66]

Hello all and thank you in advance for your advice and suggestions. I have been a long time lurker of Saverocity (and the majority of the blogging websites that have been incorporated here), but have been reluctant to post as I consider myself to be heavily involved in the consumption of Saverocity knowledge. Making the self-imposed mindset switch from financial “noob” to an intermediate level has been a difficult task for me. As I’m sure you will gather from thoughts below, I’m not sure I should be allowed to shake the “noob” label.


My main question is: When does it (NOT) make sense to utilize a Traditional 401K plan?

I am really having a hard time finding an answer to this question. I know it’s been brought up on this forum before, but I wanted to explore it in greater detail. Case Study: my parents, who hail from the rural Midwest, have worked their entire lives day in and day out. Both now have medical conditions (arthritis, joint issues, back issues), but are still 7-9 years away from retirement. How much value does the 401K offer them at that point? Sure, one can argue that it keeps them “living” self-sufficiently, but they have forgone travelling or purchasing luxuries throughout their life because it wasn’t affordable. Now that they are old, travelling (if at all) with their disabilities will cost them much more than it would have if they were young and healthy. I’m pretty sure a hiking trip to the Grand Canyon is out!


Maybe I’m paranoid, but I am sincerely worried about pushing my earned money out so far ahead. Will I be disabled? Will I die? (I didn’t check the statistics). Basically, will I be healthy enough to enjoy the money that I have packed away for so long? What is the true cost that I am paying for not being able to enjoy life (more) now? Will a $1000 Grand Canyon trip today cost $10000 when I’m 67, hobbled, and require a ATV-like wheelchair? I know that I am in the minority (and definitely missing something) because I cannot find much of a debate via google on this topic. Every source exclaims, “Max out your traditional 401K, max out Roth IRA and max out HSA!”


I do understand the usefulness of the Roth IRA. Having the ability to take out my contribution penalty free at any time is extremely important to me. This is something that I will definitely begin utilizing. But betting 37 years from now, when I can finally tap into my 401K, that I will get the same enjoyment, for the same cost, from my travels seems too much of a stretch for me. My family (including my wife’s) has seen too many early deaths and illnesses and we want to enjoy the “good years” with our family. Is it worth foregoing the 401K? I honestly do not know.


Two simple answers I foresee would solve my dilemma are:

1) Earn more money so that I can take advantage of the 401K and travel at the same time

2) Cut monthly costs in order to save for travel/luxuries


I originate from a rural Midwest village and family. I still wear clothes that were purchased back in high school (I’m 30 now). My bike, which I used through college, was purchased as a high school freshman. My wife and I have one vehicle that we use for carpooling to work. I was taught to only buy something if I have the cash in hand. The issue is not whether we CAN put money into a 401K; it is truly WHETHER it makes sense for us to do so.


I wholeheartedly do not mean this to be a trolling thread. On the rare occasions that I do see my questions asked by others, they are typically deemed “conspiracy theorists” or “nut jobs”. I’m hoping to find someone with similar concerns and advice on how they dealt with this feeling. Am I truly alone? Thank you.

 

[TBB]

As a practicing financial planner, frankly, the answer is never. The 401k plan must suck absolutely so bad to say no to it and miss the tax deduction and hopefully some matching/free money.

Of course it would really help if you sat down with a professional to get a better comprehensive plan done as it is quite silly to give advice here not knowing A LOT more about your situation.

I require all my clients to maximize employer plan contributions. And I also tell them a lot to eat healthy and exercise and try to enjoy life before they get old. I may even throw a few tips related to travel rewards to lessen the cost burden because, umm, I know a few things about that area as well.

Not sure of your tax bracket but it is pretty hard to beat your tax bracket's immediate return on your money right away and then deferring the tax for many years.

 

[Maggie66]

Thank you for your response! It is great to hear from a professional on this subject.

Personally, the big positives of the 401K for me are:
1) Tax deduction
2) Matching employer contribution (free money)
3) Tax-free growth until retirement

One can find many online calculators and crunch the numbers to see how well that money could grow until needed in retirement (my favorite is firecalc). Frankly, I couldn't agree more that it is a slam dunk to stash money away IF I manage to stay healthy enough to make use of it.

As I reread my first post, I realize that my main question is this: How much more will activities that we delay into retirement cost us as opposed to now (or near future)? What is the "real" cost of doing that activity at an older age when our bodies have gone through some major wear and tear? I don't know if I've seen this pseudoanalysis performed before. I concede, one enormous (insurmountable?) challenge with this type of analysis is the "human" aspect, ie we are all different and will have wildly different ideas of what retirement should be.

I'm 30 years old now, making a 37 year bet is a difficult pill to swallow. My life expectancy according to the WHO is 77.4, that gives me a good 10 years to enjoy my retirement. Saving for 37 to live for 10 years doesn't sit well in my stomach. Does anyone know of an online resource that can do a comparison of foregoing a traditional 401K vs other investment options?

As a FYI, except for my first couple years out of college, where my goal was to pay off my student loans ASAP, I have deferred to the knowledge of the experts and always put enough into my traditional 401K to get the employer's match.

 

[Sesq]

At 30 you are making a 25 or 29.5 year bet since withdrawals without penalties can be made at 55/59.5. Is that any better? But basically the bet is that "I'll need this money later". This is just about the safest bet there is. But its not really a 25 or 29.5 year bet anyways since as you build up funds you will have the choice to save less along the way. I am 42. I have saved enough for retirement at this point. I could stop and odds are I'd have plenty at 60 or so. The more I save today means the less I have to save or work later.

The opportunity cost of missing out on something today is valid. But you don't get a reset button later.

 

[TBB]

I really like Sesq's reply. The beneficial effects of starting early and doing as much as possible to take advantage of compounding and tax deferral allows you OPTIONS as the years go by. If you redirect the money for current fun things making a bet you won't live that long, what happens if you do? Health care advances will likely continue to extend our life expectancies. The key is to have an overall plan and your actions are congruent with your values. I have a cousin who lives paycheck to paycheck, he will be serving me pina coladas in some swanky resort he will be working in (heck, I will have to fly him there as he would not afford to pay for it...yeah, he is the black sheep of the family!). The key is to strike the right balance between being responsible to have enough to live comfortably after you are no longer working AND having a hell of a time WHILE you are working!

 

[redbirdsj]

Unless you have the inside tip on next week's boxing match (which raises other issues), there is almost no argument I can think of to not put in money to get the employer match. You could take that money out at any time, pay the penalties and taxes, and still come out way ahead.

Also, look into alternative ways to pull your money out tax-free or with lower consequences - e.g. through Roth IRA laddering or SEPP. This may give you peace of mind to stash away that money know it is somewhat accessible in the future

As for investing other money in retirement accounts, yes it's a balance between living now or later. I'm personally of the opinion that more material comfort now won't increase my happiness, I have more than enough miles/points to travel wherever I want if I can find the time (my true passion), but what I do think I will truly enjoy is more time and freedom when I'm older.

 

[Matt]

There is so much good advice here that I almost don't want to get involved! One thing I'd point out from reading your first post (you too went back to think about it too)

The issue is not whether we CAN put money into a 401K; it is truly WHETHER it makes sense for us to do so.

Of course, I don't know your full situation, but I think this isn't perhaps accurate. I can't see a situation where someone would ask this question unless in reality it is a sacrifice- IE if you put the money in you cannot use that money today. For a person to be able to fund it regardless, and only be worried about 'making sense' then that is actually a wealth transfer/ estate planning question where you have enough money to live your life to the max today, and have left over money.

While I understand your point about the cost of things like the Grand Canyon tour in the future, what about the cost of that Wheelchair/hovercraft? Or a good steak meal? You have to be able to live even if you are hobbled and old.

As an digression, I remember when I was really young I thought to myself, if I ever get disabled I would just kill myself, I couldn't live like that. I later realized that life is a gift, and even old and broken, (or young and impaired) we have to make the best of things, I learned that from losing someone very close to me. So while some might say that they can only enjoy things when they are young and able, I wonder about the truth in that. Could the money saved today pay for art classes, or music, or trips to the opera, anything that I could enjoy? I think so.

Now, I do understand that I push for 401(k) and IRA and HSA ( the latter when appropriate) but I don't suggest you stop living today to do that. The essence of this site is finding way to beat the system everywhere - slam your 10K into the 401(k) and then go travel using credit card points (carefully!) the real thing we need to eliminate is wastefulness. If you elect to forgo the retirement savings I think it is more likely you will introduce waste into your budget. By which I mean if you had $5000 of disposable income and you spend $4000 on travel that last $1000 might just get frittered away thoughtlessly (the $4k isn't a waste, though I bet we could do it cheaper!)

Most importantly, and something that I myself am most guilty of is that you need to be 'present' today. There is no point in throwing everything you have at living for the 'NOW' if you aren't really present in it. I find myself plotting, planning, thinking too much about the next thing to enjoy the now. I joke with my wife when we both do this, the time we catch ourselves doing this the most is when we are discussing where to go for dinner while we are eating lunch

As for your calculator about the difference between a 401k and 'not' - its undeniably massive. You'd start off the year with a boost equal to your tax rate+employer match, and it would compound for decades- that's a game changing amount of money.

 

[Fortension]

In my mind, the worse case scenario isn't dying before you can spend your 401k, it's living much longer than you expect without any money.

 

[Maggie66]

Thank you all for your thoughtful responses. What I take away from this discussion:

Live a balanced life (kind of simple) - I have no illusions about my current life situation. My wife and I pull in ~$124,000/year. We made a concious decision to purchase a condo in downtown San Diego (~500K, 3.99%), in which we put down 23% in order to avoid PMI and a jumbo loan rate. This decision was made knowing that this was our luxury purchase and the majority (if not all) other "extras" will take a back seat for the near future. We are young and wanted to experience urban life before the kids start to arrive. We have been in our home for 1.5 years now, and will be taking our first (couple) vacation at the end of this year. Little to no restaurants (living downtown makes happy hour timing possible every now and again), no frivolous fashion purchases, single aged car for carpooling to work, etc. As a comic side note, since we bought into a highrise condo complex downtown, my wife and I joke that we must look like we're always coming/going from a camping trip . We drive our beater car into the fancy underground parking lot filled with Mercedes, BMW, and Teslas; open the trunk and struggle to carry our Costco bulk groceries to the elevator and into our home. So to Matt's point, right now we can put money into retirement plans, but the luxury of our condo prohibits any additional luxuries/vacations...it is a sacrifice. If I want more fun: 1) Make more money 2) Increase manufactured spending techniques 3) Cut out additional expenses. I will not be reducing my retirement contributions at this point.

One thing that I have failed to mention that contributed to my original post is that my wife and are extremely close to our families; a unique relationship from all other families I have encountered. My family is back in the midwest, but hers is here in the same city. Every Sunday is considered "family day" and we drive to suburbia to spend the entire day with family. Each family member's birthday is celebrated (home cooking or cookout at the park) and each holiday (halloween, christmas, thanksgiving, fourth of July, etc.) together. Our out-of-state vacations (all but one) have been spent in the Midwest visiting my parents. This eats up any funds put aside for "new" vacations because flying home to see my family is mandatory.

My wife moved here at the age of 17 from a middle eastern country. Her family was poor; sewed their own clothes, ate only potatoes/basic grains or meat scraps, no vehicles, on-and-on. They lived more frugally than I ever would have imagined before meeting them. My wife entered US high school as a senior, learned the English language, took health class with the freshmen boys, but still managed to graduate on-time from a prominent university. This was a brutal time for her. I came from a poor midwestern family; my father grew up across from the village landfill and he worked so that I could grow up several turns (can't say blocks) away from that same landfill and go to college. Our family has overcame some incredible struggles already. I can understand the point of view of someone coming from her country, there is a much higher probability of not living long enough (no advanced medical treatment to sustain life available to "middle-class" people) so go ahead and live life now. But, as several of you have pointed out already, chances of survival well into retirement in the US is very likely.

Due to our parents' troubled history combined with the fact that we are all so close, as our parents are near retirement they suggest (push) that we should take mini-family vacations to places like Zion, Sedona, Grand Canyon, etc. Its hard to say no, as the trip itself will be very cheap due to carpooling, splitting of hotel, and other related costs. But, as I have already mentioned, the cost to do these things would mean giving less for retirement. We want to spend time with our parents. They did not have the opportunity to take these vacations when they were younger. We won't have this opportunity later in life because they will be dead. It appears as if the best time (health still permitting) for our family as a whole to travel. Decisions, decisions.

I originally got into the credit card/manufactured spending game in order to use the rewards as a fund for family vacations/luxuries. As to my original post, I am struggling with saving now or spending at these next few years on family trips while the family is still able to go.

Partly based on the thoughts I have seen here, I am hoping to ramp up my manufactured spending in order to come up with the difference for additional luxuries beyond our home. Heck, I will be finding a way to fund a Roth IRA to give myself access to money if I need it sooner than planned.

I apologize for the long post and realize it doesn't add a whole lot to the conversation.

 

[Matt]

It's your story so it adds plenty to the conversation!

A couple of points to look at:

• Salary, 124K married filing joint? Would put you well into the 25% bracket.
• Mortgage, 23% of 500K means a $385K loan at 3.99%, monthly payments of around $1835. In the early days as you say you are, due to the amortization schedule you should be able to deduct about $14,000 of mortgage interest per year also - which will boost up your Net that we get to soon.

Let's imagine you allocated $35K into 401ks, even without employer matching... You would be getting a $8750 tax deduction, and your new gross salary would be $89K, in Cali that should be something like $5500 per month. Deduct out the $1835 for mortgage leaves $3665 from which to cover food (costco cheap) entertainment (you rarely dine out) and the other basics like utilities, gas, insurance, medical etc. It sounds like it works to me, and your vacation goals seem very affordable in terms of these short hop trips with the family - bigger stuff like International trips are for the points.

It seems to me on the surface that you really are in a position to be doing both, maybe you have some unusual lifestyle expenses also that you haven't got into, but based on what I see you should be absolutely fine to put a chunk into retirement and lead the life you want today. Having said that, if you wanted to delay it a bit, and really enjoy your family today it isn't a zero sum game, just reduce the amount you put into retirement rather than eradicate it altogether.

I'd recommend that you sit down with a pen and paper and work out your monthly outflows, and then compare that to a Mint.com to see what you are missing, because from what I see you are in great shape!

 

[Sesq]

Just out of curiosity, how much of the down payment came from savings (versus say, family help)? If you managed to save up 115K, plus pay off your student loans before age 30 I'd say you have the LBYM, saver mentality down pat. Probably would be healthy for you to give yourself permission to have a bit more fun. If you do have a LBYM orientation it will just push you deeper into credit card bonuses and MS since you'll want to find ways to pay for it.

 

[Gody]

I feel like I had a similar mindset regarding being able to enjoy my benefits now vs having a larger pile of cash later. When I was in my 20's I made the decision to stop contributing to my 401k plan and focus those funds on buying investment properties. In hindsight, for me, it turned out to be a great decision. I am now 38 and those investments along with subsequent investment property purchases have put me in a position where I feel I can be financially independent within 5-7 years.
About 5 years ago, I started contributing again to my 401K since I had enough cash flow coming in that I didn't want to allocate towards real estate. Its obviously a benefit in terms of the tax deduction and company match, but I'm still not sure if will actually let it sit in the 401K until "retirement age". I have a feeling I will take the withdrawal penalty at some point and reinvest those funds at some point if I find a good reason to do so.

Here is my quick comparison of a 401K investment vs property:

401K: pre-tax money, so you save on taxes that year. PROPERTY: invest with post tax money, no tax savings
401K: money locked up until retirement age unless you want to take withdrawal penalty. PROPERTY: Usually you need to consider a property purchase as a 4-10 year hold before you make new decisions on liquidating
401K: tax free growth of income. PROPERTY: tax sheltered cash flow and the equity growth in your property can be tax-deferred for a long time using 1031 exchanges.
401K: initial employer match. PROPERTY: no initial boost but you do get the benefit/risk of having a leveraged investment
401K: taxed on distributions upon retirement. PROPERTY: There are multiple ways to cash out of property, to name a couple: a cash-out refinance is a non-taxable event. Or if the property is providing a steady cash flow you can continue to take the monthly income and pay taxes on that(can be tax sheltered, but otherwise taxed at your normal income bracket).

The main benefits of property from this comparison are the short term availability of the funds as well as the fact that property can grow almost equally as tax sheltered as 401K funds. And in my opinion, a well chosen property will most likely have much better returns than a 401K.

Most people say that a 401K contribution is a no-brainer in terms of the company match and tax free growth. But I believe most people also don't consider investing in property as a real option to consider for their investments and this is why its so easy to be drawn to the 401K. Its possible I have been fortunate with my real estate investments however I think that investment property is definitely an option that should be considered if you are looking for a vehicle that can help you maximize income/growth during your younger years.

 

[Matt]

I feel like I had a similar mindset regarding being able to enjoy my benefits now vs having a larger pile of cash later. When I was in my 20's I made the decision to stop contributing to my 401k plan and focus those funds on buying investment properties. In hindsight, for me, it turned out to be a great decision. I am now 38 and those investments along with subsequent investment property purchases have put me in a position where I feel I can be financially independent within 5-7 years.
About 5 years ago, I started contributing again to my 401K since I had enough cash flow coming in that I didn't want to allocate towards real estate. Its obviously a benefit in terms of the tax deduction and company match, but I'm still not sure if will actually let it sit in the 401K until "retirement age". I have a feeling I will take the withdrawal penalty at some point and reinvest those funds at some point if I find a good reason to do so.

Here is my quick comparison of a 401K investment vs property:

401K: pre-tax money, so you save on taxes that year. PROPERTY: invest with post tax money, no tax savings
401K: money locked up until retirement age unless you want to take withdrawal penalty. PROPERTY: Usually you need to consider a property purchase as a 4-10 year hold before you make new decisions on liquidating
401K: tax free growth of income. PROPERTY: tax sheltered cash flow and the equity growth in your property can be tax-deferred for a long time using 1031 exchanges.
401K: initial employer match. PROPERTY: no initial boost but you do get the benefit/risk of having a leveraged investment
401K: taxed on distributions upon retirement. PROPERTY: There are multiple ways to cash out of property, to name a couple: a cash-out refinance is a non-taxable event. Or if the property is providing a steady cash flow you can continue to take the monthly income and pay taxes on that(can be tax sheltered, but otherwise taxed at your normal income bracket).

The main benefits of property from this comparison are the short term availability of the funds as well as the fact that property can grow almost equally as tax sheltered as 401K funds. And in my opinion, a well chosen property will most likely have much better returns than a 401K.

Most people say that a 401K contribution is a no-brainer in terms of the company match and tax free growth. But I believe most people also don't consider investing in property as a real option to consider for their investments and this is why its so easy to be drawn to the 401K. Its possible I have been fortunate with my real estate investments however I think that investment property is definitely an option that should be considered if you are looking for a vehicle that can help you maximize income/growth during your younger years.

Respectfully, I think you are missing the essence of this though. The 401(k) vs Investment Property discussion is completely valid (and I love your experience in it too) but its not the root of the question here. The real question being asked here is should I spend now rather than save now, regardless of investment vehicle for said savings.

I'm certainly not averse to some investment property and agree the tax advantages are very interesting when done correctly.

Thanks for your insights and comparison - its very interesting and I do agree with it, I am just reflecting the focus of this particular thread.

 

[Gody]

Thanks Matt, sorry if I seemed off track. Essentially I wanted to answer the OP's initial question: "My main question is: When does it (NOT) make sense to utilize a Traditional 401K plan?"

And my answer to that would be: When you have options such as investment property, it might make sense to not utilize a 401K plan as you can get almost all the benefits while still having the money relatively accessible in the short term such that you are not fully missing out on having that money during your young/able years.

In terms of the save now vs spend now question, it sounds like the OP has been very disciplined with his savings and I think in his particular case he can afford to increase the "spend now" portion of his budget. I think if you are coming from a background where you are wired to save and be economically responsible, you can often increase your spending and once you do so your "saver instinct" can often find new ways to fill the void in savings with new income streams or lifestyle changes.

I believe Matt has posted recently about the benefit of "staying hungry"(I think it was different verbage so I'm probably approximating) so that the motivation to save/earn is always there. In this case I think if the OP decides to spend a little bit more now, I think this will be a way to help him "stay hungry" and he will naturally focus his finances to accommodate for that. Especially when you are ahead of the game, it doesn't hurt to take a few months or years and enjoy your life on a different spend level. It might become a good learning experience by doing so.

 

[Maggie66]

Just out of curiosity, how much of the down payment came from savings (versus say, family help)? If you managed to save up 115K, plus pay off your student loans before age 30 I'd say you have the LBYM, saver mentality down pat. Probably would be healthy for you to give yourself permission to have a bit more fun. If you do have a LBYM orientation it will just push you deeper into credit card bonuses and MS since you'll want to find ways to pay for it.

I apologize for the delayed post. We just got back from a midwest country wedding...yee-haw!

I'll throw in more exact numbers, I am extremely surprised (and impressed) at the amount of work forum members have put into my post.

Home
Purchase price 540K
Original Mortgage 417K
Downpayment 123K
Loan from family 54K

Amount repaid to family so far 28K

We've been following a plan to pay $1000/month back to family members. Any job performance bonuses/retention bonuses and tax deductions are put towards this as well (hence the total is more than $1000/month). This addresses Matt's discussion of something else going on that eats into the monthly cash outflow. Once we get our family paid back (should be around mid 2015) then it will be an easier decision to contribute to the 401K.

I feel like I had a similar mindset regarding being able to enjoy my benefits now vs having a larger pile of cash later. When I was in my 20's I made the decision to stop contributing to my 401k plan and focus those funds on buying investment properties. In hindsight, for me, it turned out to be a great decision. I am now 38 and those investments along with subsequent investment property purchases have put me in a position where I feel I can be financially independent within 5-7 years.
About 5 years ago, I started contributing again to my 401K since I had enough cash flow coming in that I didn't want to allocate towards real estate. Its obviously a benefit in terms of the tax deduction and company match, but I'm still not sure if will actually let it sit in the 401K until "retirement age". I have a feeling I will take the withdrawal penalty at some point and reinvest those funds at some point if I find a good reason to do so.

Here is my quick comparison of a 401K investment vs property:

401K: pre-tax money, so you save on taxes that year. PROPERTY: invest with post tax money, no tax savings
401K: money locked up until retirement age unless you want to take withdrawal penalty. PROPERTY: Usually you need to consider a property purchase as a 4-10 year hold before you make new decisions on liquidating
401K: tax free growth of income. PROPERTY: tax sheltered cash flow and the equity growth in your property can be tax-deferred for a long time using 1031 exchanges.
401K: initial employer match. PROPERTY: no initial boost but you do get the benefit/risk of having a leveraged investment
401K: taxed on distributions upon retirement. PROPERTY: There are multiple ways to cash out of property, to name a couple: a cash-out refinance is a non-taxable event. Or if the property is providing a steady cash flow you can continue to take the monthly income and pay taxes on that(can be tax sheltered, but otherwise taxed at your normal income bracket).

The main benefits of property from this comparison are the short term availability of the funds as well as the fact that property can grow almost equally as tax sheltered as 401K funds. And in my opinion, a well chosen property will most likely have much better returns than a 401K.

Most people say that a 401K contribution is a no-brainer in terms of the company match and tax free growth. But I believe most people also don't consider investing in property as a real option to consider for their investments and this is why its so easy to be drawn to the 401K. Its possible I have been fortunate with my real estate investments however I think that investment property is definitely an option that should be considered if you are looking for a vehicle that can help you maximize income/growth during your younger years.

Thanks for the great info! I have briefly looked at investment properties due to the success of multiple family members here in SoCal, but it doesn't work for us right now for several reasons,

1) Price
2) Lack of skills to fix/repair things
3) Time
4) Obligations to repay family

I have a few friends/coworkers who have several rental properties, but they started with a huge $ fund to get started. I suppose this could work for us, but since we are living downtown, anything we could afford would be quite a ways inland. With my lack of skills, one small car, and career focus, we won't be able to think of this for several years at the earliest.

 

[Matt]

Welcome back!

Make sure if that is a real loan from Family that you are paying them interest on it! If you borrow and aren't paying back at AFR they can get into some imputed interest issues as it can appear that they are offloading wealth.

Rates: http://apps.irs.gov/app/picklist/list/federalRates.html

 

[PointsEarner615]

The only justification I can think for not contributing to a 401K would be exorbitant expense ratios and lack of choice in the offered plan. For example, my "employer" (essentially an Employee Leasing agency) doesn't offer a match, and the waiting period is one year. The most inexpensive expense ratio for the index funds (really a fund of funds offering) is 62 basis points. All of the other offerings are over 100 basis points. If all of the funds offered were above 100 basis points, I might actually reconsider contributing to this 401K.

401Ks are due for a major legislative overhaul. Make the match mandatory, eliminate or reduce the waiting period, and require that the plan administrator have an actual fiduciary duty to the 401K participant rather than the current scheme which allows for industry kickbacks (all perfectly legal at this point in time).

 

[Matt]

The only justification I can think for not contributing to a 401K would be exorbitant expense ratios and lack of choice in the offered plan. For example, my "employer" (essentially an Employee Leasing agency) doesn't offer a match, and the waiting period is one year. The most inexpensive expense ratio for the index funds (really a fund of funds offering) is 62 basis points. All of the other offerings are over 100 basis points. If all of the funds offered were above 100 basis points, I might actually reconsider contributing to this 401K.

401Ks are due for a major legislative overhaul. Make the match mandatory, eliminate or reduce the waiting period, and require that the plan administrator have an actual fiduciary duty to the 401K participant rather than the current scheme which allows for industry kickbacks (all perfectly legal at this point in time).

I agree that they are a mess and need cleaning up, but even when they don't offer a match and don't have great expense ratios they are still powerful tools - the only time I would say not is if you didn't have enough money to max out the IRA and HSA first, but if you are able to do all 3 then I would recommend it, you suck up the expense ratio while employed (vastly outweighed by tax deduction) and the roll it out into a low cost option when you change jobs.

 

[Gody]

Thanks for the great info! I have briefly looked at investment properties due to the success of multiple family members here in SoCal, but it doesn't work for us right now for several reasons,

1) Price
2) Lack of skills to fix/repair things
3) Time
4) Obligations to repay family

I have a few friends/coworkers who have several rental properties, but they started with a huge $ fund to get started. I suppose this could work for us, but since we are living downtown, anything we could afford would be quite a ways inland. With my lack of skills, one small car, and career focus, we won't be able to think of this for several years at the earliest.

I live in San Diego too so I'm very familiar with the state of real estate out here. Its a common thought for new property investors to only consider properties within their own city for investment(I did the same myself when I was just starting out, there's definitely a comfort factor to it), but if you do ever give more thought to investing in property I would urge you to consider buying in other cities/states where the numbers and economy might be more in your favor. Although I do have rental property in San Diego, I've only invested in properties out of state for past 8 years because it made more financial sense for me to do so. I wrote more about the benefits of rental property in this thread in case you didn't see it, it might shed more light towards your concerns if you are interested:

http://saverocity.com/forum/threads/why-rental-property-can-be-a-great-investment.357/


I do agree with PointsEarner615 that the structure and offerings of different 401K's can be better regulated and structured on the whole. One aspect of 401Ks which I do like, and I believe its available from most providers is the ability to take a loan out from your 401K. I believe you can take up to half of your account balance or up to 50K out as a loan from your 401K. You end up paying your 401K back with an interest rate close to the prime rate and I believe the term is for 5 years. In this past few years with interest rates so low, it might be a beneficial option if you need a short term infusion of cash or maybe even an arbitrage opportunity. I'm curious if anyone else has played with this feature. Might even be worth discussing in a different thread.