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401K Contribution in the downturn

Started by FIREDad, November 09, 2018, 12:21:11 PM

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FIREDad

I am trying to decide if it will be worth it to up my pre-tax contribution for my 401K beyond just the 6% that my company will match to 10-12% or if I should just stockpile the difference in cash to deploy into physical precious metals and additional equity purchases in the event of a market downturn.  I know that I should be pushing to max out my 401K contribution but doing so would severely limit my cash leftover for alternative investments.  Any thoughts?  (For a timeline perspective, I am 32)

polama

The tax deferral benefits of a 401K are nice, but aren't a massive benefit overall. I wouldn't invest in a 401K with high fees just for the tax benefit. Similarly, if a 401K is locking you into an asset allocation you aren't happy with, I'd invest outside one (after the match of course).

Which doesn't address the wisdom of moving into precious metals/cash. People have been calling a market top for a decade now. The traditional recession indicators aren't exactly flashing red. Taking up a small contrarian position seems reasonable to me right now, but I personally wouldn't make a big bet on a market drop from here. I'd also advise having a concrete strategy in place ahead of time for how you'll go about reinvesting if there is a drop, and how you'll go about reinvesting if your call is wrong and gold dips/stocks keep pushing higher. Rather than guessing the future and betting on it, you should think about a bunch of different futures, and hedge your positions so you'll be fine in any of them. That may involve holding more cash or metals in the short term.

Sam

Hard to give advice without knowing what your after-tax investment amounts are and your overall net worth picture. I really think it is good to max out your 401(k). In 10 years you'll be glad you did.
Regards,

Sam

Dario33

Yeah, depends what your goals are.  If striving for early retirement, your after tax reserves may help influence decision.  Generally speaking, it is typically a good idea to max out 401k - even if investment options are not stellar.  It's likely the options you do have enable you to approximate total stock and total bond indexes.

FIREDad

As of today, my after-tax contributions are 58K between 2 ROTH IRA accounts and 7K in a taxable wealth account.  The IRAs are split evenly between a personal account and my employer sponsored account that I was funding with ROTH dollars but have since switched to funding with pre-tax dollars at 6% currently.  The personal IRA is with Betterment and the employer plan is a Vanguard fund with an 80/20 split between equities and bonds.  The management fees are pretty low for both as well - .25% for Betterment and .04% for Vanguard.

The goal is to achieve FIRE status in about 10-15 years.  I have started my own business that I will use to accelerate that timeline but for the time being, I want to try to deploy my capital as efficiently as possible.

thlayli

Why are people always hesitant to buy stocks, or invest in index funds, after a week of bad numbers on Wall Street? It always baffles me that people see a 3-5% decline over a short period of time and go, "Nope. I'm out. Going to hold my money until things rebound."

I swear, it's the only thing people don't want to buy on sale. Anything else out there you were willing to buy today, and tomorrow it gets a 3-5% discount, you'd be stoked and happy you are getting a deal.

I'd say simple advice, stop trying to time the market. It's cliche, but you're never going to be able to time it correctly, and the few times you do get lucky will be offset by all the other missed opportunities where you chase market rises like the rest of the lemmings. Just set a level you're comfortable investing each paycheck, and maybe cut a little deeper if you can, and try to max out your contributions each year. You'll be very happy you did in a decade. I saw my 401K go from a nice $100K to $700K in the last decade doing nothing but staying the course. In another decade, I'm expecting similar returns in the long run. My friends that balked in 2008, sold, or stopped investing for fear they were going to lose money, ended up much lower than me, as I stayed the course.

Also, if it helps, try and disassociate the money value from the shares. If you buy 100 shares of a stock or index fund, and it goes down 10%, you still have 100 shares. You can even buy 110 shares for that same price now. Once you start thinking in volume, and not price, the small movements year to year don't matter as much. There will always be a downturn around the corner, maybe it's next year, maybe it's in three or five, but no matter where you are there is a shake up brewing. These are long term investments, though, especially 401K, and money you likely won't touch for 20, 30, maybe even 40 years. Don't worry about a bad year here or there, as the good ones will more than make up the difference... and just keep investing slow and steady.

chitown-2020

Quote from: thlayli on December 14, 2018, 12:29:16 PM
Why are people always hesitant to buy stocks, or invest in index funds, after a week of bad numbers on Wall Street? It always baffles me that people see a 3-5% decline over a short period of time and go, "Nope. I'm out. Going to hold my money until things rebound."

I swear, it's the only thing people don't want to buy on sale. Anything else out there you were willing to buy today, and tomorrow it gets a 3-5% discount, you'd be stoked and happy you are getting a deal.

I'd say simple advice, stop trying to time the market. It's cliche, but you're never going to be able to time it correctly, and the few times you do get lucky will be offset by all the other missed opportunities where you chase market rises like the rest of the lemmings. Just set a level you're comfortable investing each paycheck, and maybe cut a little deeper if you can, and try to max out your contributions each year. You'll be very happy you did in a decade. I saw my 401K go from a nice $100K to $700K in the last decade doing nothing but staying the course. In another decade, I'm expecting similar returns in the long run. My friends that balked in 2008, sold, or stopped investing for fear they were going to lose money, ended up much lower than me, as I stayed the course.

Also, if it helps, try and disassociate the money value from the shares. If you buy 100 shares of a stock or index fund, and it goes down 10%, you still have 100 shares. You can even buy 110 shares for that same price now. Once you start thinking in volume, and not price, the small movements year to year don't matter as much. There will always be a downturn around the corner, maybe it's next year, maybe it's in three or five, but no matter where you are there is a shake up brewing. These are long term investments, though, especially 401K, and money you likely won't touch for 20, 30, maybe even 40 years. Don't worry about a bad year here or there, as the good ones will more than make up the difference... and just keep investing slow and steady.

The best way to think about it is that you are a shopper who is gradually becoming a merchant.    As long as you are a shopper -- and the market goes down 10%, you might be getting a better deal.  Stocks are on sale and you can buy at a discount.    Later in life when you're a merchant, you want pricing power, so its more painful when there's a decline, and you're hoping for higher prices.     So you just need to have a flexible lens and know what stage of life you're in.    It will never be the case that the market moves in a straight line forever -- and this past bull run has been pretty outstanding and remarkable.   The reality though is that the lack of volatility hasn't helped new investors take advantage of declines in pricing.... until now.

Owning a portfolio of stocks requires a business mindset like anything else.   Know whether you're a buyer or a seller -- and then interpret market conditions that way.

dpmf01

Also, if you work in a high-tax place like California/NYC, your all-in tax rate could be ~50%.  By maxing your 401k to $19k (limit for 2019) in aggregate you will be able to save more TOTAL dollars and begin the compounding effect NOW rather than saving less and beginning the compounding effect on some of those dollars-not-saved at a later time. 

If you set aside $19k of pre-tax dollars and your tax rate is 50%, it actually only cost you $9.5k of after-tax money to start compounding returns on that $19k. 

To put away $19k of after-tax dollars you would need to set aside $39k of pre-tax earnings.

To complete the picture, there are strategies you can use to access your supercharged savings of pre-tax dollars:
(1) You can take a loan of up to $50k from your 401k.  Normally this is a bad idea if you're going to blow the money but if you use it for something like a downpayment on a house, it may be a good idea.
(2) You can take no-penalty rule 72(t) fixed distributions once you're ready to FIRE (even if that's before 59 1/2).  You will be taxable on the withdrawals but you are gaining access to these dollars on a fixed stream basis if you need them.

Quote from: Sam on November 09, 2018, 06:48:38 PM
Hard to give advice without knowing what your after-tax investment amounts are and your overall net worth picture. I really think it is good to max out your 401(k). In 10 years you'll be glad you did.

Sam

The minimum one can do is max out their 401(k) every year forever they have the chance.

It's really all about how much should you invest in your after-tax investment accounts that matter the most for financial freedom. I'm assuming most folks don't want to have to wait until 60 to tap their funds.

https://www.financialsamurai.com/after-tax-investment-amounts-by-age-to-retire-early/

Regards,

Sam

Young And The Invested

I'm planning to max mine every year I can.  If anything, a downturn is when you want to maximize your contribution if you've got a long time horizon.  Buy when the market is cheap and hold low-cost index funds for the long haul.
https://youngandtheinvested.com/