Posted on 12/03/2006 5:21:23 PM PST by Clintonfatigued
1. "We're making a mint on your 401(k) — even if you're not."
The number of 401(k) investors has soared in the past decade, to nearly 50 million from 28 million, according to Cerulli Associates. That torrid growth has created impressive efficiencies for the folks who run your plan. But it doesn't mean those savings show up in your account; in fact, they could be coming straight out of it. In a practice known as revenue sharing, providers get a cut of the expense ratio on the funds in your 401(k) to cover day-to-day "administrative costs." Since the fee is charged as a percentage of assets, that revenue increases as your 401(k) grows, even though those costs stay virtually the same.
(Excerpt) Read more at money.aol.com ...
The 401K retirement plan is a good thing, but there are some catches that need to be taken into account.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus
It's meant to spread FUD only -- and thanks to ERISA - the bad plan sponsors/providers go directly to jail - no ifs ands or buts.
I agree, it's BS. All except the part about the variable annuities.
Still, I'd rather take my chances with a 401(k) than with Social Security, which probably deserves it's own top ten list of things the "provider" won't tell us.
Form a new committee,the 401k committee on 401ks.
Subpoena all 40lk folks who run our plans to testify.
We're to stupid to actually monitor our own 401k./sarcasm
I love this!!! A whole big bad-A$$ed artickle, casting aspersions all over everything and hinting that (gasp)ELIOT SPITZER is watching over all of you... And then, finally... In the very last paragraph on Page 2 (where few travel) we see "In truth, 401(k) plans are getting better."
I certainly am glad I used all those free compact discs pushing me to get into AOL for target practice and for scaring crows out our our almond and cherry trees!!!
Between financial writing like this and the tripe put out by Susie Orman, it's no wonder people are totally confused!!! Whew!!!
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus
Regardless, ever since the 401ks came about in the early 1970s, I always put the max into it. For about 10 years I put in twice the amount. That grace period came in handy to contribute last year's allowable contribution, which I had already made during the year.
Calculate that scenario here.
The short answer is generate $800K and buy a CD at 5%. In reality, depending on your age, you need to find a way to put away 10-15% of your pretax income and continue to do so your whole working life. Live below your means and by the time you are 55-65 years of age you will have amassed a fortune. Start with fairly risky high return investments and move to more conservative investments as you get older.
Key elements are One house and one spouse. Stay married and avoid debt other than home mortgage.
I cannot stress highly enough, live below your means and save as much as you can.
I hope you retire comfortably. :) (Good thing you don't need my hopes--you've taken care of business! :)) Have a nice night!
Find a job in New York that pays $400,000 and pay your taxes ;->
Yeah, that "provider". LOL.
What details? Well, when do you need that income stream to start? Are you retiring in 20 years or in 30 years or? When you retire and are receiving that income, do you want it to be $40k absolute or do you really mean as much income then as $40k buys now - meaning the real number will have to be higher by the amount of inflation between now and then? Then, will you want that amount as a level income each year, of will you need it to keep going up a few percent every year to keep pace with inflation?
Then, will you get that income as an annuity - meaning you only need it for your own lifetime or that and the life of a spouse, but don't need to leave any inheritance for your kids? Or do you want to get that income without impairing the capital, able to pass the capital on to your kids? Then, some assumptions about how much you will be earning on the money at that point, with a more conservative investment strategy (more bonds, less stock) in retirement.
OK, all those filled in, I can get a capital value for the amount of money you have to accumulate by the retirement date. I'll fill them all in one typical way, so you can see what I am saying.
(1) The income is wanted 30 years from now.
(2) The income needs to be $40k present value, and inflation will be about 2.5% per year over the next 30 years.
(3) The math therefore says the targeted income level will be $84,000 nominal.
(4) The income level then needs to still rise 2.5% per year.
(5) The income taken is not to impair the capital, which is instead to be left intact to be passed on.
(6) The return in retirement will be around 7.5% per year, gross. 2.5% of it will have to be left to fund the increases and prevent any impairment in the real value of the capital.
(7) So 5% can be taken out, meaning 20 times the income taken is needed as the capital value.
(8) The capital value needed is then 20 times 84,000 equals $1.68 million, 30 years from now.
(9) Assume the starting value is zero (no existing savings), but that contributions to the fund increase with raises and inflation etc at 4% per year.
(10) Assume the investment portfolio manages to earn 9% per year gross throughout the savings period.
Then the math says, each $1000 of inital annual savings rate results in 200,000 in ending value, and 8.4 times that level is wanted, ergo the initial savings rate needs to be $8400 per year.
Suppose your employer has the following match incentives - 100% match for the first $500, then 15% up to 6% of income. That means the gross going into the 401k will be the percentage of income you save plus 0.9% plus $425. Suppose your gross is $50k so 0.9% is another $450. Then your own contribution needs to be $8400 - $875 = $7525. If you instruct your benefits advisor to withhold 15% of your income for your 401k, you are there.
Suppose you change the goal to step up annuity (don't need to leave an inheritance, do need lifetime income rising 2.5% per year for self and spouse). Then the part that changes is the end return you can take out is more like 6.5% rather than 5%. (You would in that case actually take out a step up annuity on retirement, presumably). The end amount needed is therefore $1.29 million, total initial contributions needed are $6460, after the employer's $875 your portion needs to be $5585, so 11.5 or 12% of income is the number to tell your benefits manager.
Where does it get invested? Well, above we basically assumed you could earn 9% on average over the life of the investment. Not bonds, then. The simplest single way to get diversified investment is to put all of it in a single balanced fund. Most of those are about 60% stock and 40% bonds, though, and would be on the conservative side - more like what you want in retirement. There are some plans that have "lifecycle" funds with varying levels of stock, and you could take one that had 70%, 75%, or 80% stock. Which would be better. Either of those is dirt simple, everything goes in one fund and you never have to think about it.
Or you could use a simple 2 fund solution - one balanced fund and one pure stock fund. The balanced fund might favor "value" or "income" stocks and the pure one a broad index including smaller companies (like a total stock market fund). Then you can do one ongoing adjustment, only. Every year or two look and see if the two funds are about the same size, and if they aren't, level them off again. (That forces you to buy a little more stock when the market has been weak and to salt a bit more into bonds when it has been strong - a good discipline).
Or if you want to get fancier, you can put a third in a balanced fund, and put the other two thirds in two different stock funds, one typical big cap like the SP500, and the other smaller or midcaps (which have higher returns in the long run but also wider swings). You'd balance like the previous. The last thing you might add is a small 10-15% foreign stock fund (when the dollar swings in value, those zig as the others tend to zag etc). Only if you want to, though, not necessary.
The hard part is simply to save enough. The figures needed - 10-15% of income for almost everyone, and that can rise as high as 20% if you are starting late with only 20 years to retirement and have the most ambitious goals as to continued income growth in retirement and leaving stuff to kids etc - can seem quite daunting if you have been living on the whole takehome.
Here is the way to adjust up to what you need, if you can't start there right away. Start by telling the benefits advisor to take out at least as much as the largest that the employer matches, or 6%, whichever is less. Better is to start at 10%, but do either, what you are comfortable with. Then every year when you get a raise, increase the withheld/saved percentage by the amount of the raise, or the amount of the raise minus 1% if you need some increase for inflating expenses etc. In 5 years or less you should be up to the required level. After that the percentage going to the 401k can stay the same, the dollar amount is still rising every raise you get, as is your takehome.
The biggest things are the amount contributed each period, and time. Start as soon as you can with as big a portion as you can afford, and you will not be sorry.
I hope this helps. If you want to fill out the specifics differently, I'll be happy to give you the numbers for your actual situation.
And yeah, in the 90s I was an investment advisor - how I paid for grad school...
http://personal.fidelity.com/global/search/inquira/resultsindex.shtml?question=calculator
I sent this to my kids who are in their mid-20s a couple of years ago. I tell them to SAVE - SAVE - SAVE!
NY- The Vampire State
I enjoyed reading your example of what to do with a 401 k plan. I'm glad to see confirmation that I am doing some things right and you gave me things to think about as to what I could be doing better. I like your idea about plowing pay raises into investments. That is a relatively painless way to build things up to where they need to be.
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