January 29, 2004

8:03 PM

InvestmentFilter: So I'm permanent now at work, and have to pick a 401k option. I don't think i'll be there for many years, and cashed out the last time I had one. (But then again, i'm older now, and 70 is only 31 years away).What do you guys suggest for a 1-3 year timeframe, 401k-wise, given the fluctuating market? (If I need to, I have absolutely no qualms about cashing out again, and have never had much faith in the market at all, in general.)
posted by amberglow to (24 comments total)

oh, my first thought is not to do it all, and do Roth IRAs or something like that, but then i'd lose out on the matching funds (which kick in after 1 year there).
posted by amberglow at 8:08 PM on January 29, 2004

Right now the bulk of my 401(k) is in overseas funds. If Dubya gets elected again, I expect to leave them there.
posted by mr_crash_davis at 9:12 PM on January 29, 2004

good idea! thanks crash : >
posted by amberglow at 9:16 PM on January 29, 2004

Oh, Amber. How can you say you have no qualms about cashing out? You take a huge tax hit for withdrawing before retirement, unless you use it for certain things -- like buying a first time house.

I had to take some money out of my 401k when I first started my business, and come tax time, I think I had to practically give it all back. It's just not worth it.
posted by crunchland at 9:45 PM on January 29, 2004

For a long-term investment like a 401k, where you can easily ride out any shorter-term fluctuations in the market, stocks are still your best bet. If you're really worried about Bush, worry about inflation. Stocks generally rise to cover inflation. You can mix US and foreign stock funds to diversify your overall risk. Don't forget that betting on foreign stocks also means betting on the future value of the dollar.

If you really want to invest in a way that's compatible with your politics, you'll have a very hard time finding a country that opposed the war in Iraq, hasn't had a military adventure of its own in the last few years, doesn't have a repressive or corrupt government, provides rights for gays, and isn't in Scandinavia. You might be better off looking at ethical investment funds.
posted by fuzz at 12:53 AM on January 30, 2004

If you're starting out saving for retirement, the most important decision is not which fund to use but whether to save at all. Putting a little away in each paycheck adds up over the years, particularly if your employer matches some of the contributions.

crunchland is right: cashing out early is really not a good idea. The key is that a 401k is designed to be a *long-term* savings vehicle. If you leave your job in the next 1-3 years, either roll your savings into your next employer's plan, or into an IRA. If you cash out instead, you pay 10% to Uncle Sam for the privilege. This penalty is in addition to state and federal income taxes, which also become due. If you can afford to put money away for a few decades, a 401k is a good way to do it, thanks to the tax break it provides. But if you can't afford to save, or know that you will need the money soon (soon=in the next 20 years), it is (usually) best not to put money in a 401k at all.

In the meantime, I'd recommend diversifying. Just choose a bunch of stock funds (as opposed to bond funds), start socking the cash away, and forget about it.

Overseas funds typically have higher expenses than some domestic funds. Also, they are often "riskier" because you may be exposed to currency fluctuations. Of course, if you have 31 years to retirement, risk is not necessarily a bad thing.
posted by blue mustard at 3:20 AM on January 30, 2004

Thanks all...I know it wasn't a wise idea to cash out when i did it before, but i wouldn't have done it unless it was really necessary. I'll see if i have an ethical option in my package--it's only 2 companies, and a limited range of funds to choose from. Also, why does everyone have such faith that in 40 years whatever i put in will still exist? Social Security won't. Private pensions have disappeared too.
posted by amberglow at 5:02 AM on January 30, 2004

You want mostly index funds. Index funds are designed to track a specific stock market index so their content reflects the current mix of companies in that index. Index funds generally have less overhead costs involved with them because they don't rely very much on fund management. This is good because for every dollar you invest a larger piece actually goes to you. It's good for another reason as well. Index funds outperform the great bulk of managed funds. Most managed funds don't even come close in performance to an index fund (but it keeps investment managers in business) and the few that do are hit or miss.

There are index funds for both foreign and domestic markets.

On preview amberglow: a mutual fund is a slice of the stock market. Historically stock markets win. Stock markets depend on the growth of the economy over the long run which while there have been significant dips (the depression in the 20's, junk bonds in the 80's, Bush in the 00's) if you look at it over a long enough period of time the market gets stronger. I believe that the historical rate of return has been 11%.

For your investment to go to zero the economy would essentially have to go to zero as well. Some years you win, some years you lose but on average the return has historically been 11%. For the economy to go to zero there would have to be no more Wallmarts (and nobody to replace them), no more Microsoft (and no more replacements) etc. If you really believe that will happen then you're best off investing in Mad Max movies and learning to be quick on the draw with a sawed off shotgun.
posted by substrate at 5:12 AM on January 30, 2004

As far as ethical investing goes you have to be careful you don't cut off your nose to spite your face. Your goal is to retire at some point and you'll need cash to do that. If you want to be ethical then be ethical with the money you've earned. Retire and take your money and do good works. Leave a trust fund for whatever you find ethically compelling. The stock market doesn't give a damn if you don't invest in a company for ethical reasons. There's plenty of other people without those qualms. You won't be harming these companies but you could potentially be harming yourself or whatever you decide is ethical. For instance your 1000 dollars doesn't make a difference to the company or the stock market. If that 1000 dollars grows to 20000 dollars over the next 30 years and you do whatever your heart feels is ethical with it you'll have made a significant difference.
posted by substrate at 5:18 AM on January 30, 2004

ok, but what happens when a mutual fund company goes bankrupt or is indicted a la Enron (which i'm sure will happen more than once in the next few years)? Where's the guarantee? Isn't everyone just gambling? All of Spitzer's recent actions have me wondering.
posted by amberglow at 5:34 AM on January 30, 2004

why does everyone have such faith that in 40 years whatever i put in will still exist?

There are no guarantees. But faith is not required either. Yes, it is gambling! But bets at Wall Street have odds that are generally in your favor, unlike bets at Vegas. (On downside, there are far fewer free drinks.) Plus, it's gambling that is partially subsidized by the government and your employer, so if history is any guide, it's hard to lose (in the long run).

Still, like all gambling, you shouldn't bet money that you need tomorrow, because it could all be lost today. So it's healthy you recognize that in 40 years, whatever you put in may not exist. Even worse, you may not exist. What's that Keynes quote...? "In the long run, we're all dead."
posted by blue mustard at 5:36 AM on January 30, 2004

thanks blue mustard--but if we were talking 40 years ago, wouldn't I be advised to go with the private company pension, and social security, and that of course, without a doubt, no question, they would provide for me? Wouldn't I be fucked today?
posted by amberglow at 5:47 AM on January 30, 2004

(not with SS, but with the pension?--You get my point tho)
posted by amberglow at 5:49 AM on January 30, 2004

(Oh, this shows my failure at math and finances--I just realized I only have 30 years til 70, not 40)
posted by amberglow at 5:50 AM on January 30, 2004

(oops--never mind--early alzheimers)
posted by amberglow at 5:51 AM on January 30, 2004

Would you be fucked if you took that advice 30 years ago? In short, probably not. Private pensions and Social Security are paying out now to everybody who signed up 30 years ago. It's true that some insolvent pensions are paying out less than expected, but most plans are not insolvent (yet), and even the insolvent ones are paying something, since they are guaranteed by the government.

However, those of us who might rely on Social Security in 30 years, well... let's just say we should have a backup plan, if possible. A 401k is a decent backup plan. So is owning property and having other assets, if possible. Diversity is good. Get many baskets for your eggs. The chance that *everything* will lose its value is slim, even if the economy gets bleaker.

If you really believe a catastrophe is coming, during which the country and economy will implode, wiping out the stock market and returning society to a neolithic state, your best investment would be to buy gold and a gun and keep them nearby.
posted by blue mustard at 6:10 AM on January 30, 2004

amberglow, nothing is guaranteed amberglow. Ever. There is a possibility that all of the fund companies that you invest with will go under due to market conditions or a major scandal.

Look at it this way. Assume you want to retire in 30 years. A 401K is just a vehicle to help you get there. There are some advantages to it. You're investing pre-tax dollars so to invest an equal amount outside of this vehicle you'd have to invest more. You're getting matching funds as well, so you're getting free money. There's some risk associated with it as well. 401k funds are slices of the stock market. The stock market doesn't always go up but based on past experience (which any prospectus will tell you isn't a guarantee of future results) over the long run you make money. You could put your money into a bank instead but you lose out on the pre-tax and matching fund bonus dollars and you'll get a very low interest rate. If you decide it will take 1 million dollars to retire in 30 years that means you will more or less have to save 1 million dollars since interest rates in banks are very low.

I'm 35 and I've been investing in 401ks (and RRSPs since the first 27 years were spent in Canada) since I was about 19. I've kept track of what I've actually invested v.s. what I have now and I am in very good shape. I also know me, if I'd have stuck it into a bank account I'd have frittered it away on wine, women and song and probably a couple of sports cars too.
posted by substrate at 6:23 AM on January 30, 2004

so substrate, since you're ahead of the game, i can come live with you in my old age? ; >

thanks all...I think i'm going to do the bare minimum amount I can (2% I think at my co.) in a mix of funds (if i can) and still do an IRA on my own...you've been really helpful (and a shoutout to fes for his email too)
posted by amberglow at 7:52 AM on January 30, 2004

Sorry amberglow, you're too male ;)
posted by substrate at 9:47 AM on January 30, 2004

aw...ok, then can I park my refridgerator box on your lawn? ; >
posted by amberglow at 10:18 AM on January 30, 2004

How can you say you have no qualms about cashing out? You take a huge tax hit for withdrawing before retirement

Depending on the matching your company does, though, you may have earned up to 100% just for putting the money into the account in the first place, not to mention the gains you've made on it since. In that case, the 10% penalty seems pretty insignificant. Heck, if your company does matching at all, say the first 0.5% of your salary and you're putting in 5%, the penalty is a wash and you still get the returns. You don't get as much money as you otherwise would have got, obviously, but it's hardly the disaster people make it out to be.
posted by kindall at 12:08 PM on January 30, 2004

I'm with substrate on index funds. Also, look specifically for low fees. Mutual fund fees vary from lows of .5% to highs of 3% or more. That means they take 3% of your money every year just for the privilege of buying stocks for you. Needless to say, high fees have a huge impact on long-term returns.

Regarding international funds: these will help diversify your investments, but they won't protect you against changes in the value of the dollar. Most if not all mutual funds available in the US are "dollar denominated" even if they invest in foreign stocks or bonds. They do this to protect investors from currency fluctuations, but the side effect is that they don't let you bet against the dollar.

Finally, with regard to Socially Responsible Investing: there is no evidence that socially screened funds underperform the market. There is some evidence of performance benefits from some types of screens, e.g. environmental performance has been shown to be an excellent indicator of management quality and stock market potential (pdf). You still need to watch those management fees, but at least with social funds you know you're getting something for your money.
posted by alms at 4:09 PM on January 30, 2004

My company actually overmatches -- pays out more than 100% of what I put in up to a point. So I save at least that much per paycheck.

Your fund rep should be able to guide you. My 401K is with Fidelity, and they were able to put me in one that automatically rejiggers the growth/stability/stock/bond/etc. ratios of the fund every year, so it starts out with pretty aggressive growth and makes it more conservative as I get older and closer to retirement. It's great for folks (like me) who don't want to make all the little decisions.
posted by Vidiot at 4:47 PM on January 30, 2004

thanks guys---my company will match 100% of the first 3% and then 50% of the next 2%. I can choose from a range...there's only one int'l one (but it's under a class-action lawsuit for market timing)

These dated ones look easy tho.
posted by amberglow at 5:48 PM on January 30, 2004