Comments on: Investing in 401K plans - when is it not worth the trouble

By: Arohan

Arohan — Wed, 27 Aug 2008 19:18:54 +0000

@boy,

Thanks for your comment! I agree it is difficult to be an above average investor but it also follows by definition that there are a quite a few people who are above average. Personally, if I feel that a mutual fund manager or a CEO of a company (like Buffett or Cummings and Steinberg) can generate better return than I can, by all means I will defer to their prowess and invest with them. But as I have stated, all things being equal and if you do not have time or inclination to put in the effort for due diligence, buy index funds and stay with your retirement plan. None of these analyses is any good if a person lacks the commitment to save

Point well taken that for most investors 401k plans make a lot of sense. Just wanted to highlight some situations where it may not.

Please keep the comments coming.

By: boy

boy — Mon, 25 Aug 2008 17:06:58 +0000

I like the article a lot. It makes people think a bit more in depth than one typically does.

I, for one thing, doubt that I can be an above average investor and therefore concentrate on keeping costs down. Most people are, after all, just average.

To look at this from another angle, I think individuals should take a more behavioral approach to how they will save/invest. I think it’s safe to say when people have money that’s relatively easy to get to, they’re more likely to spend it. People with money in general investments are more likely to take money out for a nice remodeling job than from a 401k.

With that said, the 401k serves as a sort of “reality” check for people to get used to a particular lifestyle that will be much more sustainable when they retire. It’s a heck of a lot easier to “pretend” that your income is 20% less than what it actually is with a 401k, but that’s just plain un-American

By: Arohan

Arohan — Wed, 23 Apr 2008 02:33:23 +0000

@John, if I interpret this correctly, you are saying that if I have other substantial investments (to retire early) that I can draw on I can let my 401k ride for longer until I am required by law to take withdrawals. I agree, but I look at this a little differently. My perspective is that I can generate greater returns in a taxable account. Remember, all things being the same, the money that I would have otherwise sent to a 401K plan goes into a taxable account and I can have that account ride for longer as well to match whatever withdrawal period you may have in mind for the 401K plan (for the sake of a hypothetical argument)

By: John Hunter

John Hunter — Sun, 20 Apr 2008 15:03:16 +0000

Two points to consider: 1) you don’t need to withdraw all the funds at once. The longer the funds are in the tax deferred account the better. Most likely you would have to have substantial funds in addition to the max you can accumulate in your 401k early. And spending those funds down while your 401k continues to grow is likely a better strategy. Also check the rules on withdrawing funds. I think it might be that in some circumstances if you actually retire early you can start withdrawing funds early. I am not sure how it works and I bet there are penalties for anyone that tries to fake out the IRS but it is worth looking into.

John Hunter’s last blog post..Gen X Retirement

By: Arohan

Arohan — Fri, 08 Feb 2008 12:07:27 +0000

Nice article Lazy Man! And as you point out in the article, many of us are coming to this realization even if our math is a little bit different. The point I think in all of this is that the media has been saying that a 401K plan is the best thing since sliced cheese and they continued to do this through the last few years of tax cuts and other economic changes never once stopping to review if the advice is still as relevant

As an owner of the company, I have other reasons not to offer a 401K. The account maintenance expenses can be really high. The only reason I would offer this plan is for employee recruitment and retention

By: Lazy Man and Money

Lazy Man and Money — Fri, 08 Feb 2008 04:56:04 +0000

I came to a similar conclusion, though I assumed that one would be savvy. One of things I realized is that dividends are not taxed as much as income (a bonus for the taxable account) and that your investment options are often better in your taxable account (leading to reduced expenses if you are savvy). See more: http://www.lazymanandmoney.com/5-reasons-to-throw-away-your-401k/

Lazy Man and Money’s last blog post..Joseph Sangl: I Was Broke, Now I’m Not