money in 401k. take out incur cost, ride it out or stop funding?

[MRoCkEd]

Inevitably I feel another crash is coming... last time I had a 401k and at the time I was not putting
anything in it.. lost nearly half during the crash.

This time ive been contributing but like I said, its coming...

Do you stop contributing?
Do you stop contributing AND take out the balance of the 401k?
Or keep contributing and ride it out?

Opinions?

Many here had a "feeling" the stock market was going to crash, and it went on to hit record highs. People who sold during the last crash got screwed, while those who kept contributing did quite well. Save yourself a lot of headaches and don't try timing the market. Just stay the course with a well-allocated portfolio, continue contributing, and shift your holdings according to risk tolerance and years until retirement.

 

[Zippyjuan]

What would closing it cost you? Quite a bit. Let's start with $10,000. First there is the 10% penalty. You are down to $9,000. Then that money gets counted as income and you have to pay taxes on it- as far as I can find, that is the amount before the penalty. If you are in a 25% tax bracket, you will lose another $2,500 and are down to $6,500 out of your original $10,000. Just to get back to where you are right now, you need a return on that $6,500 of 53% (no I don't have this number backwards- you need to get $3500 out of a $6500 investment) which is a huge return. And we are not including any fees or taxes (like capital gains) associated with this return. Looking at it another way, if things do go bad, your investment needs to fall by more than 35% to be worse off than leaving your money where it is.

Other factors to consider- do you get a match from your employer on 401k contributions? If yes, you are passing up on free money- a guaranteed return.

If you don't get any matching and are concerned (and don't need the money for an emergency) I would leave the money there and simply stop contributing to it and put that money into something you think will be a better return. Depending on your company, you may have other investment alternatives you can shift your 401k money into.

Nobody know for certain what the economy or investments will do in the future but 35% declines are extremely rare.

 

[brandon]

Any fear that the government is going to confiscate all 401k money and wipe everyone out within the next 50 years?

Will the money still be there when you retire?

I know it's supposed to be your money and guaranteed, but what if Pres. Zorkulan in 2048 says "We need to do this to avoid a major crash. All 401k money becomes property of the State. Those that depended on their 401k for retirement can apply for stamps at this website..."

I'm afraid of that. Am I too paranoid?

I couldn't imagine them ever outright confiscating 401ks. I wouldn't be surprised if they do change the rules of the plans at some point to negatively affect people that are saving a lot of money. Another possible risk is that income tax rates and brackets will be adjusted so that you end up having to pay more tax when you withdraw in retirement than you would if you paid it up front. All in all the 401k is still one of the best investment accounts for just about everyone.

 

[amy31416]

My 401k's been doing fine. However, I have looked into pulling out and a person can get away with only a 10% penalty if you use it for "emergency" purposes--generally things having to do with housing. I think you still have to look into what tax bracket it'll put you in though.

 

[helmuth_hubener]

You think there will be a crash.

There may be.

When?

What kind of crash? Inflationary? Deflationary? Will bonds do well? Will cash? Will gold?

Answer to all of the above: we don't know.

I recommend Harry Browne's 25%/25%/25%/25% split, so that you're ready for any situation.

25% stocks
25% long-term bonds
25% cash
25% gold

If a crash in stocks comes, that's OK. Let's say stocks crash huge, say 50% down. That's only a 12.5% hit to your portfolio, and that's if nothing else goes up! Depending what kind of crash it is, one or more of the other assets will probably be doing terrific. This "Permanent Portfolio" rode out the great crashes of 2000-2 and 2007-8 with stunning success.

I am no accountant, but it seems like a low-tax way to switch to this strategy would be to take and allocate the 401k as 33% stocks, 33% long-term bonds, 33% cash (treasury money market). Then take and buy enough physical gold coins outside of the 401k to equal the protions of everything else, thus making a 25/25/25/25 split. Someone else may have a much better idea how to do this and avoid tax consequences, etc. If you do, I would also love to hear it.

 

[Kelly.]

is it possible to move your money into a self directed account?
If so, most will have a money market account, where you can park money until you feel its time to reenter the "market"

its what i did.

 

[krugminator]

1. Don't look to an in internet forum for financial advice.

2. The doomsdayers have been wrong 100 percent of the time throughout history. I remember reading some of the crap Ron Paul wrote in the early 80's about the phony stock market. Listening to him would have missed the market going from 800 to 14000. I assume you didn't listen to the doom and gloomers over the last 4 years. If had you had your post would have been about whether you should kill yourself to help pay your losses.

3. If you are going to make a bad decision to take money out of the market, don't compound it by taking money out it out of your 401k.

 

[Zippyjuan]

Often the best time to get in is when you think things are the worst. Prices are usually at or near their lowest points. The time to be cautious is when things have had big runups.

 

[helmuth_hubener]

2. The doomsdayers have been wrong 100 percent of the time throughout history.

No, doomsdayers have only been wrong when doomsday didn't occur. That is, people predicting dire reversals are wrong when prosperity ensues instead.

Their more fundamental error is to predict the future at all.

An even worse error than that is to believe that there is any reason at all to think that they know the future and to invest accordingly. What makes them so smart that they know the future?

Prosperity does not, however, always and everywhere ensue, krugminator. Sometimes crashes and recessions and depressions occur. People who believe that the stock market will always and inevitably go up may be wrong, just as people who thought that about real estate. There could be a long period of time when stocks produce little to no real returns. From 2000 to now, for instance.

By putting all or most of your money into stocks -- like, say, the Bogleheads MRoCkEd references -- is really making a bet: that prosperity will continue. The Bogleheads in particular advocate a buy-and-hold philosophy, which is good, but they are still making the bet that long-term, prosperity will triumph. But, we really don't know. It may not. Sometimes "doomsdayers" are right. Frequently. Whenever a bear market comes around again.

 

[Danke]

1. Don't look to an in internet forum for financial advice.

2. The doomsdayers have been wrong 100 percent of the time throughout history. I remember reading some of the crap Ron Paul wrote in the early 80's about the phony stock market. Listening to him would have missed the market going from 800 to 14000. I assume you didn't listen to the doom and gloomers over the last 4 years. If had you had your post would have been about whether you should kill yourself to help pay your losses.

3. If you are going to make a bad decision to take money out of the market, don't compound it by taking money out it out of your 401k.

It depends on your snapshot.

I started investing in PMs over a decade ago thanks in part to people like Ron Paul.

The DOW returns since 1999 (13 years) -- the dot-com bubble year-end peak: 3.4%

PMs have done much better.

My PMs don't charge an annual fee, but of course I also don't get a dividend.

 

[Seraphim]

Yep. The stock markets have been a terrible place to invest as a buy and hold stategy since the late 90's. A very stagnant secular bear market.

Sure, if you bought at the very bottom in 2009 and you are looking at your statement now you feel pretty good.

People in their early 60s close to retirement who really started pilling money into their IRA in the late 90's have seen NEGATIVE real returns.

It depends on your snapshot.

I started investing in PMs over a decade ago thanks in part to people like Ron Paul.

The DOW returns since 1999 (13 years) -- the dot-com bubble year-end peak: 3.4%

PMs have done much better.

My PMs don't charge an annual fee, but of course I also don't get a dividend.

 

[Acala]

I couldn't imagine them ever outright confiscating 401ks. I wouldn't be surprised if they do change the rules of the plans at some point to negatively affect people that are saving a lot of money. Another possible risk is that income tax rates and brackets will be adjusted so that you end up having to pay more tax when you withdraw in retirement than you would if you paid it up front. All in all the 401k is still one of the best investment accounts for just about everyone.

Would you have imagined an outright confiscation of gold without the benefit of hindsight? I can easily imagine the government requiring some percentage of all 401k investments going into government bonds for "safety". And then the percentage increases until it swallows up the whole thing. Then the government pays back the loan with Barack Bucks. Enjoy your retirement.

 

[Seraphim]

Yes, this.

A USA 401k seizure will LIKELY be a mandated conversion into US Treasuries.

There's no gold to take. Shove their debt down your throat as they devalue it to toilet paper.

Would you have imagined an outright confiscation of gold without the benefit of hindsight? I can easily imagine the government requiring some percentage of all 401k investments going into government bonds for "safety". And then the percentage increases until it swallows up the whole thing. Then the government pays back the loan with Barack Bucks. Enjoy your retirement.

 

[helmuth_hubener]

Nobody know for certain what the economy or investments will do in the future but 35% declines are extremely rare.

"Extremely"? Here's 2008:

The decline, what we call "maximum drawdown," was over 50%. 50% is catastrophic. It means you've got to get 100% real returns just to get back your money -- the money you already had! The money you still would have if you hadn't invested it! With average real returns of the stock market about 4% per year, that could be an awfully long wait before it adds up to 100%.

But it went right back up, you might say! Did it? The drawdown period actually lasted from October 9th, 2007 until March 28th, 2013. Five years and five months of waiting for catastrophic losses to transmorph into gains can feel like an eternity. Just ask the tens of millions of average Americans who couldn't take it and got out at that time, locking in billions in losses. And the max drawdown was actually not 50%, as I said earlier (that was just from January, 2008), but 55% nominal, and over 57% real (check it).

So your 35% number is bologna.

To put this into perspective, if you bought 100 shares of SPY in October 2007, it would have cost $140,000. By March 2009 the value of your investment would have fallen to $61,000. Your account would be underwater by a hefty $79,000. And that's nominal -- in real (inflation-adjusted) terms you lost even more.

But you said such declines are "extremely rare." So the investor shouldn't worry about them, right? Wrong.

There was a double-digit drawdown in 2010: 16%. There was a double-digit drawdown in 2011: 19%. There was a double-digit drawdown in 2012: 10%. (check it) Now 2013 only had a max drawdown of 5.6%, but that still means that in 3 of the last four years there have been very sizable, significant declines. A decline of 16% very dramatically affects your portfolio.

The stock market saw a decline of 89.19% in the drawdown that lasted from 1929 until.... wait for it..... 1954. September 22nd, to be precise. Twen-ty... Five... Years. And again, that's in nominal terms. I don't have time to figure out all these drawdown periods in real terms, but in real terms they all lasted longer.

Next up: 1973-1980, clocking in at a big Negative 45% and lasting 7-1/2 years.

Here's one a little closer to home: March 27, 2000 to May 31, 2007. A loss of 49.15% (nominal), requiring a gain of 96.65% just to break even (nominally). Again, 7 years to recovery. And then a few months later in October, it crashed again. But, but, but, if you got out during that magical four month period, you came out ahead!$$!!1! Yeah. Uh huh. Not with inflation you didn't.

November 29, 1968 to March 6, 1972. Negative 36%.

November 28, 1980 November 3, 1982. Negative 28%.

August 26, 1987 to July 27, 1989. Negative 34%.

And on and on. "Extremely rare"? Give me a break! On what planet are you living?

The Nikkei is in a drawdown and has been since 1989! "As an old associate used to say to our interns upon their starting – I have jeans older than you; and anyone still holding the Nikkei from the 80’s can take solace in the fact they can adjust that saying to tell many young finance professionals – I have Drawdown Durations older than you." (source)

Don't believe Zippy. Here is the truth: Stock markets are volatile. Steep declines are common. They are very common. Deal with it.