# The wisdom of a 401k



## Jack Aubrey

Can someone explain to me the wisdom of 401ks? I know that someone puts $$ in this account and they don't have to pay taxes on it until they cash it out/ retire / whatever. I get that. What I don't get is why it is a good idea. I'm not trying to be witty, clever, smart alec,ect., I just don't get it.

Ok, I put $$ in this account. It is tax DEFERRED, not tax FREE. Colour me cynical, but if I were to bet on which way taxes are going to go...up or down... I'm betting up, based on what I know of policrats.If that weren't enough, its often tied to the stock market...at least the one I am to inherit is.

So again, why is a 401 k a GOOD idea? Thanks guys/gals. JA


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## hiwall

In most cases your employer has some kind of matching funds up to a certain amount. Matching funds mean free money for you. It is hard to find a down side to someone giving you free money.


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## Jack Aubrey

I can see that. But in my case, I won't have. I will be given just over 100k in a 401k. I am self employed. I want to use this $$ as investment capital, not a "retirement" account. As I see it, if there is a collapse, the policrats will declare a banking holiday, confiscate 401k's and claim to convert it into socialist insecurity benefits for retirement.In other words, they'll steal it. Why not put it too good use. Tied to the market, it has already lost $6000 in value in the last 6 months. JA


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## alwaysready

*I know what you mean*

To me a 401k is like equity in a house in good times it goes up and up. But SHTF in the stock market and it evaporates. I don't have much faith in our financial system or the goverment. I have my money in "low risk" because I'm over 50. But that doesen't mean much because when they can no longer kick the "can" down the road and its time to pay the piper. Its going to disapear why do I say this? Because there are not enough physical dollars to match all of the dollars on paper. Who will come up short? The little guy! As the government tries to make ends meet taxes will go up and who knows when or how much what happens to my defered money? Also they will probrably raise the retirement age a couple of more times. Well thats my two cents on 401k which I might add is probrably all that will left when my turn comes.


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## Jack Aubrey

Exactly ! My point precisely. I invest in rental properties. Providing quality, low cost housing to folks that can't own. Not crack houses or slums, mind you. There are many folks who have lost homes in this financial climate, and will probably be renters for a while.
I just think this 401k would be better spent providing for my family and benefiting my tenets rather than providing a golden egg for policrats.With that said, is there something I am missing about these 401ks? I'm going to talk to a financial adviser,but frankly, the guy I have right now is just a bankster ( Merril Lynch), and I don't trust banksters. JA


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## BillS

We have an economic collapse coming so any kind of investment activity will go bad one way or another. It would be good for you to be fully prepared if you aren't already. I'd pull out as much as I could from the 401k and put the money in physical gold and silver.


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## Jack Aubrey

Is there a way to pull out $$ w/o sacrificing a major portion to my loving Uncle Sam?JA


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## Tweto

In these economic times, the 401K does not make any sense. If I was still working, I would stop putting money in to the 401K and start buying PM. I agree with BillS, I think we will see another market collapse soon. Any money in equities will drop 30-50% and it may be years past that for it to recover and that's assuming that there is no US financial collapse.


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## hiwall

Caution is called for in this case. Like the above said in a market/financial collapse you will lose big(possibly all). If it happens(I agree that is good possibility) but it might not. One of my old 401's I transferred to an IRA that I have total control over. With the market fluctuating wildly I have been able to make a bunch of money by playing the market(I know very little and it was maybe alot of luck?). Until(or if) the market crashes there is potential for larger than average return due to the large fluctuations of the market. It does take nerves of steel though. Drawing out that 401 will cost you pretty big and will take a good return on investment to recover that loss in the short time many feel we have left. PM to me is a last resort that we should all do but at later time(hope I know when).


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## partdeux

401k's in theory allow you to save during times of higher income, avoiding taxes today, and paying at a time when you have lower income. Plus, during normal market periods, the exponential growth can be AMAZING. One last benefit, having it taken straight out of your paycheck, it's a forced savings account... out of sight out of mind.

Unfortunately, we are in dangerous uncharted waters right now.


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## BillS

Jack Aubrey said:


> Is there a way to pull out $$ w/o sacrificing a major portion to my loving Uncle Sam?JA


You have to be 59 1/2 for regular distributions. There's a 10% penalty for early distributions. Here's some info:

http://retireplan.about.com/od/401kplans/a/401K-Withdrawal.htm

"With rare exceptions, all 401K withdrawals are taxable as ordinary income. An additional 10% early distribution penalty tax will be assessed if you have not reached at least age 59 ½ when you take your distribution. "


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## db2469

It might make sense to take that 10% hit in these times...you will also have to pay tax on that withdrawal unless you roll it over into an IRA or similiar fund...but then you'll still have to wait until you're 59 1/2 before you can withdraw without penalty...talk to your financial advisor..
DB


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## Jack Aubrey

Thank you all for your replies, they have been tremendously helpful ! Not being familiar with 401k's , you all have helped me decide on the right questions to ask my adviser. BillS, I think I just may owe you a steak dinner! I did not realize I could take a loan against the 401k. I need to find out if it's possible / how to transfer ownership of the 401k to my company. Then I could have the use of the funds. 

Economic collapse, or at the very least a Great Depression II is what I am primarily preparing to weather. I feel a whole lot of meetings coming up, ha,ha! Guys, I'm indebted. JA


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## trebmaster

Any government program is for the bennifit of the gov not its people


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## partdeux

Jack Aubrey said:


> Thank you all for your replies, they have been tremendously helpful ! Not being familiar with 401k's , you all have helped me decide on the right questions to ask my adviser. BillS, I think I just may owe you a steak dinner! I did not realize I could take a loan against the 401k. I need to find out if it's possible / how to transfer ownership of the 401k to my company. Then I could have the use of the funds.
> 
> Economic collapse, or at the very least a Great Depression II is what I am primarily preparing to weather. I feel a whole lot of meetings coming up, ha,ha! Guys, I'm indebted. JA


Be very careful when taking a loan against a 401k. If you should happen to no longer be working there, the loan is due and owing that day.


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## mojo4

Check with some of the gold companies. You "roll over" your money to their company and they send you actual gold you can hold and keep without a paper cashout of your account thereby not paying the early withdrawal fees or taxes. If everything collapses you have gold and if it doesn't consider it gold investment. If I had a 401k that's what I would do.


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## Jack Aubrey

mojo4 said:


> Check with some of the gold companies. You "roll over" your money to their company and they send you actual gold you can hold and keep without a paper cashout of your account thereby not paying the early withdrawal fees or taxes. If everything collapses you have gold and if it doesn't consider it gold investment. If I had a 401k that's what I would do.


Now, there's an idea I like! I'll look into it. Thanks! JA


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## TopTop

The original intent of a 401k or IRA was encourage long term savings & create a pool of money to finance mortgages, corporate expansion, etc. The carrot for you was tax deferral, where the money you did not send to the IRS is invested for your benefit, then taxed during retirement at a lower rate. You can convert this to a Roth right now if you want. The tax is due now, but future growth is never taxed. The reason congress approved the Roth was to get people to pay more tax NOW so they can waste more $$$ NOW instead of later.The carrot for you is tax free growth.

There are provisions for early withdrawal without penalty, like being disabled. You can also "retire" early by taking scheduled distributions for five years or attaining age 59 1/2, whichever is longer. 

As for 401k loans, some plans allow loans after you leave the employer. Check with your plan administrator. Make sure they actually check because they will automatically assume no loans after leaving the employer/sponsor. 

Buying physical gold & silver is great, but a couple problems come to mind. First, it is only a hedge against economic collapse. Like paying insurance premiums, it is a guaranteed loser unless the worst happens. Second, when someone hands you a chunk of metal how do you know it is what you think it is & not some alloy worth a lot less. Some stainless steel can only be distinguished from silver by examining under a microscope. And I don't see how you could use a five ounce gold bar for street trades after the collapse. Maybe a copper stash would be more practical. Then of course you need it where you can get to it & you must protect it.


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## mojo4

Well toptop if I gave you 100K in cash right now what is your best investment? I still say gold because the people in charge of the fed went to sleep and left the printing presses on. Add the fact that with a 401k you have to pay lots and lots of taxes right now to get it out and by far the best choice is a rollover to gold. And its not all 5 oz bars, you can get 1/4 oz coins and if you go with a reputable dealer you can trust it is gold. And BTW, I'm not advertising for any company but I advised my parents to roll over to gold too because I believe our money system is being driven off a cliff. So people who need working capital can try something else but I have a hard time investing my hard earned dollars and having no say how or in what they get invested in.


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## TheAnt

partdeux said:


> One last benefit, having it taken straight out of your paycheck, it's a forced savings account... out of sight out of mind.


The way our politicians and bankers and other leaders are the last thing I would think anyone would want is their money to be "out of sight out of mind". Anyone who says this about their money deserves to lose it.

To the OP: I dont know much about 401ks but I'd rather have 100k in PMs then in dollars. Id rather have 100k in real estate than in dollars.

Dollars value is trending down long term.
PMs value is trending up long term.
Real estate is trending ???? long term. I wouldnt be surprised to see another downturn but long long term I'd say up. "You aint no kind of man if you aint got land"


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## partdeux

TheAnt said:


> The way our politicians and bankers and other leaders are the last thing I would think anyone would want is their money to be "out of sight out of mind". Anyone who says this about their money deserves to lose it.


Little to flip on my part, if it comes out of my paycheck like a tax, then I can't spend it instead of saving it.

WRT today's economic climate, if anybody can guarantee what is going to happen, then great, plan your investment around the guarantee.


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## TopTop

Oh I didn't say not to buy gold, just pointed some possible problems. Paper gold is totally worthless as a hedge against a financial meltdown, same thing with storing it in a bank. Dealing with a reputable person is a given, but define reputable. It wasn't that long ago we thought Wall Street & people like Bernie Madoff were reputable. I think if you can not test your metals yourself then fraud & counterfeiting is a valid concern. Even your trusted dealer could be mislead. If there is money to be made, the lowlife type will get involved. Then when it comes to using it as currency for street trades after the collapse you will not be trading with your trusted source anymore. Even a 1/4 oz of gold is worth what, 450-500 & some say it could go to four times that. It could be difficult to buy a bag of veggies when your smallest coin is $2,000. Again I did not say don't buy gold. It may very well be the best possible choice for you. And I was serious about copper might be a better choice at least for some of your stash. It is cheap enough that it really can't be counterfeited, plus it has practical uses other than jewelry & circuit boards. The Chinese are already using a pseudo copper based currency.


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## BillS

TopTop said:


> The original intent of a 401k or IRA was encourage long term savings & create a pool of money to finance mortgages, corporate expansion, etc. The carrot for you was tax deferral, where the money you did not send to the IRS is invested for your benefit, then taxed during retirement at a lower rate. You can convert this to a Roth right now if you want. The tax is due now, but future growth is never taxed. The reason congress approved the Roth was to get people to pay more tax NOW so they can waste more $$$ NOW instead of later.The carrot for you is tax free growth.
> 
> There are provisions for early withdrawal without penalty, like being disabled. You can also "retire" early by taking scheduled distributions for five years or attaining age 59 1/2, whichever is longer.
> 
> As for 401k loans, some plans allow loans after you leave the employer. Check with your plan administrator. Make sure they actually check because they will automatically assume no loans after leaving the employer/sponsor.
> 
> Buying physical gold & silver is great, but a couple problems come to mind. First, it is only a hedge against economic collapse. Like paying insurance premiums, it is a guaranteed loser unless the worst happens. Second, when someone hands you a chunk of metal how do you know it is what you think it is & not some alloy worth a lot less. Some stainless steel can only be distinguished from silver by examining under a microscope. And I don't see how you could use a five ounce gold bar for street trades after the collapse. Maybe a copper stash would be more practical. Then of course you need it where you can get to it & you must protect it.


I think a Roth IRA is a terrible idea. If you pay taxes now you lose out on years and years of growth on the amount of taxes you paid up front.

If you deal with reputable companies you don't have to worry about whether or not your gold is authentic. If you have any questions you can get an accurate scale and a set of digital calipers. You can compare your readings with what a real gold coin is supposed to be for size and weight.

Copper isn't practical at all. Copper is worth $5 a pound. $10,000 would buy me one ton of copper, 23 pounds of silver or about 6 ounces of gold. I prefer junk silver because the small size makes them more liquid.

Gold and silver are perfect hedges against inflation. Gold has gone up in dollars every year for the last 10 years. 10 years ago gold was $302. Its about $1578 today.


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## TopTop

Everyone's situation is different, but just do the math. Most people will have more spendable after tax cash in their account after a set period of time with a Roth. But again, everyone is different. Just do what's best for you. I will not argue about the authenticity of gold, silver, platinum, etc. Common sense says it could be a problem. If it were, how many people would even know? Millions of people have bought gold online. How many have made any attempt whatsoever to verify it. And you're right, with accurate tools you could compare volume to weight for some piece of mind. Instead of calipers I think I would drop it in a beaker of water & measure the displacement. My point about copper is the same as yours, except I see it as a plus & you don't. I'm thinking in terms of needing to use your metal stash as currency for day to day needs & it is not total anarchy. Think 1929, 30, 31. A ton of copper in 10 lb pigs still wouldn't take a lot of room, assuming you don't live in an apt or trailer or something. Again, each person's situation is different. A couple pigs could more easily be converted to something you need on a day to day basis. Think about what is happening right now. People scavenging scrap metal, with copper being the most prized, any way they can & selling it daily to get what they want that day. And as you said, gold has rapidly escalated & is in the bubble range. Bubbles may get bigger or they may burst. Anyway, it's just an idea. Nothing worth arguing about. 

This chart shows the historical value of copper. Looks like it could be a bubble too.


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## TheAnt

Not really on the OP topic but coppers value is directly as a result of industry. If the SHTF event you are prepping for includes a decrease in industry (as many SHTF events do) you would do well to steer away from copper as a PM investment. Silver is somewhat an industrial metal as well but history shows silver to BE money. 

Copper has value but it is so high right now because of industrial use. I expect a sharp decline in industrial demand for copper and a corresponding decline in coppers value. It *might* hold its value against the dollar in the same SHTF event but I doubt it.

PMs are expensive right now in my book and based on where I am in my prepping and how much (or rather how little) reserve cash I have on hand right now makes PMs out of reach for me. Still, silver and gold IS REAL MONEY. It always has been and always will be.


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## TopTop

From 302 to 1578 over ten years is over 500%. It looks like copper grew about 750% from Feb 2001 to Feb 2011.

Might not be a good time to buy.

You are right Ant. I was thinking more in terms of a currency crisis. If the US dollar goes the way of the ruble, I think China is preparing for the yuan to become the world standard & they are banking on copper being more important than gold. But who knows. Certainly not me.


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## mojo4

Aubreys point was what to do with the 401k. Top, you made the point that a paper certificate of gold is worthless and I totally agree. The gold company I called for my parents, I can't remember the name, ships you the actual gold and silver coins you buy with the 401k money and you hold them. I'm sure you can get gold, silver and platinum bars or coins. Since aubrey wanted to invest a 401k safely PM's you can keep in your hand seem much much safer than a paper saying you have such and such in a bank somewhere and it will take forever to actually get your money. If you are afraid of phony coins then please tell where you buy yours because no matter where you get them there is always a risk of counterfeit coins but I would trust an established gold trading company far sooner than any online or pawn shop.


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## db2469

Apmex and Gainesville Coins, Inc. are 2 companies I trust...FWIW
DB


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## mojo4

Do they sell at spot db cause round my area when you sell they give you less than spot and when you try to buy they pull the "this is a collector series coin" crap to run up the price!


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## TopTop

mojo4 said:


> ...... ships you the actual gold and silver coins you buy with the 401k money and you hold them. .....
> 
> .....no matter where you get them there is always a risk of counterfeit coins.....


Be careful of that. With very few exceptions, 401k & IRA assets are required to be in the possession of a trustee. If you or your parents take possession it may trigger a taxable event.

As to your second point, that is all I was saying. There is, or should be, a real concern about the validity of your PM holdings. Apparently I hit a nerve & somehow people thought I was against gold. I never said that. Ever. Gold is good, it just may not be the best thing to buy at any particular time and less precious metals can be just as durable & maybe a little bit more useful at times. Coins have been cast from copper just as long as they have been cast from gold & silver, and I'm not too proud to pick up a penny from the dirt.

This reminds me of a conversation I had about RE at the height of that bubble. Several people were saying that no one had ever lost money on RE. They weren't making anymore & it always goes up in value. I tried to be the voice of reason & people got vile. Told me to crawl back under my rock & STFU. Fast forward a couple years & these same people were crying in their beer (they couldn't afford imported wine anymore) about all the money they were losing on their vacation homes, rental properties, REIT's, and how their liquidity was gone because their home equity credit lines dried up. Question--Is borrowed money ever really liquid? Or is it just more debt.

I have always been a bit of a contrarian & avoid following the crowd. That has caused me to miss out on some of these stellar rises, but it also keeps me from falling like the proverbial lead balloon when the bubble bursts. And it always does. Burst, that is.

Anyway, I'm not trash talking gold or Mother Theresa. And I have no idea what is going to happen. But I think that unless we get our deficit under control soon you will not want to own anything tied to the US dollar.


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## db2469

mojo4 said:


> Do they sell at spot db cause round my area when you sell they give you less than spot and when you try to buy they pull the "this is a collector series coin" crap to run up the price!


Yes, that is what they do but I'm buying gold for a safe haven, for when it's the only currency after the SHTF or possibly when hyperinflation takes it to$2000-$3000 an oz...so paying a little more than spot right now is relatively meaningless..
DB


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## Immolatus

I have no knowledge of 401k's, but I thought that the main benefit was company matching funds. Since you are self employed, that doesnt seem to make any sense. I would ditch it for an IRA, but obviously talk to an advisor.
Find one who is independent and gets paid by the hour, not one who works for a large firm, there are too many conflicts of interest.
IRA's:
Theres a lot of variables when deciding which to choose, mainly your age and income levels (current and projected), ask the advisor which is best for you. Personally I'd rather pay the taxes now and not have to worry about it down the road.

ALL INVESTMENTS ARE RISKY!
Even our beloved pm's. If theres a collapse, obviously equities will be worthless. BUT, gold and silver will not be immune. In theory they would skyrocket as long as the dollar is the reserve currency, but both to some degree rely on market fundamentals (supply/demand) and if it came down to it, in a total collapse there would be NO (this is highly unlikely, but its the worst case scenario) INDUSTRIAL DEMAND and no paper demand. By the same token, there could be lots of hoarding, and theoretically mines would cease operations as well. Point being, as much as we'd like to say that silver/gold would just go to the moon, there exists a possibility that they wouldnt.
And after all, we could be in a huge gold bubble right now. Its possible.


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## BillS

TopTop said:


> This chart shows the historical value of copper. Looks like it could be a bubble too.


Copper isn't a bubble. All kinds of commodity prices have been going up. It's a reflection on the loss of the dollar's purchasing power.


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## SuspectZero

I recently cashed out my 401k. Reason being is it still had not regained its worth since 2008 and I was tired of sitting on an old acct thats practically inactive. To me the problem with 401k's are its not a defined pension its a defined contrubution. So past employers gave their employees a set amount of money upon retirement. Good market or bad they got it. Now employers contribute maybe a 3% match (not the 80% pensions gave) and the returns all depend on market conditions. The problem people face is before an 80 yr old may have gotten $1000 a month no matter what. Now an 80 yr old can loose on their 401k and be forced to find work or accept gov help. Its a cheaper way to make employees think they are getting money for free but they don't. By law, when a retiree approaches 70 and 1/2 yrs their 401k will slowly be sold off. Which in return floods the market with stock causing the market to drop. In 2016 the begining generation of baby boomers with a 401k will begin hitting that age. In great market conditions they are great but by 2016 the market will be flooded with 3 million 401k forced sells that I dont see it recovering seeing as the next year we will have 3.8 million and the number continues to increase. Thanks, but i'd rather have that pension all the fed employees get. Including the 20 and out while most 401k workers put 40 years into their retirement with half the benefits.


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## hiwall

Many 401k's give you several options. Several stock options, bond options, or money market/ savings options. I worked at one company that did a 25% match and were vested right away!!! The 3% is much more common. As you get closer to retirement age you should gradually move your 401k or IRA to lower risk investments- from stocks to bonds or money market/ savings options. I totally agree that I would rather have the gov pension with the paid health insurance that would retire at age 48 in some cases.


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## mercygirl87

Jack Aubrey said:


> Can someone explain to me the wisdom of 401ks? I know that someone puts $$ in this account and they don't have to pay taxes on it until they cash it out/ retire / whatever. I get that. What I don't get is why it is a good idea. I'm not trying to be witty, clever, smart alec,ect., I just don't get it.
> 
> Ok, I put $$ in this account. It is tax DEFERRED, not tax FREE. Colour me cynical, but if I were to bet on which way taxes are going to go...up or down... I'm betting up, based on what I know of policrats.If that weren't enough, its often tied to the stock market...at least the one I am to inherit is.
> 
> So again, why is a 401 k a GOOD idea? Thanks guys/gals. JA


To me its not a good idea anymore. Under my uncles advisement, for quite some time before the 08 crash, I was socking ten %of my pay in my 401K. Thats money I could have paid off my house with. I will ALWAYS regret that move. Since the crash, I havnt and WILL NOT EVER put another penny in that 401K. Oh, and btw, right after the crash, my employer quit matching, and hasnt picked up either since. Good times everyone!! I have NO faith in the system, and I feel that someday these 401's will be confiscated anyway.


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## BillM

I worked twenty years for a large healthcare corp.

They had a company backed retirment savings plan.

They matched our savings , (up to five % of our income).

They invested the money and we earned intrest on our savings.

The matching money was vested after one year.

Sound like a good deal ? 100% matching savings + intrest!

Here is the real deal.

The first year Joe invests $1000.00 and the company matches it by $1000.00 plus intrest at 3%. Joe makes 103% on his money. 

The second year Joe invests $1000.00 and earns 3% intrest. But wait he already has $1030.00 and has contributed another $1000.00 and the company matches that with a $1000.00 bringing his total savings to $4030.00 which he now earns another 3% on the vested amount, ($33.00), which brings his total to $4033.00 in savings.

The third year Joe saves a $ 1000.00 and the company matches it with a $1000.00 plus intrest, bringing the total to around $6150.00.

Now we have just been in for three years and have contributed $3000.00 and we have gained over 100% in matching funds. What could be wrong with that?

Joe has $6150.00 he contributs another $1000.00 . The company contributes $1000.00 plus three percent on vested moniey in the fund or $1184.50

This actually would be a 16.5 precent return on Joe's total amount that he had in the fund after the forth year.

After the fifth year, a 14% intrest on Joes money would be the actuall intrest earned.

The intrest actually acrued will continue to drop while Joe thinks he is earning a 103 precent intrest rate on his savings.

Most mutual funds will do better than this over a long term period of time.

By the time Joe has twenty years in the fund, he is loosing money to inflation.

The company is now paying him a paltry amount to use his money even with the matching funds and the low rate of intrest earned.


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