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| Tuesday, January 29, 2008 |
| Boston Globe Business Section is getting Sadder |
Today's Boston Globe Business section featured these stories:
As the rich cut costs, others take a hit
Blue-collar workers see loss of income
Ye Gads, Limo drivers certainly have it hard these days.
Cash-strapped states resort to odd taxes
Which tells the tale of quirky taxes - an amusing story. But where is the local angle? Not one odd ball tax in Massachusetts? In New England?
It may be time to reassess conventional wisdom about 401(k) investing Are you losing money in your tax-deferred 401(k) and IRA accounts?
Here's a thought that may add to your pain: If you held those same investments outside of a retirement fund, you could be using them now to cut your taxes. Instead, you'll wait years, rebuild your balances, and pay full income taxes on every penny that you use - possibly at higher tax rates than today's.
That's one of many reasons some financial experts are now warning savers not to overdo their retirement account contributions. It's counter to what they've been saying for years, but the disadvantages of having all of your money socked away in tax-deferred vehicles can come back and bite you. OK, I kind of see the logic behind the article, but I am disturbed at how it is presented. To me it reads like - The markets are down dummy, stop contributing to your 401(k) you silly dollar-cost-averager you. Don't you realize that if you had put after tax dollars into a brokerage account you would be more likely to sell now, while your investments are at their lows, lock in your loses and help yourself by defraying some current income taxes? Think short term!
Perhaps I am reading these wrong - maybe I need more caffeine. |
| posted by Boston Gal @ 10:13 AM *
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| 12 Comments: |
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The Globe's Business section has been pathetic for about a year now. When they layed off most of the staff in that department and started buying wire services articles to fill space.
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I know you think of Suze Orman as a mixed bag (as do I), but she has been a long time proponent of only contributing to your 401(k) to the point of any company match and then putting the rest into a Roth IRA (assuming you are eligible). Mostly because the Roth gives you greater investment options. Obviously, it is possible to both max your 401(k) and then have Roth IRA contributions too, but let's assume that's hoping for too much.
I think the most difficult thing about not contributing to the 401(k) is that the money then shows up in your bank account, which for many people signals aha! access! Whereas with the automatic deduction for 401(k)s, you can't miss what you never see.
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Sure nice idea, but here's the kicker. What person who stops contributing to a 401k will actually defer that money into a taxable investment account?
Nobody. If people have trouble saving 5% into a 401k, what makes you think they'll save that 3% into a taxable account?
No way. I have trouble saving money. I only save money because I automate.
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"...maybe I need more caffeine."
Or an expert that doesn't work on commission.
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It's actually an OK idea. I know a lot of people always recommend contributing to 401k to get a maximum match. Lets do some basic numbers:
1. Suppose you contribute $100
2. The company matches $100. So assuming you are fully vested - you have $200 to pick from a small selection of funds available at the company.
3. Lets ask the following questions:
a. Is it possible that the company funds you picked lose 50% (or more) of its values during any given period? Sure. If the markets can drop 10% in a day - then this is quite possible.
b. Is it possible that the fund fees eat away at your profits so you end up earning much less then your money's full potential. Sure, very possible!
On the flip side of the coin, if you didn't contribute the $100, then you have approximately $70 after tax money to work with. You have greater control over this money (e.g. you can buy stocks , etfs with low/no fees (e.g. using Zecco.com for example) and move your money faster - as compared to a 401k. Plus you have a larger selection of investment choices at your disposal. Alternatively, you can put money aside to start your own business.
The key to note is that you really do have to take responsibility for the money you "don't contribute".
Many people like the "pick and forget" model which is really a stupid thing to do with your money.
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I don't follow your logic Next Generation. If I put $100 into my 401(k) and my company matches it with an additional $100 (free money!) so that I now have $200 in my 401(k) and using your example of a 50% loss - wouldn't I then have $100 in my 401(K)?
Where as in your Zecco example my $100 immediately starts out as $70 because I had to pay Uncle Sam $30 - so I start down to begin with - but somehow the magic of more options and choice trumps tax deferred growth and free match money?
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Sorry I should have been a little more clearer. I'm not arguing against free money - I'm more for choices rather than "buying something" simply because it seems like a good idea.
For example, my company 401k offers this mid-cap value fund as one of my investment choices via Fidelity.
Here's what I know about this fund:
1. 2% fees fixed and known
Now alternatively, if I take my $70 and go buy this fund (which I happen to like), I see the following key factor:
1. Fees = 0.66% fixed and known
Past performance is no indication of future performance - so I won't even try to compare the returns of these 2 funds compounded and projected over 10 - 20 - 30 years (when I plan on retiring).
The key here is - if I feel I need to move my money from the 2nd fund to another fund - then it is possible for me to do so - I can move it to an ETF. Also if I manage to hold the fund for over year (which I usually do) then I lock in long term capital gain rates on the gains.
In my case, the funds offered by my company are simply not good enough - enough for me to look elsewhere to put my "after-tax" money then leave it in a plan I don't like.
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With regard to the Boston Globe article on blue collar workers. They first picked a limo driver from California, whi said his income has dropped substantially. They didn't ask him what professions his passengers typically represent. I have a good friend who lives in CA. While she is not a writer, she holds SAG and Actor's Equity cards, and she said she knows many people in the LA area who work in the industry and are really hurting due to the writers strike. With new productions at nearly a standstill, all of those ancillary workers like makeup artists, gaffers, sound techs and the writers themselves are out of work, and obv less likely to spend on luxuries like limo rides. Perhaps after Hollywood gears back up post strike will things pick up.
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did you read the article about the limo driver - it points out something VERY interesting.
2/3rds of the consumer economy is generated by those households making more than 150k/year ---
so this whole notion that you can "stimulate" the economy by giving $300-600 to households that make less than 150k/year does not make a LOT of sense....
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^ I think you misread that.
A=affluent spending
C=total consumer spend
E=total economy
A = 0.39C
C = 0.67E
To get A in terms of E, you end up with A = 0.26E
So the Affluent, who earn >$150K annually, make up 26% of the overall economy
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Tax diversification is a good idea. Anyone who wants financial freedom before 55-60 years old needs to invest outside retirement accounts.
Living Almost Large - clearly the answer isn't "nobody". Plenty of people of moderate net worth have plenty of money outside retirement accounts and owner occupied houses. I do for example. Plenty of profiles on NetWorthIQ do. I find it somewhat shocking that the average middle class person doesn't seem to and has no real financial freedom.
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Moom, I think you are in the minority. Correct me if I'm wrong but I think the savings rate is 1%. How can people be expected really be responsible?
I don't think I can either. But we're young yet. We're just doing retirement accounts and we'll work on taxable savings next. But I think the average person can't be responsible.
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The Globe's Business section has been pathetic for about a year now. When they layed off most of the staff in that department and started buying wire services articles to fill space.