Friday, September 11, 2009

The truth about 401(k)’s

The following is what I have learned through trading my father’s 401(k). I am not a financial advisor, so take what I say and think about it for yourself and how it may apply to you. I will not be held responsible for the results from what you do with your 401(k) (including, but not limited to losses).

Now that the disclaimer is out of the way:

What if I were to tell you that you can make more than 50% a year on your 401(k) without ever loosing a dime? Would you believe me? And if so would you listen? What I’m about to say maybe something you wont like, but it’s a fact and you should really think about it.

Most companies match your 401(k) payments (usually it’s $.50 on the dollar or more), but if yours doesn’t I’d talk to them about it. All the money you put into a 401(k) is also tax free (unless you withdraw it before the predetermined date), so whatever you would loose in income tax is added to your 401(k) balance. Every company that offers a 401(k) is also required to have a “stable fund”, which is a fund that is almost risk free (unless something like nuclear war breaks out). These funds usually have a small return of 2%-4% per year.

So, how you can make money with a 401(k) without ever loosing is by never investing it! Yeah that’s right, I said never invest your 401(k) in anything. If you do this (or just park it in the stable fund) you will earn 50% (or more depending on your company’s match) from your company’s matching payments, plus whatever you are saving in taxes (most of the time that is another 30% to 40%)! That means without doing anything with your 401(k) you are earning 80%+ a year!! Now you tell me, would you risk making 80% just so you can invest in something to make an extra 10%? If you would then I hope you know what you are doing, because I wouldn’t risk making 80%+ a year without the worries of a investment gone bad just for another 10%.

I know some of you reading this aren’t from the USA, however all of the above only applies to people in the USA and their 401(k)’s (I also have no idea if what I said would apply to any other type of retirement account).

I hope my post was enlightening for you, and if you have any questions just post them in the comments, thanks for reading!


FX said...

With your explanation you get 50% or 80% for the funds you put in that year as I understand. But you are not earning anything on funds from previous years. In ten years it's just 5-8% on overall funds if same amount is added every year.

StockHunter said...

Yeah that is correct, I missed that part when I did the math. However the point is that if you throw the money in a stable fund, with company matching you will never loose money and always make money. I know of a lot of people who have lost a lot of money in their 401(k)'s, however at the same time my dad has made money with this strategy.

I guess my overall point is that if you are not a trader/investor then either don't trade it (park your money in the stable fund), or hire a pro to do it for you.