401K Dillema

[Microwave]

Good day,

 

So I have about $6,000 invested in my 401K through work, but I won't be retiring for another 30-35 years. My fear is that the dollar either won't exist by then or inflation will make my investment worthless. If I cash out the 401K now, I'd have to pay a large fee (30% I think?), but I feel like that might be the best option. I could take that money now and create my own retirement fund (bitcoin, gold, silver, whatever) and not have to worry about inflation.

 

I'm just curious on what your thoughts are on 401K's/Roth IRA's, will the dollar even be worth anything by the time I can cash it out, and is it irresponsible to cash out my retirement fund early? Any input would be greatly appreciated. Thanks!

[Songbirdo]

Disclaimer: Not a financial adviser or a CPA, and therefore I cannot give financial advise and therefore the following should not be considered as much.

 

There's the early withdrawal fee and the income taxes on top of that. And the tax would be at your highest rate since it will be on top of your regular income for the year. Can't forget about the taxes!

 

I've heard the self-directed IRA would let you buy the gold/silver ("IRA approved bullion" like Eagles) with the full amount of the 401k transferred to it (no penalty, no tax), but you will need to look into it further yourself to confirm the notion.

 

Ask yourself: How high of a risk do you think inflation or outright dollar collapse is? Weigh that against the meager but "consistent" returns you'll get in a 401k or a bond. Do the same for the alternatives (your "bitcoin, gold, silver whatever"). Make a decision what you feel is the best route to take.

[Prairie]

I've heard the self-directed IRA would let you buy the gold/silver ("IRA approved bullion" like Eagles) with the full amount of the 401k transferred to it (no penalty, no tax), but you will need to look into it further yourself to confirm the notion.

A third party has to hold the gold, so in the event of a collapse you might not even be able to get possession of it.

[st434u]

Take it out if you're afraid that the State may steal it in the future. Otherwise call Europacific Capital or your favorite brokerage firm and tell them you want to transfer it to them and have a portfolio heavily weighted towards precious metals, mining stocks and agriculture.

 

If you do take it out and pay the penalty, don't put it in bitcoin.

[ribuck]

In the long run, precious metals keep up with inflation but are not a productive (wealth-generating) investment. In the long run, stocks exceed inflation by several percent per year. Compound that over 30 years and you'll be way ahead with the money in the 401K, invested in a low-charge tracker fund.

 

Mr Money Mustache is a very readable blog that explores these issues.

[st434u]

ribuck, stocks are often in huge bubbles and even if the company itself is productive (which sometimes it isn't), the valuations can be so high that in the long term you can pretty much only lose.

 

If you can pick good stocks and good sectors, then it can still yield a profit, but you should be careful when assuming that you can't go wrong with stocks.

 

There is a lot of manipulation to keep precious metals prices down, and the general sentiment is too bearish when it should be the opposite. So they're the opposite of a bubble, and in the long term you can pretty much only win (beat general price rises by a lot).

[ribuck]

From the inflation-adjusted statistics in Thomas Sowell's book "Basic Economics":

 

...a dollar invested in bonds in 1801 would be worth nearly a thousand dollars by 1998, a dollar invested in stocks that same year would be worth more than half a million dollars in real terms. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78 cents...

 

The bottom line is that a productive investment such as stocks will, over a long enough term, vastly out-perform non-productive value-holding assets such as precious metals

[st434u]

Sowell is a socialist, and of course if you pick a stock that is one of the few that's still around in 1998 and has existed since 1801, it will be worth a lot, but what about all the tens of thousands of companies that went broke along the line?

 

Also, the gold one doesn't add up at all. In 1801 a dollar was defined as 1/20th of a troy ounce of gold. In 1998 that same amount of gold would've costed you $14.50. Today it would cost you $65.

[st434u]

Oh, those stats are adjusted for CPI, that's why gold is worth less, ok.

[ribuck]

Yes that's right. When looking at long-term investments, one needs to adjust all the statistics for inflation. It's also important to use geometric mean rather than arithmetic mean for all growth statistics. Otherwise, people mis-allocate their investments as a result, and don't realise until years or even decades later, by which time it may be too late to recover.

 

As for the statistics, they do include all the losses from the companies that went broke along the line. Profits from the companies that did well are more than enough to make up for losses from those that failed.

 

In the UK, the long-term statistics for the stockmarket as a whole, including dividends re-invested, show a growth of 5.1% per year above inflation. If one can keep total fees below 1% per year (which should be possible provided one is aware of them), and if you use tax-efficient investment wrappers such as ISAs, it should be possible to get a fairly safe long-term return of 4% above inflation.

 

This means, if one wants to retire with a perpetual inflation-adjusted income of £10,000 per year, one would need a stock portfolio valued at £250,000. Add a small pension and one can survive comfortably. Anything above that will let someone in the UK live well rather than just "survive".

[LibertyDefender]

I think the first question would be how likely do you think that a dollar collapse will be in the next 30 years? As Songbirdo pointed out, you would be responsible for taxes and fees on your early withdrawal. I think the heft of this hit is only worth it if you feel the aforementioned dollar collapse has a good chance of coming to fruition during your timetable. I think precious metals are a great investment, but (and a few people already made this point) you should only buy them if you are going to physically hold them. They are a good hedge against inflation, but typically do not outperform stocks. Their great strength is that you physically have something of value when the economy collapses and/or hyperinflation demolishes fiat currency. If you invest in precious metals through an ETF, or a 401(k), you have - in effect - destroyed that great strength because you are not the physical holder of the wealth if chaos breaks out.

 

I think starting your own retirement fund is admirable, and would give you constant access to the funds without penalty. However, you will lose out on the tax benefit of lowering your reported income through traditional 401(k) contributions. I think all the investments you mentioned are good, but remember that you probably want a diverse portfolio to hedge against risk. Also, not to be too repetitive, but whenever the investment is a physical thing (eg: precious metals), posess it yourself whenever possible.

 

I don't think a complete dollar collapse is likely in the next 30 years. I say likely because I definitely think it is possible, just not more-likely-than-not. I think you are right to be cautious about 401(k)s though - I believe a more likely scenario in the next decade or so is that Roth IRA contributions get banned and/or high net worth surtaxes begin to be applied to retirement accounts. The idea has already been brought up in the U.S. Congress, and they hopelessly need your wealth to satiate their need to spend.

[st434u]

Yes that's right. When looking at long-term investments, one needs to adjust all the statistics for inflation.

Not necessarily. If you are comparing various different investment propositions, it's just as good to adjust all of them as to adjust none of them. 

It's also important to use geometric mean rather than arithmetic mean for all growth statistics. Otherwise, people mis-allocate their investments as a result, and don't realise until years or even decades later, by which time it may be too late to recover.

You lost me there. 

As for the statistics, they do include all the losses from the companies that went broke along the line. Profits from the companies that did well are more than enough to make up for losses from those that failed.

But weighted how? Equal amount of investment in all companies, investment based on earnings, based on market cap at the time, in a particular index, what is it?I think significant amount of meddling with the data would be necessary to come up with numbers like the ones quoted above. 

In the UK, the long-term statistics for the stockmarket as a whole, including dividends re-invested, show a growth of 5.1% per year above inflation. If one can keep total fees below 1% per year (which should be possible provided one is aware of them), and if you use tax-efficient investment wrappers such as ISAs, it should be possible to get a fairly safe long-term return of 4% above inflation.

Well you're assuming that the inflation statistics provided by the UK government are legit, which I doubt. In any case, this says nothing about the return investing in gold. Over the past 14 years gold and silver have both gained about 11% per year in USD and GBP.

 

Also I would again like to know how this "stock market as a whole" thing is calculated.

whenever the investment is a physical thing (eg: precious metals), posess it yourself whenever possible.

There are other ways to be invested in precious metals besides ETF's / 401k's that do not require you to take possession, and have other benefits.The safety in physically holding the metals doesn't come without it's own risks, because what if you get robbed? Or what if you have to leave the country and can't make it past borders carrying your metals? Surely you can find a way to sell them on the black market and re-buy on the other side, but that has it's own additional risks and costs. 

I don't think a complete dollar collapse is likely in the next 30 years.

Oh it's not just likely, it's a certainty.

[Prairie]

It's also important to use geometric mean rather than arithmetic mean for all growth statistics. Otherwise, people mis-allocate their investments as a result, and don't realise until years or even decades later, by which time it may be too late to recover.

You lost me there.

Seems like it's because the arithmetic mean gives more weight to later values, since those are inflated more than earlier ones in terms of value.

[LibertyDefender]

 

Oh it's not just likely, it's a certainty.

 

 

We can argue our opinions on the likelihood, and I think I am more in your camp than you think. That being said, it is certainly not a certainty. I agree with you that having physical posession of precious metals carries the loss-risk of being robbed, but I would like to hear you elaborate on other methods of precious metal ownership that you find preferrable (certificated gold?). Additionally, while ETF and 401(k) ownership of PMs might not be preferrable in my mind, I find it curious that you would argue against physical ownership for a person who is afraid of a dollar collapse. I understand the risk of phsical theft, but if you are convinced that fiat curriencies are going to become worthless, aren't you arguing my position? Again, perhaps I am not privy to the investment methods you hinted at, which is why I requested clarification.

 

Additionally, if it wasn't clear from my original post, I am all for PM ownership. I own a decent amount myself. Finally, while your extreme caution about the stock market is warranted, I think it is worth investigating an investment strategy that has historically paid off well.

[ribuck]

st434u,

 

You wrote:

If you are comparing various different investment propositions, it's just as good to adjust all of them [for inflation] as to adjust none of them.

 

Not really. If the raw figures tell you that gold increased by a factor of 10 and stocks increased by a factor of 100, you might assume that gold would enable you to increase your wealth. But if there was inflation of ten times, the inflation-adjusted figures would show that gold kept the same value and stocks increased by a factor of 10, so you would know that gold had maintained its purchasing power but didn't increase it. Therefore, only by looking at the inflation-adjusted figures would you realise that gold would not enable you to increase your wealth.

 

You asked about geometric mean. Here's why it using the geometric mean is the only meaningful way to calculate long-term growth. Suppose the stockmarket goes up 20% one year, and the next year it goes down 20%. You might be tempted to use the arithmetic mean and say that the average growth was zero, i.e. (1.2+0.8)/2 = 1.0. However, that gives an over-optimistic sense of market performance.

 

To see why this is so, suppose that you invested $100. The first year, the market goes up 20%, so you end up with $120. The next year, the market goes down by 20%, so you end up with $96 (i.e. 80% of $120). Therefore, if you have growth of 20% followed by shrinkage of 20%, the average annual growth is not 0% but minus 2% per year!

 

The geometric mean takes care of this, because the formula is sqrt(1.2*0.8) which is approximately 0.98, i.e minus 2% per year.

 

You wrote:

Also I would again like to know how this "stock market as a whole" thing is calculated.

 

This needs a chapter of a book, not a forum post. But there are widely-accepted stockmarket indexes with well-defined and statistically-sound methodologies. When statistics cover decades, they sometimes need to use different indexes for different parts of their coverage. It's a compromise, but it's the best that can be done.

 

If you're interested in seeing which investments were sound and productive in the long term, the annual Credit Suisse report on historical investment returns is rigorous, informative, and quite readable. Naturally all of the figures are inflation-adjusted and use geometric means:

https://www.credit-suisse.com/investment_banking/doc/cs_global_investment_returns_yearbook.pdf

 

You wrote:

[dollar collapse is] not just likely, it's a certainty

 

In the event of dollar collapse, gold is useful, though in my opinion not useful enough to be worth losing decades of profit that stocks would yield. It's likely (though not guaranteed) that profitable companies would still pay dividends to holders of their stock, even in the event of a dollar collapse.

 

You wrote:

Over the past 14 years gold and silver have both gained about 11% per year in USD and GBP

 

Sure. Gold and silver tend to do well in times of turmoil. But over the longer term, they approximately keep up with inflation and nothing more. So do you want a hedge against financial turmoil, or an investment that will increase your wealth and from which you can draw an ongoing passive income.

 

LibertyDefender wrote:

whenever the investment is a physical thing (eg: precious metals), posess it yourself whenever possible...

 

I absolutely agree. Holding "paper" gold works fine when things are running smoothly, but in the event of a collapse the gold won't be there for you.

 

I'm tied up with work and won't be able to participate further in this thread, but I strongly recommend that any investor reads the Credit Suisse historical report that I linked above, and also other similar publications.

[cobra2411]

I've heard the self-directed IRA would let you buy the gold/silver ("IRA approved bullion" like Eagles) with the full amount of the 401k transferred to it (no penalty, no tax), but you will need to look into it further yourself to confirm the notion.

http://camaplan.com/

https://www.trustetc.com/

 

Those are two that I know of and I have money with camaplan, so I can speak directly about them. They follow the IRS guidelines for an IRA with no other restrictions. I have a stock account setup where I can even trade futures and options. I've also used my money to buy real estate and loan hard money. You can also buy gold though them as well. There are many other "self directed" IRA's out there but many have restrictions in their charter with the IRS and thus are limited in how much you can control. So they are self directed in the sense you can buy and sell stocks, but you can't buy physical gold or real estate because they've elected a restriction on their filing with the IRS. 

 

I'm not sure on the details of rolling your 401k over, but I don't believe you can do it if it's from your current employer. 

[BrianBrian]

Something I didn't see mentioned is if the company you work for matches 100% of up to x% contributions that means the 401k could lose half its value and you'd still have what you put in it, assuming you only put in up to what the company would match.

 

My employer matches up to 5% earnings so I put in 5% and they match it and I have 10% of my income in the 401k before it's effected by the fluctuations in value of assets.Without the match I wouldn't bother but for now at least I see it as worth the gamble of at least being able to immediately double some money.

[Songbirdo]

That would be true if it wasn't already money out of your pocket to begin with. If the company has to provide a X% for every Y% you invest, that's less income they are able to pay you directly. Every benefit they offer you is a deduction in the amount they are willing to pay you on the income-side.

 

I would rather have the option to get the X% "company match" included in my normal paycheck rather than the 401k carrot to get me into give up an additional Y% of my remaining income into the government program, but then not get the company's X% if I choose not to participate.

[BrianBrian]

That would be true if it wasn't already money out of your pocket to begin with. If the company has to provide a X% for every Y% you invest, that's less income they are able to pay you directly. Every benefit they offer you is a deduction in the amount they are willing to pay you on the income-side.

 

I would rather have the option to get the X% "company match" included in my normal paycheck rather than the 401k carrot to get me into give up an additional Y% of my remaining income into the government program, but then not get the company's X% if I choose not to participate.

Yea that's not an option. It's take it or leave it.

[st434u]

I would like to hear you elaborate on other methods of precious metal ownership that you find preferrable (certificated gold?).

You can have them physically stored for you in a location that is safer than your own property. It won't be a secret that you have them, but at least you know that it will take a lot of firepower to steal them. And as long as you have it in a country with a somewhat stable political situation, you should be fine. Also, you can count on being able to get the money anywhere in the world you happen to be in, if you have to flee across borders.Another option is to own mining stocks. While the whole exchange market could collapse along with the currencies and banks (and I don't think that will happen necessarily), companies will likely still remain true to their shareholders. And while owning a gold mining company is different than owning gold, and there's always regulatory risks involved, it's close enough. And it has more earning potential, as you can not only gain on gold's appreciation, but potentially get a positive return in gold, considering your initial investment as gold also. 

Additionally, while ETF and 401(k) ownership of PMs might not be preferrable in my mind, I find it curious that you would argue against physical ownership for a person who is afraid of a dollar collapse. I understand the risk of phsical theft, but if you are convinced that fiat curriencies are going to become worthless, aren't you arguing my position?

I'm not against physical ownership. It's a good idea to have a few ounces around that you know will come handy in covering basic necessities for a bit or paying for a trip out of the country. It's different to plan on saving for your retirement by stocking 50 kilos in your own property. Even if they are very well hidden, it's a pretty large risk to be taking. Assuming these are your only savings you could be wiped out if something were to happen. And you're unlikely to be able to get insurance against this kind of risk.Not to mention, if you do decide to do that, blasting it all over the internet for the raging zombies to be able to look up 10 years into the future, when things have really hit the fan and the relative value of gold to everyday items has skyrocketed, may not be the safest thing to do.ETFs and other financial instruments have another benefit (and risk, if misused), in that they allow you to leverage. It's true that the exchanges could go bust entirely, but again, I don't think that will happen necessarily just because the currency has. 

Additionally, if it wasn't clear from my original post, I am all for PM ownership. I own a decent amount myself. Finally, while your extreme caution about the stock market is warranted, I think it is worth investigating an investment strategy that has historically paid off well.

I'm not saying you should avoid stocks altogether. Just know that opening the financial times, closing your eyes and waving your finger until it lands on something is a terrible idea, even if you plan on holding it for 30 years, and even if you diversify.I would just avoid stocks from countries/sectors that will be hit hard by the coming economic Armageddon, and instead choose countries/sectors that will do well in the turmoil, and within those, don't just pick at random, but try and know the companies you're investing in, or at least have someone who's judgement you trust recommend them.

[st434u]

Not really. If the raw figures tell you that gold increased by a factor of 10 and stocks increased by a factor of 100, you might assume that gold would enable you to increase your wealth. But if there was inflation of ten times, the inflation-adjusted figures would show that gold kept the same value and stocks increased by a factor of 10, so you would know that gold had maintained its purchasing power but didn't increase it. Therefore, only by looking at the inflation-adjusted figures would you realise that gold would not enable you to increase your wealth.

Again, this is irrelevant because you're comparing one investment to another. So you know that the stocks outperformed gold 10 to 1. You seem fixated on whether each investment earns a profit or not. It's more important to know how much you get by doing Y as opposed to doing Z. 

You asked about geometric mean. Here's why it using the geometric mean is the only meaningful way to calculate long-term growth. Suppose the stockmarket goes up 20% one year, and the next year it goes down 20%. You might be tempted to use the arithmetic mean and say that the average growth was zero, i.e. (1.2+0.8)/2 = 1.0. However, that gives an over-optimistic sense of market performance.

Uhh, no, I just look at the total growth over the long-term, and then use compound interest to calculate the average annual rate of growth. I don't know if that's called using the geometric mean or what. 

This needs a chapter of a book, not a forum post. But there are widely-accepted stockmarket indexes with well-defined and statistically-sound methodologies. When statistics cover decades, they sometimes need to use different indexes for different parts of their coverage. It's a compromise, but it's the best that can be done.

I admit that I don't know much about how these calculations are done, but this sounds like a bunch of financial hocus pocus to me. 

In the event of dollar collapse, gold is useful, though in my opinion not useful enough to be worth losing decades of profit that stocks would yield. It's likely (though not guaranteed) that profitable companies would still pay dividends to holders of their stock, even in the event of a dollar collapse.

Sure, but what if the companies go bankrupt too? I mean take a look around, companies are going for 100+ times earnings, IPO's are coming out left and right from companies who've never made any money, they only lose money but hope to make some in the future, with no reasonable business proposition for doing so. There is a huge bubble in stocks, especially social-media stocks and the like, and especially in the US. Also, I don't think the USD collapse will take decades to materialize. I think it's probably just around the corner. 

Sure. Gold and silver tend to do well in times of turmoil. But over the longer term, they approximately keep up with inflation and nothing more.

There really is no longer term when it comes to gold and silver. They've been made illegal to use as money in just about every country in the world, for the past 43 years, and to some extent since the early stages of World War I, and increasingly the early stages of World War II.At least from the 18th century until 1910, prices in gold continuously fell. This means that gold's purchasing power was going up, not just "keeping up with inflation" (I assume you're talking about general price rises). But I guess using your definitions, you would be right, because gold was "keeping up with deflation"... The thing is, there was "deflation" (general price decreases) and not "inflation" precisely because the money was gold.From 1913 increasingly and to this day, States all over the world have not only made gold and silver illegal to use as monetary instruments, but they have led a coordinated effort along with the major banks and megacorporations to suppress their value, so as to not awaken too many people to the monumental scam of unprecedented proportions that is the fiat currency system.This won't last forever. And when the tide starts to turn around, what you will see is 100 years worth of value suppression finally floating to the surface, and once it picks up speed, it will come up like a rocket exiting the earth and heading for the stars. Eventually, it will settle at some very high value, and then continue to rise more slowly, as it was doing before the coordinated world States/banksters/megacorps intervention began.This is why it went up so much over the past decade and a half, it's starting to catch up for lost time.If the entire world ditched fiat for gold sometime in the near future, you would be able to buy a good car for an ounce of gold. A nice house would probably cost you a couple ounces (thanks partly to the almost universal housing bubble, which would pop without fiat currency to prop it up). A decent job, like driving a tractor around, would pay about an ounce of gold a year. A good job, like being an engineer for the company that makes that tractor, would pay two or three ounces a year. A great job, like being the guy coordinating and managing the team of engineers at that company, would pay about 10 ounces a year. 

I strongly recommend that any investor reads the Credit Suisse historical report that I linked above, and also other similar publications.

I'll check it out, thanks.