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401k or IRA ??


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41 minutes ago, Haskell_Hunter said:

This is a complicated question with no easy answer.

My answer to the question is:  It depends.

You can't just look at a fund's rate of return and forecast future returns.  But there's also something else about that number they aren't telling you about: Management Fees.  Let's say a fund has a historical return of 10% and you want to use this as a basis for projecting future returns.  Take a look at the management fees of that particular fund.  Most will be 1% or more.  Several (like Fidelity) will be over 1% and can get as high as 2.5% depending on the fund.  What this means is that when you are projecting future returns, you need to subtract the management fee from the historical return of the fund.

So it would look like this [historical return] - [management fees] = actual return.  In the example above with our 10% annual return fund, if the fee was 1.5%, the return is actually 8.5%.  You lose 1.5% worth of returns every year, and you lose the compounded interest that comes with those returns.

Here is a screen shot from one Fidelity fund I picked at random.  Notice the section on fees and their description of those fees.  Also look at the Morningstar rating and see that a 0.71% fee is in the top 20% of lower-cost finds.  Imagine how high fees are for the 80%-100% range!

349680679_ScreenShot2021-03-04at11_40_29AM.thumb.png.319f1c027811fc99347ab8a1b65a6ec0.png

Actively managed funds have higher management fees.  It means that your annual returns may look good on the surface, but you could be doing a lot better with a different fund.  A fund that also returns 10% historically with a 0.04% management fee is pretty good.  They still gotta' get paid for doing some work for you, but it's a fraction of the 0.71% that the Fidelity fund charges.

So when you are choosing funds, always, always, always look at the management fees and reduce the historical return rate by that amount.  Then compare historical returns.  You'll get a better idea of which funds may have a better potential to earn you more money.

Folks recommending the 401K because of the matching up to 6% are making a good call.  But is it 100% matching up to 6% or a smaller percentage?  Generally speaking, the funds in a 401K are very limited and the management fees are high and the funds offered aren't very diverse.  It means that your total rate of return for your investment including the 6% matching may not do as well as another investment.  There's a good amount of math involved in doing this forecasting, but it's not too difficult if you're good with Excel.  You can build your portfolio there and forecast future returns in a model of your 401K.

IRAs usually have a larger array of investment options available to them as well as some other really neat things.  You can buy an apartment building with your IRA and use the rental income as dividends into your IRA.  The value of the real estate will go up too.  You might actually see a greater rate of return with something like that than you would with your 401K.  I personally prefer IRAs over 401Ks because I can get a lower management fee and can diversify my portfolio much better that way.  But everyone' situation is different, and I actually enjoy burying my nose into Excel and running financial models all day long.  I am not an active investor by a long shot.  I have no short positions at all.  All of my positions are long positions.

If you want to invest it somewhere that you don't have to think about it, go with the 401K.  But if you think you want to spend some time crunching numbers and moving your investments around to maximize returns, I would suggest the IRA.  I would actually suggest an IRA that is not provided by your employer but one you've created on your own.

Best of luck with your decision!

Haskell makes some good points but he is off on one thing. All mutual fund and ETF performance data is net of fee's so the performance results are net numbers not gross. I do this for a living so I talk to clients every day about things like this. That is my banner that you see running on this site. 

As most have stated contribute to your 401k to max out your companies contribution. 401k's typically have decent stock fund options and horrible bond options. They also tend to have expensive funds and have hidden costs that you dont see. One advantage 401k's have over IRA's is that if you are 55 or older and you leave your job for any reason you can access your 401k funds penalty free. In an IRA you have to wait until you are 59 1/2 to avoid penalties.

Roth IRA's are a great option but they do have income limits and those limits vary based on if you are married or single. I always advice clients to take advantage of Roth IRA and Roth 401k's if available. We dont know where tax rates will be in the future but in doubt they will be lower. There are very few investments that provide tax free returns and Roth's are one of them.

The decision to work with an advisor or be a DIYer is a personal one based on how comfortable you are managing your money and how much you want to be involved in the process. I see too many people that have their money sitting in cash because they dont know what to do or they have much more risk in their portfolio than they understand. Mistakes that make a huge difference in their financial future.

I agree with Haskell that Vanguard is a great place for someone that wants to manage their own money. They have a lot of quality and efficient Mutual funds and ETF's that I use in my  practice all the time.

Managing your own money is just like any other task in life. Some guys are comfortable changing there own brakes to save a few buck and some are not. It is import to know what your doing in both cases to avoid disaster.

Just a few thoughts. Good Luck!

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If you can afford it, always contribute enough to max out yr company 401k match.  It's a no brainer.

When I first started working, an old guy gave me some advice I call critical mass strategy.  You know how much interest you pay every month early on in yr mortgage because of the amount you owe?  Now think how much interest you will earn if you had that amount in your 401k.  If you slam your 401k & hit a big amount (critical mass) early in life, that money will pile up by the time you are ready to retire.  

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Just now, gregtpal said:

If you can afford it, always contribute enough to max out yr company 401k match.  It's a no brainer.

When I first started working, an old guy gave me some advice I call critical mass strategy.  You know how much interest you pay every month early on in yr mortgage because of the amount you owe?  Now think how much interest you will earn if you had that amount in your 401k.  If you slam your 401k & hit a big amount (critical mass) early in life, that money will pile up by the time you are ready to retire.  

as long as you dont do anything foolish like get married & end up divorced that is...that derailed big time...

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Have you reviewed the investment options within your 401(k)?   Do you work for a large company or small?   If you work for a large company, the fees in the 401(k) should be lower than what you’d get in an IRA for similar funds.   This is due to the fact that the 401(k) plan has more assets and becomes eligible for less expensive shares of the mutual funds.  If your company and plan is small, sometimes the savings aren’t as dramatic as for those at larger companies for bigger plans.   For the average person there is plenty of good options.   No brained to contribute as much as you can to the 401(k) and then if you max out the 401(k), depending on your income you can contribute to an IRA on a tax deductible basis, after tax basis or Roth.  If your income is too high to contribute to an IRA on a deductible basis or a Roth there is a loophole called a back door Roth where you can contribute to an IRA on an after tax basis and then immediately convert it to a Roth.  Lots of options for you but you need to do some research.  One of the most important things to do is look at your current investments and fees in the 401(k) and then if someone tells you to rollover from your k plans to an  IRA, ask them what funds they’d recommend in the IRA and do some comparisons.   I’d be willing to bet that the all-in fees in the IRA will be higher.   

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16 hours ago, gregtpal said:

as long as you dont do anything foolish like get married & end up divorced that is...that derailed big time...

Or have kids, send them to private school, buy a house, buy a boat, etc. You know the usual stuff

There is nothing more intolerant than a liberal preaching tolerance 

God gives the toughest battles to his strongest soldiers

"Leadership is a potent combination of strategy and character. But if you must be without one, be without the strategy."

 

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22 hours ago, vdep217 said:

I have a simulator on my vanguard if every thing stays the same between my esop and 401 I will have 3 million at 55 4.8 million at 59 and over 8 at 65.  I increase my contribution evey year.  Before I was married I was at almost 20 percent now with 2 kids and Bills im at 7 percent wich us 2 percent over match from my company.  

  Most kids don't think ahead and will scramble in there 40s when they realize they have no retirement.

My goal has always been to be semi retired at 50 and just work for benefits so I can enjoy life. I'm on that track of my mortgage being paid off at 43 as long as eligibility for benefits stays at the 30 hour threshold my goal is within reach

Semi retired is boring...........

ESTATESALESBYOLGA.COM    ALWAYS BUYING ANTIQUE AND VINTAGE ITEMS  CALL 908 868 8236 MIKE

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