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Comment by komali2 | Hacker News Reader

Regarding 2: I cannot wait to pay off my debts (scheduled in September!) and start putting money in IRA and 401(k) :) Every time someone asks me if I'm using the 401k I always feel sheepish answering "no... because I have debts with a higher interest rate than I'd get on the return..." Nobody seems to buy it but I've run the math again and again, it's just true.

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Does your company offer a 401k matching program? If so, that is basically an instant 100% return. If they are not matching, then you might be right, but if their is a match on the table, it probably makes sense to max that out.

This advice is common. It should come with the caveat to investigate the vesting timeline for that 401k match. One of my former employers matched at a great rate, but that contribution did not vest until you had spent 4 years at the company. Given the rate of turnover at lower-seniority positions in the industry (PR agency), it was entirely unrealistic for more than half of the employees there to ever expect to see the benefit of that match.

That is a good point. I did a quick internet search, and it looks like the max number of years for cliff vestings is now 3 years, which for most people is fairly reasonable. For gradual vesting, it looks like they can spread it out over 6 years, which seems a bit much, but at least you are vesting some of it over time.

[1] https://www.irs.gov/retirement-plans/plan-participant-employ...

Hah, I should have mentioned, yea we have no matching. Good catch!

We do have options though. Those will vest into millions... one day.... any day now....

Something worth keeping in mind is employer matching as well as the ability to take loans from your 401(K). My employer matches up to 6% of my salary at 150% (man is this awesome), the past year I've been putting my 6% in and just last month I took half of everything (including the employer match) out as a loan to pay off debts at 4.25% APR. The money would perform better in the market than the interest I'm paying back to myself, but I'm not throwing money away on interest to the banks and instead paying it back to myself while continuing to make my regular contributions.

If I remember correctly this kind of loan also doesn't affect your credit since you are borrowing your own money.

This is correct.

Yes, this is the right thing to do.

From /r/personalfinance: https://i.imgur.com/fb7Dtmh.png

Where's the part where medical bills bankrupt you and you die in your 40s from what's an otherwise easily treatable disease?

A great way to mitigate that is to move to Canada. :)

Totally, there are people who have higher-leverage savings strategies than investing in a 401(k), like paying off debt in your case. In the end, the most important number to track is your savings rate (total consumption / total income). If you have a savings rate of at least 25% and can maintain that throughout your working career, don't worry, you'll retire rich. :)

The articles subjects definitely highlight that. But it also highlighted income inequality. If people don't earn enough they have no chance at saving. High rents are not helpful. They should be talking about ways to incentivize lower rents.

how much was your loan interest?

I just personally disapprove of 401ks. For one, I remember the Great Recession. They bailed out the banks and left the little guy/gal to ruin. Contemporaneously, all those fancy market valuations stink of an economy about to tank, again. I value investing in stocks/bonds, but in current conditions I would not trust a 401k investment broker.

>For one, I remember the Great Recession.

How old are you?

The Great Recession was right after the financial crisis triggered by subprime mortgages.

You're probably thinking of the Great Depression.

I didn't think that term had to be defined. How can people forget so fast?

Not everyone seems to be aware calling the period The Great Recession is a thing yet.

So invest your 401K in a stock index fund.

Then don't talk to a broker. That's a choice, and one you need to go out of your way to make. Invest in index funds and 95% of the work is done.

Most work 401ks feature a pretty small selection of funds, so I'm not sure why you'd ever talk to a broker. Usually a bunch of Retirement age focused funds (so the 2045 fund is if you want to retire in 2045), Index funds, and some pretty basic mutual funds.

The biggest benefit of 401Ks comes from your company provided match, because that's free money and instant ROI.

So not talking to the person I'm trusting my largest capital investment to is a feature?

> For one, I remember the Great Recession. They bailed out the banks and left the little guy/gal to ruin.

What do you mean by the "little guy/gal"?

It's true that the 2008 financial crisis only resulted in one banker going to jail, and he was not an executive. It's also true that the crisis only resulted in one bank getting indicted for criminal charges, and it was a small family-run bank in Chinatown with a stellar mortgage default rate (0.5%), and which reported activity that they discovered themselves, not a (metonymical) Wall Street conglomerate[0].

But if you're referring to people who own 401(k) accounts or receive pension funds, that's exactly who was bailed out. "Let the banks fail" is a common refrain, except what that literally translates to is letting people's retirement funds get wiped out due to impropriety that they weren't involved with at all.

[0] They identified an employee who had falsified loan applications, and reported it to regulators after firing the employee. They were acquired of all charges brought to trial, and the prosecutors themselves later requested that the charges be dismissed, because they realized how ridiculous they were.

They bailed out the financial entities with failing mortgage backed securities. They didn't bail out the people owing a mortgage. They could have made a mass restructuring program but instead left all those people to ruin. It's a point against the system in total and not just a 401k. You have to have a huge amount of trust in many people to say you won't touch your 401k money for 20+ years. If you can't trust the stock market how can you sign off on a 401k.

>bailed out the banks

In the 1930s, the bank stockholders were wiped out (equity set to zero), and they started over. In the 2008 crisis, bank stockholders were "bailed out". The value of their shares did not go to zero. The people who owned the bank before still owned it after. That is the difference between 401(k) accounts taking a 30% haircut and the bank stockholders retaining ownership of insolvent banks.

When the media talks about "too big to fail", they mean "too big to have stockholders wiped out and have the government recapitalize them". Supposedly it sounds too much like socialism. It is really regulatory capture at its finest.

> "no... because I have debts with a higher interest rate than I'd get on the return..."

Sorry to tell you now but this is the wrong way of looking at it.

The 401k will save you from paying tax the next 50 years. The first few years you might be a little behind but its worth it because later you'll have your contributions throttled. (assuming you can pay that much in)

This is the financial planning equivalent of optimizing your MVP for 3 million concurrent users.

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