Can anyone help me to better understand how 401K works?

[Absalom]

Yep, this is one you might be best on consulting with a good financial advisor...CAUTION>>>>Make sure it's a certified consultant, and not someone who may not have your best interests at hand.

WuzzFuzz

^^^^^ This. Any investment advisor who works for a bank, insurance company, stock brokerage etc. makes his income off commissions on the stuff he sells you. So any advice may be, however indirectly, steer you toward options that may not be in your best interest, even if they are perfectly legitimate and not trying to rip you off.

What you might want to look for if you need some competent professional advice is a so-called "fee-only financial planner". These people take a fixed fee for their time and don't sell products. Their advice is generally more trustworthy. For example check napfa.org

 

[DWalt]

A lot of what has previously said will be about as clear as Mandarin Chinese to anyone who has little to no experience in personal finance and investment alternatives. Many people pointed out that investments in securities can fluctuate. However, keeping your retirement in essentially cash or cash equivalents can be equally or more disastrous than market fluctuations for one reason - inflation. The purchasing power of a dollar decreases over the years due to it. So $1000 would buy lot more than the same $1000 today. On the other hand, at least in the post-Depression era, there has been no 10-year period in which the equity markets have decreased (i.e., the "Stock Market"). Therefore, it is generally better to place the majority of your retirement savings in some sort of a fund which represents the performance of a large portion of business. And there are a great many of those. Remember, time is on your side, and the longer you hold investments, the more probabilty their values will increase. One approach which is very common, at least for equity portion of your investment portfolio, are funds which mirror the S&P 500 stock index. Fees associated with such funds can be very small, often less than 0.25%/year. There are also funds which represent the debt side also, which mirror income-producing bonds. It's important to note that Bonds are not nearly as safe as most people assume, as bond prices are greatly influenced by prevailing interest rates, and inversely so. When interest rates increase, bond prices decrease, and vice versa. Nonetheless, a retirement portfolio held in an IRA should contain both equity and debt components to add a little more stability. Some feel that a 50%/50% mix is advisable, with annual re-balancing to maintain that ratio. The famous "couch potato" portfolio which does this is practiced by many, and will usually provide returns as good as much more complex investment strategies. Good luck.

 

[SmokeStack Lightning]

How a 401K works?

It's rather simple. The corporations and employers now have the employee to fund his/her retirement releasing them from that obligation.

401K's were not designed for this purpose.

But as always, Corporate greed wins out.

Statistics show that the average family has a 401K value of @ $120,000 these days.

I retired 14 years ago from a Trade Union who offered (and still does) a "Defined Pension" funded from the employers who hire our members.

I live frugally, own my house and am and have been debt free for quite a while.

This is my point of writing this. I've collected in that 14 years of retirement 4X what the average family has invested in 401K's and I don't live the 'high' life.

And the worst thing of 401K's besides the "Administration Costs" and "Hidden Costs" is that anytime the stock market goes down, so does your retirement savings.

Even the "Inventor" of 401k's isn't happy with what has happened to them vs "Defined Pensions".

Father of modern 401(k) says it fails many Americans | Marketplace.org

 

[BigBill]

I worker for corporate world headquarters engineering.
They matched 6% so I could put in up to 20%. That's 26% of my pay per year. At the end of the year I got another 10% interest. Times this by the 20 years I worked. I have a good income at 65yo. I'm makes the same money as if I was working being retired. I'm not rich buy I can pay the fuel oil man when he comes.

Start your 401k now and slam it with the most money you can afford even if it's 6% to get there 6% do it. Time flys by. I got old so fast

Some companies only offer 401k now and eliminated there pensions..

 

[hoosierone]

My 401K has done very well. I always contributed the max, got the match and had several places I could put the money including bonds or just a money market for the very skittish. It was great to be able to defer taxes while I was working to when I draw it out now, paying a lower tax on it as my bracket is less than when working.

Since the 401K (about 95%) stocks has a great record and they charge me very little for managing it, I chose not to roll it over anywhere. I do have other more conservative investments to balance risk.

 

[ChattanoogaPhil]

My company automatically puts in 4% of my pay, and matches it.
They match up to 4%.
I'm putting in 4%, so are they matching what I put in, or just 4% of the 4% I put in?
Never really payed much attention to it as they just started doing this a few years ago.
I'm thinking of upping the contribution to 10% or 15% as I need to do something other than just put it into a savings.

Well....

Your employer is matching dollar for dollar on that 4% you put in. Doubling your money on day 1 is as good as it gets. Stay with that.

As far as other savings... take a serious look at a self directed Roth IRA. Its not tax deferred up front like with a 401k, but all the earnings over the years are tax free. And you aren't forced to make withdrawals later in life like you are with a 401k. Also employer 401ks are not as flexible as self directed Roth IRA. Open up a Roth IRA with Scottrade or whoever and you can move around your money any time you like.

Good luck.

 

[DWalt]

With a 401k, typically an employer will have a management agreement to handle the plans with a brokerage firm or bank. You will often have some limited choice as to how the contributions are used, normally among some mutual funds, and with some limitations, your investment choices can be changed, e.g., you can move everything into a money market if you wish, or everything into a fund which follows a market index.

A Roth IRA is entirely self-directed, and you make your own (after tax) contributions (in amounts limited by IRS requirements) and your own investment decisions. If you are married, both you and your wife can have separate Roth accounts, even if she does not work and have an income. You will need to go through a financial institution such as a brokerage firm to set up and act as a custodian for your Roth account. Best way to go is to use one of the on-line brokerages, such as E*Trade, Schwab, etc. You really don't need to speak with anyone if you do it that way. Just open an account and set up a Roth account, and fund it, in the space of a few minutes. Depending upon your eligibility under IRS regulations, everyone should have both a 401K traditional IRA and a Roth IRA, funded to the maximum amount possible under your circumstances. And do it as early as possible. It is also possible to set up a personal IRA account outside a 401k plan, and you could have a 401k, an individual traditional IRA, and a Roth IRA.

There are different approaches to gaining the same IRA-type benefits if you happen to be self-employed rather than collecting a paycheck.

 

[FredBart]

It is very difficult to get good advice on a firearms site for your questions. DWalt has very good suggestions. However, you really need to go to a library and look at some print books on this subject. So much of the answers depend upon your income, your age and your future prospects for employment. Web sites can give you some info, but books are more unbiased.

I would encourage everyone that can open a 4 per cent 401k with full employer matching to do so. However, when you get into Roth vs conventional IRA's so much is dependent on your individual circumstances that any public advice is meaningless.

You need to study your options before you see any financial planner. A fee only Certified Financial Planner ( CFP ) is fairly expensive per hour. But, he or she can give you advice based on your individual requirements. You cannot get that on a public forum.

 

[Scott in NCal]

I worked like a fool in my 20's 30's and 40's retired on my 52 birthday. I had a full time job with excellent retirement benefits, and I fixed and fliped houses(and kept a few as rentals) in the San Francisco Bay area, bought some farm land and maxed out a deffered comp (457, a 401k type thing for govt employees) and invested aggressively in high growth stuff. It did well, real well. I was an idiot. I am in a higher tax bracket now then I was when I was saving. I think I am going to put it in a self directed IRA and buy farmland to put in it. Unlike the statements, at least I will have a place to hunt, don't think that will trigger conversion. Going for the employeer matching is a given. If all you are planning on retiring with is social security and the 401k probably you should max it out. I wish I would have "invested" that money in Colt Pythons, K frames, farm land, a new truck every 2 years, a nicer house for my family ect ect. The tax people knew, we would save for 30 years and when we went for that money are home loan interest deductions would be nill. I should have paid off my mortage asap, paid the taxes on income and put what was left over in a Roth.

 

[DWalt]

A Roth IRA is probably the best tax benefit there is for most common wage earners, as none of the growth in the investments is taxable at withdrawal (yet), and there is no required minimum withdrawal starting at age 70-1/2. Unfortunately, there are IRS limitations as to who can have one (income limitations exist) and how much can be contributed annually.

 

[johngalt]

A Roth IRA is probably the best tax benefit there is for most common wage earners, as none of the growth in the investments is taxable at withdrawal (yet), and there is no required minimum withdrawal starting at age 70-1/2. Unfortunately, there are IRS limitations as to who can have one (income limitations exist) and how much can be contributed annually.

That is true about the income limits, but you can get around it by depositing in the regular 401k, then do a Roth conversion and roll it into a Roth IRA. There are no income limits there.