“When I turned 14, I took fiduciary responsibility for my mother’s 401K. We discussed it over Italian food. I had my first espresso, it kept me up all night. I fell asleep at dawn for five minutes and had a stress dream about the house burning down. Pretty good birthday.” – American Dad
The ear bud is playing a tape that says – in/out, in/out, so she doesn’t forget to breathe.
I was driving with The Boy back to Stately Wilder Manor on the way back from a fast food restaurant where he had consumed 3,000 calories out of his 10,000 daily calorie requirement. That’s one thing I miss – I was the same when I was his age, but now if I look sideways at a bag of Ruffles® the button on my jeans has a high chance of becoming a weapon outlawed in California due to velocity alone. Soon enough there’ll be a waiting period for Chips Ahoy™.
Out of nowhere, The Boy asked, “Why on Earth would anyone have a 401K?”
I’m used to random questions by The Boy at any point in any conversation. In the middle of discussing the economics of a thorium-based fusion reactor, he’ll pipe up and ask, “Do you think fish ever get tired of eating seafood? Oh, and what if we fed tuna mayonnaise, would that skip a step?” Bonus points if you can identify the two movies those questions came from without using the Internet. As The Boy is getting ready to go off to college, I suppose it makes sense.
First you get the khakis, then you get the job, then you get the girl, then the mortgage, then the divorce because your wife doesn’t agree that PCs are better than Apple© products and then you retire bitter and alone. So you might need a 401k.
See, The Boy gets the “thinking too far ahead” thing from me.
Admit it – this wasn’t just me.
I realized that it would be a fair topic for a Wednesday post, and probably a moderately fun one, too. If you have a 401k, or are retired, I know that you’re thinking, “Why would I want to read about a 401k, anyway?” Because it will be funny. I promise – I’m a trained Professional Humorist and Certified Duck Yodeler. You’re professional when people pay you to stop doing something, right?
401k’s aren’t taught in school, probably because no one would be listening, which still doesn’t explain why they have Band. The advantage of being 16 is that you are immortal, and your entire lifetime is spread out before you. A 401k? Might as well spend time teaching about the best types of denture adhesive or why candy bars don’t cost a dime anymore.
But you’re not 16 anymore, at least not according to your FBI profile, so I can keep discussing 401ks without your mind wandering. At least too much.
There are basically three types of retirement plans:
- Have Very Wealthy Parents
- Be a Part of a Defined Benefit Plan
- Contribute to a Defined Contribution Plan
I prefer the first option, as should you. Sadly, my parents were only of the “comfortably well off” sort rather than “mind numbingly” wealthy. They selfishly managed to spend all of their money on themselves doing things that they liked. All they left me with was years of love, encouragement, good advice, help with a college education, wonderful memories, and times just tough enough to build the character I needed. They were awful.
Okay if your parents were losers like mine, you have to pay attention to the other options:
A Defined Benefit plan is something that, if you’re working in the United States, you’re already in. Social Security is such a plan. You contribute 7.5% of your income, which is matched with another 7.5% by your employer. Then, Congress spends it on worthless programs meant only to enrich the people that vote for them and on bacon-wrapped shrimp. Because who doesn’t like bacon-wrapped shrimp?
Thankfully, eventually if you live to age 107, you’ll receive enough money back from Social Security to subsist entirely on a diet of dog food and sawdust you gather from nearby construction sites. And the dry dog food, not the wet – what do you think we are, the Bill Gates’ family?
Other examples of Defined Benefit plans are pensions and stealing office supplies from your employer. I would discuss pensions, but unless you work for the government, pensions are as relevant as discussing attacks by a roving band of tyrannosaurus rex – it’s not going to happen in your lifetime. If you work for the government, pensions are a never ending fountain of chocolate-covered strawberries that I also get to pay for.
The reason pensions became as rare as decent Stephen King novels after he quit cocaine and were phased out by most businesses is that the 401k, a Defined Contribution plan, appeared in the 1980’s. With a 401k, a business can safely contribute just once to the employee, and then forget about them forever, making them even more disposable. Eventually they’ll figure out how to make employees “single use” like a Keurig® coffee brewer but they’ll have to worry about the hole they’ll need to pop into your head – oh, wait, that’s Facebook®. The biggest advantage for a business is if the employee decides to invest all of their 401k money in pantyhose and elephant rides it doesn’t matter to the business. Once they match your contribution, they’re done.
But having a 401k is a choice, and I have one. Why?
First and foremost, my employer matches my contributions. I contribute 6% of my pay, and my employer contributes 3% on top of my current salary. In my case, it’s like a 3% pay raise. And these are pre-tax dollars. Every dollar I put in my 401k lowers the amount of taxes that I have to pay right now, plus I get a free 50% of what I save invested. I like that.
Okay, mine are paid off. I paid them off in 2013 – I paid payments ahead, but I kept a balance until December 2012 was over, just in case the Mayans were right. That’s one way to stick it to the man.
When I invest in the various funds that my employer has to offer, then the amounts in my account grow tax free until I begin to pull money out. At that point, I then have to pay taxes on the money I take out of the account for The Mrs. so she can selfishly spend it on insulin.
But there are downsides or risks to having a 401k as well.
- There are a limited number of plans. What if I really want to invest in dirigible manufacturers instead of Apple®? I’m sure dirigibles are coming back this year – rumor has it they’re going up.
- A 401k is another way for Wall Street to monetize your life, which will probably be the focus of next Wednesday’s post. And we know Wall Street has your best interests at heart, right?
- What will future tax rates be? When I begin to take money I believe that I won’t be paying as high a tax rate as today. But I could be wrong. I’ve just been itching to pay for health care for illegal aliens, so, there’s no telling.
- A 401k is easy for government to confiscate: it would take exactly one law and some politicians have even discussed the idea. Why should those that save their money be entitled to any of it? Selfish, like my parents.
- What will the market performance be? For my lifetime, the market has gone up and down, like Oprah©’s weight. But it’s mainly stayed up. Also like Oprah®’s weight. Or dirigibles, which are kind of Oprah™ shaped.
- What will inflation be? Will we become Zimbabwe with a nuclear arsenal and a better navy?
- Perhaps one of the scariest comments I’ve seen with respect from this came from Arthur Sido (LINK) (I’m paraphrasing): “Your money will become worthless while benefits to those on welfare will increase.” Well, I guess that’s one good way to achieve the goals of communism!
I love it when Communists prove that it works this time.
But when I look at all of the risks above, I realize that I’m exposed to them already unless I completely invest in the three precious metals – gold, silver, and lead.
My 401k doesn’t seem to accept .223 or 7.62 as a valid investment.
One other advantage of the 401k is that it adds a significant amount of financial stability. Most 401k plans allow you to borrow against them. Financial advisors don’t like this, because they’d much rather you pay interest to a bank with headquarters in New York rather than yourself. Also, sometimes you can’t add more money to a 401k after you’ve borrowed money against it.
A loan against my 401k has been useful to me on one particular occasion. After my first wife She Who Will Not Be Named moved out she handed me a grocery sack filled with bills. She then handed me a checkbook. “I have no idea how much money is in the account.” And then she walked out.
My loan from my 401k paid for the late payments. Barely. That experience allowed me to be able to answer this important question:
Why are divorces expensive? They’re worth it.
I shouldn’t complain, my divorce was better than most. I just wish she hadn’t gotten my hair in the settlement.
The downside of a 401k loan is that you have to pay it back immediately if you leave that job. If not? The money becomes taxable that year – plus a 10% penalty tax is added on.
Now The Boy wonders if he can feed the 10% penalty to fish. Go figure.
I am not a financial advisor. I am a silly blogger that writes on the Internet. If you use my advice, you certainly get what’s coming to you, which may include being impacted by an asteroid, eaten by a sasquatch, or financial ruin. So there.
