The key component of any 401k, as many have commented before, is the employer match. Just look at the math for a simple base case:

Salary: $50,000.00
Employee Contribution(A): $ 3,000.00
(6% to get full Employer Match: 50K x 6%)
Employer Match (B): $ 1,500.00
(3% average for most plans in US: 50K x 3%)
Total Contributions (A+B): $ 4,500.00
Investment Return (C): $ 225.00
(assuming a modest 5% per year: 4.5Kx5%)
Total at Year End (A+B+C): $ 4,725.00

Your return, then, would be (4,725.00-3,000.00)/3,000. This total is 57.5%. Obviously, this assumes that you’re getting the 5% return over the entire $4,500.00 for the full year. In reality you only reach that amount at the end of the year. So, correcting for that, your return is 53.5% (same calculations done on a monthly basis and then aggregating at the end of the year). If you can get those kinds of returns investing outside a 401k, you should be working for a hedge fund making billions of dollars and not worrying about a measly 401k.

401(k) plans are a sham to fleece the little guy. My plan is NOT keeping up with inflation (and I mean real inflation, not the phony government kind that doesn’t count food or fuel) and the cheapest funds in my plan (which, by the way, include companies that do business in Sudan) still charge 2% in expenses. An 8% return minus 2% expenses = 6% return. Add in 10% inflation and explain to me again why this is such a good deal?

Tommy from FL, your reasoning for not contributing to a 401(k) is foolish. The idea of taxes raising in the future is the only reasonable point you make in your article, but from the sounds of it, that is hardly why you are not investing in your 401(k). You are simply using your daily “expenses” as an excuse not to contribute. You have to pay rent, school loans, and “expensive” gas, that is a given. It is what you do with the remainder of the money you earn that is important. If you truly have no money left over to save, then fine, but that doesn’t make investing in a 401(k) an investment “actually losing quite a bit by putting into it”. Don’t kid yourself. I mean really, it shocks me that anyone who spends the time to write a post on a money blog can’t understand how much of a slam dunk investment the 401(k) is when receiving a company match. Really, if your employer offers a company match, and you are not taking advantage of it, you are completely ignorant. I hate to be rude, but there isn’t any other way to put it. I personally invest retirement savings after my company match into a ROTH IRA, but that is an argument for another day. The fact is you will never find another investment opportunity that can compare to a 401(k) with a full company match. If you don’t receive any match and your investment choices inside a 401(k) are terribele, then you certainly have an argument against it. As for everyone here claiming that everyone should be investing in gold, I have a hard time reading your posts without laughing. I mean really, your thought process really defies reason altogther. So you go ahead and be safe, but gold and squirrel away money in a shoe box. I will be getting my “mythical” 8% return from stocks. Really, your rhetoric is damaging to young people coming here for financial advice, keep your doom and gloom attitude at home.

When the offer on the table has free money involved, count me in! I’m 24 and the Co. I’m with matches 100% up to 6% and gives a free core 4% on top of that.6+6+4= 16%! Like I said, I’M IN!

As babyboomers put money into the stock market in the mid 1980’s the Dow Jones jumped from 2,000 to 14,000 at it’s peak value. Now that babyboomers are starting to take out more money than they were putting in a year as they retire the stock market will collaspe.

It’s a simple math equation and the result will be in five years the US stock market will have no value left as 40 million baby boomers take their money out at 10 times what they put it in as.

Just look at google it is being used as a means to keep some mutual funds afloat but sooner ot later those funds will have a run on their money much like bank runs in the 1920’s and 1930’s.

401k funds in hundreds of billions are being misused and put to prop up the daily markets. Those who have the knowledge and skill of getting 5% return should consider doing so. I have stopped contributing.

I think a lot of people underestimate just how powerful the 401k is. If anything, you should INCREASE your contributions during an economic slump or a recession. The best time to buy is when the blood is running in the streets…

I started saving a bit late because I hung out in college for 7 years with no clue what I wanted to do. When I got my first full time job I started contributing to my 401k. I was making $12.50/hour.

8 years later my 401k has grown to over $200k despite my making so little money initially that I could not max it out every year even when the limit was lower than it is now.

If you’re not putting enough in your 401k to get the full match, you’re just throwing your money away. You’ll never get a better deal on your money than that first 6%. 6% really isn’t enough though unless you started contributing at 18 and don’t plan to retire early. I’d say 10% is a reasonable minimum for someone starting in their 20s. Tack another 5-10% per year on for every 10 years you wait unless you want to work til you die.

Don’t hold off til you get your down payment for a house saved up. Don’t hold off til you pay off your student loans. Don’t hold off til you get your car paid off, etc… How LONG you save makes as much if not more difference than how MUCH you save.

I’m 23, and I’m against 401k.

Yes, I know I should be investing for “my future”. Yes, I know I should be excited to get that price matching that is “free money”. Unfortunately, I don’t think about it in the same mindset as everyone else does. In my mind, I’m throwing money that I could be using *right now* (to pay for student loans, expensive gas, rent, and a host of other things) into an account that I can’t use until I retire. Yes, it’s not taxed immediately. But unfortunately, history tells me that taxes and inflation have been consistently increasing for..well..just about ever. So, at the end, if I haven’t made any extra money off the stocks (lets just say), I’m actually losing quite a bit by putting it into a 401(k) rather than spending it now. The 3% matching is not a “free raise” as many people claim it is, because I don’t get to see any of that money for another 40 years. And then, of course, I’m only “partially vested” for 6 years. Since very few people my age even stay at a company for more than 2 years, the 401(k) is really just a ploy to keep you working for them when you could be making more real money somewhere else.

You should look at a 401k as tax break only, and as a gamble. If you’re going to take a risk, risk those matching funds, not your principal. As far as today’s market is concerned, it can only do well as long as the Fed can hold interest rates low and by expanding the money supply, which ultimately lowers the US standard of living, and the worth of your assets in dollars, such as your 401k. For most people, their biggest financial asset will always be their job, not their savings.

My company offers the most lousy mutual funds in 401K, almost all morningstat 1* rated, and broker charges make it impossible to buy equities in 401K plan. Even if market recovers someday, I have little to no chance of making 8% return,
Consider this before opening 401K, if company is not matching your contribution, there is no good reason to invest in 401K

To Tony L. of Germantown. How much of th e 900k is principal?

Sure, you could have saved 10% by putting your money under your mattress a few months ago. The trick, however, is to know when to take the money out from under your mattress and invest it. When you figure out the magic rule for both decisions, let the rest of us know.

To Eric, NY, NY:
If you move your money after the market has come down, you are bound to lose money on anything you do (buy high, sell low). Smart investors are buying now because they won’t be buying at the peak. Our portfolio has not lost much because the mutual funds have come back quite a lot. Consider all the positive returns in the last five years, we are still way ahead of the game with mutual funds. The extra funds we bought during the low in March has come up handsomely.

My wife and I are both office workers in our late 40’s. We have accumulated 900K mostly since the dot com bomb. The key approach is to stick to a plan, don’t panic, and don’t follow the crowd. I often joke about Americans not thinking about their investment often enough. There is a Chinese saying: If you don’t care about money, money doesn’t care about you. You just have to pay attention.

The historic basis for stock returns are made on past years when dividends were paid out. The ‘mythical’ 8% return is no longer achievable now that so few stocks pay dividends.

In my 401k, I try to buy the funds which cost the least and offer dividends and capital gains to help offset any market correction. Remember, when you buy low through payroll deduction or quarterly dividends, when the market turns up, you are ahead on those buy-ins.

Hey Kurt from Burlington, what makes you think that Updegrave works for Wall Street?

Gold has never been a good long-term investment, just a holder of value. It’s also a short-term fluctuator, just like stocks: If you bought gold about 2 months ago, you’re down about 15%. (Look it up).

And the “experts” are right that it’s a good idea to keep putting money into stocks when you have a long time horizon. Stocks are shares of companies, and companies have earnings (well, the good ones do). Neither real estate nor gold have earnings– their prices are more purely about supply and demand. But no matter what the market currently “thinks” about JP Morgan (for example), if it has earnings– and pays a dividend– it simply does.

The stock market is a place for wealthy hedge fund grifters to rob pensioners. They have the full monetary support and backing of the thieving gubbermint too. The only safe place for money is in gold, or under the mattress.

I have increased my 401k contributions to reverse the effects of the market. My balance as well as my Units/Shares are higher than the beginning of the year.

The historical return on stocks has been based on past years that had better dividends paid. The magical ‘8%’ isn’t going to materialize now that dividends are becoming a thing of the past.

The question here is weather or not to keep contributing to your 401K or not?
Let’s look at a couple of facts first off. Let’s assume that your gross income is $50,000 per year. If your smart, and you conribute 10% of your income to your 401K, that will make your taxable income $45,000. The government gets less money, and you have more money for your retirement, so that we won’t have to depend on Social Security for retirement benefits (which, by the way, by it’s own admissions will be insolvent in the year 2041) Also, most all employers have matching contributions from anywhere 3% to 10%….THATS AN AUTOMATIC 30-100% Return on your investment IMMEDIATELY….ALL PRETAX, TOO BOOT!!!!

Or you could quit contributing to your 401K, Raise your Tax burden, give away the free matching compensation from your employer, and put the money into a “Savings” account, or a CD that gets 2-4% Return, not even enough to keep pace with inflation.

In 06 and 07, I got 15% and 18% returns in my 401K respectively. And even amidst the roller coaster ride in the stock market in 08, I’m still a few bucks up….It’s simple, I have control over my investments in my 401K and chose to invest in the funds that have invested largely in the energy sectors, and International Funds….So, do your own homework. If you complain about high gas prices and energy costs, doesn’t it make sense to invest in those sectors?????

Warren Buffet, richest man in the world made his money on the premise of investing in established companies that he believed were undervalued by the market. What better time to do exactly what he does than when the market is down? Bill in Milwaukee is right - be greedy when everyone else is fearful, be cautious when everyone else is praising how great the economy is smooth sailing ahead. All good things come to an end, but the economy has only gone up over time. Buying gold and oil and such is foolish. To approximate a quote - why would you want to buy something that people dig up out of the ground only to refine it process it and bury it again and guard it.

Remember gold was $250/oz ten years ago. Is it reasonable to believe the near all-time high we had a while back will soon rise to ridiculously higher levels in the near future? What happened to the fools who bought gold as an investment in 1975 for $1500/oz and then sold it when they retired for $250/oz 25 years later?

Gold is for morons.

if you not retiring for 10 plus years, don’t worry about it……….buy more, you’ll be glad you did

We have about $500,000 in an American Funds 401k. Yes, it’s down about ten percent. Does it make sense to move it into a holding account until the market picks up?. It’s about a 40/60 split with the 60% being global funds as opposed to domestic.

When the market tanked at the beginning of the year, I raised my rate of contribution so that I’ve maxed out my 401k. The market has rebounded somewhat and the gains I’ve made on the intense amount of investing hasn’t made up for all my losses, but certainly puts my overall rate of return for this year much higher than it would have been otherwise, and certainly better than any of my friends or colleagues with whom we share this type of information. It’s true, when the market is low, buy buy buy.

With 401K being pre-tax and your ability to dollar cost average it doesn’t get any better than this for the long hall.

Walter, I cannot understand why you keep pushing people into this scam. This saving plan is a JOKE. I agree with Eric, my money would have better gains under my mattress. I know you are likely paid lots of money to peddle this scam, why don’t you write an article saying why a 401K is a BAD idea…because it is.

I just graduated college, I started my 401K on January 16th, and it’s up 13.6% since then. People thought I was nuts to throw money into it in January, but those are the same people who turn around and tell you “buy low, sell high,” as if my 10 year old sister didn’t know that already. Seriously though, when markets tank, it like going to a yard sale of stocks. BTW, it’s still on sale, so use that 401K to capitalize on tax deferred gains with 100% of your money, not 75% of your money after the good old payroll taxes hit it!!!!

putting your money under your mattress you still would have lost money since the dollar is being de-valued.although,you may take a bigger hit in your 401k if its in unstable stocks(like mine-UAUA)..

If you look at the period 1998-2007, the average return for the S&P 500 was roughly 5.9%. Now, during 1998, the S&P 500 returned 28% so for the S&P 500 not to fall further, the market would have to return at least 28% in 2008. Don’t think that will happen.

You want to buy low and sell high… well the market is low. Use this opportunity, it’s been time to buy. When the market recovers over the next year your funds will have great gains! 401 K’s are long term investments.

The loss you are seeing in your 401k is unrealized loss. In other words it is only a loss on paper. Right now you are buying into mutual funds that are on sale. When the market goes up, which it will, you will have more shares and make up all of that unrealized loss. Take a look at a historical trend of the market and you will see what I mean. The best thing that could happen is that you buy low for your entire life due to a lagging stock market then it goes up all at once to the level that it would have gone to if it would have increased gradually. This dip is exactly that scenario, but over a smaller time period!

Walter got this one right. RUN, dont walk, to your HR office and up your contributions if you can.

Aside from all the obvious benefits, a 401(k)(or 457 or 403(b))have significant feature: payroll deduction. It literally forces you to pay yourself first.

Ultimately, what funds you invest in won’t make nearly the difference as if you decided not to participate at all.

“I keep seeing articles about how terrible the market has been lately. Has no one else noticed that the S&P 500 is up around 10% from its low 2 months ago?”

Yeah, but it’s still down since the beginning of the year (my 401k has been pretty much flat year-to-date.) Not much has changed in the broad economic picture over the last two months.

“Isn’t it possible that the market low was 2 months ago, and we are now in the early, highly-profitable stages of a bull market?”

Sure. In fact, this article sort of says that:

“…there’s a good chance that the money you invest in your 401(k) when the markets are struggling will give you some of the highest returns you’ll earn over the long run.

…

…it’s not a bad idea to remind yourself that the money you contribute when your fellow investors are most skittish often ends up racking up higher returns.”

“Why don’t any of the market experts seem to mention this possibility?”

The general consensus seems to be that the US economy as a whole (and even the global economy to some extent) is going to suck for at least 6-12 months. That would make any kind of major short-term recovery unlikely. But (if you believe that consensus) it also implies that we’re probably near the bottom.

The overall stock market will probably just bounce around and not move up or down much until the housing market stabilizes (which itself may depend on what Congress does over the summer and who wins the presidential election this fall.) Unless things really take an unexpected turn for the worse, you’re probably not going to see any more big losses. A lot of bad news and gloomy outlooks are already priced into the market.

Of course, the general consensus in 2005-2006 was also that housing was priced correctly and its value would continue to skyrocket indefinitely. People have a tendency to assume that the future will be like the recent past (in both positive and negative ways). So YMMV.

If you’re thinking long-term (again, 20-25+ years, like a retirement fund for someone in their 20s to mid-40s), I don’t see any reason to not be investing lots of money in low-cost stock market index funds. Just put it on autopilot and try not to think about it. Bonds or T-bills will almost certainly lose out in the long run (they pretty much have to if the market is reasonably efficient), and you can’t reliably predict when to move from bonds back to stocks in advance. You might give up some short-term gains if the stock market flounders for another year or two, but you’ll probably make up for it and then some by being invested heavily in stocks for the whole of the next bull market rather than jumping in partway.

Like Updegrave mentions, if you’ve got a shorter time horizon, then you need to move some money out of stocks and into bonds to reduce volatility — regardless of what the market is doing right now. But unless you’re really on the verge of retirement, you’re still talking something like 50/50 stocks/bonds at most. If you really believe that the overall economy is going to be crappy for a long time (5+ years), maybe you should slant a little more towards bonds or hard assets than would normally be recommended. But I would definitely not advise putting all your money into bonds/cash and leaving it there until stocks feel less risky — then you’re just following the herd, and probably buying back in near another stock market peak.

I lost 10% of the value of my 401k since last year. I would have been better off putting my money under my mattress. But I’ll still continue contributing to it while I can. I hope to be able to roll it over somewhere else soon. Right now it’s managed by a company that charges very high fees and hasn’t delivered on returns.

I keep seeing articles about how terrible the market has been lately. Has no one else noticed that the S&P 500 is up around 10% from its low 2 months ago?

It is incredibly difficult to call a market high or a market low until well after the fact. Isn’t it possible that the market low was 2 months ago, and we are now in the early, highly-profitable stages of a bull market?

Why don’t any of the market experts seem to mention this possibility?

“Stocks don’t pay interest and historic averages do not predict the future, as every prospectus for a mutual fund tells you. Believe them. Because over some periods you will lose money. Over the last ten years, when prices went down and then back up, people made money. But the previous ten years when prices went up and then back down, people lost money.”

Based on data from here (http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html)

(This is data for the S&P 500 index, and assumes you are not paying taxes on dividends, as if the growth is in a 401k.)

Investing from January 1998-January 2008 (fully reinvesting all dividends) returned the equivalent of 5.27% annually, or 2.57% annually after inflation is taken into account.

Investing from January 1988-January 1998 returned 17.69% annually, or 14.29% annually taking inflation into account.

This is a little unfair, though, since this reflects buying in shortly after Black Monday in 1987. The results for January 1987-January 1997 are 14.55% / 10.91% — still much better than investing in the late 90s through today.

You can, however, easily gain or lose money in any time period based on what you chose to buy or sell — and you can cherry-pick even 20-year segments where the S&P 500 did very poorly (01/1962-01/1982, for example, returned less than 1% annually after inflation is taken into account, and had negative real returns if you had to pay taxes.)

If you’re in it for the long haul (25+ years), there’s never a “bad” time to be investing money in low-cost index funds. Unless you are trying to hedge that the US Government is going to collapse in 20 years or something like that — but if that happens, you’ll have bigger problems than your retirement fund.

For pete’s sake, NOW is the time to be contributing MORE to your 401K.

Gold is at it’s peak? I better hurry up and sell. How about oil? Price is pretty high, must be at it’s peak too. Better sell that too…thanks for the advice. My buy gold comment was a dig at the “pros” at Wall Street who know well they need predictable cash coming in the form of the individual 401k cash flow machine, that’s all. You will never hear them tell you to stop contributing. Ever. Be careful.

The biggest profits you will ever make are on stocks purchased during an economic downturn. (Buy low, sell high).

You are confusing the market and the economy. The market can go down or up independent of the economy. In fact it usually does.

I would not stop contributing, but I would do is switch your investment elections to bonds or T-Bills until we know for sure that the market decline is over. As it is now, we may be entering a recession. I personally think we got a ways to go!

The ‘average’ rate of ‘interest’ in stocks is about 8 percent,

Stocks don’t pay interest and historic averages do not predict the future, as every prospectus for a mutual fund tells you. Believe them. Because over some periods you will lose money. Over the last ten years, when prices went down and then back up, people made money. But the previous ten years when prices went up and then back down, people lost money.

On the other hand, if you put your money under the mattress or in a savings account that pays interest at less than the rate of inflation, you are guaranteed to lose money.

Another option: continue to contribute to get the tax reduction benefit by limiting overall taxable salary, but if the individual is really nervous, contribute those funds to a money market or bond fund. And while yes, a down market may be a great opportunity to buy, the money market or cash fund might allow some to sleep better at night. Ideally, cash funds might be shaved later and put into stock funds.

Kurt from Burlington, CT is a funny man. I feel bad for him. Why would you buy something at its peak? I bet he was preaching to buy stocks in early 2007. Kurt, the key is to buy low, and sell high - the current down market allows for a lower entry point, so you get more shares for the same amount of money.

Avoid the stock market during a slump and buy gold while it’s at an all time high, eh? You’ll be saying “paper or plastic” when you are 70.

Think both sides of the coin. Before you give any dime away for 30 to 35 years into this locked down “hole”, check and ensure you have “good low cost diversified” funds in 401K and not holding complete garbage CDOs, MBS, Junk bonds. 401K is another vehicle for WS to privatize the profits and socialize the loss on their investments. Most fools will not realize in this “Buy and Hold” mantra perpetuated and stamped in the “Permabull” brains over so many years. Believe everyone, trust no one.

Down or markets correction periods should be looked at as buying opportunities.

Isn’t the opposite is also true - up markets are the time to sell. Of course figuring out which is which is a complete speculative gamble.

When the market is down like it has been, if you can afford it, you should increase your 401k contribution. Down or markets correction periods should be looked at as buying opportunities. When it bounces back (and it always does) it won’t have to bounce as far, and the investor will always come out ahead than if they try to time a rebound. Remember a 401K is a long term investment.

What Walter is forgetting, and I think what JoAnna from Louisiana is inquiring about, is that lettuce is $2 a head and milk is $4 a gallon…and our wages are stagnate. We need all the extra cash we can muster these days.

Don’t ever stop. You want to put the time value of money on your side. If the stock market drops, you automatically by more shares. Think long term - 20+ years and try to ignore short-term turmoil. I have been putting money into my 401K steadily for about 25 years and I am very glad I never stopped.

This is such BS. The only reason why the answer is “Yes” is because Wall Street needs to be able to count on your cash. There is a reason why the market goes up in the first quarter, bonuses and company profit sharing plows huge amounts of cash into Wall Street and it is this fact that makes perfect sense to them, and NOT YOU. Buy gold.

Why is it that investments are the only thing that people don’t want to buy “on sale”? A down market is the BEST time to buy, provided you are not looking for short-term gains.

Putting money in 401k when the market is down when you have time to invest for the long term is the best time to buy. Think of it as accumulating shares on the cheap. Then when the market goes up your shares will be worth a lot more.

Contribute to your 401k, yes. Even if your company does not match. The ‘average’ rate of ‘interest’ in stocks is about 8 percent, the average rate of inflation is about 3 percent, resulting in a 5 percent gain. Add that over a 40 year period and you will have a stack of money on which you can safely retire (and maybe your spouse or children.) This is in addition to any defined benefit plans and, if it lasts, Social Security.

The biggest profits you will ever make are on stocks purchased during an economic downturn. (Buy low, sell high). Without question, invest as much as you possibly can. (The 2008 IRS maximum 401k contribution is $15,500 not including employer match.)Be greedy when others are fearful.