Is It Ever a Good Idea to Withdraw from 401K?

To put my opinion in a short, succinct sentence, no I do not personally believe that you should ever withdraw money from your 401k account, unless it is for dire circumstances which cannot be financially remedied some other way, instead of raiding your dear life savings and safety mattress. This is something that we should all try to keep intact for as long as we possibly can, not only for the sheer financial security of it, but also for the tax implications and the numerous other cuts that government actually gives us as a reward for being disciplined retirement savers.

Even if it if for an emergency, such as losing your job, you must really consider the penalties that you may pay before considering this avenue of cash generation. Sure, there may be government relief efforts under way to help you withdraw money from tax sheltered savings accounts like 401k’s in dire straits, but even so, you still need to look at the big picture. Some of the considerations to make are the following.

How long will it take you to replenish this money that you have withdrawn, or borrowed against, your 401K? If you borrowed it instead of just withdrawing it, of course that is a better option because of course you have then had to pay yourself back with interest usually with most plans, but even if you borrowed you have to consider this. While that money is out, you are less that amount out of your account, which means you have less “principal” in your account on top of which to build your earnings.

If you’ve ever heard of the concept of compound interest, then you know the value of having a large beginning amount in your retirement account, since the more money you have, the more the money exponentially builds “on itself” to create true wealth. Withdrawing this money through borrowing it is less offensive than taking it out and not repaying it as a loan, but you are still reducing your compound interest because you are reducing that money for a period of time, which means it’s not growing.

Withdrawing and not paying it back is a whole different, and much worse, animal since you are taking the money out and not replacing it. How long has that money taken to build up to where it is now, and how long do you think it will take for you to get it back up that high again? When I think of this, it makes me shudder, personally! To think that you have to start all over is scary, and this money is supposed to be protected in the event of bankruptcy, so it is wise to always see what your other options are before you dip in to your 401k money.

Returns Mediocre on Investments in 2010?

There are so many predictions and speculations running rampant today on what’s going to happen, not only with the economy in general, in 2010, the new decade, but what is going to happen with the stock market at large as well. We had such an odd year to say the least, with the unexpected, and certainly many think, as well as myself, unwarranted, rally in stocks that continued all the way to the bitter end of 2009, that it makes one wonder what will happen in the new year. Will this rally continue and stock prices continue to be inflated in relation to what’s actually happening out there in consumerland and the housing market?

While that is anyone’s guess, it is my educated guess, and of course my gathering of numerous other opinions of experts who have like minds, that the market will be soft this year. I don’t think at this point, like I did last year, that there is another impending huge dip in stock prices as there was in 2008 that devastated so many people’s retirement accounts, but I do think that we will not see any spectacular, meaningful movement in the stock market as a whole in the year to come.

There just isn’t enough underlying reason for this to happen. Think about it. Government spending has largely propped up many businesses, banks, and even the housing market, artificially by infusing money into them where consumers could not because of the ridiculous unemployment rates.

Further, these so called “improvements” in the housing market aren’t really improvements in large part. They are mostly because the foreclosure rates are so high, and because houses that are just sitting there, built, yet vacant, already written off by construction companies, aren’t even included in the housing numbers, so the numbers you see, I hate to break it to you, are largely not the accurate, true reflection of what is actually going on.

I don’t think you need to worry about stock prices totally collapsing as they did in the not so distant past, but don’t expect robust returns in 2010, unless we have some major marvelous recovery that no one could have predicted.

Too many employers are still trying to feel out the recovery, and since they’ve found numerous ways to boost production and efficiency, and profit, without hiring more people but instead doing it with the people they have, this does not bode well for a true, consumer driven and employment driven recovery, which means stocks will just remain artificially propped up and not actually grow like they should. Maybe you could find a good dividend stock or two and stick with that, it may be the safest bet for getting returns on your money for retirement.

Missed Opportunities

I really want to throw up when I see how many stocks I was seriously considering buying when they took huge headers back in 2008, but was too scared to make the plunge because of all the rampant fear that the sky was falling and that all stocks would go to zero (now that I look back on that idea, it’s ludicrous, but when you’re in the clutches of fear, there’s not much you can do other than make what you feel is your best decision for you and your family).

Because of the market fear and panic, I missed out on many stocks that I was eyeballing that have skyrocketed since the fears have abated a bit. I do still wonder though, do we really have a solid reason for these fears abating, or is it simply all of us zestful Americans wanting to make a buck, jumping back in with all confidence, before we should? Part of me does think the “recovery” isn’t really going as well as it should be, and we should still be leary of stocks, but every time I think they will take another precipitous turn for the worse, I read news like “jobs reports spur the market” and things like that. So now I wonder if I’M being too negative.

Some of the opportunities I feel I missed out on, maybe even as short term investments, were Genworth Financial. This was one of the scariest stocks I was looking at because it deals with the housing market, which as we all know, is what got us started in this huge mess in the first place. Anyone who touched this stock back when it was seventy eight cents per share was probably due for a head examination. But look at it today. It’s priced over eleven dollars a share. That, my friends, is what’s called a ten bagger, and you could have multiplied your money by ten times had you bought this “on the bottom”.

However, you obviously don’t have a crystal ball to see into the future, so how could you have known that? Other companies that I was looking at, like Chinese search giant Baidu, were around a hundred bucks a share and now are priced at well over 400. That’s a four bagger right there. And I missed it because I was too scared to buy anything. I have a list where I keep track of stocks I was looking at and at what price, and let me tell you, when I see missed opportunities like this where I was ready to make a move and didn’t, well, it pretty much makes me realize I maybe should listen to my gut a little more!

Trust Tough After Madoff for Financial Advisers

It’s no wonder that smaller time financial advice companies are having a heck of a time proving they are not crooks to would be investors after the series of frauds that were committed against investors, most notably the Bernard Madoff scheme, and several others occurred in what seemed like rapid succession. Why did they seem so close together you may wonder? Well, because the economy combined with the massive market falls created the perfect storm for Madoff’s and other similar Ponzi schemes to fall apart pretty quickly.

Where schemes like this once were insulated by market returns that could be average to pretty good with the money they actually legitimately invested, they fell completely apart and were exposed when the market took multiple dives in multiple sectors because then they were left with only other client’s money to pay off the old clients. They essentially were depending on the new client’s investments of cash to pay off the old client’s “returns”, in a sort of pyramid like scheme. When the income dies off, the whole pyramid falls apart, and although schemes like this were run for years without any hiccups, they completely imploded in the market drop of 2008.

Because of these schemes, many investors, both rich and middle American investors, are extremely skeptical when it comes to financial advisors now, especially when it comes to independently owned, perhaps smaller firms that don’t have a brand name. Because people aren’t sure who to trust, now they are tending to go more with big names like Merill Lynch and larger banks as their financial advisors. Which is kind of funny if you think about it, after the collapse of Shearson Lehman, which was a big outfit.

I have to admit, even I am doing a little more than my due diligence when it comes to researching and making sure I’m not getting duped. I actually have a smaller accounting and investment firm that does both my taxes and my investing for the year for my small business and my personal taxes, and after this scandal broke along with multiple others after it, I made sure that I read over my paperwork and did my homework on where my money was really going.

It wasn’t that I didn’t trust my accountant, but I thought of how many people had blindly trusted theirs and then ended up losing their life savings, and I thought that I’d better really start to be more of an aware consumer. The sad part is that even if you are an educated and aware consumer, you still can’t avoid every con man out there. It does help though when you are aware of signs to look for and what you should be getting as far as documentation.

Can You Time the Market?

So, what is this phrase “timing the market”, that you see if you happen to have any interest in investing your money for the future and making more out of your nest egg, or even simply doing shorter term stock trades and making those short term profits, rather than the (what I like to use) buy and hold strategy that market giants like Warren Buffett and others have used over decades to build massive fortunes in some of the most solid companies out there?

Well, timing the market means that you try to time when the market’s up and down times will be. In other words, you have to be able to take a number of variables that go into the stock market’s performance, such as economic conditions, sector performance in various sectors like energy, technology and so on and so forth, and something that is far more intangible and hard to track, consumer and investor sentiment.

That last variable is the reason that market timing is not an exact science, and the reason behind most economists, legendary investors, and scholars, saying that no one can time the market, not even the most seasoned investors on the planet. The recent market rally is a perfect example of why this is nearly impossible, or at the very least highly improbable. Do you actually see any sustainable recovery or jobs rebound?

Not really, so then why has investor confidence seemed to climb to disproportianat levels? Well, that’s exactly the point they want to make when they say that no one knows when the market is going to turn for the worse or the better, because no one really can predict it. Even the richest investors did not predict the massive fall of the market that spawned billions of dollars in investment and 401k losses, putting the majority of Americans under water when it came to their cherished nest eggs of money for the future.

There are a few indicators you can look at that can help you make wiser, more informed decisions about what to do with your money and when, however, even these indicators cannot foretell the biggest variable, which is the confidence of consumers and investors, who largely drive the stock market’s performance.

Automate for Less Temptation to Spend

When I think of all the smartest financial decisions I’ve made in my life, one of the ones I’m gladdest I did in the first place was to automate a lot of my investing for my future. It really is true when they say money is “out of sight, out of mind”, because I think that automating deductions from my paychecks, then also automating them from my checking account into a fund that is designed specifically only for investing, has been the quickest way for me to build true and lasting wealth for my future retirement and security.

It’s been so easy to do that and just watch those monthly statements grow (except of course when the market’s doing terribly, which seems to have pretty much subsided for that last couple of months anyway) because I literally never touch the money, see it, or have an opportunity to get at it. I can’t tell you how gratifying it has been to know that I have my security set for my future, just by putting away money that is tax deductible today. That’s of course the second great part, is that the money you put in tax deferred accounts for your future is essentially not going to be costing you anything until you retire.

By automating, you are also ensuring that you are less likely to reduce or stop those monthly payments to yourself, because it is usually a hassle to do so, and many times you think, well why would I do that when I may just be back on track financially in a few weeks. These types of thoughts are the reason that automating your withdrawals for your savings or retirement are the perfect way to ensure your retirement is safe. After all, who can really count on social security these days?

If you’re not already in some way contributing automated payments to a savings or retirement account, you should really consider doing it now. Not only are the financial benefits great, but it really forces you to budget your money on a whole new set of rules, and then it sets that new budget in place and puts the money out of your mind by keeping it out of your sight. It truly is the best way you can psychologically save money for your future, with minimal pain, hemming and hawing about it.

How Long Til People Recover 401k Money?

This is a question that is on many people’s minds, especially those that are going to be ready to retire in the next 5-10 years and lost a lot of their money that they’d invested in the stock market with the plummeting market that started in October of 2008. It’s on my mind, I know that, and I’m only in my mid thirties, so I can imagine how much this question would be burning at people who had set their heart on retiring sometime around now or in the next few years. I can’t tell you how many stories I’ve heard of people who have either had to go back to work or have had to put their retirement plans off because they lost quite a bit of their capital or their savings to the stock market volatility.

The question though, is when will be back to those same market levels that we enjoyed in early and even later in 2008, before the awful crash happened? Sure, we’ve started to see some hikes in the market, but most stocks are nowhere near their highs and may never reach them again for all we know. It’s hard to tell whether you should invest in the market when it’s this volatile, but these are unprecedented times, and there are bargains to be had. I can pretty much guarantee that while this market has made many of us poorer, it sure will make quite a few more people rich or a lot of money who had the guts to go in and buy great stocks on the cheap.

That’s how the market works. To paraphrase the infamous Warren Buffett, you should buy when fear is high, and be fearful when others are greedy. I’m paraphrasing of course, but this saying is well known in the financial and investing world, but hardly anyone can actually live by it and practice it because it really is a scary thing to do when it looks as if the whole infrastructure of our market will implode and never recover.

But these economic cycle, just as they start, they have to subside as well. We are too powerful an economic engine to be put down for good, and although there are many of us suffering from this market, we may also see some opportunity where others don’t, and we may benefit from that if we just have patience and the knowledge it takes to pick winners for the long haul.

Retirement Looks Like Pipe Dream For Many

Well, it used to be, way back when, that you’d work for one single company for almost your entire adult working life, and you’d retire with your “gold watch” and a nice pension or retirement nest egg. That was before the new economic reality that unfortunately faces us today, one that has forced many people out of retirement to report back to the work force because of losses in the stock market that made it necessary, and also one that has pushed out other’s retirement indefinitely.

Many people are finding that their retirement accounts have been wiped out substantially by the current economic conditions that have greatly affected the market and investor confidence, which wiped clean years of progress on the Dow Jones industrial average in a matter of days. It’s still recuperating, and although it has increased substantially, some wonder if it might not take years to get back to the levels we enjoyed in the beginning of 2008, and especially in 2007 when the market seemed to peak and if anything, be overvalued by investors.

I’m 34 years old, and I know that this current crisis has set back my plans about five years if my calculations are correct. I had a plan to actually retire from my corporate job a little earlier than the real retirement age, and work on other projects outside of that job, however this current situation drained a lot of my nest egg, and I’m finding that I don’t feel so confident not “retiring” early without that money that I thought I’d have as a cushion for when my real incomes stop coming in.

A lot of horror stories have culminated as well. There are stories of scams and frauds coming to light because of the collapsing stock market, where older people who are already retired are finding that someone has ripped them off of all of their retirement savings. There are stories of elderly people losing so much in the stock market that much of their inheritance money has been dashed, and won’t be passed on to their young ones, which means less money circulating in the economy yet again, and there are also stories about the elderly getting taken for their money from other fraudsters that prey on this sort of thing.

I’ve also heard a lot about my friends who have lost quite a bit, and have been forced to maybe dip into emergency funds early on or cut back on their college savings funds for their kids so that they may still retire in peace and comfort.

The Importance of a Good 401k

If you have the option of a participating in a 401k at your place of employment, I beg you to make this choice of taking part or not a no brainer and just going for it and putting a percentage of your pay into it every two weeks, or however often you happen to get a paycheck. What most people don’t realize is that they are missing out on a great opportunity to make excellent money in a shorter period of time because most of the time companies will match you up to a certain percent by putting in some of their own money to match yours, so you have an even greater benefit, and build up your funds even faster than if you did not have the company match.

Company matches are a great thing. It’s free money, and if you give that up, then you are truly throwing money away and there’s no excuse for that – ever! If you’re concerned about the current market volatility, most 401k accounts will offer a very low risk option. For example, my 401k is through Fidelity, and they offer a money market account as one of their deposit options, where your money is automatically put into a money market account instead of a higher risk mutual fund or stocks of some sort.

Money markets are pretty much guaranteed, but they offer a very low yield, which is why usually people who are close to retirement choose them, since they are no longer worried about growth, but rather have already attained all their growth and are instead worried about sustainability of their capital as well as stability of income, not a high return any more.

Another huge benefit to 401k accounts is that they give you a tax break. Your taxable income is reduced by as much as you contribute. So say if you decide to contribute ten percent of your total income every pay, your taxable income is reduced by that much, reducing your overall tax liability by that much more, which is something we could all use – a tax break!

Of course, if you think your tax bracket will be significantly higher at retirement, than you might instead choose an option where you can pay those taxes now and instead lower your future tax liability for when you are forecasting a much higher tax bracket for yourself or you and your spouse. I suppose it all depends on what you are expecting for your future, and how you think you’ll fare in you job or livelihood in the future as to whether your taxes will be lower now or in the future.

Bernie Madoff’s Victims Want Justice

Bernard Madoff will go down in history as pulling off the biggest, most hurtful in terms of psychologically and financially, ponzi schemes in the history of the US. Once a respected fund manager, and even holding a top spot at the NASDAQ exchange, Madoff won a lot of followers with an investment that seemed to produce very consistent and fairly high but not so much so to create suspicion right away, returns for his clients.

Even though one man who studied his investments said there was no way he could have consistently racked up such great returns over the period of years he ran his scheme brought this to the attention of the SEC repeatedly, his please for a serious investigation were basically ignore. Hence, why we need a major overhaul of the SEC to make sure these types of schemes don’t undermine the investment world and shake investor’s confidence over and over again.

An news piece recently spotlighted the fact that many of Madoff’s victims, several of whom have basically lost their life savings and are devastated financially, want justice to be served and want that justice to be as swift and as severe as it possibly can be. In other words, they don’t want this guy getting off easily at some minimum security white collar prison that isn’t really like hard time at all.

His victims all feel that he should serve maximum prison time for swindling out of their hard earned money, many times up to thirty years worth of saving and investing, which were just gone in a dash. One person even said that their son’s college fund along with their life savings was wiped out because they believed in Madoff securities and thought they would also be protected from such an elaborate scam by the SEC, of which one email scoffed that obviously they were wrong on both counts.