Investing, Retirement 
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No 401(k) Employer Match!

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One of the interesting financial “dilemmas” I’m going to have to think about is what I’m going to do with the 401(k) contributions with my new company because my new company doesn’t match employee contributions… whereas my old company would contribute 3% for ever 6% I contributed, my new one will contribute exactly 0% for every whatever% I contribute. They have a generous profit sharing-type program where they contribute to your 401(k) so it’s not entirely horrible, but it doesn’t depend on your own contribution whatsoever.

The conventional wisdom is that you should contribute the minimum amount required to get the maximum employer contribution into your 401(k) [stage 1], then pump up your Roth IRA [stage 2], and then go back and max out your 401(k) [stage 3]. If any of those options are unavailable to you (eg. you’re single and your adjusted gross income is over $95k and you can’t contribute to a Roth), then you just skip ahead.

So, according to the game plan, since stage 1 is now unavailable without employer match, I’ll move straight into contributing to the Roth IRA and then put the “rest” into the 401(k). The only problem is that right now I’m only in stages 1 and 2, I don’t contribute more than “necessary” into my 401(k) because I want to build up a higher emergency fund reserve because of home ownership (the number of emergencies grows exponentially when you own the four walls and the roof you live under) so I’m not really sure how much I want to put into my 401(k). Up until now, my 401(k) contribution has been decided by the financials (can’t give up that company match!) but now I’m not sure what to do.

Any suggestions? For now I’m going to contribute 10%, four percentage points higher than before but it’s a nice round number. :)

{ 13 comments, please add your thoughts now! }

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13 Responses to “No 401(k) Employer Match!”

  1. Amy says:

    You should follow the wise path you just mentioned. Minimum contribution to the get the maximum employer contribution is recommendable.

  2. VSelfridge says:

    Getting all of the Employer 401K match that is available is always a good strategy (why leave THEIR money on the table!)

  3. Pete says:

    A few things:

    1) Being twenty-something, I would not worry as much for saving to your 401(k) if you are building up your emergency fund and Roth IRA (especially with no company match). You can always switch back to the 401(k) once you have your emergency fund is properly established. It is worse to be caught short for an emergency than not contributing 1 or 2 years to a 401(k) – especially if you have already started in your early-20s (ahead of curve).

    2) If you build your emergency fund while cutting your 401(k) contribution, make sure you are saving that 10% that use to go into the 401(k) and putting it to the emergency fund instead of spending the extra income (note, it may be less than 10% reflecting tax effect)

    3) You mentioned that there are more emergencies when you have a home. Yet, a big mistake new home buyers make is not factoring in repairs and upkeep into their budget. If it is in the budget, then it is not really an emergency (unless the roof and furnace go at once). Emergency is for when one loses their job, becomes disabled or has a major medical bill (not routine repairs). My concern is when people use their emergency fund for normal repairs and then lose their job after one of these repairs. The fund is depleted just as they really need it.

  4. John says:

    You’re right about the Roth at 100%, especially at your age.

    If you don’t have any cash reserves, then maybe you should build them up. But don’t count your 401(k) contributions out:

    If you’re going to earn a lot of savings this year that you won’t need, funneling into 401(k) lowers your taxes this year, and when you do draw on these funds, you will likely be in a lower tax rate. As well, recognize that the money’s not completely out of reach: you can loan money in a 401(k) to yourself, and there is interest but you pay the interest back to yourself, so it’s free. (Not all employers offer the loan feature.) Finally, pre-tax 401(k)’s aren’t as valuable or flexable as post-tax Roth’s, but we’re still basically saying “lower my taxes this year, and put the money beyond use for a very long time, so it will appreciate in value, and when I take it out, I’ll be spending the principle and interest as my income while I’m in a lower tax bracket.” Alternatively, in addition to home ownership emergencies, if there are *strategically valuable* investments you can make in your home (kitchen, structural value-assurance, exterior, and bath), and even do the work yourself, this is a great investment because you’ll recover it at resale and there’s no tax on capital gain from the sale of your own home. Plus you get to live in the value. Try that with a bank account.

    In my own case, these are high-income years for me, and I want to slash my income to lower my tax rate. I fully funded my Roth IRA, and fully funded my HSA, and now 401(k) is the next target. You can put at least $15,000 of your own income into one.

  5. JR says:

    For me, one of the great things about saving in a 401k is that I actually end up saving money whereas my “emergency savings fund” never seems to get off the ground. My company provides minimal matching (2% of my 6%), but I decided, even though i’m relatively young and broke, to maximize my 401k deposits at 15%. I know I should take advice from you regarding establishing an “emergeny savings fund,” but I’m concerned that if I lower my 401k contribution below the max contribution of 15% than I’ll lose out on the savings and more importantly the compounding and won’t be able to make it up later. It’s my understanding that the max contributions rule for 401k deposits are the lesser of 15% or 15,000 annually. This is only an issue if you have a base salary below $100,000 (as I and most of my 20-something peers do). Once you’re salary passes that threshold (as I think many 20-something career people do) you are maxed out at the $15,000 contribution and can’t make up the “lost” pre-tax savings dollars. I suppose you could make up the savings via another investment vehicle, but then they’d be after-tax dollars, not to mention by that point (presumably) you’d be losing a higher percentage of your salary to taxes. If anyone’s got advice or insight on this, I’d love to hear it.

  6. Miller says:

    so here’s the next obvious question… how much of an emergency fund do you need? People say 6 months… I haven’t done this for myself yet, but maybe the blogosphere can help ya out there!

    – mortgage
    – food
    – car/insurance
    – etc, etc, etc…

  7. E. Uriel Acevedo says:

    If your employer does not match any of your 401k contributions I would advise you NOT to contribute ANY money into the 401k.

    I would also suggest that you NOT make contributions to ANY government sponsored tax deferred programs- these include IRA’s, Roth IRA’s, SEPs and all other government sponsored tax deferred plans.

    There are a plethora of reasons for me to make such an unconventional suggestion, however the primary reason revolves around the fact that the lack of accessibility to your retirement funds during your income producing years is a heavy price to pay for the “perceived” short term tax advantage that these programs provide.

    During your lifetime- your need for capital will far outweigh your need to defer your income taxes! If you do not address that need, first and foremost, you will be sentencing yourself to a lifetime of paying interest and finance charges to banks, finance, leasing and credit card companies!

    Even the most well intentioned, disciplined, frugal and financially savvy people will still need to: buy a fair share of cars to drive during their lifetime; buy a home or two to live in; pay for medical emergencies not covered by health insurance; and send their children to grade, middle, high school and college.

    All of the aforementioned require a significant amount of capital. Why borrow the money from a bank when you can borrow your own money and pay yourself back the interest that you would have otherwise given to a bank?

    If you had the chance to compare -the amount of money you will pay in interest associated with your mortgages, car loans or leases and any other interest you will pay throughout your lifetime due to lack of available capital- to – the amount of money you deferred in taxes by contributing to government programs (remember the tax is simply deferred- either your or your heirs WILL eventually have to pay the taxes on this money) – which amount do you think will be greater?

    The debate as to how much money is necessary to establish an emergency fund would be non-existent if people were properly capitalized to begin with. Until you are completely self-funding ALL of your capital needs (i.e. cars, mortgage, college funding etc) I would consider you under-funded, hence I would suggest a larger emergency fund.

    {Let me clarify that I AM NOT suggesting you borrow money from your 401k since that would be a ghastly mistake! First of all there are limitations as to how much and even IF you are allowed to borrow YOUR OWN money from your 401k, but more important is the fact that when you payback the money into your 401k you are in effect paying back money that has ALREADY been taxed, only to be taxed once AGAIN in retirement when you take that money out again!}

    As a Financial planner I utilize a financial strategy which addresses the need of capitalization while also providing taxation benefits. The strategy involves the use of Mutually Held (non-direct recognition), Dividend paying Whole Life Insurance as a capitalization vehicle.

    For a detailed explanation on the mechanics behind the strategy you may also visit the following link also available on my lens:
    http://www.infinitebanking.info/IBC%20-%20How%20It%20Works.pdf

    I would like to state that although some might perceive my participation in this blog as self-serving or “agenda based”, I would like to reassure all bloggers that my participation is based on a Sincere and Honest interest in the topics discussed. The information provided herein and on my lens are all FREE of charge, with no strings attached- should you have any questions you may contact me directly at: urielifa@atlanticbb.net

  8. King Asa says:

    Mr. Acevedo.
    I think the point is that he has already compared “the amount of money you will pay in interest associated with your mortgages, car loans or leases and any other interest you will pay throughout your lifetime due to lack of available capital- to – the amount of money you deferred in taxes by contributing to government programs”, and the amount saved on taxes is greater.

    Why not take advantage of tax-deferred retirement accounts when you can get an average return greater than the interest rate you would pay on a car loan or mortgage anyway. Sure the return on your investment is not guaranteed, but the whole basis of the stock market is balancing risk with return.

    I’d rather get 5% interest on my money in an online savings account and take out a car loan that only has a rate of 3%, than put up all the money to buy the car in cash upfront.

  9. King Asa says:

    JR, your understanding that the max contributions rule for 401k deposits are the lesser of 15% or 15,000 annually is incorrect. You’re correct about the $15K… but you can contribute any percentage of your salary in order to get to that amount. So, if you made only $30K per year, you could still contribute 50% of your salary to max out your 401K.

  10. E. Uriel Acevedo says:

    I am not sure how Mr. Asa can infer that our blogger ALREADY compared the interest on loans vs. taxes saved, nor do I see how he can claim that the taxes saved would be greater than interest paid?

    If we assume that our blogger makes $95k a year and he contributes the maximum amount allowable to his 401k, (and also has no other deductions) he would defer approximately $ 4,200 in taxes in 2006. By contrast if he has a $ 250k conventional 30 year mortgage at a fixed interest rate of 6.5% he will end up paying $ 15,500 a year in interest (net of tax savings).

    Which do you think is a bigger problem $ 4,200 in taxes or $ 15,500 in interest paid?

    As his life evolves his need for capital will continue to increase, however the same reasons that increase the need for capital (i.e. transportation, family, children, education, business ventures etc.) will also increase the amount of tax deductions he will later have, thereby widening the gap between interest paid and taxes paid (i.e. the more deductions he will have the less taxes he will pay- the more capital borrowed the more interest he will pay).

    I regards to whether one should leverage borrowed money verses using ones own money; the only true way to be able to make that determination is by having accumulated the money (i.e. capitalized) in the first place. MOST people do not have the money and choose to hide behind the hypothetical of that argument (by the way those online rates are NOT guaranteed and they CAN go down- by contrast do you think the fixed interest on your debt has a chance of ever going down?). The KEY to leveraging ones own money is to PAY yourself back the interest that you would have otherwise had to pay a bank to borrow the money- this way you are guaranteeing that your money is always working for you.

    This brings me to the topic of “average rate of returns” in the stock market:

    I’m afraid that this concept is one of the greatest misconceptions in the world of personal finance. Despite the fact that everyone claims to know that past performance is no guarantee of future performance, conventional wisdom is insistent on highlighting the fact that the market indexes always will outpace the return of guaranteed fixed investments. And so the BUY-HOLD strategy (index investing is a buy-hold strategy) was invented thus paving the way for the creation of financial instruments (such as mutual funds) and tax-deferred programs (such as 401k’s) to be pedaled to hard working people trying to do the right thing!

    In order to truly understand this fallacy one must first examine its origin. If you look at a stock market index chart for the past 102 years you will find that the stock market continuously has moved to new heights, however when you take a closer look at the graph you will notice that the market moves in secular cycles. A secular cycle is defined as periods of long positive returns followed by periods of long flat or downward turns.

    When you look at these cycles you will notice that the great majority of time the market is actually doing NOTHING- it runs flat! Whether things will work out in the long run actually MAKES NO DIFFERENCE AT ALL if you are looking to retire or have a large capital need- such as an emergency, a need for a new car, a need to buy a home, a need to pay for a child’s education etc.

    To further illustrate the point had you been in a BUY-HOLD situation, such as which you are almost forced to have within a 401k (due to its lack of investment options), during the period between 1966 and 1982 or the period between 2000 and 2004, there is a good chance your portfolio gains would have been negligible.

    I can assure you that you would have paid a lot more in interest over those years than you would have made in the market had you utilized a BUY-HOLD/INVEST in the Index strategy.

    The reason is simple, because no matter how you spin it or how “little” the interest you are paying may seem; the fact remains that the INTEREST you PAY will be a constant and an inevitable consequence should you continue to choose to be undercapitalized.

    And why are most people undercapitalized during their income producing years?
    1) Because they don’t save at all
    2) Because they invest rather than save
    3) Because they tie-up their money in IRA’, 401k’s and other qualified tax-deferred programs as well as other illiquid assets such as their home (but that’s another topic all together).

    My main point of contention is that we are taking unnecessary risks with our money in hopes of getting a better rate of return. In short we are gambling with our future and failing to examine the true problem.

    Your only chance to effectively manage stock market risk is by having COMPLETE control over your individual investments in the stock market- this task is next to impossible with regards to your 401k contributions.

    a) First of all 95% of all 401k’s are based on mutual fund investments (with the very rare exception of 401ks that allow individual stock trading- this exception however is usually only available to top executives of the company, i.e. the plan trustees). You have limited selection at best and no control over what funds are available for you to choose from. That decision is made for YOU by your 401k plan trustees, who in most cases are just as qualified to make those decisions as the company’s janitor. In addition, you are also typically limited to how many times you may change your strategy in any given year.

    b) Second of all you CANNOT control the internal expenses within your 401k. Do you know how much you are paying in fees and services inside your 401k- of course you don’t- it is NOT disclosed on your statements and you have no way of knowing how much you are actually paying- As a person who has made a great deal of money “rescuing” faulty 401k and Split dollar plans I can tell you that if you knew it would make you sick to your stomach.

    c) Proper Asset allocation and automatic portfolio rebalancing can only be achieved within your 401k by selecting an “actively managed” portfolio option, which by the way are not available in all 401k’s, and which also usually come at a cost (i.e. more fees). – In the end most of these “actively managed” allocation strategies typically end-up with below average returns as compared to the benchmarks.

    Another area which I would like to caution all 401k fans is an area seldom addressed by conventional financial planning experts and that is: Fiduciary Responsibility. It has been my personal experience that even when 401k plan administrators are made aware of: inappropriate fund availability, high fees, fund overlapping or any other atrocities within their 401k plans they usually end up doing NOTHING since it would end up costing the company time and money to change the plan. So in the end it is the employee who will blindly continue to bear the expenses within the plan.

    And REMEMBER the reason you did all this was to DEFER paying taxes- meaning that you are only delaying the payment of taxes. You WILL have to pay the taxes later – in fact, if you don’t start taking distributions at age 59.5, when you reach the age of 70.5 you will be REQUIRED to take distributions or you will be faced with a 50% penalty for not doing so.

    I ask you WHY are we so focused on handing over our money to other people to manage and impose restrictions and limitations on how we can manage and use OUR OWN money?

    I KNOW that most people are trying to do the right thing by maxing-out their 401k and qualified plans, however in the process they are: giving up control over their hard earned money; delegating their future to others, the uncertainty of the stock market and unknown future taxation rates.

    What is more; this inevitably leaves them in a constant state of undercapitalization- So in the end they will continue to lose money paying interest and finance charges to banks, finance companies and credit card companies for the rest of their lives- money that they will never see again.

    Don’t you think it’s time to start questioning the validity of this misguided conventional wisdom?

    In the words of Mr. Nelson Nash the author of The Infinite Banking Concept: “When government creates a problem (i.e. – onerous taxation) and then turns around and creates an exception to the problem they created (i.e. – tax-sheltered retirement plans, etc) aren’t you just a little bit suspicious that you are being manipulated?”

  11. John says:

    I have to disagree with Acevedo. Especially his stance on avoiding all IRAs. The Roth IRA isn’t tax deferred. You put in post taxed money and it grows tax free. You can also remove up to the amount you contributed without penalty if it’s for things like buying a home for the first time.

    As a Financial Advisor, I’d be wary about what you are suggesting to people.

  12. E. Uriel Acevedo says:

    John,

    It does not surprise me that you- and the Great Majority of Financial Advisors for that matter- would be WARY of anyone who would suggest you take a moment to think outside the proverbial “conventional financial planning box”.

    Your Roth IRA comments are EXACTLY the type of misguided advice that permeates the Financial planning industry today.

    And YES I do mean misguided because it OMITS a great deal of IMPORTANT facts which make the Roth IRA a very poor and limited CAPITALIZATION vehicle:

    1) Income taxes AND Early withdrawal penalties on Roth Ira’s may apply depending on the following:

    a) Roth distribution ORDERING Rules
    b) The Roth Ira’s owners AGE
    c) The AGE of the Roth Ira
    d) The time that has elapsed since any regular or conversion contributions were made to the Roth Ira account

    ** Under IRS ordering rules you are only allowed to remove your original contributions at ANY time without tax or penalties.

    2) If you remove your original Roth IRA contributions you CANNOT put that money BACK into your Roth IRA.

    3) As all government sponsored retirement plans, Roth Ira contributions are LIMITED to a certain amount each year and based on many factors such as income, marital status and age.

    To highlight the Exit Strategy within a Roth Ira as an Advantage is truly Misleading and perhaps one of the most regurgitated pieces of advice given by financial advisors today!

    That is the nonsense that makes ME wary…

  13. Rebecca says:

    I have to say, after reading Acevedo’s detailed description of increasing capital vs. tax deferment; it makes LOGICAL sense. However, Acevdeo’s recommendations require significal lifestyle changes that the majority of people will refuse to undertake.

    I too have thought of Acevedo’s theory… not in great detail because I am no financial expert, but I examine logic. In my effort to ‘do the right financial thing’ I’ve often wondered what’s the point. My money is/will taxed, upon taxed, upon taxed. No matter what option/program you select for tax deferment, it all sounds like smoke and mirrors. We all need to just hunker down and save, but I know that is difficult. By all means I am not getting on a soapbox for I am guilty myself of not saving.

    This topic is not about what financial products to choose; its about what type of lifestyle are you willing to undertake.


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