I just started a new job, and am offered the chance to put some money into a 401k with an employer match. This is my first time ever putting anything into a 401k.
This is being administered through a service called “Guideline”, which offers a variety of portfolio options with different levels of risk, with different percentages going to stocks and bonds: Guideline’s Managed Portfolios | 401(k) Investment Funds
But I’m confused. I thought a 401k is some sort of savings account for retirement. This service makes it seem like I have to spend all that money betting on random financial instruments that I don’t understand and don’t want to utilize, especially with the way the US is headed. Even the lowest risk one invests half in the US stock market. I have zero interest in the stock market or investing in what’s left of the US government.
Do I HAVE to put this money into risky gambles like this? It can’t just be in a bank somewhere? I don’t care if it gains no interest, or doesn’t keep up with inflation or whatever. I very much doubt I’ll be able to withdraw from it when the time comes anyway.
I’d much prefer to keep that money in a regular bank, preferably one outside the US. Is it possible to do that but still keep the pre tax employer match?
There is sometimes an option for a cash-like instrument, such as a Money Market Fund, to invest your money in. Find out if there is one, but don’t expect much return on your investment.
You might also consider a Mutual Fund consisting of foreign stocks since they may do much better than US stocks for the foreseeable future.
Their full menu lets me choose something called a Vanguard Federal Money Market Fund (VMFXX). But that still just invests most of it in the US government, which doesn’t seem stable at all.
Do I HAVE to invest it? I can’t just deposit it into an account?
It’s bizarre to me that saving for retirement requires betting in these markets. Seems like a scam…
You’re not alone. Many people think that a “401k” plan is a retirement savings plan, but it’s not. It’s actually a plan that gives you access to a variety of investment options. It’s kind of like a bank. When you put your money in the bank, you don’t just put it in the bank. You put it in a specific account, like checking, savings, money market, CD, etc. The 401k is like having access to a bank, but it’s up to you to pick which investment option(s) will hold your money. Sometimes the plan will have a default option which holds the money if you don’t make a choice. The plan should have an overview of the investment options with their risk profile. Some of them will be riskier than others.
Sometimes the plans have an investment option which is based on a retirement age target. These are plans which change investment goals as you get closer to retirement. So when you’re young, they put more money into riskier investments that have bigger upsides. When you’re older, they put the money into more conservative investments which are less likely to go down. They are good options for people who are uncomfortable with making those kinds of decisions themselves.
There may also be a plan which is like a savings account. Although the money is safe, it won’t go up much. Certainly it’s understandable to want to avoid risk, but if you avoid all risks in investing, then you may have a much smaller nest egg when you eventually retire. Not having enough money in retirement may bring on other problems if money is tight.
That’s ultimately what I’m asking. I don’t WANT to use a service like Guideline at all. Can I just take my 401k and put it in a bank or credit union of my choice?
I was not offered that option, so this just seems like a way to force me to invest though a service I don’t trust in a market I have no interest in for a government I have no faith in.
Is that really how it’s supposed to work, or am I missing something? Everyone with a 401k is forced to participate in this gambling scheme?
When you put your money in a savings-type account, the account manager finds ways to make money off of your money. That might be by lending it to other people at a higher interest rate or by investing it themselves in other things. The movie “It’s a Wonderful Life” has a scene which involves this. The account holders want their money out of the bank, but there’s not enough money in the bank to give everyone their money back. The bank owner explains that John’s money was used to pay for Joe’s mortgage, Sam’s money was used to pay for Jack’s business loan, etc. The system works well as long as the savings account holders don’t all try to get their money back at the same time.
Yes and no. It’s not possible to just choose a bank and put your 401K money into it , it has to be invested through whichever company administers your employer’s plan. That is, however, not the only way to save for retirement. If you aren’t concerned with your contributions being tax deductible, there are Roth IRAs which you can open with a bank or you can just use a regular savings account if you can trust yourself to not raid it for other reasons.
However, don’t let this
But that still just invests most of it in the US government, which doesn’t seem stable at all.
drive your decision. Because if that isn’t stable, then FDIC insurance is also pretty meaningless.
Maybe- it won’t affect a bank balance but it also might not affect your 401K. Because you most likely aren’t buying individual stocks.
I’m not a financial advisor, but this is literally giving away part of your compensation (the match). I can’t imagine any investment that is risky enough to be worth giving away free money.
VMFXX has literally never lost value. If you have legitimate concerns about the US government defaulting then I guess it would make sense to avoid it, but if that happens I wouldn’t feel very safe with my money in a bank either.
I see no reason to believe that foreign bonds would be safer. Investing in a foreign bank account is likely difficult to impossible.
If you believe that investment is gambling, then the answer is “yes”. But this was true for pensions and other forms of retirement savings as well - the “gamble” was just moved to the pension’s investment account and the risk to the employee was the pension account going bankrupt.
Nothing is without risk - the key is to evaluate your tolerance and need to assume risk in order to meet your financial goals.
Yes, but like I said in a 401K or similar type plan you generally aren’t buying individual stocks (I’ve never seen one that does but there might be an exception).
I own some stock in one company through an investment account at my bank. If that goes down in price, I’ve lost money on paper. I won’t actually have lost anything unless I decide to sell it. In my retirement account, I have money in 8 different funds, each of which holds multiple stocks/bonds. I don’t recall a time when all the funds lost value at the same time- and certainly all the stocks never have. Which means that when some lose value, others gain value, so my “loss” is less.
Losing the employer match is losing the biggest return you are ever likely to get on your money. Nothing is going to be without risk - but I just want to give you an example. I retired and stopped contributing three years ago. My balance today is thousands more than it was when I stopped contributing - even after I’ve withdrawn a few thousand dollars. That would never happen with a bank account.
I would assume “no”. You company has an arrangement with whatever firm handles your 401k (I presume Guideline) where they will offer matching on one of the funds Guideline provides. One of those funds might offer you the opportunity to invest in foreign companies. I’m pretty sure there are probably no funds that allow you to take money out of your paycheck tax-free and dump it offshore.
These aren’t “random” financial instruments. They are selected by the fund manager to represent different thresholds for “risk” based on the assets classes in the fund. ie “Large Cap” means big companies, “S&P 500” means a cross section of stocks in 500 public companies that represent the “Standard & Poors Index”. “Stocks” represent shares of ownership or “equity” in a company while “bonds” represent shares of debt. Stocks are inherently riskier but have a larger upside (i.e "I think your company will be worth more…or it could be worth nothing) while bonds are safer but tend to have a lower return (ie “you owe me x plus interest, but you could go out of business and not pay me at all”).
The way you “minimize risk” is to spread your investment over a diverse set of financial instruments and asset classes in different banks.
It also helps to understand the nature of “risk” and “return on investment” (ROI) as it applies to different asset classes.
Putting all your money under the mattress may seem like the safest option as it’s 99% under your control. But it has a negative return due to inflation and always runs the risk of getting robbed or the house where the mattress resides burns down with all your money. Then you’re broke.
Honestly, the SDMB may not be the best place for long-term financial advice. It’s too much of a liberal “oh the right-wing capitalist government is going to collapse and climate change so don’t give those greedy capitalists your money” echo chamber. Not that they are necessarily right or wrong, but it’s all mostly based on emotion and ideology. You can’t make an investment decision based on it because there is no sense of probability or timeframe. It’s like not investing in Apple in 1985 because the Sun is going to burn out in a few million years.
Given the age, work history, and financial education of the OP, he should be looking at a timeframe of AT LEAST 25 years before retiring. The economy might be destroyed by stuff that hasn’t even been invented yet by that point!
Keep in mind all the major Wall Street banks have entire departments of people whose job it is to consider all these possible scenarios and figure out where they should be investing to maximize profit.
Yeah, man, don’t do that. You are passing on free money. There must be a base-level money market account you can put your contributions into, and that is where the employer match will go as well. If you do not distribute that into the mutual funds offered with the 401k program, then it will just sit there with no risk and gaining virtually nothing, but at least you are acquiring that sweet employer match (again “free money”).
And this:
I would recommend the same, and take deep breaths. Then, step back from here and consult a financial professional or do some reading on sober, non-political financial analysis to get a sense for what real financial experts are thinking about the next few years in the markets. Rather than, ya know, taking input only from the cool kids here, and a few dipsticks. Hint: it’s not all gloom and doom.
It’s understandable to want to avoid risk, but giving up the employer match is a big mistake. The employer match is essentially doubling your contribution, which is like a 100% return on your money. You could put $1000 in a bank savings account and have $1000, or you could put $1000 in the 401k and end up with $2000 after the employer match. The match is typically at some percentage of your salary, like 3%. What that means is that if you contribute 3% or more of your salary, the employer will match up to that first 3%. Put it in that money market option VMFXX. It’s essentially a savings account. You are virtually guaranteed not to lose your money in that account. It’s practically like putting your money in a safety deposit box that gives you a little bit of interest.
This is the correct low-risk option. But the OP would be giving up considerable upside possibility by taking such a low-risk position. They really need to consider their needs and match risk profile to that.
I will correct my previous comment that VMFXX has never lost money. It has done so twice in its history. In 1994 and in 2008. In 2008 it dropped from $1 to $0.97 (a 3% drop) which really freaked people out. You may remember lots of financial stress at that time. It quickly recovered and hasn’t budged off of it’s $1 price since then, while spinning off dividends the whole time.
Right! And you cannot go back in time to recoup money you decided not to collect, if at some point you decide investing is okay. Better to receive that money now, let it sit while you decide what to do with it, than to not have received it at all.
There’s nothing evil about 401k accounts. Quite the contrary, they are one of the easiest ways for the working class to have access to investment funds that are likely to lead to wealth. With all due respect to msmith537, this liberal is very fond of his retirement account (mine is a 403b, rather than a 401k, but that’s a minor distinction). It’s given me a much higher net worth and sense of security than I ever would have gotten with just a bank account.
I will also echo doreen’s example. I have an older retirement account that I haven’t made any contributions to since 2021. It’s worth almost $20,000 more today than it was then, without my adding another penny. That’s what compound interest can do for you.