It simply doesn’t work like that. The return on $.85 isn’t going to be simply multiplied by 60. The assumption was that the money doubled every 7 years (that assumes about a 10% gain).
Using your numbers:
1 Now - 15% taxes = .85
$.85 * 2[sup]5.9[/sup] = $35 (it doubles 5.9 times in 40 years)
$1 Now * 2[sup]5.9[/sup] = $60
$60 - 15% taxes = $51
I prefer not to use my retirement income as my rainy day fund. That’s separate money. My assumptions on retirement funds are that I will not touch it until I am 65 years old - or perhaps older. Unless I die in which case it becomes my husband’s or children’s.
Yeah, you need to invest in a new calculator.
No one has yet mentioned (or stressed, as I’m about to) **the miracle of compounding.
**
Here’s a common example: If you start at age 20 saving and investing $2000 a year tax-deferred at X% interest (let’s say 10%, though I don’t remember the exact number. 10% is the historical return of the S&P 500 index, roughly) and stop contributing at age 28, you will have more money at age 65 than the person who starts contributing $2000 at age 28 and continues until age 65.
Let me emphasize that:
Person 1: Age 20 - 28, $2000 per year = $16,000 total contribution
Person 2: Age 28 - 65, $2000 per year = $76,000 total contribution
At age 65, Person 1 has more money. As counter intuitive as this seems, it’s true. (I’m at work right now and don’t have the time to run a spreadsheet that shows this, but you can easily do it yourself.)
The bottom line is, congratulations on your foresight. DO contribute the maximum amount you can afford NOW. It pays off handsomely in the future. This is the miracle of compounding, and I wish** I **knew it when I was in my 20s.
J.
I hope everybody can ask questions in this thread.
I may have panicked, but I don’t think so. OK, I really hope not. So, my experts…
I was diversified in my 401(k) across six funds. Of the six, 5 were losing money, none at lower than 15%. That had cost me over a quarter of of year’s salary since 1/1/08. Tonight I directed future contributions to the two funds available to me that were making money. I left my investments in the suckass funds knowing I had bought shares cheap but that they lost value.
I can play with my distribution at any time, but moving money can cost me. So, if the other funds start to rebound I can redirect funds to them, but if not, future contributions will go to those doing slightly better than stuffing my cash in a mattress.
Did I do right, because I can still fix it before my next paycheck?
Thanks
p.s. If there is a better thread in which to ask this question, could you point me there?
No, that sounds pretty sane. While most everyone’s mutual funds laid an egg this year so far because of the market the wrong thing do do is panic and pull all your money out and put it into bonds. Since the market is so low right now it’s actually a good time to stick money into it (you know the old saying- buy low, sell high).
No one can predict the market but if you could you’d wait till the market is booming then move all your money into bonds. Then after the market crashes shift it all back into stocks. Wait til it climbs and is booming again and shift it back into bonds.
I am not an investment professional.
There are two potential issues with your strategy.
First, you’re putting future contributions in two funds based on past performance. But it’s important to understand why these two funds have increased in value in a market downturn; “past performance is no guarantee of future results” and all that. Did the conditions that caused these two funds to increase in value still exist today? Was the rise in value just a fluke? These aren’t easy questions to answer.
Second, you’re planning to contribute to the other funds again as they rebound. Engaging in market timing like this is tricky because stocks tend to drop and rebound quickly at first, and then fluctuate for awhile before the next significant price movement. By the time you have enough data to notice an uptrend, there is the risk that you will have already missed a substantial percentage of the value increase. For instance, see this five year graph of the S&P 500. Substantial price movements in both directions occur quite rapidly and it’s difficult to identify the overall trend. Both the rise to the peak at June-September 2007 and the subsequent fall are littered with noticeable intermediate uptrends and downtrends. To make this work, you need to try to predict future trends rather than observe current ones, a challenging task.
That’s sort of the beauty of an asset allocation-based strategy, assuming you’ve chosen an allocation that is appropriate for your risk tolerance. You basically choose to remain ignorant about the answers to these questions and save yourself a lot of effort and grief. “I don’t know, I don’t care, I’m just going to take the market average over the long haul.”