In general you are correct, but sometimes there are other factors. In my own case my income varies dramatically from year to year. It can literally double from one year to the next, then fall by the same amount the following year. Not only that, but it’s common for me to receive most of a year’s income the last week of December as one giant lump sum.
So that makes it very hard to set up tax payments to match what I owe. In the past, I would occasionally underestimate my taxes so badly that I would owe penalties. I don’t want that to happen, so now I way overestimate my taxes just to be safe. I get a large refund most years, but at least no more penalties.
The key is, how sure are you that the student loan rate will stay at 2%, and how sure are you that the investment will stay at > 2%. If either is not 100% sure, your risk profile must be taken into consideration.
I wonder how much of this contributes to the omnipresent epidemic of financial scams. That guy got double money for nothing, but we look down our noses and tut-tut when folks fall for pyramid schemes or crypto shell-games. When you don’t understand how money works but you see rich folks making it hand-over-fist, it’s understandable to imagine you just haven’t found the right “secret button” yet. And then when some canny scam operator dangles a plausible story under your nose…
So… this right here. This is why I see no reason to screw around with money. There are so many details, so many traps that I can either live my life exercising the skills necessary for my job, or I can devote myself to figuring out finance. Maybe others can do it - I can’t. Or won’t, if you prefer.
Even simple things like figuring out what kind of bank account to open up. I’m done immediately after seeing the multiple, multiple rules, terms, penalties, if / then situations.
Screw it. Basic savings account. Don’t be a spendthrift. I’m done. I don’t care.
I’ve posted on this board about my colleagues IN FINANCE who can’t figure out that a 10% decrease followed by a 10% increase does not bring you back to zero.
30 years ago, I had a chat with a financial advisor. He had a share certificate pinned to his bulletin board. It represented shares of a company he had worked for that let employees purchase shares, and he bought a lot of them. The company went under 10 years later, making his shares worthless.
I’ve never had a an ESPP like this, not in the 1990s, nor the 2000s, nor the 2010s. It’s always been buy stock by payroll deduction, then sell a day later and get the money available in your bank account 3-5 days later. In one case 10 days later unless you paid for a wire. And back in the 1990s there was a $30 transaction fee to sell shares (plus a percentage after the first few thousand). If I was literally flipping each week, I’d lose money. And my tax return would be 40 pages long.
I am not persuaded that the circumstances, as you have laid them out, substantially changes things. Except to the extent that it only further highlights the extent to which such schemes are most favorable to the employer (ok, and to highly compensated upper management), and less so for the (lower level) employee. FWIW, my impression of this is colored by a similar scheme the US military recently concocted for its retirement plan. Basically, they reduced the DOD’s contribution to retirement pay, but with the “tradeoff” that the DOD would match contributions to its 401K-equivelant (the Thrift Savings Plan or “TSP”).
The official story was/is that (under certain very narrow, borderline ideal) conditions this will actually result in a net increase in retirement compensation. The reality is probably something closer to what you describe for private industry: those who make the most money, and so are more likely to have excess income that can go to retirement savings, will make bank. In private industry, that would be upper management and the like. In the military, that would be officers. And FWIW, I’m not hurting either: I medically retired with a pension, which by happy (or unhappy) circumstance is in a narrow class of military pension that is free of federal income tax (combat service related disability retirement). On top of that, as an officer, I maxed out my TSP every year (albeit before the matching fund scheme was a thing) and also a Roth IRA. Conceivably, someone like me might, ignoring for now the premature retirement, have done better under the new system of matching contributions, but I was an officer. That is what allowed me to max out TSP and a Roth IRA every year: I was an officer making on day 1 what an enlisted service member might start making after only 8 or more years of service, and that’s just going off base pay, not counting bonuses, housing allowances, and cost of living adjustments.
All that to say, I am loathe to write off a less than 100% take rate for matching contributions as evidence of financial illiteracy. As you yourself say, it’s a really good deal for the top earners. That still doesn’t make it a good deal for lower income earners, who are more likely to fall short of the excess earnings necessary to gain entry into the program, much less take full advantage. You can’t get a thousand dollars a month in matching contributions if your take home pay after taxes, and less rent, food, transportation, debts, and other expenses is already less than a thousand dollars a month, bordering on zero.
That upper management does get to take full advantage of the scheme, because wages are so uneven that they can max out 401K contributions and still have plenty to spare while also getting full of advantage of matching contributions, only highlights the extent to which such schemes contribute to inequality under the guise of “choice” and “personal responsibility.” As if someone who has next to nothing left to save on retirement is still somehow equally “free” to choose to take advantage of a matching contribution scheme, never mind that they aren’t realistically paid enough to do so while also maintaining an ordinary standard of living.
My company has limits on how quickly you can sell stock purchased through the ESPP. If you’re flipping stocks too quickly, you’re not allowed to continue participating.
I’ve often thought that there should be a government or insurance backed plan in all 401ks that acted like a pension or social security. The participant would make their regular investments, but they wouldn’t have access to the money until after retirement. It would be sort of like how SS works. For those people who don’t save for retirement (or save at all) because they can’t make a decision, they would come out ahead. Better to invest in this suboptimal plan than not invest in a plan at all.
If anyone offered to sell me something for $0.85 that I could immediately sell for $1.00, I’d be very suspicious: “What’s the catch? Is this a scam? If this is such a sure moneymaker, why don’t you do it yourself? You know what they say: If it sounds too good to be true, it probably is.”
I agree, except to note that we are talking about two differing situations. You are talking about those with the inability to participate due to low pay, and I am referring to those who choose not to participate due to financial illiteracy. There is a large group of people who earn more than subsistence wages but don’t have much financial acumen. It doesn’t help the conversation about poor drivers by pointing out that some people don’t have cars.
I really don’t get how you think that this is an employer scam. It is giving free money to the employees. It’s a benefit to the employees. It is part of their compensation.
Sure, it is used to attract employees, because employees want it, they want the free money. But offering benefits to attract employees isn’t a scam, even if it is to work at a company.
That some don’t take advantage of it isn’t the company’s fault.
I mean, you can define how you want what reasons people don’t save money for retirement. Financial literacy is just one of them. Impulse control and ability to live within your means is probably as if not more important.
To enter into the program, they withhold a bit of your paycheck, the amount that you ask them to. Of course its a better deal for people who make more, they are making more.
I mean, taking a 5% reduction in pay isn’t that much, and it makes a huge difference in your future, especially when it is matched. If you can’t make ends meet, then you can’t make ends meet with 5% withholding either.
I worked MW jobs for decades, barely scraping by, but always took advantage of any 401ks or SIMPLE IRAs or whatever they had. And then I was able to cash in all that towards opening a business.
That some financially illiterate people don’t use the 401ks that employers offer doesn’t make the employers bad people for offering them.
The reason that people aren’t financially literate is because no one ever taught them to be. It’s not something taught in school, you are lucky to learn to balance a checkbook there. It’s something that could be taught by parents, but many parents are financially illiterates as well, and they also tend to keep their finances close to their chest, and don’t give any education to their children, not passing along what they have learned.
So people learn through rumor and gossip, for example, they hear someone talk about how 401k’s are bad, that they are some sort of scam from the employer, so they don’t participate in them. They already don’t trust their employer, as they have been conditioned to reflexively hate anyone who signs their paycheck. So, they lose out. They lose out a lot.
Everyone will learn some important financial lessons in their life, it’s just a matter of whether they learn them before or after it is too late. And too often, it is after.
Companies offer a 401K match of e.g. 50% match of the first 5% of the employee’s deduction, because they are secure in the knowledge their actual uptake rate will be much lower than 100%. If indeed, due to more financial literacy and/or more higher paid workers, somehow uptake rate got near 100%, the employers would reduce the quality of the offer to maybe 30% of the first 4% or whatever.
It’s not quite bait and switch, but it’s like the “all you can eat” buffets that would go broke if literally everybody did. We’ve had threads and threads on the whole “What if everybody did it vs. Is it wrong if just I do it?” conundrum.
IMO the typical company 401K match is an example, unlike their medical benefits plan, of something the company can overpromise and underdeliver. They get all the recruitment benefits of the overpromise and yet the workers enable them to underdeliver. No one employee gets any less than they ask for, but collectively they let the employer pay out far less than 50% of 5% of total payroll. And the employer knows it.
Forget the subtleties of paying off a 2% loan vs inventing at 3%.
What people need to do is stop taking payday loans! It’s a predatory market designed to suck money for poor people.
The latest stupidity I see is those commercials for services where you can get your paycheck a day early (no doubt with some “fee”). So, you currently get paid on Friday, but your money runs out by Thursday. So you shift your “payday” to Thursday. Then what happens? In a couple weeks, you run out of money on Wednesday. Do you shift your payday to Wednesday, perhaps with another “fee”?
And in that 60 days the market, or maybe just that company (737 Max, anybody?) takes a big hit. Maybe you only get 125%, or 100%, or 75% of your salary. There is a risk.
And I don’t understand how a company can sell you stock at 85% value and allow you to sell it “seconds” later at market value. Someone is losing money. Maybe the company makes it up in volume.
For stock in a blue chip company the risk is vastly smaller than the double-your-money built in from the git-go. For most big companies over most two-month intervals the stock price change is mere random noise. And not a very loud noise = a large price change either. It’s pennies around the edge.
Again it’s all about the employee not having a crisis if yes, this week your paycheck is a bit short. Because with just about equal probability your next paycheck will be as long or longer than the last one was short.
As to who gains from these ESPP plans, it’s very, very simple.
The shareholders at large are the losers, the employees who are eligible and sign up are the winners, and management is the beneficiary of the good feelings those employees have about this scam / program. This is another example of stealing a penny each from 100 million shareholders and giving the resulting one million dollars to a comparatively few upper level employees. Even if that “comparatively few” numbers in the thousands or more.
@ASL_v2.0 is giving the worst possible advice that can be given regarding a 401K. It’s not unfair to point that out.
Sure, not everyone takes advantage of it, but that doesn’t mean that you shouldn’t. You are better off if you do, and worse off if you don’t.
I don’t know about that. They get a number of tax breaks that actually make that money pretty cheap to give out. I never ran a 401K, as that’s for larger businesses, but I used to offer a SIMPLE IRA. The reason that I stopped offering it was because I didn’t have enough people using it to make it make sense. If I had a larger number of employees taking me up on it, it would have cost me less to administer
But this isn’t one of those situations. You have a situation where at most, you are looking at increasing the compensation of employees by 2.5%. And that 2.5% is treated very favorably for tax purposes, so in many cases is actually much less.
If there is any scam here, it is the people who are subsidizing the tax benefits that those who are signed up for the 401k are receiving. The employee who takes the 401k is the one that is coming out best in the situation.
Only because of financial illiteracy and thinking that the 401k isn’t by far the best investment most employees can make.
While it’s probable that the employer is aware of it, it is absolutely not being fair to employers to make it out as though it is some nefarious thing that they are offering.
BTW, they can overpromise and underdeliver on medical benefits as well, not all employees sign up for employer subsidized healthcare. For much the same reasons, financial illiteracy and a reflexive distrust of employers.
