Please explain 401k?

A young person can recover from the inevitable crash of high risk investments before they need the money.

A person closer to retirement cannot.

Most employer match vesting is 100 % after 7 years. All monies fully matched are therefore getting a bit over 14% interest above and beyond investment gains!

Sounds great for both young and old investors, right?

Wrong. 401k retirement gets taxes when you withdraw it. A person who starts investing in retirement early with a 401k pays taxes on ALL of their retirement nest egg when they start using it. If they use a Roth IRA instead, they pay taxes when they originally earn the money, then never again.

That means 40 to 50+ years of compound interest income in a Roth IRA is not taxed. But 40 to 50+ years of compound interest in a 401k IS taxed.

Young folks who start putting money away early should use a Roth. Someone trying to catch up in middle age would be better served by a 401k.

 

I partially agree. A person close to retirement only has to protect that portion of their nest egg that they will need before their portfolio recovers. if a person has $500,000 in their portfolio, and they plan to use $25,000 per year, at MOST $125,000 (5 years withdrawals) should be sidelined, the rest should be invested to make sure it will continue to outrun inflation. For a person close to retirement, some of that money still has a 30 year investment horizon.

You lost me with both the assumptions and the math. Your statement that MOST employers vest after 7 years is incorrect. 22% vest immediately, and 47 have a graduated vesting schedule, usually of 5 years (a portion of the match vests every year). See, for example Employer 401K Match Averages & Vesting Schedules. As far as the math goes, if the company matches, the additional return on the investment is 100%, no matter when that match vests. Instead of investing $100, you invest $200 and both the investment and the match return the same, so it's a 100% increase in the return for the employee.

I absolutely agree that ROTH is better than traditional 401(K) or IRA without a match. My numbers show that a match still beats the ROTH in the end. Free money is better than tax free money, but as i mentioned in my first post, you should consider only investing in a 401(K) up to the match, and then invest in a ROTH.

The REALLY GOOD NEWS is that a few years ago, the 401(K) rules were changed to allow companies to offer the 401(K) with a ROTH option: the best of all worlds!!!! Roth AND match. The employee can invest in a ROTH and get a match. More and more companies now offer ROTH options in their plans, and employees should talk to their HR department about adding it. It is the best possible option.