Categories
economics

401k in an inflationary period

Redcabinsteve asks:

My wife is a high earner with substantial amounts in a profit sharing acct and a 401 acct. If anyone has the words to convince her to at a minimum take some $ off the table I’d appreciate it. She deflects my words like reverting back to mean, things go down, etc.

If you have a 401k with employer matching, she might be correct. Let’s look at a 401kas an example. Her employer matches her contributions, up to 7% of her income. Let’s look at the math to see what happens if she deducts 7% from her pay:
Let’s say she has an income of $50k per year. That means a deduction of $3500 a year. Her employer matches that with another $3500, for a total of $7000 put into her 401k.
Assuming that the two of you have a taxable income between $81,050 and $172,750, your marginal tax rate is 22 percent. What this means is that In exchange for this $7000, her take home pay is only reduced by $2,730 because she doesn’t pay tax on that money, since it is deducted before income taxes are calculated.
So she ‘loses’ $2,730 in take home pay, but turns that into $7,000 in retirement savings, which translates into an instant 154% return on investment.

The larger her employer match, the better off she is. If her employer doesn’t have employer matching for the 401k, the advantage is much less, and inflationary periods really hurt you. In the example above, if there were no employer matching, that $2,730 becomes only $3,500, which lowers the return to 28%, which in this inflationary environment doesn’t help as much the inflation is hurting you.

In my case, once I have worked there for a year, my employer offers a 4% match. I plan on deducting that maximum 4% as soon as I am eligible.

EDIT: Comments have devolved into nonsensical gobbledygook. I normally leave them open, but I’ve had enough. Comments closed.

13 replies on “401k in an inflationary period”

I’m 70 and on SS, she is 48. She’s a critical care nurse practitioner. I was a respiratory therapist. At first we contributed equally to expenses, now I’m in the uncomfortable position of being a financial burden. A form of contribution to our efforts could be my advice to take money off the table.

DM I understand the 401 includes a lot of free $s but it’s still a big pile I believe is at risk. The profit sharing is substantial too. It’s from their pulmonary group hitting ICU numbers.

When we first got together in 08 her 401 took a 70k hit in the market downdraft. It’s a little frustrating because I had suggested doing then the same thing I am now. I had been draining to 0 my 401 to use in our cabin project. That money didn’t get a haircut and was put to good use.

Side note, a friend’s parents has 115 acres about 30 minutes north of Dallas suburbs. After subtracting 33 acres for the adult kids the parents remaining acres would net over 2.4 million at current offers. To me, that’s a home run but no the father wishes to subdivide and sell lots. This type of project is not in the fathers wheelhouse.

Isn’t my wife’s accts and my friends parents situation similar? They’ve already won but will not accept the trophy. These days just about anything could happen. Relying on financial stability is risky I think.

But you missed what happened in the years after the 08 crash. The 08 crash was an unrealized loss, that is it was a theoretical loss that existed only on paper. By cashing out at the bottom, you took that theoretical loss and made it real. Had you stayed in the marked (as I am sure you have seen by looking at her account) you would have seen that the market rebounded.
For example, the S&P500 fell from 152 to 79 in the 2008 recession. Ten years later, it had rebounded to 257. Those who got out saw half of their wealth disappear. Those who stayed in saw their money double over the next decade.
The issue isn’t what the market will or won’t do. The issue is what the US dollar is going to do.

I think the problem is the feeling that one of the first places that will be raided in a complete currency failure and reset would be people’s 401ks.

At this point it’s a gamble on whether the financial system survives in its current form until you retire. Or a gamble that however they handle the crisis you will still end up on top due to the match despite whatever tricks are played.

Last year there was a good opportunity to get out without paying a penalty, which then allowed you to move that money into something more liquid, but I believe that opportunity has passed for now.

That is a possibility, but there is no way to plan for that. The government could just as easily begin door to door searches for guns, gold, or any other investment. They could also declare all rental property to be free of charge.
There is no way to plan for what the government will do. Since my advice in the post above only “costs” you 3% of your pay annually while netting you 8% in savings, it is IMO a fairly safe way to invest without too much risk.

I cashed out my pension when I quit the sheriff’s depot years ago. Didn’t put a penny in my 401k because I could see what was coming. No retirement for me in 25 years. Hyperinflation and the economic collapse will wipe all this out. Frankly, I’d start pulling it out, pay the tax, and convert it to hard assets.

20 years of 10%/year currency inflation reduces the purchasing power of savings by a factor of nearly seven times: 1.1^20 = 6.7275 What kind of retirement lifestyle does she think she’s going to afford with 1/7th of her savings?

As compared to, taking it out of 401k/dollars and putting it into timber farmland and shiny gold coins. 20 years later she’ll stand a better chance of still having as many acres and coins; she won’t lose 10% of the acres and coins each year.

Again, that depends. Farmland will appreciate in some areas, and not in others. My real estate investment is doing quite well.

The problem with gold (and I am not saying to NOT buy gold, I have a bit myself) is that it is a nonperforming asset. That is, gold doesn’t grow in value. All it does is keep pace with inflation.

That is why, in an inflationary environment, gold is the better investment. In good times, gold should be between 5 and ten percent. In inflationary times, it should be as much as 30 percent.
That is why I am reducing my stock holdings. However, it is still important to diversify. It is foolish to place all of your savings in one basket.

Sounds like she has faith in the religion called government, and that faith can’t be shaken fast and deep enough to retain her savings. What you’re going to do about this is a personal survival question. How many men in history got on the boxcar or otherwise didn’t evade doom because their wives told them to? Like rust, Darwinism never sleeps.

Sure she has way more confidence in .gov than I do. Mostly she has confidence in the docs she works with. I know, kinda strange but hey we get along very well. On personal survival doing ok in north central texas. The rural community here about as good as can be.

Comments are closed.