401K, how does it work? Should I enroll??

[Total Refected Power]

Kranky asked:

I wanted to ask - what is an "ESPP"? Is that a plan where you buy stock in the company you work for?

ESPP: Employee Stock Purchase Plan

It varies from company to company but at my wife's company they allow her to buy company stock at a 15% discount to the lowest price on either April 1st or Oct 1st. So even if you sell the next day you lock in a 15% return (minus cap gains of course ). It is payroll deduction and a good way to dollar-cost average into the stock. We have been very lucky and made a lot of cash with ESPP!!

You have to enroll in the plan for six months at a time and can only buy up to 10% of your salary in stock.

 

[Emos]

<< I still have TONS of credit card bills and student loans I had to pay off.. that was the reason why i didn't sign up for it in the first place. >>



Yeah....I can relate to your situation! I put off saving in a 401k and Roth for the first couple years of my career because I had bills and loans I wanted to pay off. However (unless you're really disciplined) having bills and loans are practically a fact of life....you need to expect the unexpected! I've learned my lesson and make sure to put away a percentage into savings NO MATTER WHAT.

 

[Total Refected Power]

I put off saving in a 401k and Roth for the first couple years of my career because I had bills and loans I wanted to pay off.

Yup, we are all there at some point. I wish I had started earlier. That's why I encourage younger people to start ASAP!!!!!!!!!!!!

 

[Insanitation]

Well, I'm in the same situation with a lot of credit card debt and school loans. But I am investing in a 401K because it was too good to pass up. Compaq matches 100% if you put in at least 6% of your paycheck. I figure I can live small and try to pay off my credit cards ASAP. It's a small price to pay in the long run.

 

[Emos]

<< Compaq matches 100% if you put in at least 6% of your paycheck >>


That's really good....my company still only does 50% up to 6% :| I've heard there are some companies that'll put in 100% up to the max! (Then again maybe it's just an urban legend)

 

[kranky]

I would not invest 10% of my income in an ESPP. IMHO, that's too much money invested in a single company. If I wasn't able to fully invest in a 401k, and pay off debt, I would cut back on the ESPP to do so.

Diversification is important. TRP, I'm glad your ESPP worked out well, but Ender510's situation sounds like most of his savings right now are in the company stock. That's not wise.

 

[Total Refected Power]

kranky:

Yes, diversification is very important and we initially were taking advantage of the &quot;group sale&quot; aspect of the ESPP. That means you would automatically sell after buying at the 15% discount. To achieve a 15% return in 6 months at no risk was awesome. So in effect we held the shares for a few seconds. That has changed now (too many people using it as a &quot;bank of high interest&quot and we have been buying and holding the shares for the past year. Next cycle we have decided to rebalance the 10% contribution. This has nothing to do with 401ks. We each contribute the max to our plans and get matches. The ESPP is after-tax money so it really takes a chunk out of your check!!

Without knowing the particulars of ENDER's plan I can't make a strong comment either way but if he is buying and holding I agree that 10% is too much.

 

[wyvrn]

<< The income stream comes from policy loans. And when you start borrowing on your life insurance policy, you begin to devour it.

But there's a more basic problem here. It's true that you can borrow the cash value from a life policy without paying taxes. But if you borrow too much, the policy collapses because there is not enough cash left to keep it in force. If that happens, the money is no longer a tax-free loan. You owe tax on everything you've borrowed. That's something that the life insurance agents never mention. >>



From the article link &quot;Why life insurance is a bad investment&quot;... Well if you borrow against any policy, then you would begin to devour your principle. Hehehe, so how is this a disadvantage only to life insurance?

I like how he generalizes that life insurance agents never tell their clients something about their policies, as if all insurance salesman are any more corrupt than any other group of financial advisors. RIIIIIGGHHHT!

Ok, if you borrow most of your cash value and don't leave enough to cover monthly insurance costs, of course your policy is going to die. That is true with all insurance policies. So basically, with a life insurance product, you don't pay tax tax on gains as long as you follow the policy rules, whereas with a mutual fund or 401k, you ALWAYS pay tax. Which would you rather have?

Being single has little efect on whether you should have insurance. VUL tax advantages far outweigh the cost of insurance when used as a long term vehicle.



<< For instance, a life insurance policy is a long-term commitment. What if Congress changes the tax treatment of the policy? Or changes the treatment of policy loans? The insurance company can make changes, too, like increasing fees. >>



Life insurance is long term, just like a 401K, pension plan, or IRA. What is the pt here? Congress cannot change tax treatment of a policy after the fact, there is a little blurb in the Constitution about defacto law making Nice try though. Fees can only be increased to a stated maximum, which BTW is capped by law. So fees are never going to eat up the investment principle unless you cancel your policy after a very short term, like 1 year. But then if you are investing for retirement, why would you do that? Please!




<< Interest earned might decrease. >>



Well a VUL is a variable policy, like a 401K or an IRA. Interest rates depend on the same market instruments as any other investment. Is there a point here? Anywho, since we know that over any 15 year period, the market has yielded 12%, none of the investments, long term, have anything to worry about, do they?



<< but not as an investment for you or for your own retirement. >>



Wrong. Variable insurance polices get the same return as any variable security because they are based on the same market instruments. And if I can take up to 90% of my policy without penalty and tax, I would say this is a superior retirement vehicle. The 10% left over should be MORE THAN ENOUGH to cover insurance expenses. And if not, then your investment advisor can help you work out the details in a very short amount of time.



<< Whether it actually makes sense for your beneficiaries depends on how it is structured and how much you are paying for it. That's pretty difficult for you and I to assess. >>



In less than an hour I can sit down and explain the whole thing and have very little confusion, maybe he was not trying hard enough? . I would also like to point out that variable insurance is the fastest growing variable instrument right now.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Ok Kranky let me address your post:



<< Later on, when you have a family, look into a term policy. But mixing your investments with your insurance is only benefitting the insurance company.

First, you are restricted to investing in the options the insurance company offers. Those options are probably owned and run by the insurance company or their affiliate. You will needlessly restrict yourself to a very few investment options.

Second, it is extremely complicated to understand. In my experience, financial instruments that are incomprehensible tend to serve the seller, not the buyer. I want simple term life insurance so if I'm dissatisfied I can change insurers easily. I want to control my investments for the same reasons. I don't want them tied together so I can't do what I want. >>



You are always limited to what your brokerhouse carries as a fund family. HOWEVER, the company I invest with is a world carrier, and has over 5000 different accounts from which I can choose. That is more than almost any American brokerage house, and I am not limited to a particular family. I can invest in Janus, Van kampen, and a bunch of others without having to utilize more than one brokerage firm.

And to get rid of a common misconception you stated. Variable Insurance companies do not mix their investments with yours, they are setup in separate accounts by law. So the company does not make any money off of me by my investing through them, rather everyone benefits from being able to bulk buy shares, keeping overall costs down.

VUL is not incomprehensible, I have explained it to peoples of all age groups and never had a problem. Rather, you seem to have biases that prevent you from looking into the policy and understanding the information. Not unlike people who are intimidated by building their own computer because &quot;it is too complicated&quot;, so they pay more for less in a pre-built system.

I would venture to say this was written by a biased source. When you invest, please get all applicable information and make a reasonable decision for yourself.

 

[wyvrn]

<< Also, I am curious as to how the VUL works. If there is no minimum, and the only minimum is the amount of the life insurance, what approx. fees am I looking at? I also heard you can roll your 401K into this later as well.. how does this work? >>



AFAIK, are different types of investments, one is employer supported and the other is not (pre-tax contributions vs. post-tax). You cannot roll one into the other, you would have to &quot;cash out&quot; and then reinvest. If you are brand new in investing, this is not a big deal. But once your investment starts to grow, you need to stick with that investment vehicle and hope for the best. That is why making an intelligent decision at the outset is the best policy.

VUL has fees, mainly loads on the insurance and payments to the professional money managers who manage your separate accounts (the investment part of the contract). This is capped by law, and your policy will tell you what they will charge. What you can invest in your VUL policy is derived by your face amount, which is derived by your income. The rule is simple and flexible, but I am not going to post it here. Suffice it to say a VUL is less restrictive than an IRA.

 

[SUOrangeman]

Just do it.

I have a 401a &amp; 403b (work for a not-for-profit company, hence no 401k) and a Roth IRA. I've socked away roughly $50K in 2.5 years ... and that's given the poor market performance over the past yer or so. MS Money has me valued at $30M long after I retire. Tough to beat that. All of this based on my salary over the past few years ... and I am decently under the Social Secruity base salary ($80K now, I think).

-SUO

 

[kranky]

Obviously wyvrn and I disagree on the merits of a VUL policy. I will readily admit I find them confusing, with poorly-disclosed fees and complex features, and projections that are usually presented as fact to a prospective customer who has little understanding of insurance. I stand by my comment that a young person with no one dependent on his/her income, has no need for life insurance - whole life, term, VUL or otherwise. Yet we do agree on this:

When you invest, please get all applicable information and make a reasonable decision for yourself.

There is no substitute for knowledge.

 

[Cyberian]

TDSP - Listen to everyone and JUST DO IT!!



<< If you ahve enough put away, you can retire when ever you want. Though companie retirement benifits won't kick in until your 65. >>



Depends on the Company - Mine started at 54, when I retired.