A friend is using his 401k to save up a deposit for a house.

[blurredvision]

He got his 401k statement in yesterday, and was complaing hardcore about losing so much money (he doesn't have much in there in the first place). He wanted to just withdraw it before he lost more money, which I told him was a completely ignorant thing to do. I explained that he hasn't lost anything until he cashes it out, otherwise it's just a number on a piece of paper.

As we continued, I found out that he's pissed because one day he wants to use what's in his 401k to possibly put a down payment on a home. I'm correct in telling him that he's ignorant, right? If that's a yes, then what are his best options for saving for a down payment? One of those ING savings or something else? You don't have to take your time to explain anything in detail, I just want to point him in the right direction and make him do some research.

I appreciate it.

EDIT: He's 28 years old, if that gives any perspective.

 

[BurnItDwn]

Wasting 401K money on a house down payment is a HORRIBLE idea. 401K money should be saved for retirement. 401K is safe from banks taking it away during bankruptcy, so if he winds up getting fired, etc .... he should not touch that money at all.

Best way to save for a house is savings account, savings CD, money market account, mutual funds, stock market, or many many other accounts. Lowest risk would be savings account.

 

[DaveSimmons]

If he plans to die before age 65 then cashing out the 401k is a great idea. Live fast, die youg, leave a pretty corpse.

Otherwise, he should be maxing out a 401k and Roth IRA for retirement, then putting money for a house down payment into high-interest savings on top of that.

If he can't live below his means enough to do that, he probably doesn't have the financial self-discipline to afford a house which requires: mortgage, property taxes, HOA fees, maintenance.

 

[blurredvision]

Thanks guys, I'll relay this info to him (as if it were my own 😛).

 

[GoPackGo]

401k is a waste right now.

People getting ready to retire now can't...since its nearly all gone.

 

[spidey07]

Originally posted by: GoPackGo
401k is a waste right now.

People getting ready to retire now can't...since its nearly all gone.

Utter nonsense. If they were getting ready to retire they wouldn't have much if any money in stocks.

 

[tallest1]

While cashing it out for a house deposit is a horrible idea, taking it out and putting the money into a CD is seeming like a better idea, even with the tax penalty

 

[da loser]

Originally posted by: DaveSimmons
If he plans to die before age 65 then cashing out the 401k is a great idea. Live fast, die youg, leave a pretty corpse.

Otherwise, he should be maxing out a 401k and Roth IRA for retirement, then putting money for a house down payment into high-interest savings on top of that.

If he can't live below his means enough to do that, he probably doesn't have the financial self-discipline to afford a house which requires: mortgage, property taxes, HOA fees, maintenance.

i disagree on maxing out a 401k, that's what $15k?

Originally posted by: tallest1
While cashing it out for a house deposit is a horrible idea, taking it out and putting the money into a CD is seeming like a better idea, even with the tax penalty

or you could establish a IRA CD

 

[spidey07]

Originally posted by: tallest1
While cashing it out for a house deposit is a horrible idea, taking it out and putting the money into a CD is seeming like a better idea, even with the tax penalty

So buy high and sell low, eh?

 

[KeithTalent]

Our 401K equivalent (RRSP) allows you to borrow a certain amount (25K IIRC) out of it, tax free, for the down payment on a first home as long as you repay it within 15 years (again IIRC) . Is there nothing like that in the U.S.?

KT

 

[Fritzo]

Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

 

[GoPackGo]

Originally posted by: spidey07

Originally posted by: GoPackGo
401k is a waste right now.

People getting ready to retire now can't...since its nearly all gone.

Utter nonsense. If they were getting ready to retire they wouldn't have much if any money in stocks.

You assume people manage it correctly.

 

[GoPackGo]

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

 

[SagaLore]

Originally posted by: peritusONE
I'm correct in telling him that he's ignorant, right? If that's a yes, then what are his best options for saving for a down payment?

With the way the economy has tanked, he might actually be pretty smart by killing the 401k and investing it in real estate. I know a lot of people from my last job that lost their entire retirement by letting it ride the market, but the specific investments never required. It really depends on the 401k though. (obviously, this is not advice, just my opinion based on my own personal experiences with 401k)

Why doesn't he just stick it in a savings account? 😕 No fees, it gains some interest, won't cost him anything when he wants to withdraw it.

 

[JulesMaximus]

Maybe I was wrong on this. I seem to recall that though...

 

[Zim Hosein]

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Are you insane? :Q

 

[Mo0o]

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Willing to bet on that?

 

[ConstipatedVigilante]

Originally posted by: Zim Hosein

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Are you insane? :Q

My thoughts exactly...

 

[Fritzo]

Originally posted by: GoPackGo

Originally posted by: Fritzo
Wow...tell him to search for his idea and Google, and I will give him $50 if the first 100 hits are not articles on why this is a TERRIBLE idea.

He should be dumping as much money as he can in his 401K right now- funds are so cheap that he has a lot of buying power. When the economy picks up, he could be as much as 50% ahead of the curve at retirement.

You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Uh...yeah...let me guess, those are just the first numbers that poppped into your head? I'm fairly certain we're not going to see the Dow go below 6000 anytime soon, and plus the Dow is just an average. Some of my funds are actually doing fairly well. This guys is going to retire in 35 years. If he buys a ton of cheap funds and we have a rocky 2-3 years, he'll be that much better in 35.

 

[Special K]

Originally posted by: spidey07

Originally posted by: GoPackGo
401k is a waste right now.

People getting ready to retire now can't...since its nearly all gone.

Utter nonsense. If they were getting ready to retire they wouldn't have much if any money in stocks.

I disagree with this to some extent. Even a conservative investor who intends to retire at age 65 should still have a decent portion of their portfolio (~40%) in stocks. After all, they could live another 20+ years from that point. If they keep all their money in cash, they run the risk of outliving their assets. They most likely still need to have a portion of their portfolio growing.

Of course this is a very broad statement that depends on a number of factors, such as:

1. How much money do you have saved up? If you can support your current lifestyle by keeping all your money in a money market fund and living off the interest, then more power to you.

2. How do you plan to live in retirement? Obviously the higher your living standards, the more money you will need.

3. Do you want to leave an inheritance? Do you want your money to continue to grow through generations?

The issue depends on a number of other factors, but to say that anyone planning to retire this year should not have any money in stocks is not very accurate.

 

[EMPshockwave82]

cant you borrow against what you have in your 401k for your first home purchase? maybe he's mistaken on how that works........

just something i remember hearing before.

 

[QueBert]

My GF's 401k dropped 40% and will probably get much worse before it gets any better - that's assuming it ever does. It's very possible by the time she retires there will be next to nothing in her 401k. The economy here is going to get way worse than it currently is. In 20 years a 401k might be worth less than a Mexican Peso.

 

[DaveSimmons]

Originally posted by: GoPackGo
You assume that its not going to keep going down.

I wouldn't put any money into 401k until we hit the bottom.

Dow will hit somewhere between 1000-2000.

Most 401k plans only let you take money out with each paycheck, they don't let you catch up later in a lump sum when you magically know the markets have reached the bottom.

You gain an instant 20%+ from income tax savings, plus employer matching. If an employer matches you 50% that's an instant 70% return on your investment.

Passing that up because the market may drop another 20% is not very wise.

disagree on maxing out a 401k, that's what $15k?

Right the more detailed recommendation is usually something like:

1. max out 401k up to the employer match (so if they match 50% up to 5% you set your contribution to the full 5%)
2. max out IRA
3. save up several months' worth of living expenses in high-interest savings
4. pay off all debt
5. save up for a house
6. max out the rest of your 401k up to the overall $15K limit (no more employer match but you do get the instant 20+% income tax savings)

 

[mchammer187]

Originally posted by: EMPshockwave82
cant you borrow against what you have in your 401k for your first home purchase? maybe he's mistaken on how that works........

just something i remember hearing before.

The way mine works is you can borrow but you lose out on any interest you would have received. The interest you pay on it goes back into the 401K though.

right now would be a terrible time to do that unless you are betting on the market going downhill significantly further.

 

[nerp]

Originally posted by: QueBert
My GF's 401k dropped 40% and will probably get much worse before it gets any better - that's assuming it ever does. It's very possible by the time she retires there will be next to nothing in her 401k. The economy here is going to get way worse than it currently is. In 20 years a 401k might be worth less than a Mexican Peso.

Every week, your GF is dollar cost averaging and increasing her positions in a big way. When the market recovers, she'll regain that 40 percent much more quickly than pulling the money out and having it rot in a savings account. In fact, by averaging down, which is what you should be doing for any long term investment, you're raising the chances of having signficantly stronger positions when it's time to retire.

People bailing on their 401ks now are making a huge mistake. Along with penalties and tax hits, they're losing historic opportunities to average down and profit handsomely in 10-20 years. A 401k is not a daytrading account and the key is to NOT let your emotions get in the way of your long term investing goals.