Most people are eligible for a 401k plan at work. Most 401k plans offer some sort of employer match to your contribution. That 410k employer match is FREE money from your employer. Employer matches often match 100% of your contribution up to a fixed limit. That employer match is effectively doubling your money. You won't find another guaranteed 50-100% return out there so the 401k employer match should be your #1 priority for retirement savings. Unfortunately far too many people don't contribute to their 401k plan and miss out on this free employer matching money.
401k Participation Rates
Overall roughly 2/3 of people with 401k plans participate in the plan. The exact participation rates vary and go up and down over the years. USA Today reported: "Overall participation rates in 401(k) plans fell from 65% in 2009 to 60% this year," The participation rate numbers are a bit higher for people with employer matches but still not nearly 100%.
I found an older study How Workers Use 401k Plans but it mostly has data from the 1990's.
The study says that "For all workers, participation rates are higher when there is an employer match, 67 percent versus 60 percent." So that means that from their data they found that there were 33% of people who did not participate in their 401k plan even though there was an employer match.
A survey from Schwab found a bit higher participation rates. They say: "Plan participation increases to 76 percent of all eligible employees when a 401(k) match is offered compared to 70 percent when no employer contribution is available," From their figures the 76% participation rate would mean 24% of people with a 401k match don't contribute. A Fidelity report says that they found in 2007 that "The average employee participation rate for companies that offer a match is 63 percent. At companies that do not offer a match it is 57 percent." That would mean 37% of people don't take advantage of a match offered. Thats three different sources citing figures of 63%, 67% and 76% for the participation rate with employer match plans. This tells us that there are anywhere from 24% to 37% of people eligible for employer matching 401k funds who are NOT participating in the 401k plan at all.
Thats a lot of people who are losing out on a lot of money. We're talking tens of billions of dollars lost across the country. For an individual family the difference can be like a 3-5% pay raise. Typical employer match rates are in the 3% range. The exact nature of the match varies but according to Fidelity about 35% of plans offer 100% match on the first 3% and another 14% offer 50% match on the first 6%.
About 20-30% of Americans are leaving +3% of free income on the table by not utilizing their 401k employer match.
"But I NEED the money"
I'm assuming that many if not most people who don't participate in their 401k are not contributing because they feel they need that money to live on and pay the bills. I understand if you are struggling and living paycheck to paycheck that it can feel impossible to save money for retirement. But missing out on 50-100% return on your money is simply throwing out money. You need money right? Do you know a better way to turn $100 into $150 or $200 instantly? Unless you've got a magical investment secret nobody else knows about then you should jump at a chance to have your employer match your funds. This is the best way to save for retirement. You have to somehow find a way to put something into your 401k to get that matching free money. Even if you start with a very small amount its a start. $20 a month today could grow to $50 a month next year and $100 a month the year after that. I know its sometimes easier said than done and sometimes people are in a real tight spot. If thats honestly you you then you have to do what is right to put food on the table. But for most of us we can find a way to squeeze a few bucks out of our budget by simply giving up some luxuries, being more frugal or otherwise tracking and controlling our spending.
Plus keep in mind that the money you put in your 401k will often help reduce your tax bill. If you're a single person making $45,000 with a standard deduction then you're paying 25% on every additional dollar in taxes. That means that if you put $100 into your 401k then its only $75 less out of your paycheck. Of course if you're in a lower 10-15% tax bracket then the tax impact is less. But in any case the bite you feel out of your paycheck is less due to the tax benefits.
Even if you have to cash out the 401k later and pay the 10% early penalty you'll still come out ahead if you get a 50-100% match.
Here's an example of that: Lets say you make $20,000 and get a 100% match on the first 3% of your pay. If you put 3% of your pay into your 401k then your employer with match it with another 3%. 3% of $20,000 would be $600 so your $600 will be matched with $600 from your employer to give you $1200 total. Now lets say you pull that $1200 early cause you are unemployed for an extended period. You'll have to pay a 10% penalty on the withdrawal. 10% penalty on $1200 is $120. Initially you put in $600 and you get $1,080 out after the penalty. I'm not figuring taxes but that would be a wash since you'll either have to pay them now or later.
Roth IRA's aren't better
People LOVE Roth IRA's. Thats understandable. The Roth IRA is a great retirement vehicle. However Roth IRA's do not guarantee you free money like a 401k employer match. Would you rather have $100 in a Roth IRA or $150 or $200 in a 401k?
Now you might think that taxes make the Roth IRA win. It is feasible that taxes could make a Roth IRA better. However that is a very unusual scenario that would be based on paying virtually no taxes today and a fairly high tax rate tomorrow. You'd have to go from pauper in your working years to a prince in retirement. If your tax rate is 0% today then its almost a given that you won't be in a very high tax bracket in your retirement years. If you're the exception to that then send me an email, I'd love to hear your story. For the other 99.99% of us the Roth IRA is not going to come out ahead even with wacky up side down tax implications.
Think of it this way: We can't tell what the future will bring but I'd rather have $200 in retirement today than $100. A bird in the hand is better than 2 in the bush. $200 today versus $100 is kinda like 2 birds in the hand versus one in the bush. 2 birds in the hand should be 4 times better than 1 in the bush. Ok so if thats getting to smartsy clever then how about I just end with this :
$200 > $100
Bottom Line: If you are eligible for a 401k employer match then you should contribute to your 401k up to the point of the match. If you don't then you're losing out on free money.
January 7, 2011
Double Your Money
January 6, 2011
$5 Gas is Coming... Eventually....
Lately I seem to be noticing several mentions of "$5 gas" coming in our future. This is one of the topics that has been batted around the personal finance blogosphere a little bit in the past week or two.
One article on FoxNews discusses the topic : Former Oil Exec Predicts $5 a gallon Gas by 2012 Energy Shortages by Decades end In the article the former exec of Shell oil John Hofmeister predicts that gas will cost $5 "in two years" and that we'll see gas stations run out of gas by 2018 or 2020 due to supply/demand being out of whack. It seems all this talk of $5 gas comes from what John Hofmeister has said.
Here's a Youtube video from 3 years ago in 2007 where the same executive saying that there "is plenty of oil and [natural] gas out there". But then he follows that with : "if we had public policy to support" getting it. He talks about how the policy only allows for exploration of oil in 15% of the "outer continental shelf". Now a few years later the same guy is scaring us all with predictions of $5 gasoline. And sure enough the news article also talks about the topic of deep water drilling. Basically what I'm seeing is oil executives telling us that $5 gas is coming and then using that as a reason to argue for more offshore drilling. Maybe I'm just a little cynical about what oil executives tell me. Coincidentally John Hofmeister also has a book Why We Hate the Oil Companies
In any case I think that $5 gas is coming sooner or later. If we have gas at $3 today and it goes up 5% a year then it will be just about $5 around 10 years from now. So $5 gas is pretty likely within a decade. Could it hit $5 within 1-2 years? Sure it could. It was well over $4 just a couple years ago. It really shouldn't surprise anyone that gas might hit $5. But you know what it could also drop to $2 a gallon or lower. Just in case you have a short memory here's a graph from Gasbuddy.com showing gas over the past few years and note how it dropped from over $4 to under $2 in less than 6 months back in 2008.
Predictions of $5 gas are not new. $5 gas by Labor day was written 2.5 years ago. In 2005 they thought that hurricane Rita might cause gas to hit $5. In some places it wasn't very hard to 'predict' $5 gas back in 2007 because people were being charged $5 a gallon. Of course that was for premium gas and only at one over priced station as far as I can tell. I forget did anyone say if we're talking about regular or premium and did they explicitly say national average price? I'm sure they are just talking national averages for regular gas. Maybe.
Back in 1998 the Economist published the article The Next Shock? which predicted "We may be heading for $5" ... oh wait, oops they were talking about the price of a barrel of oil. Back then oil had fallen to just over $10 a barrel and the experts were predicting how it could go even lower. One of those experts was from Shell : "The chairman of Royal Dutch/Shell, Mark Moody-Stuart, three months ago unveiled a five-year plan that assumed a price of $14 a barrel." They weren't just predicting it they were making plans for it. But Mark wasn't very close. Oil quickly shot up and doubled within a couple years and didn't go under $20 in any time during that 5 year period. But I'm sure if they keep making guesses they'll eventually get it right. A broken clock is right at least twice a day.
$5 gas will come sooner or later. When that will happen is anyone's guess.
January 5, 2011
Securities Investor Protection Corporation, SIPC
The Securities Investor Protection Corporation, or SIPC, is an insurance program for investment accounts. The SIPC is kinda similar to the FDIC in that it is created by the government in order to help protect individual peoples finances. The SIPC is however very different than the FDIC in how it functions. The SIPC insures investment accounts like stock brokerage accounts but theres lots of limitations and details about the insurance.. It doesn't guarantee the performance of your investments, but it just protects your ownership of your investments in case the brokerage firm that holds them goes under.
SIPC covers cash and securities held in a brokerage firm. If a brokerage firm were to fail financially then SIPC will step in to help salvage the assets and ensure that individual investors don't lose their assets.
The SIPC insures up to $500,000 in assets including $250,000 in cash per individual.
The SIPC helps recover missing assets. If a brokerage fails and during its bankruptcy some of the assets are lost or otherwise missing then that is what the SIPC helps recover.
What the SIPC doesn't do
It does NOT protect your stocks or other investments from loss of value due to market losses. So for example if you bought Blockbuster stock before they went bankrupt then that is your problem and the SIPC won't help. The SIPC does NOT protect you if you are sold worthless investments. SIPC does NOT protect futures contracts, currency, investments in limited partnership or unregistered annuities. When they say they don't cover currency I believe that means people who are dealing in trading foreign currencies.
SIPC doesn't really protect you from fraud in general. If you buy 10,000 shares in SuperGoodStock company from TonySoprano Brokerage, LLC firm and then find out when you try to sell your shares that SuperGoodStock is fictional and not worth the paper its written on and TonySoprano Brokerage's phone # is disconnected and their offices are vacant with a for lease sign then I don't think the SIPC can help you there.
How it works
First if a brokerage fails the SIPC will step in to help sort things out. You will get back ALL the equity assets that are registered in your name. After that the brokerage firms remaining assets are pooled and then divided up to pay off all customer claims. If there is a short fall of the assets then the SIPC will help make sure you get at least $500,000 of your assets including up to $250,000 of cash assets.
The $500,000 limit does not mean that you automatically lose anything over $500,000 that you have in a brokerage. For example if you have $2 million in assets that are all in mutual funds registered in your name then you should get all $2m in those assets back since they are legally registered in your name. If you have $2 million in cash then you may only get $250,000 back since that is the limit of cash the SIPC insures. Cash is cash so it might get 'lost' during the bankruptcy of a brokerage.
Making sure a brokerage is insured
You definitely want to only work with brokerage firms that are covered by SIPC. You can look up members of SIPC at the SIPC website via their member database.
Disclaimer: I'm not an expert on this stuff and I'm only interpreting what I read on SIPC.org and other websites. If your brokerage firm goes bankrupt then you're best off contacting SIPC to file a claim and find out exactly what you may or may not be covered for.
January 4, 2011
Updown Performance : 2010 Year End Summary
I play with stocks using an Updown account. Its part learning tool, part practice arena and mostly just a game. This is my annual summary of my results in Updown for the year 2010.
As I discussed in my recent December summary for Updown, in 2010 my Updown portfolio was up about 20%.
The S&P 500 was up about 13% for the year. In 2010 I beat the index by about 7%.
The previous year in 2009 the S&P beat my UPDown results. I was up 22% in update and the S&P was up 26% in 2009. So the S&P 500 beat me by 4% for the year of 2009. In the two year combined period covering 2009 and 2010 I'm up about 4% more than the S&P 500. I started Updown in March 2008 and since then I'm up 24.9% while the S&P 500 is still down -4.3%.
Here is the summary of my performance in Updown versus the S&P 500 for various periods:
| Updown | S&P 500 | |
| 2009 | 22% | 26% |
| 2010 | 20% | 13% |
| 2 year | 46% | 42% |
| Most of 2008 | -15% | -33% |
| Life | 24.9% | -4.3% |
When I say "most of 2008" above that is the period from March 2008 to Jan 1, 2009 covering the period of 2008 after I first started Updown. The "Life" period is from March 2008 to Jan 1, 2011
Here is the yearly performances shown graphically. 2008 year is just the 9 months at the end of 2008 post March.
And this is what the dollar balance would look like over time starting with the initial $1,000,000 of pretend money you get in Updown :
| Updown | S&P 500 | |
| Jan-11 | $ 1,249,000 | $ 957,000 |
| Jan-10 | $ 1,040,833 | $ 846,903 |
| Jan-09 | $ 853,142 | $ 672,145 |
| Mar-08 | $ 1,000,000 | $ 1,000,000 |
And then graphically this is how $1,000,000 would have performed in my Updown portfolio versus the S&P 500 over time from March 2008 onward:
For the last two years I'm doing OK but not great. I am ahead of the S&P overall but they beat me one year and I beat them one year. I'm only ahead by a few % points over the past two years. Given the work and risk involved I don't think its worth it to beat an index by 4% over two years when the market is up over 40% in that time. But I did a lot better than the index in 2008 and my overall returns are much better off because of it. I'd certainly rather have $1.2M than $950k so in that respect I'm clearly beating the index.
Dividends Yielded ~3.7%
Dividends contributed about $39,582 to the portfolio for the year. That is about a 3.7% yield on my portfolio for the year as a whole.
Remember that this is not real money so it shouldn't be thought of as equivalent to a real portfolio. There are many reasons that my results in Updown differ from what I'd expect to see in real life.
Updown is pretend money and I treat it that way. I am not very careful with my investments in Updown. Since theres no real risk with the money I don't worry or take too much care to make the right investments. This is not to say I don't try to make money with Updown. I do try to make money for nothing more than the fun of having a higher 'high score' in the game. But if I'm going to gamble with pretend money my risk tolerance and attention to detail when performing analysis is not the same as if I were investing real money. This factor may both hold me back and improve my results. On one hand since its a game I might make purchases on a whim that aren't that thought out and then not worry about them too much. You might expect that to lead to poorer results than if I was more careful, diligent and serious in my investments like I would be if I had invested real money. On the other hand since its a game I'm not too worried about taking higher risks and generally if you take higher risks and bet right then your returns will be higher. So if I'm less risk tolerant and make some good choices then I could make a lot more money in Updown based on being more aggressive with the investments there.
I use Updown to try out strategies. This is part of the reason I'm using Updown in the first place. Updown is a game and a tool for me. As a tool I use it to try out an investment strategy and see how it might work. Some of these strategies are flops.
Lots of unused cash. My Updown portfolio right now has over $500k in cash and only around $700k in investments. That is a lot of cash that is sitting idle and not making a return. If I had closer to 100% of my Updown assets invested in equities then I might have achieved a return closer to 30-40% rather than the 20% rate for the year.
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