Friday’s Reader’s Question – 401(k)

I received the following email this week:

I am about to leave my job and have a sizable (at least for me) 401k account of about $450k. I’m very concerned about where to put this money to keep it safe and hopefully make it grow. I have put it all, in the meanwhile, in the “fixed” account, which does not invest in stocks or bonds, but almost certainly has an unknown exposure to mortgage debt and derivitives. Upon leaving my job, I’m looking to move it somewhere that is not likely to go bust in what I consider the inevitable crash of the U.S. economy. I’ve thought about rolling over to a precious metals, minerals or resources related mutual fund, but worry that the losses in other areas of the fund family will bring the “whole house” down.

I’ve been very careful not to fall into the “debt trap” that many Americans will be caught in by living below my means and saving. I don’t want all this hard work and sacrifice to “go up in smoke”. I am also concerned that the government will shut the doors on IRA/401k liquidations, so they can pilfer my hard-earned nestegg. I am presently 55 years old and will immediately start to take the money at 59 1/2 to get it in my hands and away from government tactics. Can you suggest some interim
safe havens for this 401k money?

A couple of things in this email bother me:

1. “I’m looking to move it somewhere that is not likely to go bust in what I consider the inevitable crash of the U.S. economy. I’ve thought about rolling over to a precious metals, minerals or resources related mutual fund, but worry that the losses in other areas of the fund family will bring the “whole house” down.”

First off, how do we know that there will be a crash in the U.S. economy? And, there is NOTHING safe about precious metals, minerals or resources! Don’t fall into that trap! Sure, those areas have performed well over the last couple of years but there’s no guarantee that they will keep performing well.

2. “I am also concerned that the government will shut the doors on IRA/401k liquidations, so they can pilfer my hard-earned nestegg.”

The worst the government can do is raise taxes, which will take a bigger bite out of your savings when you withdraw it. The government cannot “shut the doors on IRA/401(k) liquidations.”

Here’s my suggestion:

1. Read Paul Grangaard’s The Grangaard Strategy. I reviewed the book last year and also wrote a follow-up post about the strategy. These two posts will give you an idea of what the strategy is.

2. Come to the realization that there are no “safe havens.” Yes, there are places you can stash your money that will keep your principal safe. However, they won’t protect you from inflation, which will eat away at your retirement account and leave you with half your purchasing power in as little as 10 years. That to me is a very real risk.

3. Finally, quit worrying about things you can’t control. Life’s too short to worry about such things as economic collapses and government pilfering.

13 thoughts on “Friday’s Reader’s Question – 401(k)”

  1. I’m not familiar with “The Grangaard Strategy” — will have to check it out.

    But I agree 100% with you assessment in points #2 & #3.

    Also, from my perspective, for something to be an “investment” is has to generate some kind of cash flow either through dividends or retained earnings that are reinvested into the “investment”. Precious metals, etc. don’t meet this criteria and therefore, in my opinion, are not investments.

    They are at best speculation, but not investing.

  2. The only way to be completely “safe”, even though there is no guarantees in extreme situations is to move your money to qualified insured vehicles. An IRA CD at a bank, FDIC insured up to $100k or a fixed annuity which is insured by the issuing agent, and even in the event of default insured further up to $100k in cash value.

    You could divide up your account into small chunks and spread them across different institutions to qualify for their insurance, but your earnings will likely only just keep up with inflation.

    Also, while those vehicles may be insured, who knows what could happen in extreme conditions such as a collapse of the economy. Nothing is a sure bet.

    So like JLP said, you aren’t doing yourself any good by worrying about unknowns that may never happen. You can help prepare for the worst the best you can, but doing so could end up hurting you more than helping if your fears don’t come true.

  3. If he’s got that kind of money saved in his 401k, he should roll it into an IRA at some fund which will let him diversify, and spread his assets that way. Sticking his whole egg into one basket (when it’s that big) is stupid even if there isn’t a risk of economic collapse.

  4. If the US economy crashes, his dollars will have no value and the last thing he needs to worry about is whether his investments are safe.

  5. This person sounds a bit paranoid, and since I can’t improve on the advice given by you and the other commenters, I’m left with making a flip response: Liquidate the 401k and use it to build a bomb-proof bunker. Stock the bunker with water purification equipment, fuel, non-perishable food, a shortwave radio, and guns and ammo. Keep a stash of Krugerrands for trading with other survivors. Don’t use the Internet since the government is monitoring it to find out where all the money is hidden.

  6. I’m with Sam. The guy would do well to change his radio station, quit reading the peak-oil websites, and take some time to study the history of gloom&doomers; they have a pretty awful track record.

  7. The wrier seems too emotionally attached and too sure of his assesment. You should always ask yourself, “What if I am wrong?”. From the tone of his message I doubt any advice will be heeded, but if he really wans to shoot himself there are inverse funds available from Rydex and Pro Shares etc that will increase in value should his dire predictions ever come true.

    If the writer fears the government will seal his IRA and he plans to take withdrawals as soon as possible without regard to the tax consequences, then he should learn about 72t withdrawals. At 55 he could already be throwing away his money.

  8. I agree that the word “paranoid” describes the original post. Of course there could be reasons why the poster does feel that worried about the state of the economy, government actions etc. The great depression of the 1930s affected the spending and investing habits of many who experienced it for the rest of their lives.

    Without knowing more about the poster’s personal circumstances it’s hard to add anything to JLP’s comments and what has been mentioned above. One thing which I would suggest be considered carefully is the intention to start drawing down in 4.5 years and, if that intention is to be carried out, the best asset allocation – something for a professional financial adviser to consider (something I am not).

    One final comment: even though precious metals (and many other things) do not generate income they can still be regarded as investments. There have been studies (which I have some queries on) which suggest that adding some commodities to a portfolio of other investments can add slightly to returns while reducing risk over the medium term.

  9. To echo some of the earlier posters, the thing that your reader should realize is that as long as he is talking about his investment in terms of “dollars” or even “money”, it is at the mercy of the government. Taxation should be the last thing he’s worried about; inflation (the hidden tax) could do in his life savings much easier. Just ask the citizens of Germany, Argentina, Peru, Mexico, and many others. Like it or not, in the event of the catastrophic crash that he is thinking of, he will have bigger things to worry about than his retirement savings. Accessing *any* account (whether it’s invested in stocks or gold) may be impossible in such a situation; the best things to have are food, ammo, actual physical commodities (some gold & silver couldn’t hurt), and enough land to grow a garden.

    I have my own inner doom-sayer, and fortunately it doesn’t come out very often; all I can say is that it only makes sense to prepare in proportion to the likelihood of the outcome. If he thinks there’s a 1% chance of this happening within the next 5 years, he should take $4.5k, buy a storage shed for his back yard, and stock it up with rice and ammo. If he thinks there’s a 10% chance, he should take $45k and buy a small farm close to where he lives.

  10. As for “cynical investing”, the problem is that precious metals aren’t all that good of an investment, unless you both own the actual metal and expect a true Mad Max-style apocalypse – and even then, ammo is probably a better investment. If you expect a more “ordinary” crash, ie one where bad things happen but civilization continues, gold may be a hedge against a hyper inflationary episode, but would actually be a pretty bad place if you expect a massive bubble-pop, which would be strongly deflationary. Gold would not have been the investment of choice during the Great Depression. If you’re expecting a dollar crash, an easy hedge is to invest overseas – people should have some amount of overseas investments anyway.

    As for tax policies, that is a more valid concern; there, the best thing is to have investments in several types of accounts: ie tax-deferred like a traditional IRA, something like a Roth, and after-tax investments. IMO, the biggest danger taxwise (although it would be a good thing generally) would be a shift to consumption taxes and away from income taxes, by moving to something like the “Fair Tax” or to “Pigovian taxes” (carbon taxes to reduce oil use, etc). This would hurt post-tax accounts and Roths, but be a good thing for money fetched from traditional IRAs if income taxes are lowered.

  11. I don’t really recommend doing this, but the writer should learn about the provision of 401(k)s whereby people who separate from their employer in or after the year in which they attain the age of 55 may take unrestricted distributions from their 401(k) without the 10% early distribution penalty (note that 72t distributions are restricted based on life expectancy). Thus, the writer could cash in his 401(k) immediately after retiring. Ordinary income taxes would be due, and the distribution of his large balance would put him in a high tax bracket, but then the money would be outside the 401(k)/IRA umbrella, and thus presumably outside clutches of Congress that he seems to fear. If instead he rolls the 401(k) into an IRA, then 59-1/2 becomes the age at which he can take unrestricted penalty-free distributions.

  12. I was in a similar situation in 1998 when I retired with a substantial 401k amount. My advice is to leave it in the 401k and take yearly distributions in an amount of around 7 or 8 percent. I have withdrawn about $500k in almost 9 years and still have my original amount. A simple diversification in a US index, a foreign index, and smaller amounts in better performing funds, and a move into cash reserves during big downturns did the trick.

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