Mid-life checkup - proposed adjustments

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martinman
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Mid-life checkup - proposed adjustments

Post by martinman »

We have been aggressively saving over the past 10 years maxing out retirement plans. My wife and i just hit a milestone... 1M in cash in our combined retirement & investment plans! We briefly touched it a few years ago during COVID, but of course the drawdown changed things abit. All good though - it's one of those things that i've learned not to worry about; still DCA'ed all along, maxing out everything and here we are.

So, here's the question: almost all of our wealth is in USD - 85% 401k, 5% HSA, w/ ~5% blue chip crypto. I don't have any (physical) precious metals and I think i'd like to diversify; perhaps even increase crypto holdings. I'd like to take a $25k 401k loan at 9% interest over 2 years to help diversify. Is this a bad decision?
Silk McCue
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Re: Mid-life checkup - proposed adjustments

Post by Silk McCue »

Borrowing money at 9% to speculatively invest would be a very poor decision indeed. If you want to speculatively diversify then do it with cashflow.

FYI - Crypto is a forbidden topic in this forum.

Cheers
HomeStretch
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Re: Mid-life checkup - proposed adjustments

Post by HomeStretch »

Congratulations on your portfolio milestone!

You likely have better options than a 9% 401k loan to diversify. For example, you can change your holdings in a tax deferred account with no tax consequences or direct new contributions to a more diversified holding (not crypto!). Also, $25k (=2.5.% of your portfolio) isn’t enough to meaningfully diversify.

For best feedback, consider posting in the “Asking Portfolio Questions” format found here:
https://www.bogleheads.org/wiki/Asking_ ... _questions
sailaway
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Re: Mid-life checkup - proposed adjustments

Post by sailaway »

What are you invested in with your 401k and HSA? You mention cash and USD, but those aren't really investments. Are you holding equities? Bonds? Stable value? Some combination?

401k loans sometimes mean you cannot contribute to your 401k until the loan is paid off. They also sometimes require a lump sum payment when you leave your job. Folks have found themselves short when their investments crash and a layoff comes at roughly the same time.
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Watty
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Re: Mid-life checkup - proposed adjustments

Post by Watty »

martinman wrote: Sat Jun 03, 2023 7:55 am I don't have any (physical) precious metals and I think i'd like to diversify; perhaps even increase crypto holdings. I'd like to take a $25k 401k loan at 9% interest over 2 years to help diversify. Is this a bad decision?
It would be hard to think of a worse one.

As someone else mentioned if you post your information using the "Asking a portfolio question" format as a guideline you will get better suggestions.

Here a link to the post explaining why discussion of crypo is not allowed here.

viewtopic.php?t=349207

Part of the reason for banning even the discussion of crypto was that it had many very vocal supporters that kept bringing it up. Part of the problem was that even though most of arguments for crypto had been debunked many times before people got tired of challenging pro-crypto posts over and over again so some of them were going unchallenged which could give the impression that crypto was considered a viable choice since it was being discussed so much.

As far as winning the crypto lottery by buying some and having it become worth a gazillion dollars that is just making a wild bet like buying a large number of lottery tickets, except with a lottery someone will win it even if it was a bad bet. With crypto there is a very good chance that no one will win.

It is also a huge mistake to put crypto in the same category as precious metals. People often do that to try to give crypto some credibility but they are nothing alike. I am not a fan of precious metals either but putting some money into precious metals would not be the end of the world if you pay cash for it. The big problem with precious metals is once you have more than a few thousand dollars in precious metals storing it in your house does not make sense.
jumbo shrimp
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Re: Mid-life checkup - proposed adjustments

Post by jumbo shrimp »

Congrats on the 1MM! I recommend sticking with stocks and bonds and not bother with the other asset classes you mentioned. I have read enough about the others and there haven't been convincing reasons that they are healthy long term investments as of now.

I also recommend to increase your emergency fund if you have been pulling money out of your investments. 401k loans, IRA loans aren't great.
Olemiss540
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Re: Mid-life checkup - proposed adjustments

Post by Olemiss540 »

Maybe to ease your concerns over investing so heavily in a particular segment (USD), you could consider market weighting the rest of the world economy. No better diversity, and recent returns do not indicate future performance.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Topic Author
martinman
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401k Loan - later in life

Post by martinman »

[Thread merged into here --admin LadyGeek]

Ok, so I probably know the answer to the question, but I'll ask anyway:

Should I take a 401k loan at 9% interest? The loan amount would represent ~2.5% of saved capital (1.8% of total NW).

I'd use it to pay off debt:
+ A high interest HELOC taken when rates were low. (Paying minimum amount; interest is about $500 / year).
+ 0% financed purchase... w/ a high monthly payment. $500
+ Put a dent in a car loan

Just wondering if the rules change for those of us that are 10 years from retirement with a significant (to us) nest egg already saved.

I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.

Thoughts?
kumjan
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Re: 401k Loan - later in life

Post by kumjan »

Bumping this.

Plus I think you will get better advice if you post a full picture of your finances (income, expense, debt with rates, etc).
shess
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Re: 401k Loan - later in life

Post by shess »

martinman wrote: Tue Jul 04, 2023 12:43 pm I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.
Verify whether your plan allows additional contributions while the loan balance is outstanding.

Also note that most plans require IMMEDIATE repayment when you leave the 401k plan (for instance, if you are laid off). IMHO this means that you should only take a 401k loan for convenience reasons, where you could pay it off immediately, but prefer not to for various reasons.

There is a lot of FUD around how 401k loan interest is treated - you can find some very bizarre YouTube videos on this. IMHO the simplest treatment is to pretend you took a loan outside the 401k, and you bought a bond inside the 401k, so they are entirely separate line items which just happen to have the exact same attributes. So if shifting your existing debt into this 9% loan would be an improvement, that can obviously be helpful. On the 401k side, is the 9% yield preferable to whatever you would otherwise be investing the 401k in? Right now, I think I'd take a guaranteed 9% return if it was on offer.

All of that said, my own approach to a late-stage case like this would be to simply stop making 401k contributions and put the cash towards paying down the loans as soon as possible. Obviously stop digging the hole, too, if you need retail debt like this to support your current lifestyle, you're going to be in trouble at retirement. My reasoning for redirecting the cash is that where a 401k works best is when you can put money in and let it grow for decades, but at this point any additional funds you put in simply isn't going to have that much time to compound.
KlangFool
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Re: 401k Loan - later in life

Post by KlangFool »

OP,

No.

This does not help you. You had overspent and get yourself in serious debt. The only way to solve this is to reduce your current spending and pay down the debt. Taking the 401K loan will simply let you put on ever more debts. The pressure to pay down the debt ASAP will be reduce a bit and you will dig a deeper debt hole.

Pain is good at this stage. Without the pain, you will not reduce your spending.

KlangFool
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SB1234
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Re: 401k Loan - later in life

Post by SB1234 »

martinman wrote: Tue Jul 04, 2023 12:43 pm Ok, so I probably know the answer to the question, but I'll ask anyway:

Should I take a 401k loan at 9% interest? The loan amount would represent ~2.5% of saved capital (1.8% of total NW).

I'd use it to pay off debt:
+ A high interest HELOC taken when rates were low. (Paying minimum amount; interest is about $500 / year).
+ 0% financed purchase... w/ a high monthly payment. $500
+ Put a dent in a car loan

Just wondering if the rules change for those of us that are 10 years from retirement with a significant (to us) nest egg already saved.

I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.

Thoughts?
Assuming 50 k loan and 4 year payback at 9% rate the payment is 1244 per month. This is going to be after tax payment so you are losing the immediate deferment at your marginal rate but the actual loss is going to depend on what your tax rate is during.withdrawal from 401k in the future. The actual loss is the difference in your estimated taxes in future and current marginal tax rate.
Let's assume the difference is 10%. So taking the loan is actually costing you 124.4 per month.
So I think If the interest you are paying on the existing debt is more than 124.4$ then taking 401k loan makes sense.

Note: Taking 401k loan also has other effects such as modifying your AA. i.e if you are currently stock heavy then by taking a 401k loan has effect of reducing your stock heaviness.
superstition: belief that market will one day come around to your concept of fair value
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SB1234
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Re: 401k Loan - later in life

Post by SB1234 »

shess wrote: Tue Jul 04, 2023 1:02 pm
martinman wrote: Tue Jul 04, 2023 12:43 pm I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.
There is a lot of FUD around how 401k loan interest is treated
Not sure what you mean, but it is a fact that interest paid on your 401k loan is indeed double taxed.
superstition: belief that market will one day come around to your concept of fair value
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cchrissyy
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Re: 401k Loan - later in life

Post by cchrissyy »

a full picture would help give better advice

but from this small picture i agree with Klang you have overspent and it would be wise to get in control of that, not merely moving the debt around. therefore, if the solution has anything to do with your 401k, i would suggest temporarily decreasing your new contributions. not a loan.
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shess
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Re: 401k Loan - later in life

Post by shess »

SB1234 wrote: Tue Jul 04, 2023 1:58 pm
shess wrote: Tue Jul 04, 2023 1:02 pm
martinman wrote: Tue Jul 04, 2023 12:43 pm I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.
There is a lot of FUD around how 401k loan interest is treated
Not sure what you mean, but it is a fact that interest paid on your 401k loan is indeed double taxed.
It is taxed when you pay back the loan, just like pretty much every other loan in your life. It is taxed when you take distributions from the 401k, just like every other distribution you take from a 401k. This concern should not have any influence on your decision to take a 401k loan.
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SB1234
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Re: 401k Loan - later in life

Post by SB1234 »

shess wrote: Tue Jul 04, 2023 2:08 pm
SB1234 wrote: Tue Jul 04, 2023 1:58 pm
shess wrote: Tue Jul 04, 2023 1:02 pm
martinman wrote: Tue Jul 04, 2023 12:43 pm I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.
There is a lot of FUD around how 401k loan interest is treated
Not sure what you mean, but it is a fact that interest paid on your 401k loan is indeed double taxed.
It is taxed when you pay back the loan, just like pretty much every other loan in your life. It is taxed when you take distributions from the 401k, just like every other distribution you take from a 401k. This concern should not have any influence on your decision to take a 401k loan.
Agreed. I just wasn't sure what was being referred to as FUD
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WhiteMaxima
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Re: 401k Loan - later in life

Post by WhiteMaxima »

I took a 50k 401k loan at 3.25% rate before market correction in Jan 2022. I use the money to do house remodeling. The SP500 was down 20% something like that. I am repaying the loan and buying SP500 at 20% off the peak. I think I made good move then. Now it is 9% rate.
exodusNH
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Re: 401k Loan - later in life

Post by exodusNH »

SB1234 wrote: Tue Jul 04, 2023 1:58 pm
shess wrote: Tue Jul 04, 2023 1:02 pm
martinman wrote: Tue Jul 04, 2023 12:43 pm I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.
There is a lot of FUD around how 401k loan interest is treated
Not sure what you mean, but it is a fact that interest paid on your 401k loan is indeed double taxed.
Yes, but loan interest always is.

If you took a loan from a bank, you'd use your already-taxed income to pay the loan. The bank books the interest as earnings and pays tax on it.

In this case, you're playing both roles.

The benefits of the loan are that it's not underwritten and has no impact on your credit score.
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Jimbo Moneybags
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Re: 401k Loan - later in life

Post by Jimbo Moneybags »

Sorry but I'm confused. :confused
Last month, you created a thread where you proposed taking a 401k loan at 9% in order to invest in crypto and/or precious metals.
So, here's the question: almost all of our wealth is in USD - 85% 401k, 5% HSA, w/ ~5% blue chip crypto. I don't have any (physical) precious metals and I think i'd like to diversify; perhaps even increase crypto holdings. I'd like to take a $25k 401k loan at 9% interest over 2 years to help diversify. Is this a bad decision?
viewtopic.php?p=7295476#p7295476

But now you want to take a loan to pay off debt?? As noted by others, if you cannot afford to pay your debts without tapping into your 401k (simply paying off one loan with another), you are living beyond your means. Using a 401k loan to make payments on other loans is simply shuffling debt around, not actually paying it off.

If you want to solve your problem, cut your spending and pay your debts with available monthly cashflow until they are eliminated. A 401k loan, whether to invest (speculate) or put toward other debt, is a terrible idea.

By the way, in January you asked about debt pay down strategy (viewtopic.php?p=7065943#p7065943) for the same loans you are asking about here. Why haven't you paid them off already? Have you been unable/unwilling to get serious about getting out from under this burden of debt?
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Cosmo
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Re: 401k Loan - later in life

Post by Cosmo »

KlangFool wrote: Tue Jul 04, 2023 1:07 pm OP,

No.

This does not help you. You had overspent and get yourself in serious debt. The only way to solve this is to reduce your current spending and pay down the debt. Taking the 401K loan will simply let you put on ever more debts. The pressure to pay down the debt ASAP will be reduce a bit and you will dig a deeper debt hole.

Pain is good at this stage. Without the pain, you will not reduce your spending.

KlangFool
Also, if you should lose your job, this 401(k) loan balance will be due immediately.
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Re: Mid-life checkup - proposed adjustments

Post by LadyGeek »

martinman - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread.

As noted by others, may I suggest you post your portfolio information in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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shess
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Re: 401k Loan - later in life

Post by shess »

SB1234 wrote: Tue Jul 04, 2023 2:13 pm
shess wrote: Tue Jul 04, 2023 2:08 pm
SB1234 wrote: Tue Jul 04, 2023 1:58 pm
shess wrote: Tue Jul 04, 2023 1:02 pm
martinman wrote: Tue Jul 04, 2023 12:43 pm I guess the other thing - this loan would dramatically improve our quality of life. We're really feeling the pinch with higher prices, while simultaneously trying to max our 401k (we're both 50+). Just need a bridge to the next couple years.
There is a lot of FUD around how 401k loan interest is treated
Not sure what you mean, but it is a fact that interest paid on your 401k loan is indeed double taxed.
It is taxed when you pay back the loan, just like pretty much every other loan in your life. It is taxed when you take distributions from the 401k, just like every other distribution you take from a 401k. This concern should not have any influence on your decision to take a 401k loan.
Agreed. I just wasn't sure what was being referred to as FUD
I mean "Fear, Uncertainty, and Doubt". YouTube videos which mention 401k loans as being double-taxed do not generally go into how your credit-card payments and car payments and loan-shark payments are taxed identically to your 401k loan repayment - if they did, they would not lead to uncertainty and doubt. I have no idea if the fear part is intended, but insofar as "Double-taxation of 401k loans!!!!one!1!" is a plausible clickbait title for a YouTube video, I think it's reasonable to assume it.

Another piece of this is arguing that there's some increased value in the fact that you're effectively paying interest to yourself. I would wager that people who are in a position to need a 401k loan are often NOT the greatest investments. 401k loans have a low bar to hurdle in terms of underwriting, but they generally aren't the best loans available to a retail borrower. The fact that those other loans aren't on the table (or that the OP already has these other loans with worse terms) should raise some red flags. IMHO, taking a 401k loan is a bit more like engaging in a P2P lending platform, where there's some definite risk involved, and, unfortunately, no way to diversify that risk. But it definitely has better expense ratios...
Reamus294
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Re: Mid-life checkup - proposed adjustments

Post by Reamus294 »

martinman wrote: Sat Jun 03, 2023 7:55 am I'd like to take a $25k 401k loan at 9% interest over 2 years to help diversify. Is this a bad decision?
Yes, this is a bad decision.
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