A Better Use for Your 401(K)
Apparently the advice to never touch your 401(k) is not so cut-and-dried, and it could easily be that immediately taking all that money out of the retirement plan would be the optimal move. The Mogambo Guru explains…
John F. Wasik, a Bloomberg News columnist, brings us news that although nobody has any income to support more spending, nobody has any savings to support more spending, and nobody has anything of value (like home equity) to pawn to support more spending, all is not lost!
There is still one, last, pitiful source of money that could be used to support more spending. He writes, “Among the most awful pitches is something that’s being touted as an employee benefit: the 401(k) debit card. This allows you to treat your retirement fund as a cash account to withdraw money.”
If you are like me, you said, “Hmmm! I like this new idea! And if I find a way to conveniently tap into my wife’s 401(k) to get some money to fund a little party for my hoodlum friends and me, then I like the idea even more!”
Probably because he knows my wife and her complete lack of sense of humor about me taking a lousy few bucks out of her purse, much less raiding her retirement plan, he says, “Don’t even think about it.”
I think to myself, “Oh, yeah? You think I’m scared of my wife? Is that what you think? Huh? Is that what you think, punk?” Naturally, I instantly decide that I have to prove to this guy that I am a Big Macho Mogambo (BMM) who is not scared of his wife. Or even his kids! And in fact, I OFTEN challenge them to a fight, right out in the front yard! Ask them! Or ask the neighbors! Or you go get ’em, and I’ll fight them right here for ya!
But before I could put any plan into effect, he says it is not about me at all! Instead, the caution is because “Debited withdrawals are treated as loans, subject to interest and fees and must be paid back within five years”, and the money (of course) has to be with “after-tax dollars in those five years.”
Then he adds (as if he is reading my mind), “What happens if you don’t pay back these funds?” Well, I am sorry to report that the news gets pretty ugly at that point, and all my planning seems for naught, as he says, “Unlike a checking account-linked debit card, you will owe income taxes plus a 10 percent penalty if you are younger than 59 1/2.”
Being naturally argumentative, here is my thinking: You gotta pay the taxes anyway, whether you get the money now or later, and so by NOT taking the money out of the 401(k) right now, you are betting that the retirement plan will go up in price, AND go up enough to offset the loss in the buying power of the dollar!
And to that I bellow a Loud Mogambo Honker (LMH) of a laugh “Hahahaha!”
Hell, the dollar has lost 40% of its value in the last 5 lousy years! And you are probably sitting on a year-over-year 20% loss in your 401(k) to boot! Hahaha!
The ten percent penalty, however, is quite a haircut, I will admit. But if you are now sitting on 20% year-to-date losses in your 401(k), compounded by a massive loss in the buying power of the dollar, you would have been better off – far better off! – taking the money out of the 401(k) at the beginning of the year, paying the 10% penalty, paying the tax and putting the money into gold like you know you should have, but didn’t! Hahaha!
And if you don’t believe me, and you haven’t gotten your latest retirement-account statement to see your losses, CNNMoney.com reports, “Falling stock markets around the globe and the credit crunch are putting the pension funds of some of the largest U.S. companies into deeper financial holes. Since the credit crunch hit last fall, pension plans funded by S&P 500 companies have lost about $280 billion in assets, according to an actuary at Mercer, a human resources consulting firm. The losses amount to about 7% of a total $4 trillion in pension plan assets.” A 7% loss for the pension plans of the 500 biggest companies in America! Hahaha! And you think you can do better? Hahaha!
So the advice to never touch your 401(k) is not so cut-and-dried, and it could easily be that immediately taking all that money out of the retirement plan would be the optimal move, meaning (for me, anyway) it would be one of the few times in my whole failure-prone life that I did not do the wrong thing, at the wrong time, or with the wrong girl!
And the gains in gold and gold-oriented mutual funds, when so many other investors are losing their butts and they come wailing to me “I didn’t do what you said when you said to buy gold, silver and oil, and now I am a loser, boo hoo hoo! Help me!”, as if there is something I could do at this point, just makes it sweeter still! Whee!
Until next time,
The Mogambo Guru
for The Daily Reckoning
July 14, 2008
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.
Think you’ve got trouble? Today is a public holiday in France. It marks the occasion when the mob rose up and broke into the Bastille, liberating a couple of half-wits and social deviants. It was only a small chimney fire in historical terms. But soon, the whole country was on fire.
The French should have realized right away that the Revolution would be more trouble than it was worth. A few years later, France was broke…at war…and her leading citizens were siding with the enemy. Not only that, hundreds of thousands were dying from small pox.
But that is the trouble with history; there’s no way to back up. And you never end up where you expected to go.
More about the French Revolution…below.
Meanwhile, we have our own troubles to reckon with. And again…there’s no backing up.
Now getting hot is the war between inflation and deflation. Both sides launched major attacks at the end of last week.
Fannie, Freddie – Finito
Yes, the dark twins of mortgage finance dominated the news over the weekend. Every financial page covered the story. One story reported that the government was mounting a rescue operation. Another said the Fed had opened its discount window to them. Another had the U.S. Treasury Secretary denying that they needed any extraordinary assistance. Still another explained how they got into such a mess.
Of course, here at The Daily Reckoning we know how they got themselves into such a jamb. They lent money to people who couldn’t pay it back. And they weren’t the only ones.
“Crisis Deepens as Big Bank Fails,” adds the Wall Street Journal. The big bank is IndyMac. It is the largest bank failure since Continental Illinois bit the dust in ’84. Much of the depositors’ money is protected by FDIC insurance. But there’s still $1 billion uninsured. And, of course, FDIC can’t bail out everyone; it only has so much money.
“Analysts say more banks could fail,” reports the International Herald Tribune.
FDIC can bail out a few of these banks…but not all of them. And there is no way it can bail out Fannie and Freddie. Together, the twins have more than $5 trillion in liabilities. That’s more than a third of US GDP. And former Fed governor William Poole says they’re broke already.
Investors are still holding on – barely. Fannie’s shares fell to $10.25 on Friday. Freddie was down to $7.75 – for a total loss of 87% from the peak. (We previously reported that the share had traded as high as $60. Actually, the high was closer to $100. Sometimes we get the facts wrong, here at The Daily Reckoning. But it’s the interpretation of the erroneous facts that matters; of course, we get that wrong too, sometimes.)
Fannie and Freddie are “too big to fail,” no doubt about it. But who has the money to stop them from failing? Where are those Sovereign Wealth Funds when you really need them? We doubt whether they are stupid enough to do it, but what a coup it would be! We mean, if the Sovereign Wealth Funds recapitalized America’s largest mortgage lenders. So far, they’ve contented themselves with a few minor purchases of America’s iconic buildings, infrastructure and industries. But if they bought control of Fannie and Freddie, they would hold the mortgage on America’s housing too. And they could get rid of trillions of their unwanted dollars. (Foreign central banks already hold large pieces of Fannie and Freddie’s debt.)
But for the moment, the bailout looks like it will come from homegrown sources. Ben Bernanke called on Freddie’s CEO over the weekend. It is believed that the Fed chairman let it be known that its discount window would be opened a bit wider today – wide enough to lend directly to Fannie and Freddie. This will give them access to money at a preferential rate – about half the rate of consumer price inflation. You’d think you could make a fortune – if you could borrow so cheaply. In “normal” times, it would be a cinch. But in wartime, it’s hard to make money – even when lenders give you credit at no cost. No matter where you put the cash, it’s always in danger of getting blown up.
*** It is a good time to neither a borrower nor a lender be. And a bad time to be an investor.
All the world’s stock exchanges are now officially in bear markets. England was the last one to cross the 20% line. “FTSE officially bear market,” reported the Financial Times over the weekend – stocks are down 22% from their October high.
Investment gurus and Wall Street shills tell us that this is a great opportunity. They think they see a bottom.
But bottoms do not come along every day. There have only been four major bottoms in the last 108 years says the Financial Times – ’21, ’32, ’49 and ’82. A couple important points – the closest two were 11 years apart. The last two were separated by 33 years. Also, major bottoms don’t happen at the beginning of a recession; they happen at the end of one…when an economy is ready for another big growth spurt.
Nor do they happen when stocks are still relatively expensive – as they are now. They happen when they are cheap…when they sell for 5 to 8 times earnings, not 10 to 15 times. They also tend to happen when the Dow and the price of gold are getting close to a one-to-one relationship. Just before the ’82 bottom, for example, you could buy the entire Dow for a single ounce of gold. Now, it takes nearly 12 ounces.
Most important, a real, major bottom doesn’t happen when you’re looking for it. It comes after you’ve given up…when investors have lost interest in stocks. You may recall a notorious cover from Business Week in the summer of ’82: “The Death of Equities.” No one was expecting a bottom; they thought stocks were dead.
Our guess is that we are still in the bear market than began in January of 2000. After 2002, the biggest, most reckless expansion of credit in history produced one of the greatest bear market corrections in history. Even so, stocks in the United States never hit new highs in terms of gold, or oil, or inflation-adjusted dollars. And now they’re headed down again – even in nominal terms.
Yes, there’s a bottom ahead. You’ll be able to see it coming…after you’ve forgotten to look.
*** “The French Revolution didn’t change things as much as people thought,” said our historian friend. “It replaced one authoritarian, centralized government in Paris with another.”
There is no stopping history. There’s no backing up. Once the wings begin to fall off, the plane is going to crash; there’s not much you can do about it.
The French Revolution began calmly enough. “Reform” was everybody seemed to want. Meetings were called. Various reforms were discussed and implemented. For a while, it looked as though France might make a transition in a civilized way. But things inevitably heated up. A small number of aristocrats fled to England, Austria and Germany. There, they stirred up trouble. Soon France was at war with almost all its neighbors. Even the king tried to flee. And then, feeling themselves surrounded by enemies on their borders…and saturated with traitors, saboteurs and terrorists at home…the Terror began to squeeze the whole country. Scores were settled. Vengeance was meted out. By the time it was over 30,000 citoyens had lost their heads.
And when the butchery, the wars, the epidemics, and the mobs were finally cleared away…France was back in the hands of a monarch, one more powerful than Louis 16th.
The Daily Reckoning