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Cash out your 401k

   We are told all the time to stay in the market, not be scared off by market fluctuations and that investing is a long term position. While I agree with these age old pearls of wisdom, I recently cashed out my 401K. Here’s why.

    When I started working for my last employer, I decided to take advantage of the matching offer their plan had at the time. Through fidelity, I opened my 401K and dumped 4% of my pay into it each week, for which the company matched 2% on top. Year by year it grew slowly and surely just as I was told it would, that is until the end of last year of course. By the end of 07′ I started taking little hits, just a few bucks here and there but mostly it did nothing, zero growth , to me anyway, is still a loss. Then when the clock struck 2008, it really headed south. As the country entered this “Not a recession” the markets, and my portfolio, decided to head south for the winter, and seeing as its now summer I had hoped they’d be back by now….guess they like it down there.

    So as I do every month I opened up my financial spreadsheets and started crunching the numbers. I had lost over 4.4% of my portfolio in 08′ so far. To say the least I was a bit angry at this. I was in a set of funds that historically produced an average of 8% each year and I had lost over 4%. To me of course, in my own math I’m down 12.4% for the year. As I went over the rest of my spreadsheet I noticed id’ been losing a lot of money on a loan I had gotten a few years back. Comparing the loan with my 401K, I came to a realization.

    The loan would take me about 2 more years to pay off. I added up all the interest payments I would have to make in those two years. Then I took the balance of my 401K and figured out how much money I would have lost If I continued to lose 4% a year, then how much I could possibly make on that same investment if I had gained the estimated 8% a year that it had historically earned. In both cases, the amount of money lost from the loan was a significant amount more than any amount I could have made by staying in the market.

    I can already hear the cries in the background saying that the compounding of the investment gains have to be considered, but rest assured we’re dealing in fairly small amounts of money here, so compounding losses won’t hurt me in the long run. Also, the amount of money I’m saving on the loan can now be added to my Roth IRA, which will net me a greater savings and greater investment than having left it in my currently slumping 401K. So now all the money that was once going to that last debt every month is now going into building a positive investment instead.

    Less loss + more savings = better deal

Next post: This old house, looking to our first home.

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