Wednesday, March 13, 2013

Retirement Savings Accounts

I'm not linking to it, but in a discussion regarding whether to pay into a 401k or an IRA one of the comments includes the line:
I have considered investing in both the 401(k) and IRA… but I fear that splitting my money amongst the two retirement accounts will hamper the compounding effect I would realize. Any thoughts?
I am constantly surprised by people who think they know what they are talking about making such obvious mistakes.  Maybe the person is a novice, and trying to figure things out, but why would anyone think that splitting funds would hamper the compounding effects?  The commenter isn't saying that one returns better than another (which does make a difference, but then it would be a return vs. safety question).

If you take 1000 dollars a month and invest it all into an account that pays out 5% you will end up in exactly the same place as if you split it into two different accounts that each pay out 5%. There may be some differences in the accounts due to fees/taxes/other, but if an all inclusive ROI for each account is the same then splitting the money makes exactly 0 difference.  The reason to pick one over another, or to split has to do with limits, company matches and investment opportunities.

Also, as Atrois keeps saying: our current retirement scheme is very broken.  We need to make SS more generous so that our citizens don't have to rely on things like 401k's to survive retirement. That sentence above is evidence that even people who do try, and who think they understand this, are often quite lost.

To add to his reasons, though: if we made SS more generous, then that would provide a huge boost to the economy.  I'm saving far more than I would because a) currently SS doesn't provide much, and b) all the political discussion is around how to make it worse.  Make SS more generous and there are things I would be looking at buying, also I wouldn't be wasting my evenings trying to figure out how much and where to invest for retirement.

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