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Did you recover your 2008 market losses ?
No, 30% of losses or more have yet to recover
No, 20% of losses or more have yet to recover
No, 10% of losses or more have yet to recover
Yes, or nearly, almost all losses have been recovered
Yes, and the gains since have outweighed the 2008 losses

Click here to see results so far.

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Yes, or nearly, almost all losses have been recovered

Yes, and the gains since have outweighed the 2008 losses



not clear what the distinction is between these last two


(didn't vote cuz i don't have 401(k), only IRAs)



=
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Sorry but TMF truncated the subject line. Not cool.

I voted 4.

Quicken is utterly useless at keeping tracking of gains because of all sorts of problems with employer plan changes, improper characterization of contributions, etc. So I keep track of everything in an Openoffice spreadsheet.

Year 2008 was particularly brutal for me :

Beginning balance 218277.76

Contributions 15500
Employer match 6238.7
Earnings -93392.74

Ending balance 146623.72

Rate of return -40.76

-----------------------------------------------
2009 was much better, but not a full recovery.
Beginning balance 146623.72

Contributions 12575.73
Employer match 4657.27

Earnings 54405.46

Ending balance 218262.18

Rate of return +35.05

-----------------------------------------------
2010 is not as good as 2009, also . But my new employer allows me to make after-tax contributions, so the balance is growing faster, but not because of the rate of return. I realize there is still a week to go in 2010 and things can change, but hopefully not too much.

Beginning balance 218262.18

Contributions 16500
After-tax contributions 17422.33
Employer match 6318.9

Earnings 37506.22

Ending balance 296009.63

Rate of return +16.33

To summarize
2008 : -93392.74
2009 : +54405.46
2010 : +37506.22

So I still have $1481.06 to recover, ie. I recovered 98.4% of the losses, not accounting for inflation.
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0x6a74 .
The 4th one is 0-10% of the losses still need to be recovered.
The 5th one is if you have a notable net gain for the years 2008 through 2010.
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I voted Yes, and the gains since have outweighed the 2008 losses, but in mid-2009 I rolled over my 401k into an IRA, and went from a restricted choice of funds to slowly taking control and shifting into stocks from funds. So far the changes I've made have, on average, paid off very well. Of course my transformed portfolio hasn't experience a pullback yet - making money on a rising market is the easy part.
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making money on a rising market is the easy part

Amen!
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It's hard to answer this. I didn't sell anything on the way down. As the market started to come go back up, I started selling some equity funds in favor of increasing my fixed/bond fund allocation. I kept this up each time the market recovered another 10% or so. At the start of the market drop, I was 70% equity. I'm now 69% fixed. Along the way I booked some cap loses on the sale of equity funds, and I have a carry forward cap loss of of around $130K. Until I stopped all working for income in June of this year, I had deposited some new money, plus seen gains in the bond funds. As I sit here today, I'm ahead of where I was at the market top, but just by a little, plus I have a $130K cap loss carry forward. I'm much more comfortable with my asset allocation now, since it's much more conservative. My bond fund holdings are at the short and intermediate end.
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Rus on the assumption the intermediate bond holdings have an average maturity in years (i.e. more than 1 year); your holdings are in mutual funds and finally the fund is forced to sell bonds at some point before maturity - I say think twice. Just look at what will happen to a 2 year from maturity instrument when rates rise to 3%.

If you were 70% equities, I urge you to get back there. Maybe you want to get into dividend paying equities, but bonds generally and particularly bond funds in my view will be money loosing over the next 3 to 5 years.

I have bonds, but I hold bonds that will be held to maturity -- thereby eliminating the interest risk.

Gordon
Atlanta
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Rus on the assumption the intermediate bond holdings have an average maturity in years (i.e. more than 1 year); your holdings are in mutual funds and finally the fund is forced to sell bonds at some point before maturity - I say think twice. Just look at what will happen to a 2 year from maturity instrument when rates rise to 3%.

If you were 70% equities, I urge you to get back there. Maybe you want to get into dividend paying equities, but bonds generally and particularly bond funds in my view will be money loosing over the next 3 to 5 years.


You most certainly have a point, one that's vexed me for some time now, what with bond funds at such low yield levels. I'm not concerned about the 3% rise, because I'll see that coming about 50% of the way before getting there, then I'll move my fixed money into MM. I have no trust in the stock market anymore, and only a little more in the bond market. The market drop taught me that the market can and will again drop 50% or more, only the next time it might not come back. Just as the folks in Japan. I used to think that the true terrible stuff couldn't happen in the US, but I was wrong...way wrong.
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I'll use my Roth as an example, since that is where most of my money is. I also did not factor in contributions or withdrawals, which increased the account by a net 14K.

2008... -69K
2009... +50K
2010... +57K

Milt
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ResNullus,

The poll was about 401k, so capital losses should not apply. With a 401k it should be fairly easy to answer this based on market gains/losses for each of the years 2008/2009/2010 . Usually the annual statement will break down the contributions and gains/losses so you can easily tell.
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The 4th one is 0-10% of the losses still need to be recovered.
The 5th one is if you have a notable net gain for the years 2008 through 2010.



ok ...then i voted #5 for my IRA

..would be #4 for overall investments.


but ... being retired, no more contribs to IRA, and withdrawals from other accts for expenses .

the difference in gains because i'm more conservative with IRA investments


FWIW
...
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ResNullus,

The poll was about 401k, so capital losses should not apply. With a 401k it should be fairly easy to answer this based on market gains/losses for each of the years 2008/2009/2010 . Usually the annual statement will break down the contributions and gains/losses so you can easily tell.


Since I had my original fixed asset allocation within my IRA (it was only 30% of the total portfolio, give or take), I am actually ahead of the market high, no counting additional contributions.
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Rus when I said 3% rise, I meant the 2 year bond going from 2% to 5%. As you undoubtedly know interest rates have generally being going down since 1980. Last time I checked no one was predicting negative interest rates, but the carry trade sort gets there.

I know the returns are bad, but CDs will return your principle. Bond mutual funds that do not keep all bonds to maturity will loose principle as they sell in a rising bond rate environment.

Gordon
Atlanta
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Only because - being the underacheiver I am, I went mostly into cash Nov.07 when I started a new job and the in 2008 bought a bunch of VPU on October 10th at 49 - Dividend was pretty attractive!!
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I'm fairly surprised by the results of the poll. I thought I was doing fine by breaking even for the last 3 years, but clearly not. I didn't sell anything on the way down. I only kept adding new money to the funds through contributions. I remained in the same funds the whole time until april 2010, at which point I rollled over the 401k to my new employer 401k. The old employer was acquired anyway and the plan was being turned over to a different company, so the funds would have changed anyway. Thus I figured it was a good time to do the rollover.

68% of TMF members say they have overall gains for the 3-year period which shocks me. I expected that to be a minority. Looking at various indexes :

S&P 500 :
12/31/2007 137.42
12/27/2010 125.65
Down 8.5% for the period

DJIA
12/31/2007 13364.16
12/27/2010 11555.03
Down 13.5% for the period

This doesn't include dividends, but even with them included, they still wouldn't have recovered. If anyone knows of an online tool that can provide the total return inclusive of dividends for a custom period, I am interested.

For those that answered 5, how did you recover those losses ?

Were you not fully invested in 2008 when the market tumbled ?
Did you time the market and manage to sell high and buy low ?
Were you in other types of investments that performed better, like gold ?

Were your account balances small enough in 2008 that the losses weren't that great, and then you added lots of funds in 2009/2010 which produced gains ?

Inquiring minds want to know.
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For those that answered 5, how did you recover those losses ?

Were you not fully invested in 2008 when the market tumbled ?
Did you time the market and manage to sell high and buy low ?



not so much sell-high, buy-low as sell as sold as it fell
(lived through the 2000 puke and waited too long to sell back then)

and have been buying back on the rise.
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Yep Madbrain -

I timed the market perfectly out of luck - Sold high, bought low. Actually ended up 2008 with a gain.. And every time my wife tells me procrastination doesn't pay - I laugh!!!

d(Timing)/dT


Sold things like
DRYS @~94
JKL @~75
GGP&KIM @~40
CRM @~46
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madbrain: "Quicken is utterly useless at keeping tracking of gains because of all sorts of problems with employer plan changes, improper characterization of contributions, etc. So I keep track of everything in an Openoffice spreadsheet.

Year 2008 was particularly brutal for me :

Beginning balance 218277.76

Contributions 15500
Employer match 6238.7
Earnings -93392.74

Ending balance 146623.72

Rate of return -40.76"


I am not following your math in terms of Rate of return.

Also, how are you accounting for ongoing contributions by you and timing of employer match?

-----------------------------------------------
"2009 was much better, but not a full recovery.
Beginning balance 146623.72

Contributions 12575.73
Employer match 4657.27

Earnings 54405.46

Ending balance 218262.18

Rate of return +35.05"


Ditto. Plus how are you separating out earnings on 2008 contributions and employer match?

-----------------------------------------------
"2010 is not as good as 2009, also. . . . I realize there is still a week to go in 2010 and things can change, but hopefully not too much.

Beginning balance 218262.18

Contributions 16500
After-tax contributions 17422.33
Employer match 6318.9

Earnings 37506.22

Ending balance 296009.63

Rate of return +16.33

To summarize
2008 : -93392.74
2009 : +54405.46
2010 : +37506.22

So I still have $1481.06 to recover, ie. I recovered 98.4% of the losses, not accounting for inflation."


How are you separating out earnings on 2008 & 2009 contributions and employer match?

If you are not, then I strongly suspect that you have overestimated your recovery. (:<)

Subsequent earnings on contributions and employer match need to be separated how to accurately calculate recovery.

Regards, JAFO
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I understand your concern about market returns. If you invest in index funds, that may be what you get.

Here are the returns on 4 of my stocks over the 2007-Today period

TIC Close Buy Date Price % Return %SP Ret
NFLX $179.23 6/1/2007 $21.56 +731.3% -12.9%
IMAX $25.19 8/29/2007 $4.40 +472.5% -8.8%

DLB $66.89 8/17/2007 $34.09 +96.2% -7.7%
ATW $37.42 8/17/2007 $33.24 +12.6% -7.7%

(This is from "My Scorecard" on MF)

These are the 2 highest and 2 lowest that I bought in 2007. In 2008, I bought more stocks, Ford being the best for 2008.

I believe NFLX is the only stock I bought in 2007 that did not go negative during 2008. I believe IMAX went down about 50%. Some did not recover until 2010.

Yes, the market was going down. Having been retired since 2005, some people would call me nuts. I have been through a number of market sags, nothing this bad, but I have managed to get through them.

The market will correct itself again in the future. No one knows how much or when.

Gene
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JAFO31,

The formula I use to calculate my rate of return in my spreadsheet is as follows :

=100*(annual market value change/(starting balance +(personal contributions+employer match)/2))

This is the way I account for the fact that the contributions are made throughout the year - I count the return on half the contributions. It may not be very conventional or accurate. But I think it's good enough for me because I actually try to spread the contributions continue all the way to the last few payrolls of the year to maximize the per-paycheck match. Otherwise I have to wait until april of the next year to get the match true-up, and only get the true-up if I am still with the employer as of 12/31 .

What formula would you use to compute the return ?
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JAFO31,

You are correct that I didn't separate out the earnings on 2009 and 2010 personal and matching contributions. If I made zero additional contributions in those two years, the return would have been lower, and I wouldn't be as close to recovery. I can estimate that by assuming the same rate of return and deducting the contributions. Something to add to my spreasheet later on.

In the later part of 2010, I made a lot of contributions to money market account that have basically no return. This is the case for a good chunk of the after-tax 401k contributions. That is partly because I intend to roll them over to a Roth IRA next year, and I want to minimize the taxes at the time I do the rollover. It's actually better to have low/no earnings on them. My employer lets me do 1 or 2 annual in service withdrawals for the after-tax contributions. The other reason is because I was very invested nearly 100% in equities and it's not a bad thing to have a few % of my assets less at risk.
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madbrain: "The formula I use to calculate my rate of return in my spreadsheet is as follows :

=100*(annual market value change/(starting balance +(personal contributions+employer match)/2))

This is the way I account for the fact that the contributions are made throughout the year - I count the return on half the contributions. It may not be very conventional or accurate. But I think it's good enough for me because I actually try to spread the contributions continue all the way to the last few payrolls of the year to maximize the per-paycheck match. Otherwise I have to wait until april of the next year to get the match true-up, and only get the true-up if I am still with the employer as of 12/31."


If your contributions are made roughly every paycheck throughout the year and the employer match is made concurrently with each contribution, then your method is fair and reasonably accurate methodology.

My pay periods are the 15th and the last business day of the month, so I prefer 5/12 rather than 1/2 (there is no new money invested from 1/1 -1/15 and the contribution from the last paycheck of the year has no time to earn anything.

Employer matches are also paid differently. None from my current employer. IIRC, the last employer of mine that made one made lump sum payments at year end --- no time to earn anything --- or perhaps even in Q1 of the next year.

What about earnings on subsequent contributions?

Using your original numbers -

"<<<Year 2008 was particularly brutal for me :

Beginning balance 218277.76

Contributions 15500
Employer match 6238.7
Earnings -93392.74

Ending balance 146623.72

Rate of return -40.76

-----------------------------------------------
2009 was much better, but not a full recovery.
Beginning balance 146623.72

Contributions 12575.73
Employer match 4657.27

Earnings 54405.46

Ending balance 218262.18

Rate of return +35.05

-----------------------------------------------
2010 is not as good as 2009, also . But my new employer allows me to make after-tax contributions, so the balance is growing faster, but not because of the rate of return. I realize there is still a week to go in 2010 and things can change, but hopefully not too much.

Beginning balance 218262.18

Contributions 16500
After-tax contributions 17422.33
Employer match 6318.9

Earnings 37506.22

Ending balance 296009.63

Rate of return +16.33

To summarize
2008 : -93392.74
2009 : +54405.46
2010 : +37506.22

So I still have $1481.06 to recover, ie. I recovered 98.4% of the losses, not accounting for inflation.>>>"


If you had made no contributions for 2008, 2009 and 2010 and received no employuer contributions for those years, would your account have $216,796.70 ($218,277.76 - 1,481.06) or would it be less? If less, then you are attributing part of your "recovery" to earnings on dollars contributed since then, which I suggest is not entirely accurate.

Regards, JAFO
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I don't understand the question. I didn't start investing in 2007 so the decline in 2008 is just one of many "bumps" in the road (more of a pothole I guess:) Granted, 2008 was much larger than the other bumps, but I don't measure my gains from some arbitrary peak or valley in the market.

FWIW our investments value has gained 30% since Dec '07, but 25% of that gain is added contributions.

Our real average gains for all investments (without adding money) are:

1 Month ROI	3.63%
1 Year IRR 19.60%
2 Year IRR 24.81%
5 Year IRR 5.45%
10 Year IRR 5.93%
Total IRR 7.21% (since '94)


-murray
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madbrain: "I didn't separate out the earnings on 2009 and 2010 personal and matching contributions. If I made zero additional contributions in those two years, the return would have been lower, and I wouldn't be as close to recovery. I can estimate that by assuming the same rate of return and deducting the contributions. Something to add to my spreasheet later on."

Ok. I am not tyring to make your life more complicated.

"In the later part of 2010, I made a lot of contributions to money market account that have basically no return. This is the case for a good chunk of the after-tax 401k contributions. That is partly because I intend to roll them over to a Roth IRA next year, and I want to minimize the taxes at the time I do the rollover. It's actually better to have low/no earnings on them. [I want to come back to these two statements] My employer lets me do 1 or 2 annual in service withdrawals for the after-tax contributions. The other reason is because I was very invested nearly 100% in equities and it's not a bad thing to have a few % of my assets less at risk."

The latter sentences suggest that you thought about the issue and have good reasons for doing your calculations that way you did; those reasons were not readily apparent in the initial posts and looked like you might have a "Beardstown Ladies" problem.

That is partly because I intend to roll them over to a Roth IRA next year, and I want to minimize the taxes at the time I do the rollover. It's actually better to have low/no earnings on them."

Why not invest in very agressive stocks and if they decline in value then you have even fewer dollars of tax to pay?

IOW, I do not believ that argment as framed has much merit. In the context where the total dollars available outside the rollover amount to pay the taxes on the rollover amount is limited, I can see wanting to keep the rollover amount limited, but that is because of the limited funds available outside the rollover amount to pay taxes and wanting to avoid using any of the rollover funds to pay taxes because of the penalty associated therewith and not because it is good on an absolute basis to have "low/no earnings".

The goal for most rational people in the USA is not to pay the least amount of taxes, but to have the most dollars available after taxes are paid.

If not, I have a fool-proof method for paying no taxes and an offer (that no one has ever accepted to date) to pay less in taxes.

Regards, JAFO
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Madbrain,

I can tell you for a certainty that between 12/31/2007 and 12/26/2010 my overall portfolio has grown 1.44% without contributing to the accounts. I retired on 12/31/2007 so I have not have any income to contribute to my 401k(s) and IRA(s).

The bummer is that I can't tell you how I did it as Quicken will not generated "Allocation Reports" for me for any previous dates. (I just found this out and can't say that I'm happy about it.) Also, I generated some previous end of year reports out of Quicken, but didn't choose to print out the (then) current allocation. (Again, bummer!)

But I can tell you that in 12/31/07 that I held 47% in Fixed Income, 5% in Cash, 47% in Mutual Funds and 1% in Equities. So I can also say that I was managing the Fixed Income portion while Mutual Fund Managers were handling a 47% share. I took a 19% loss on my portofolio at the low point during the period.

I have done some asset reallocation in the last 3 years but nothing major. I stuck with some of the better Mutual Funds and moved money out of some underperformers. I am now managing about 10% of my portofio in MDP which also means that I now have slightly more dedicated to individual equities than I did on 12/31/2007. But again, my diversification hasn't changed much. (All the Mutual Funds that I canned had most of there investments in stocks.)

So I guess all this says that spreading your assets among various investment types is a very good thing, especially as you approach and enter retirement. I know that it helps me sleep at night.
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JAFO31,

Re: post 67965

My paychecks are every 2 weeks, both with previous employer and current one. And the match is paid on each paycheck. With both employers there was a true-up match due the next year if the match was not maximized, ie. by maxing out the contributions before the last pay period over the year.

The balance would most likely be less than $216,796.70 today if I had not added any new money in 2008, 2009 or 2010. There are multiple ways of accounting for the new money being added - either assuming zero new contributions in those years, or assuming that the new money would have been sitting in a money market and earning the prevailing rate of return for those years. Since I'm 34 and not retired, I think the later method makes a little more sense for me than assuming zero new money. Also, a lot of money would have been taxed upfront if I didn't contribute since I'm ineligible for deductible IRA contributions, and the earnings on the money market interest would also have been taxable.

Re: post 67968,

The reasons for me not investing all of the additional money in aggressive stocks immediately are not just taxes - my asset allocation was skewed nearly 100% equities already which really killed me in 2008, and the market had gone up quite a bit in 2009 and 2010. At some point there will be another market decline. Having a little cash sitting on the side isn't a bad thing, at least for now. I might use some of the cash to invest additional money on the way down, or in bonds after rates go back up a little. This my way of limiting risk a little, and my way of timing the market.

As for why not to invest all the money aggressively in stocks immediately, it comes down to timing of the taxes :

1) if the value declined significantly before the rollover to Roth, I might have a large capital loss. Possibly larger than the $3000 that I can deduct annually. I have zero capital gains to offset since all my investments are in retirement accounts, so having capital losses doesn't do me much good and might spill over to another year. Maybe to a tax year during which my income and tax bracket would be lower and the capital loss wouldn't be worth as much.

2) if the value increased significantly before the rollover to Roth, I might have a paper gain, and I would have to pay the taxes on that gain at a high rate of 38% combined federal/state immediately at rollover time. This would be a short-term gain (less than 1 year) since I plan to do a rollover to Roth of my after-tax contributions every year.
Then the money would go to Roth in similar investments (aggressive stocks). If the value then declines afterwards, there is no possibility of ever taking a loss on those. Or is there ? I can't imagine the government letting you have it both ways, not ever taxing you on any Roth gain, but letting you take a capital loss if there is one. Am I wrong ? I plan to only withdraw the money at retirement time anyway, during which I presumably will be in a lower tax bracket so the capital loss by then wouldn't be worth as much as the taxes that were paid upfront. However in the long run, hopefully there wouldn't be any loss at all.

I haven't done all the math and feel free to poke at my arguments, I enjoy your comments. Basically I'm willing to forego the earnings for one year of after-tax contributions to have the benefit of never paying any taxes on them at all and not having any short-term downside risk. I might change my mind once my overall asset allocation changes.
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The goal for most rational people in the USA is not to pay the least amount of taxes, but to have the most dollars available after taxes are paid.

And this seems to be the misconception of Roth conversions; you may end up paying less dollars in taxes by converting an IRA to a Roth, but you are likely to end up with less dollars available after taxes are paid.

-murray
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The formula I use to calculate my rate of return in my spreadsheet is as follows :

=100*(annual market value change/(starting balance +(personal contributions+employer match)/2))

This is the way I account for the fact that the contributions are made throughout the year - I count the return on half the contributions.


Accurately computing your return is surprisingly easy to get wrong. Variations of the "Beardstown Ladies" problem occur all the time--especially for people who are not a guru in arcane financial formulas.

If you are using an Excel spreadsheet you can easily get the accurate rate of return with the XIRR function. There'e really no excuse to not use XIRR.

However, a reasonably SWAG is a bit different from your forumula.
return = ((ending_value - (total_contributions/2)) / ((starting_value + (total_contributions/2)). What this does is say that your ending value is too large by 1/2 the total contribution and the starting value is too small by 1/2 the contribution, and adjusts those values accordingly. In essense, it does the math as if half of your total contribution went in at the start and half went in at the end.

So when you run the math to compute your returns, obviously your ending value is not 200, but is 200 - 15 (since 15 of it is the money that you just put in). And your starting value is obviously not 150, but is 150 + 15 (since you started with 150 and immediately put in another 15).

Lumping the contributions in with either the final value or starting value will greatly distort the math.

For example: end = 200, start = 150, total contributions = 30.
Lumping at the start (your formula?):
is (200 / (150 + 15)) or (200 / 165) or 1.212 = 21%

But from your description, you formula would seem to be: (200 - 150) / (150 + 30/2) or (50 / 165) or 30.3%.

Lumping at the end:
is ((200 - 15) / 150) or (185 / 150) or 1.233 = 24%

Distributed lumping:
is (200 - 15) / (150 + 15) or (185 / 165) or 1.121 = 12%

I plugged numbers into excel, starting value 150, contribute 2.5 (30 / 12) at the beginning of each month, ending value 200. XIRR of that is 1.1205 or 12%

If I change the monthly contribution to the 15th, the XIRR is 1.121.

Hmmmm, wow.....I knew your formula was wrong (based on my own expererience) but I didn't realise it was **that** wrong.
What you think is a 30% return is actually 12%.

For those who don't know, the "Beardstown Ladies" problem was that they didn't do ANY adjustment for the contributions, so they used:
(200 / 100) or 2.00 = 100%. No wonder they thought they were financial geniuses.
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madbrain: "
As for why not to invest all the money aggressively in stocks immediately, it comes down to timing of the taxes:

1) if the value declined significantly before the rollover to Roth, I might have a large capital loss."


I thought these funds were in an after-tax 401-k? Why discuss a capital loss? What happens in the 401-k, generally stays in the 401-k.

"Possibly larger than the $3000 that I can deduct annually."

If my understanding is correct (i.e., that the dollars we are discussing in a 401-k), why is htis even relevant?

"I have zero capital gains to offset since all my investments are in retirement accounts, so having capital losses doesn't do me much good and might spill over to another year. Maybe to a tax year during which my income and tax bracket would be lower and the capital loss wouldn't be worth as much."

I am not following any of this paragraph.

"2) if the value increased significantly before the rollover to Roth, I might have a paper gain, and I would have to pay the taxes on that gain at a high rate of 38% combined federal/state immediately at rollover time."

It is only a paper gain if you do not sell immediately after the roll-over (or immediately before the roll-over, for that matter).

"This would be a short-term gain (less than 1 year) since I plan to do a rollover to Roth of my after-tax contributions every year."

Why is this relevant? The funds are in a 401-k plan, right?.


"Then the money would go to Roth in similar investments (aggressive stocks)."

Only if you do not sell. Nothing requires that the investment be the same after the roll-over.

"If the value then declines afterwards, there is no possibility of ever taking a loss on those."

Generally not.

"I plan to only withdraw the money at retirement time anyway, during which I presumably will be in a lower tax bracket so the capital loss by then wouldn't be worth as much as the taxes that were paid upfront."

What capital loss is there to take? Once it is in the Roth, the account does not generate capital losses that can be offset againt capital gains (or ordinary income, up to the $3,000 annual limit and carry forward until death.

And gettin back to my original point, unless limited by dollars outside the rollover amount to pay taxes and choosing to avoid the penalty that arises from using a portion of the rollover to pay taxes, I fail to see why $x contributed and rolled over is better than $x contributed and $y earned during the interim both being rolled over. There is more in the Roth in the latter scenario.

And if the "38% combined federal/state [tax rate due] immediately at rollover time" unnerves you, then perhaps there should be no roll-over at all.

Many of the people on these boards like the idea of multiple pots of money with different tax consequences - Roth IRA / Traditional IRA/401-k / after-tax accounts with capital gains and losses and dividend income, so that they can mix and match income streams and take advantage of the standard deduction and personal exemption amounts available to them. Having insufficient taxable income to use all of those amounts is effectively leaving money on the table, because they are annual, use it or lose it, options (that are not cumulative).

Regards, JAFO
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Rayvt,

I'm going to have to google the Beardstown ladies problem . But, be assured that I am accounting for my contributions. I'm not using Excel but Openoffice. It does seem to have the XIRR, but I never used it .

However, if I want to use XIRR to calculate the rate of return within one year, it would appear that I need to input the time of every contribution, dividend, etc. And I'm not sure how I would account for simple valuation changes. If it is so, it seems to be awfully complicated, and seems like having to go that deep into detail is an excellent reason to me not to use XIRR .

In my earlier formula, "annual market value change" is calculated like this :
final balance - all contributions (personal and match) - starting balance .

If I use your example with end = 200, start = 150, total contributions = 30, then using my formulas I find :

annual market value change = 200 - 150 - 30 = 20
rate of return = 100* (20 / (150 + 30/2)) = surprise .. 12.12% !
Our formulas don't disagree much, do they ?
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annual market value change = 200 - 150 - 30 = 20
rate of return = 100* (20 / (150 + 30/2)) = surprise .. 12.12% !


Ah. I mis-interpreted what you meant by "market value change". So, yes, your formula is the same as my SWAG. You adjust both start & end values by 1/2 of the total contribution, same as my SWAG.

I used to use XIRR in Excel for my portfolio computations many years ago, but don't anymore since I discovered that this SWAG formula gives almost the same result for regular periodic contributions.

BTW, you don't include dividends in the XIRR, just additions & withdrawals.

It becomes quite complicated when you have irregular contributions and/or a mix of both additions & withdrawals. Like when you want to figure your returns for a taxable account that you shift money into and out of. But XIRR takes all that in stride, whereas none of the simpler methods do.
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JAFO31,

I thought these funds were in an after-tax 401-k? Why discuss a capital loss? What happens in the 401-k, generally stays in the 401-k.


No, in this case the funds don't stay in a 401k, I'm only using the 401k after-tax contributions as a short-term conduit to rollover to a Roth IRA.

My employer allows in-service withdrawals of all after-tax contributions every 6 months (or 12 months, I forget) without penalties. And the IRS allows the rollover of those after-tax contributions to a Roth IRA.

My plan is to contribute as much as I can after-tax to the 401k, then zero out the after-tax balance every 6-12 months as allowed by the plan, and roll them over to a Roth IRA. If there are earnings or losses attributable to those after-tax 401k contributions before this rollover, then it complicates tax matters.

a) If there is a gain, I have to find outside money to pay the 38% taxes on those gains. Let's say hypothetically that I made 20,000 of after-tax contributions last year. There was a huge short-term market rally and the balance doubled to 40,000 before I rolled over to the Roth IRA at the end of the year. Then, I need to pay the taxes on the 20,000 gain, and find another 7,600 of outside money to pay the taxes due, in order to rollover the 40,000 of after-tax contributions and their gain from the 401k to the Roth IRA.

Another option is to withdraw 7600 in order to pay the taxes, and rollover 32400 to the Roth IRA.

b) If there is a loss.
I made the same 20,000 of after-tax contributions. But the market tumbled and the funds are now only worth 10,000.
It's the end of the year and I want to rollover the after-tax balance to my Roth IRA. I do the rollover of the 10,000 remaining after-tax balance. No taxes are due on it, and I have a 10,000 capital loss. But I can't deduct the entire loss in the same tax year since it's over 3,000. It has to be spread over 4 years. And I might not be in a 38% tax bracket in each one of those 4 years, depending on my job situation, so the capital loss isn't worth as much due to the time value of money. Of course maybe I will be in a higher tax bracket, or maybe we'll go into deflation and it will not be as bad :) But I won't bet on that.

The after-tax 401k has tax treatment fairly similarly to a non-deductible IRA, but without the $5000 annual contribution limit.

Does my previous post now make some sense to you ?

It is only a paper gain if you do not sell immediately after the roll-over (or immediately before the roll-over, for that matter).

Now I am the one who doesn't follow you.

What capital loss is there to take? Once it is in the Roth, the account does not generate capital losses that can be offset againt capital gains (or ordinary income, up to the $3,000 annual limit and carry forward until death.


What about the (however unlucky) case where the Roth IRA balance has a net decline between contributions and withdrawal in retirement ? I know the IRS allows a capital loss deduction in this case for non-deductible contributions in a traditional IRA. It seems fair enough - in a non-deductible IRA you pay taxes on the gains when you withdraw, so if you are unlucky enough to have a loss when you withdraw, you get the capital loss tax break (with a $3000 max).

What I wonder if in the case of a Roth IRA if you have such a loss. Since you never pay any taxes on the gains on the Roth when you withdraw the funds, it would seem very unlikely that if you lose all your funds through bad investments in a Roth, you would then be able to take a capital loss when you withdraw. But I'm not the IRS. Perhaps somebody else knows. OK, I just googled it. http://www.fairmark.com/rothira/losses.htm . Looks like some deductions are allowed, but it's subject to many limitations.

And gettin back to my original point, unless limited by dollars outside the rollover amount to pay taxes and choosing to avoid the penalty that arises from using a portion of the rollover to pay taxes, I fail to see why $x contributed and rolled over is better than $x contributed and $y earned during the interim both being rolled over. There is more in the Roth in the latter scenario.


Yes, dollars outside the rollover amount to pay taxes are not unlimited ;) I'm neither Bill Gates nor Ben Bernanke ;).

You keep mentioning gains, and not losses. The reason why not to risk the short-term money before rollover really comes down to the risk of capital loss that I already mentioned above.

Remember that I plan to rollover once to twice a year as permitted, so the money would be invested as cash equivalent fairly short term. I'm not a short term trader and I'm not confident about my ability to generate gains in every 6 to 12 months period between rollovers.

As of today my retirement assets are already $320,000 (between IRAs and 401k). I had about $17,000 of after-tax 401k contributions this year. That is 5.3% in cash investment earning basically nothing for 12 months. I don't think it's an excessive portfolio cash allocation overall. If anything, I have been guilty of being 100% in equities before which hurt me a lot in 2008. Yes, the return on those 5% is nothing right now, but it is short-term money.

This year, the after-tax money was invested for a very short-time, actually mostly during the last few months of the year. I set my contribution percentage very high and my net paychecks went down to close to zero. I had to watch it because my employer allows after-tax contribution rates up to 75% of gross income, but the taxes and other benefits actually make up more than 25%. I was careful not to have a negative paycheck. I wonder if payroll would do a direct debit every 2 weeks instead of direct deposit if that happened. I didn't really want to find out that badly ! I got a total of about $40,000 contributions to the 401k including pre-tax, matching and after-tax. Next year I will spread out the pre-tax and after-tax more evenly so that I can hit the maximum $49,000 ceiling in december.

In the later part of this year, I have actually been spending down my e-fund to pay the $6000/month loans and other expenses on my 2 properties, all the while collecting essentially no paycheck while I max out the 401k both pre-tax and after-tax in a mad rush before the end of the year. My older house is for sale and the sale was supposed to close monday, sigh. And my father's estate still to be settled, which also includes the sale of his home in France as well, but some money as well. Now, perhaps you understand why I don't mind having the after-tax contributions not being at risk. If my efund gets too low in the next few months, I can withdraw the after-tax contributions instead of I rolling them over, but only if they are still there. But I shouldn't have to do that unless I lose my job, neither my old home or my father's home sells in the next year, and the euro goes to zero. I think none of them are likely, let alone all.
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Rayvt,


It becomes quite complicated when you have irregular contributions and/or a mix of both additions & withdrawals. Like when you want to figure your returns for a taxable account that you shift money into and out of. But XIRR takes all that in stride, whereas none of the simpler methods do.


Yes, it seems like XIRR would work for that, but it would be a pain. The complexity of taxable accounts has always been unattractive to me. Almost as much as having to pay the taxes ;).
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I think you might want to stop doing anything at the moment because the bits and pieces of what you are doing may not be giving you the result that you want. Do you have an overall financial plan ? Have you considered consulting with a fee paid financial planner ?

When it looks like you are in one of the highest marginal tax brackets, getting money into a Roth should be carefully considered. Right now it looks like a little knowledge is a dangerous thing.
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I am no tax expert, but some of what you write does not seem correct to me.

I intend to post on the Tax Board and ask the regulars to respond in tis thread.

Regards, JAFO
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>> For those that answered 5, how did you recover those losses ?

Were you not fully invested in 2008 when the market tumbled ?
Did you time the market and manage to sell high and buy low ?
Were you in other types of investments that performed better, like gold ?
<<

Maxing out a 401K plus annual company match of about $6000 per year. Without new money, I'm probably still down 10-15% from the November 2007 high. But I've also added over $60K in new contributions and company match since then.

#29
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Yes - by far. We never touched our thrift saving plan (Federal 401k equivalent) allocation, and just "let it ride." Very glad we did.
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madbrain,

You wrote, Did you recover your 2008 market losses ?

Yes. But mainly because my employer went belly up in 2008 and I rolled my 401(k) into my rollover TIRA and shifted a good portion of that account into beaten-down, fixed income securities on the theory that unlike individual homeowners, most big corporate issuers weren't simply going to default on their debts ... despite what the market seemed to be saying.

Had my 401(k) funds remained stuck in that 401(k) account, I doubt I would be doing nearly so well. My new 401(k) assets are also up; but that's no surprise given recent market moves. Perhaps the only surprise was that I didn't feel beaten up enough to put a lot of my contributions into money market funds [or reduce my contributions] like a lot of my [new] coworkers did.

My only regret is that loosing my employer in 2008 made me irrationally conservative about hording cash. [E-fund has risen to about 18 months of expenses, which even I would admit seems kind of silly.] Had I deployed most of that cash instead of hording it, I could have shaved a couple of years off my retirement target.

- Joel
Who thinks that until recently, stocks and especially bonds have been on sale!
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In the later part of 2010, I made a lot of contributions to money market account that have basically no return. This is the case for a good chunk of the after-tax 401k contributions. That is partly because I intend to roll them over to a Roth IRA next year, and I want to minimize the taxes at the time I do the rollover. It's actually better to have low/no earnings on them. My employer lets me do 1 or 2 annual in service withdrawals for the after-tax contributions.

Hi, madbrain. JAFO asked us over on the tax board to come take a look at this because he had some concerns about your understanding of the law. I'm reading only your posts to this thread in order, and have come across my first concern.

I've never heard of a 401(k) that accounted for earnings separately by source of principal. IOW, there are two pots of money in your 401(k)--after-tax contributions and everything else, which includes pre-tax contributions, employer contributions, and earnings. If you convert just after-tax contributions and you have no traditional IRA accounts lying around, there should be zero taxable income from the conversion. See the discussion beginning on page 62 of IRS Publication 590.

Have you verified with your plan that if you do a rollover of your after-tax contributions that some earnings will come along with it? If they say yes, how are those earnings calculated?

There may be more as I read on.

Phil
Rule Your Retirement Home Fool
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if the value increased significantly before the rollover to Roth, I might have a paper gain, and I would have to pay the taxes on that gain at a high rate of 38% combined federal/state immediately at rollover time. This would be a short-term gain (less than 1 year) since I plan to do a rollover to Roth of my after-tax contributions every year.

ALL taxable distributions from retirement accounts are ordinary income, regardless of how the money got there.

Phil
Rule Your Retirement Home Fool
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If the value then declines afterwards, there is no possibility of ever taking a loss on those. Or is there ? I can't imagine the government letting you have it both ways, not ever taxing you on any Roth gain, but letting you take a capital loss if there is one. Am I wrong ?

Yes, on a couple of fronts. First, in the realm of retirement accounts capital gains/losses are irrelevant from a tax standpoint. If you have after-tax money in an IRA and if you liquidate all your IRAs for less than the total of your after-tax money, you have a Schedule A miscellaneous itemized deduction. See Pub 590.

Phil
Rule Your Retirement Home Fool
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OCD,

I worte, My only regret is that loosing my employer in 2008 made me irrationally conservative about hording cash. [E-fund has risen to about 18 months of expenses, which even I would admit seems kind of silly.] Had I deployed most of that cash instead of hording it, I could have shaved a couple of years off my retirement target.

After I posted I realized this statement might seem to conflict my previous statements.

During the past year I sold my house and reduced my expenses somewhat. The horded cash is mostly from the proceeds of that sale - I've continued to max-out my available retirement contributions and have even made a number of taxable account purchases - mostly from excess income... I've mainly been reluctant to invest most of that cash from the home sale, even though I know I should. Had I simply put the money into the investment options I was researching at the time, I'd be a lot better off (like a 50% gain).

- Joel
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Over the 3 year period..

Not including cash -

401K (about 55% of my investments) +3%

non 401K (about 45% of my investments) +8%

combined +4.8%
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reallyalldone,

I'm in a 28% federal bracket, 9.6% California. Since I itemize on my 1040, the actual combined tax bracket is 34.912%.

Getting the money into a Roth is definitely not my first choice. I'm still doing it because I have exhausted all pre-tax investment options, and it is much more attractive to me than using taxable accounts since the earnings in the Roth never get taxed. I only want to use taxable accounts for my e-fund, not investments. I have a bunch of money coming to me in the next year from the sale of my residence and my father's estate, so I can afford to do it.

I haven't consulted with a financial planner, though I have considered it before. My overall financial plan is certainly very unusual and calls for the following features :
- saving as much as possible in tax-advantaged accounts while I'm working
- early and short 100% self-funded retirement using SEPP distributions from Roth IRA and 401k. How early, I'm not sure, but probably between age 50 and 55.
- good probability of dying before age 62, before I could see a cent from social security retirement
- good probability that my partner will die even before I will, and that I can thus die broke or leave all my assets to charity since we don't have children
- good probability of being in a lower tax bracket at retirement, if same-sex marriage passes in our lifetime at the federal level

For 2010 I saved $45241.23 for retirement.
$17422.33 after-tax 401k which I will roll into a Roth IRA very soon
$16500 pre-tax 401k contributions
$6318.9 matching 401k
$5000 in non-deductible IRA contributions which I rolled into a Roth IRA
$0 in taxable accounts

For 2011, I will increase the after-tax 401k contributions so that my total retirement savings will be $54,000. I can probably keep this up for at least the next 3-4 years given the money I have coming from my old residence and my father's estate.
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TMFParti,

I have no traditional IRA lying around, I make non-deductible annual contributions ever year but then immediately convert the balance to Roth, so there are no taxes due on the conversion.

My 401k plan reps said that if I withdrew or rolled over the after-tax portion, some earnings would come along. I have gotten several answers from different reps about the exact formula. I am just going to have to do it for the first time this coming january and see what actually happens when I do this rollover. I would very much love it if no earnings came along ;).
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ALL taxable distributions from retirement accounts are ordinary income, regardless of how the money got there.

Thanks, I stand corrected. Regardless of the tax rate - capital gain or ordinary income - my point was that some taxes would be due at rollover time. This is only true if I have to withdraw some of the earnings when I withdraw the after-tax contributions.
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Rough numbers from memory (only includes 401(k), but other investments similar):

Year end - Value

2008 - 155K
2009 - 89K
2010 - 270K


Over those two years I contributed 33K (no match). Net change after subtracting the contributions = 30% (ish). How?

Not panicking while witnissing the drop & continuing to invest in equities as things went down. Must admit that my subscription to MF Stock Advisor helped.

Byron (Not a MF newsletter salesperson)
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