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Author: Rutabaga2000 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Where to from here? Date: 3/30/2000 4:32 PM
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So here I am, 26 years old, and Foolish enough to be spending time thinking about my retirement. I recently changed jobs, and have about $5,000 in a 401(k) account with my previous employer. In a few months, I'll be able to take part in my new company's 401(k) if I so choose. Here's the dilemma. The 401(k) here contains no index funds. We have a raft of Kemper mutual funds available. I understand that I could roll that money into an IRA or a ROTH IRA - I'w under the income cut-off. But doing that involved taking a tax hit now. Am I better served by moving my money to the new 401(k) and guessing at the best funds in the basket, or by dropping my $5K plus $2K/yr. into a F4 port in an IRA? Any help would be appreciated.

P.S. I did send The Letter to our 401(k) plan administrator advocating index funds.
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Author: ez2bhard Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20797 of 76398
Subject: Re: Where to from here? Date: 3/30/2000 8:33 PM
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rutabaga,

I would IMMEDIATELY roll the 5k out of the previous employers 401k and get it into a Roth. The ability to grow the 5K for 30+ years taxfree is a HUGE benefit to you. You will first have to roll the 401K into a regular IRA and then convert to a Roth IRA, and pay taxes on the converted amount. So make sure you can cover the tax bill with out of pocket expenses.

Next, since you didn't mention it, I'm assuming your current employer doesn't offer a matching contribution.
Therefore, I would make the $2000 contribution each year into a Roth, and if you have additional funds to invest, use the 401K, assuming you can find a decent fund.

The ability to save on a tax deferred basis in the 401k is still a good benefit. Let's say your marginal tax bracket is 30%. That's an immediate 30% return on each dollar you put into the 401K, which should make up for the higher expenses of Kemper funds.

You don't have to "guess at the best funds in the basket". Check up on their funds at <www.morningstar.com> David Dremen, who manages the Kemper-Dremen High Return Fund is an outstanding manager, even though, he, like all the other value managers, have been "taking their lumps lately", I think it's an excellent time to get into a good value fund.

Good Luck!

ez



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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20804 of 76398
Subject: Re: Where to from here? Date: 3/30/2000 11:00 PM
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IMHO you have these options to consider. IMO only these make sense. Not in order
1. Roll the money into Roth. 5K is small and if you you can handle the tax bit do . I think you can roll 401k into Roth. But you better checka and make sure. If they withhold 20% when you do it, then don't
2. Roll it over to IRA and invest in S&P 500 index or Technology fund.


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Author: Rutabaga2000 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20817 of 76398
Subject: Re: Where to from here? Date: 3/31/2000 9:40 AM
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Ooh. I forgot to mention that my employer matches 50% up to the first 6% of my income. If I max it out, this comes to $1950 in free money per year. However, the gains I expect to make on the money in a 401(k) seem lower to me than what I'd get investing in foolish 4 stocks or whatever in my own IRA. Does that change your recommendations?

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Author: SactoFool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20820 of 76398
Subject: Re: Where to from here? Date: 3/31/2000 10:57 AM
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Ooh. I forgot to mention that my employer matches 50% up to the first 6% of my income. If I max it out, this comes to $1950 in free money per year. However, the gains I expect to make on the money in a 401(k) seem lower to me than what I'd get investing in foolish 4 stocks or whatever in my own IRA. Does that change your recommendations?

Let's see if I understand this correctly.

You defer 6%.
You get a 50% match (an additional 3%).
If you put that into an Index Fund you should get 10-12% retrun (0.9% - 1.08%).
For a total combined return of 65% - 68% on your original 6% deferal. (9.9% - 10.08% of your income total, including your original 6%.)

What kind of return were you expecting from the Foolish 4 again?

Sacto Fool

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Author: Rutabaga2000 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20844 of 76398
Subject: Re: Where to from here? Date: 3/31/2000 6:16 PM
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>>What kind of return were you expecting from the 
>>Foolish 4 again?

>>Sacto Fool

Here's what my math looks like.  There are at least a
few flaws in it.  Flaw 1 - my income never changes.
Flaw 2 - I never stop contributing - and I'm still
working at 76 years old.  Flaw 3 - I'm calculating
interest off the amount at the beginning of the 
year instead of quarterly.  Nonetheless, the
differences are striking.  For the first 20
years the IRA lags the 401(K).  But by year 34, the
IRA is worth double the amount in the 401(k).  And
after 50 years, the IRA is at 43 mil, gaining over 5
million dollars per year, and accelerating.
Meanwhile, the pokey old 401(k) is
at a "measly" 7 million, and growing by 700K annually.
If anyone sees more flaws, let me know.  It really
looks like IRA is the way to go.   


Strategy 1 - Put all the money in a 401(k)					

	Assumptions:  $5000 starting balance.  Employee contribution				
	is $3900 annually.  Employer contribution: $2450 annually.				
	Assumed 10% interest.				

Year	Start Bal.	My contrib.	Employer 	Interest 	End Bal.
0	 $(0.00)	 $5,000.00 	 $(0.00)	 $(0.00)	 $5,000.00 
1	 $5,000.00 	 $3,900.00 	 $2,450.00 	 $500.00 	 $11,850.00 
2	 $11,850.00 	 $3,900.00 	 $2,450.00 	 $1,185.00 	 $19,385.00 
3	 $19,385.00 	 $3,900.00 	 $2,450.00 	 $1,938.50 	 $27,673.50 
4	 $27,673.50 	 $3,900.00 	 $2,450.00 	 $2,767.35 	 $36,790.85 
5	 $36,790.85 	 $3,900.00 	 $2,450.00 	 $3,679.09 	 $46,819.94 
6	 $46,819.94 	 $3,900.00 	 $2,450.00 	 $4,681.99 	 $57,851.93 
7	 $57,851.93 	 $3,900.00 	 $2,450.00 	 $5,785.19 	 $69,987.12 
8	 $69,987.12 	 $3,900.00 	 $2,450.00 	 $6,998.71 	 $83,335.83 
9	 $83,335.83 	 $3,900.00 	 $2,450.00 	 $8,333.58 	 $98,019.42 
10	 $98,019.42 	 $3,900.00 	 $2,450.00 	 $9,801.94 	 $114,171.36 
11	 $114,171.36 	 $3,900.00 	 $2,450.00 	 $11,417.14 	 $131,938.49 
12	 $131,938.49 	 $3,900.00 	 $2,450.00 	 $13,193.85 	 $151,482.34 
13	 $151,482.34 	 $3,900.00 	 $2,450.00 	 $15,148.23 	 $172,980.58 
14	 $172,980.58 	 $3,900.00 	 $2,450.00 	 $17,298.06 	 $196,628.64 
15	 $196,628.64 	 $3,900.00 	 $2,450.00 	 $19,662.86 	 $222,641.50 
16	 $222,641.50 	 $3,900.00 	 $2,450.00 	 $22,264.15 	 $251,255.65 
17	 $251,255.65 	 $3,900.00 	 $2,450.00 	 $25,125.56 	 $282,731.21 
18	 $282,731.21 	 $3,900.00 	 $2,450.00 	 $28,273.12 	 $317,354.34 
19	 $317,354.34 	 $3,900.00 	 $2,450.00 	 $31,735.43 	 $355,439.77 
20	 $355,439.77 	 $3,900.00 	 $2,450.00 	 $35,543.98 	 $397,333.75 
21	 $397,333.75 	 $3,900.00 	 $2,450.00 	 $39,733.37 	 $443,417.12 
22	 $443,417.12 	 $3,900.00 	 $2,450.00 	 $44,341.71 	 $494,108.83 
23	 $494,108.83 	 $3,900.00 	 $2,450.00 	 $49,410.88 	 $549,869.72 
24	 $549,869.72 	 $3,900.00 	 $2,450.00 	 $54,986.97 	 $611,206.69 
25	 $611,206.69 	 $3,900.00 	 $2,450.00 	 $61,120.67 	 $678,677.36 
26	 $678,677.36 	 $3,900.00 	 $2,450.00 	 $67,867.74 	 $752,895.09 
27	 $752,895.09 	 $3,900.00 	 $2,450.00 	 $75,289.51 	 $834,534.60 
28	 $834,534.60 	 $3,900.00 	 $2,450.00 	 $83,453.46 	 $924,338.06 
29	 $924,338.06 	 $3,900.00 	 $2,450.00 	 $92,433.81 	 $1,023,121.87 
30	 $1,023,121.87 	 $3,900.00 	 $2,450.00 	 $102,312.19 	 $1,131,784.06 
31	 $1,131,784.06 	 $3,900.00 	 $2,450.00 	 $113,178.41 	 $1,251,312.46 
32	 $1,251,312.46 	 $3,900.00 	 $2,450.00 	 $125,131.25 	 $1,382,793.71 
33	 $1,382,793.71 	 $3,900.00 	 $2,450.00 	 $138,279.37 	 $1,527,423.08 
34	 $1,527,423.08 	 $3,900.00 	 $2,450.00 	 $152,742.31 	 $1,686,515.39 
35	 $1,686,515.39 	 $3,900.00 	 $2,450.00 	 $168,651.54 	 $1,861,516.92 
36	 $1,861,516.92 	 $3,900.00 	 $2,450.00 	 $186,151.69 	 $2,054,018.62 
37	 $2,054,018.62 	 $3,900.00 	 $2,450.00 	 $205,401.86 	 $2,265,770.48 
38	 $2,265,770.48 	 $3,900.00 	 $2,450.00 	 $226,577.05 	 $2,498,697.53 
39	 $2,498,697.53 	 $3,900.00 	 $2,450.00 	 $249,869.75 	 $2,754,917.28 
40	 $2,754,917.28 	 $3,900.00 	 $2,450.00 	 $275,491.73 	 $3,036,759.01 
41	 $3,036,759.01 	 $3,900.00 	 $2,450.00 	 $303,675.90 	 $3,346,784.91 
42	 $3,346,784.91 	 $3,900.00 	 $2,450.00 	 $334,678.49 	 $3,687,813.40 
43	 $3,687,813.40 	 $3,900.00 	 $2,450.00 	 $368,781.34 	 $4,062,944.74 
44	 $4,062,944.74 	 $3,900.00 	 $2,450.00 	 $406,294.47 	 $4,475,589.21 
45	 $4,475,589.21 	 $3,900.00 	 $2,450.00 	 $447,558.92 	 $4,929,498.13 
46	 $4,929,498.13 	 $3,900.00 	 $2,450.00 	 $492,949.81 	 $5,428,797.95 
47	 $5,428,797.95 	 $3,900.00 	 $2,450.00 	 $542,879.79 	 $5,978,027.74 
48	 $5,978,027.74 	 $3,900.00 	 $2,450.00 	 $597,802.77 	 $6,582,180.51 
49	 $6,582,180.51 	 $3,900.00 	 $2,450.00 	 $658,218.05 	 $7,246,748.57 
50	 $7,246,748.57 	 $3,900.00 	 $2,450.00 	 $724,674.86 	 $7,977,773.42 
					
					
					
					
Strategy 2 - Foolish 4 IRA					
	Assumptions - $5000 starting balance.  $2000 annual IRA contribution				
	No employer contribution.  17% interest rate on Foolish 4 stocks				
	(You Have More Than You Think - p.201)				

Year	Start Bal.	My contrib.	Employer 	Interest 	End Bal.
0	 $(0.00)	 $5,000.00 	 $(0.00)	 $(0.00)	 $5,000.00 
1	 $5,000.00 	 $2,000.00 	 $(0.00)	 $850.00 	 $7,850.00 
2	 $7,850.00 	 $2,000.00 	 $(0.00)	 $1,334.50 	 $11,184.50 
3	 $11,184.50 	 $2,000.00 	 $(0.00)	 $1,901.37 	 $15,085.87 
4	 $15,085.87 	 $2,000.00 	 $(0.00)	 $2,564.60 	 $19,650.46 
5	 $19,650.46 	 $2,000.00 	 $(0.00)	 $3,340.58 	 $24,991.04 
6	 $24,991.04 	 $2,000.00 	 $(0.00)	 $4,248.48 	 $31,239.52 
7	 $31,239.52 	 $2,000.00 	 $(0.00)	 $5,310.72 	 $38,550.24 
8	 $38,550.24 	 $2,000.00 	 $(0.00)	 $6,553.54 	 $47,103.78 
9	 $47,103.78 	 $2,000.00 	 $(0.00)	 $8,007.64 	 $57,111.42 
10	 $57,111.42 	 $2,000.00 	 $(0.00)	 $9,708.94 	 $68,820.36 
11	 $68,820.36 	 $2,000.00 	 $(0.00)	 $11,699.46 	 $82,519.82 
12	 $82,519.82 	 $2,000.00 	 $(0.00)	 $14,028.37 	 $98,548.19 
13	 $98,548.19 	 $2,000.00 	 $(0.00)	 $16,753.19 	 $117,301.38 
14	 $117,301.38 	 $2,000.00 	 $(0.00)	 $19,941.23 	 $139,242.62 
15	 $139,242.62 	 $2,000.00 	 $(0.00)	 $23,671.24 	 $164,913.86 
16	 $164,913.86 	 $2,000.00 	 $(0.00)	 $28,035.36 	 $194,949.22 
17	 $194,949.22 	 $2,000.00 	 $(0.00)	 $33,141.37 	 $230,090.58 
18	 $230,090.58 	 $2,000.00 	 $(0.00)	 $39,115.40 	 $271,205.98 
19	 $271,205.98 	 $2,000.00 	 $(0.00)	 $46,105.02 	 $319,311.00 
20	 $319,311.00 	 $2,000.00 	 $(0.00)	 $54,282.87 	 $375,593.87 
21	 $375,593.87 	 $2,000.00 	 $(0.00)	 $63,850.96 	 $441,444.83 
22	 $441,444.83 	 $2,000.00 	 $(0.00)	 $75,045.62 	 $518,490.45 
23	 $518,490.45 	 $2,000.00 	 $(0.00)	 $88,143.38 	 $608,633.82 
24	 $608,633.82 	 $2,000.00 	 $(0.00)	 $103,467.75 	 $714,101.57 
25	 $714,101.57 	 $2,000.00 	 $(0.00)	 $121,397.27 	 $837,498.84 
26	 $837,498.84 	 $2,000.00 	 $(0.00)	 $142,374.80 	 $981,873.64 
27	 $981,873.64 	 $2,000.00 	 $(0.00)	 $166,918.52 	 $1,150,792.16 
28	 $1,150,792.16 	 $2,000.00 	 $(0.00)	 $195,634.67 	 $1,348,426.83 
29	 $1,348,426.83 	 $2,000.00 	 $(0.00)	 $229,232.56 	 $1,579,659.39 
30	 $1,579,659.39 	 $2,000.00 	 $(0.00)	 $268,542.10 	 $1,850,201.49 
31	 $1,850,201.49 	 $2,000.00 	 $(0.00)	 $314,534.25 	 $2,166,735.74 
32	 $2,166,735.74 	 $2,000.00 	 $(0.00)	 $368,345.08 	 $2,537,080.81 
33	 $2,537,080.81 	 $2,000.00 	 $(0.00)	 $431,303.74 	 $2,970,384.55 
34	 $2,970,384.55 	 $2,000.00 	 $(0.00)	 $504,965.37 	 $3,477,349.93 
35	 $3,477,349.93 	 $2,000.00 	 $(0.00)	 $591,149.49 	 $4,070,499.41 
36	 $4,070,499.41 	 $2,000.00 	 $(0.00)	 $691,984.90 	 $4,764,484.31 
37	 $4,764,484.31 	 $2,000.00 	 $(0.00)	 $809,962.33 	 $5,576,446.65 
38	 $5,576,446.65 	 $2,000.00 	 $(0.00)	 $947,995.93 	 $6,526,442.58 
39	 $6,526,442.58 	 $2,000.00 	 $(0.00)	 $1,109,495.24 	 $7,637,937.81 
40	 $7,637,937.81 	 $2,000.00 	 $(0.00)	 $1,298,449.43 	 $8,938,387.24 
41	 $8,938,387.24 	 $2,000.00 	 $(0.00)	 $1,519,525.83 	 $10,459,913.07 
42	 $10,459,913.07  $2,000.00 	 $(0.00)	 $1,778,185.22 	 $12,240,098.30 
43	 $12,240,098.30  $2,000.00 	 $(0.00)	 $2,080,816.71 	 $14,322,915.01 
44	 $14,322,915.01  $2,000.00 	 $(0.00)	 $2,434,895.55 	 $16,759,810.56 
45	 $16,759,810.56  $2,000.00 	 $(0.00)	 $2,849,167.79 	 $19,610,978.35 
46	 $19,610,978.35  $2,000.00 	 $(0.00)	 $3,333,866.32 	 $22,946,844.67 
47	 $22,946,844.67  $2,000.00 	 $(0.00)	 $3,900,963.59 	 $26,849,808.27 
48	 $26,849,808.27  $2,000.00 	 $(0.00)	 $4,564,467.41 	 $31,416,275.67 
49	 $31,416,275.67  $2,000.00 	 $(0.00)	 $5,340,766.86 	 $36,759,042.54 
50	 $36,759,042.54  $2,000.00 	 $(0.00)	 $6,249,037.23 	 $43,010,079.77 


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Author: ez2bhard Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20868 of 76398
Subject: Re: Where to from here? Date: 4/1/2000 2:40 PM
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Rutabaga,

I would disagree with your return assumptions. You're assuming you can maintain a 17% return over the long haul with the Foolish Four strategy. The Foolish Four returns go back 25 years, during a period when the stock market has significantly outperformed it's historical average.

Is your 10% return assumption based on an analysis of the Kemper funds offered in the 401K? How have the funds done relative to the Foolish Four and S & P 500 over 5 yrs.? 10 yrs? 15 yrs? I'm aware of several Kemper funds that have outperformed the Foolish Four and S & P 500.

I would use the same return assumptions of 10% for your analysis or, at the very most, give the IRA no more than a 2% advantage.

ez

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