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Financial Planning / Foolish 401(k)s


Subject:  Re: 401K help! Date:  1/11/2013  2:19 PM
Author:  Fuskie Number:  24995 of 26170

You say the company matches 6% of your salary in company stock. Do you mean they give you 6% of your salary in stock automatically, or they match your purchase up to 6%? If they are just giving you the stock and your cost basis is zero, then your profits are $5 to $15 a share. If they are matching your purchase, then your cost basis is half the price of your purchase, since you receive 2 shares for every one bought.

In other words, if your salary is $50,000 and you spend 6% of that on company stock, $3000, you will end up with $6000 worth of stock after the company match. If your stock price is $10/share when purchased, your effective cost will be only $5/share since you will hold twice as many shares as you bought.

If, over the next 20 years, the stock price increases, your double positions (your purchases plus the matching contributions) will have a similar effect to dividend reinventing. Your doubling of shares will allow you to double your gains, while at the same time it would halve the cost of your losses if the company goes in the opposite direction, offering a small cushion.

The real question is what you think of the company. Does management have their heads on straight and they are navigating a temporary downturn? Do you make or provide a sold product or service for which there is a long term market in which the company is a respected competitor? Would you invest in this company if you were not an employee receiving matching shares?

The last question may be the hardest to answer because we are often emotionally attached to our work and view our employers either through rose or shroud colored glasses.

You would also be wise to be concerned how much of your portfolio is weighted in company stock. Since the company is already lowering your cost basis through matching contributions, it is probably not necessary to increase your accumulation rate to lower your cost basis. Instead, I would look at building out the rest of your portfolio, adding investments outside of the 401k in a Roth IRA, relations investing, or adding additional investments inside the 401k if you like the non-company stock options.

The idea is that you can reduce your company stock investment as a percentage of your portfolio by growing the size of your portfolio. This has the added benefit of improving your overall retirement savings situation. It is impossible to know where the market, or your company will go over the next 20 years, but the good news is you have plenty of time to find out.

Who recalls that when Time Warner bought Turner Broadcasting, his TBS shares bought through an ESPP account over 6 years shot through the roof, even though Time Warner ended the ESPP, but when Time Warner was bought by AOL, the options they threw at us never broke the surface, remaining under water until I left the company...
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