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How Your 401(k) May Be Hurting You


Balancing current and future financial concerns.


A popular prescription in the personal finance domain is to increase or maximize annual contributions to 401(k)s or similar retirement plans. However, one of the best financial decisions I've made over the past couple of years has been to move in the opposite direction -- to radically reduce my retirement account contributions.

For many years, the tax-deferred feature of traditional retirement accounts, plus the added sweetener of employer matches to contributed funds, found me seeking to "max out" voluntary retirement account contributions (this year the limit is north of $16,000 for 401(k)s).

A few years ago, I began assembling a quarterly personal balance sheet to obtain a better picture of my financial assets and liabilities. I noticed that the value of my retirement assets was relatively large compared to other asset categories. Meanwhile, the value of my current assets -- liquid financial assets such as cash that I could readily deploy in the present day -- were quite small and not growing.

On the liabilities side of my balance sheet, debt was growing. In addition to a mortgage (refinanced multiple times to pull out equity), I was lugging a home equity loan, a car loan, and a number of credit card balances.

Because the overall value of my assets was growing faster than my debt, it didn't hit me right away that a potential problem was brewing. After all, the bottom line (literally) was that my net worth was increasing.

Veteran Minyans know that by early 2006, Minyanville content was peppered with concerns about potential for a severe economic and financial downturn, perhaps even a calamity. Central to most concerns was the amount of debt and leverage building in the system. Borrowed funds were increasingly being employed to support extravagant lifestyles as well as to speculate in financial assets. Should this debt and leverage rapidly unwind, severe deflationary forces could be unleashed.

Over the next year or so, Minyans learned that prudently managing risk ahead of such a scenario entailed reducing exposure to risky assets, increasing liquidity, and decreasing debt.

I began cutting my exposure to equities in my retirement accounts where most of my risky financial assets resided. Over the period of a year or so, pretty much everything went from blue chippers such as Johnson & Johnson (JNJ) to gold miners such as Newmont Mining (NEM).

However, I was having trouble getting more liquid and reducing debt. Sure, I was raising cash in my retirement accounts as I sold stock, but those funds weren't immediately available for present-day liquidity purposes without taking a significant penalty for early withdrawal. My paycheck wasn't helping much, since funds that weren't going toward monthly bills were being channeled to my 401(k).

It dawned on me that my personal financial strategy was out of balance. I was so focused on committing income to retirement accounts -- accounts that I wouldn't be able to access for many years (without significant penalty) -- that I was ignoring the need for building adequate resources to support living in the present.

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