A 401k loan is stirring a negative public impression lately and many argues whether it's something worth risking for. Forbes's Investing section contributor Michael Smith gives his expert advice on the matter.
In his example, he cited that a credit card debt of $20,000 with 19.99 interest rate and a minimum payment of $600 will be paid in 27 years and a staggering $25,000 paid interest amount in total. On the other hand, paying off a $20,000 debt using a 401k loan with 4.25 interest rate, $370 monthly payment in a 5-year term with only $2,250 in total interest amount paid sounds more logical.
This example shows how loans, in general, are greatly influenced by its interest rate which should be one of the main considerations in getting one. However, there are experts who warn people of getting a 401k plan in the first place.
From the Opinion section of the Observer, contributor James Altucher openly declare that a 401k plan is a scam. He explains that the employer match aspect of the 401k plan is compensated by its employees' salary rate.
He adds that if the employee leaves the company earlier than the 4-6 spread, the employer match is often not awarded. The tax savings element is also questionable as tax rates are unpredictable and once the employee takes the money out from a 401k plan, the highest tax rates are always expected.
Instead of relying on a 401k plan for retirement, alternatives such as plain frugality matched with the maximum savings efforts could be a sufficient plan for an enjoyable retirement, as shared by young Boston couple in Forbes.com. The couple is targeting to retire by the year 2017. They will turn 33 by that time.
A 401k plan is supposed to provide adequate funds for retirees to live a normal life after leaving the workforce. However, a closer look may change the way people look at it.
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