Originally posted by @Harrison Sharp:
Originally posted by @Jonathan R.:
@Harrison Sharp Why is it horrible advice? It’s about opportunity cost. If you can take your money and make a much better return than do it. Being a slave to Wallstreet is horrible advice. He gets zero match. I too do a 401k up to 6% but I get a 75% match up to 6%. I like to control my money.
Withdrawing your 401k is about the dumbest thing you can do, you'll have a 10% haircut off the top and then you'll have a large amount of taxable income on your tax return next year so set aside another 20-25% for that. In what world is it good advice to recommend taking a guaranteed 30% loss before you even are able to get another investment? Also 401k loans are risky as well, even if you get the interest, if you leave the company you're at you have to pay back the entirety of the loan within a short time period, again hope you have cash set aside for that... the better advice would just be to keep his money in the 401k, start contributing to a roth 401k instead of traditional and lower the amount, and then saving additional money on the side for real estate.
And as far as your tax and market timing points... Most people aren't in a higher tax bracket when they retire unless you've built up a massive real estate portfolio that is cash flowing a ton with paid off properties. I agree the market could be overpriced right now, but trying to time the stock market is a fools game. He's dollar cost averaging every paycheck and thus limiting his exposure to large drops assuming he continues to do so during a correction. Additionally, we just saw a 20% pullback in December, why not get in now? That could have been the selloff that was coming. Everyone is terrified of another 2008 and those events simply don't happen very often. What we just saw in a 20% pullback are more normal and par for the course.
I emptied my 401K and IRA twice so far and it has played a key role in allowing me to reach the point where I am now...which is financial independence (ie, I could quit my job right now if I wanted). Without using the funds from these accounts, I'm pretty sure I would have missed out on some really good opportunities and my financial picture would be no where close to what it is right now....let alone financially independent.
However, with that said. I still agree 100% with the advice above. When I think back about how lucky I was with the timing of the investment as well as being presented with the opportunity, I can't help but think emptying my retirement accounts like that was pretty reckless. Luckily for me, it worked out quite well....and if anyone is thinking about doing the same thing, please consider where we are in the current real estate cycle. I made my investments during a red-hot California and Asia real estate market and my timing was very lucky. Doing the same thing right now at the crest of the current cycle would be an absolute terrible move in all 50 states, Asia, and Europe. In fact, it's a pretty reckless move at all points in the cycle.
Also, someone else mentioned perhaps parking your money in the AHP fund as an alternative to CD's or other low-risk investments. Don't let the liquidity terms fool you. This is not a low-risk, money-market type of investment that happens to earn double-digits. You are assuming equity-like risk without any of the upside. Your returns are capped at 12% in the previous fund, and in the current offering, I believe it is capped at 10%. These are good coupon rates for debt-style investments, but the AHP investment is structured as an equity investment. The sponsors are earning 30-35%.....i.e., they are taking substantial risks. And usually, equity investments are structured so that the majority of profits above and beyond the preferred return goes to the investors. AHP is structured so that 100% goes to the sponsor. Also, flexible liquidity can be good, but there is also a very big downside to this....though I imagine there is something in the agreement where the sponsor can freeze redemptions in certain situations.
