401k vs Stock Options

LineSkiCat14

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Hey fellas. So I got a job opportunity thrown my way. Similar companies, both in their more "adolescent" start-up years. Pay will be a bit better, and some better benefits, but also some worse benefits. By and large, it's just a step forward in my career.

The area of concern is that the company offers "Stock Options", I don't know to what extent, either in amount, time, etc. I just know it's for all employees and you can kind of tailor your pay to be a percentage of SOs. Not knowing much about SOs, I read into it, and it seems like a good, but risky perk. You only have the OPTION to buy stocks at a low price. And when the company goes public and/or does well, you could be sitting pretty. Or.. the company tanks and you just lost out on a big chunk of salary. New company received two classes of funding recently but has NOT gone public (to my best knowledge). In my opinion, they offer a great product, one of the best in it's class, and are clearly garnering attention. I think the company is primed for growth, atleast over the next decade.

Sounds good, but the catch is there is NO 401K. Zero. I'm a pretty big proponent for 401K, because being young, I see how much it can grow by the time you retire. My current company matches 7% and I put in 8%, so a pretty sweet benefit, that I may potentially be giving up.

So my question is, and my apologies for not having more details, as this is all I know for now, what would you pick? Why? What things should I be concerned about? And if I choose the new company, what the hell do I do with my old 401K? Can I still add to it myself? Roll it into a Roth IRA?
 

DSmith21

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If you roll a traditional 401k into a Roth IRA, you are going to pay tax on the whole thing as if it were additional income to you. You can roll it into a traditional IRA and have no tax consequence until you retire and draw money out. Just know that before you decide.

As to your original question, I would rather have a 401k with a nice match than a stock option in a startup. I am just risk adverse and would rather have a sure thing. You could also tell your employer that you have been given an opportunity for a new job with higher pay. Tell them that you would rather stay if they could match the salary. The worst that could happen is they could say no. They are not going to fire you for being honest.
 

LineSkiCat14

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Do I have to roll it over? Can I still feed money into my 401k, even without an employer's match? Obviously the 401k is company sponsored, so in my scenario, do people just throw it into a Traditional IRA, put their own percentage into it, let it grow, and then take it out when they retire?

The second part is definitely an option, as I was in the works to move up anyways. Although, the company has done quite a few things wrong in my eyes, and actually just released a company-wide statement that wasn't exactly good news for people in my department. Basically job security for all of us is now in question. Fine for 5-10 years, but after that is completely up in the air.

It would be a good 35-40% raise (as it stands now, could feasibly be dropped down to 25% as the position doesn't exist), so I might not even want the current employer to match.. might just have to call it a day, shake hands, and move on.
 

DSmith21

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Fund fees are typically lower in an employer plan than in an individual IRA. That is why someone should consider leaving the in the plan if they are happy with the investment choices.
 
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LineSkiCat14

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My 401 is VERY young right now, only 6-7 years old and was using early-career money. I can't just let it ride, I don't think it will really go anywhere.

Good to know I can't keep feeding it after a leaving. My best bet would be to roll it into the Traditional IRA, which is fine with me.. but I'm not good with Stocks/bonds, so I'd have to have like Fidelity manage it. All I know is I want aggressive growth, 90% stock at least (only 28 years old).

I'm fine with the crash recently. I get the deal. I know this stuff will happen and have always heard that you just have to ride it out.
 

MdWIldcat55

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Fund fees are typically lower in an employer plan than in an individual IRA. That is why someone should consider leaving the in the plan if they are happy with the investment choices.
I was just typing the same reply.
 

LineSkiCat14

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I'm pretty good financially for my age and have a sound understanding of personal finance. I throw 8% into my 401k, save an additional 20% of my paycheck into a Savings Account to buy a house in a year. I'm on the right track, doing all the right things. No debt (aside from a car payment), 800+ credit score..

So being in a good financial position in my late 20's I don't want to fumble my 401K.
 

UK_Memphis

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My 401 is VERY young right now, only 6-7 years old and was using early-career money. I can't just let it ride, I don't think it will really go anywhere.

Good to know I can't keep feeding it after a leaving. My best bet would be to roll it into the Traditional IRA, which is fine with me.. but I'm not good with Stocks/bonds, so I'd have to have like Fidelity manage it. All I know is I want aggressive growth, 90% stock at least (only 28 years old).

I'm fine with the crash recently. I get the deal. I know this stuff will happen and have always heard that you just have to ride it out.
Fidelity has it now? How many options does your current plan offer? Any ETF's? Is there a really large company stock you like?
 

blueboy08

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If you are seriously considering stock options as a large portion of your pay, you need to have a lawyer look at what type/class of stock is being offered, since it doesn't sound like equities/finance are your thing.

Having a 401k isn't that big of deal if there is an increase in pay that far outweighs the benefit of a 401k. I took a job about a year ago in which the pay jump was worth the fact that the company does not have a 401k. There are other ways to invest (if you are under 35-40, a Roth is a great vehicle).
 
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CatDaddy4daWin

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According to Ray Dalio you generally don't want more than 30% of your portfolio in stocks as it is historically 3x the risk than others. At your age I suppose you could go up a bit higher, but 90% just sounds like you're asking to get taken. Also index funds have much less in the way of costs than actively managed funds. That 5% return you got last year suddenly becomes 2-3% after they take their percentage.

I'm no financial guru but have been trying to educate myself over the last year so my advice is only what i've read. Ray Dalio is one of, if not the top finanicial guy you would want to take advice from. The key is to absolutely do not sell off stocks and funds when you have weeks like the last few. Especially with how long you have to go.
 

CatDaddy4daWin

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And although you pay after tax into a Roth, you are not taxed when you take it out. Which, if you are uncertain where your tax rate will be in 30+ years when you retire, may be something to think about too.
 
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UK_Memphis

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My 401 is VERY young right now, only 6-7 years old and was using early-career money. I can't just let it ride, I don't think it will really go anywhere.

Good to know I can't keep feeding it after a leaving. My best bet would be to roll it into the Traditional IRA, which is fine with me.. but I'm not good with Stocks/bonds, so I'd have to have like Fidelity manage it. All I know is I want aggressive growth, 90% stock at least (only 28 years old).

I'm fine with the crash recently. I get the deal. I know this stuff will happen and have always heard that you just have to ride it out.
I just picked out one ETF. I don't know much about it but am looking at it for the future. It is DIV and invests in dividend paying stocks. Can be bought for less than $25 currently. Say you have 50K and get 2000 shares. It is currently paying a .1705 monthly dividend. So $340 a month reinvested will be $1,000's per month in 2-0-30-40 years. All that is assuming the market doesn't crash completely.

I'm betting something like that is not offered in your 401k.
 

CatDaddy4daWin

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So basically, don't listen to this guy's advice.
I'm just offering advice based on what I've read and listened to from Ray Dalio and other financial gurus. It's not surprising that the majority of Americans make very little off of their mutual funds because they put it all in stocks and sell low and buy high.
 

LineSkiCat14

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Ugh, I can't answer those. Fidelity has it through the company, or at least they are managing it. I honestly never look at the options. All I change is how aggressive I want to be and what ratios I would like. I really don't know enough about stocks to feel comfortable making changes, at least right now.
 
A

anon_l8pbkn96tg3j6

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Always take the step up in your career unless the pay is very different. A change of scenery is usually positive in so many ways.
 

UK_Memphis

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Ugh, I can't answer those. Fidelity has it through the company, or at least they are managing it. I honestly never look at the options. All I change is how aggressive I want to be and what ratios I would like. I really don't know enough about stocks to feel comfortable making changes, at least right now.
Call them and ask. Or look it up when you log in next. Go to the change investments options and a list of available options should pop up.
 

krazykats

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If your young take the stock option. You obviously like the company and seem to believe in it and the stock option on their part allows them to offer less money because of the benefit. But also because of the benefit you'll have a genuine care and concern of the companies well being.

You need to know the details of when your eligible to start getting stock and when it vests! A lot of companies give you stock that doesn't best for 2-5 yrs in order to protect themselves too.

Basically just know what your getting and leave your 401K where it is.
 

RacerX.ksr

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I've got my money tied up in change right now. Look for the quarter to make a major comeback, soon.
 

throatpoker

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According to Ray Dalio you generally don't want more than 30% of your portfolio in stocks as it is historically 3x the risk than others.

Never heard of Ray Dalio, but this is terrible advice. If you're 70 years old, then yes 30% or even less stock makes sense. For a 30 year old though, it would be a big mistake to invest in anything less that 80% stocks. The OP has it right. A good mix for her would be like 50% large cap, 20% International, 20% small cap, 10% stable/bonds. Something along those lines.
 

throatpoker

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I looked up Ray Dalio, so I'm just going to assume cat daddy got the context of his quote mixed up. He had to of been lecturing a seniors home when he gave that advice.
 

Chuckinden

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The last IRA I wrote was about five years ago and it had a very low return rate at what it was paying then....something like 2.5%. Are annuities paying better interest today than five years ago? I really doubt it.

If you can control what the investments in your 401K, then I would keep it there for awhile to see how it does before I made any rash decisions.
 

CatDaddy4daWin

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I looked up Ray Dalio, so I'm just going to assume cat daddy got the context of his quote mixed up. He had to of been lecturing a seniors home when he gave that advice.
not at all, here's more information:
http://learnbonds.com/14931/all-weather-portfolio-ray-dalio/

Now, keep in mind his portfolio is based on the thought that there are 4 'seasons' to investing and his allocations are his best strategies for weathering all seasons of the stock market. And to avoid the extreme swings one might see in their portfolios, which is what can cause people to freak out and sell at the worst time. His breakdown was:

30% stocks (S&P 500 index fund) stocks 3x riskier than bonds
15% intermediate term bonds (7-10 yr treasury)
40% long term bonds (20-25 yr treasures) - counters volatility in stocks
7.5% gold
7.5% commodities

Portfolios Results:
1984(beginning of 401k plans) - 2014:
9.72% actual returns, net fees
average loss: 1.9%
lost money 3 out of 30 years

2000 - 2014
11% actual returns, net fees

I reallocated my 401k plan a few months ago to try this so I'm curious to see how it does. I did end up pushing my stock allocation to 40% and reducing the others because my 401k didn't have a commodities index fund.
 

KY_Kid

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Go to Bogleheads.org. Read up, post your situation if you like. Profit.

Thank me later.
 
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not at all, here's more information:
http://learnbonds.com/14931/all-weather-portfolio-ray-dalio/

Now, keep in mind his portfolio is based on the thought that there are 4 'seasons' to investing and his allocations are his best strategies for weathering all seasons of the stock market. And to avoid the extreme swings one might see in their portfolios, which is what can cause people to freak out and sell at the worst time. His breakdown was:

30% stocks (S&P 500 index fund) stocks 3x riskier than bonds
15% intermediate term bonds (7-10 yr treasury)
40% long term bonds (20-25 yr treasures) - counters volatility in stocks
7.5% gold
7.5% commodities

Portfolios Results:
1984(beginning of 401k plans) - 2014:
9.72% actual returns, net fees
average loss: 1.9%
lost money 3 out of 30 years

2000 - 2014
11% actual returns, net fees

I reallocated my 401k plan a few months ago to try this so I'm curious to see how it does. I did end up pushing my stock allocation to 40% and reducing the others because my 401k didn't have a commodities index fund.
I am 80% stocks (60% US, 20% INTL). If you are dumb enough to jump out of the market as it's falling then yes, certainly put your money in something safer and less profitable.
 
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My 401 is VERY young right now, only 6-7 years old and was using early-career money. I can't just let it ride, I don't think it will really go anywhere.

Good to know I can't keep feeding it after a leaving. My best bet would be to roll it into the Traditional IRA, which is fine with me.. but I'm not good with Stocks/bonds, so I'd have to have like Fidelity manage it. All I know is I want aggressive growth, 90% stock at least (only 28 years old).

I'm fine with the crash recently. I get the deal. I know this stuff will happen and have always heard that you just have to ride it out.
If you've been putting in what you say you have, what's your 401k balance right now? Pushing $80k?

You literally got in at the bottom of the market.
 

buckethead1978

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Why not roll it over into an IRA and control it yourself? And be able to contribute. You have many more options of products to invest in outside of a 401k.

Fidelity has it now? How many options does your current plan offer? Any ETF's? Is there a really large company stock you like?

I just picked out one ETF. I don't know much about it but am looking at it for the future. It is DIV and invests in dividend paying stocks. Can be bought for less than $25 currently. Say you have 50K and get 2000 shares. It is currently paying a .1705 monthly dividend. So $340 a month reinvested will be $1,000's per month in 2-0-30-40 years. All that is assuming the market doesn't crash completely.

I'm betting something like that is not offered in your 401k.

Call them and ask. Or look it up when you log in next. Go to the change investments options and a list of available options should pop up.

See these quotes?

Do the opposite.
 

throatpoker

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You could of just dumped everything into the S&P since 1984 and returned 8.5%. So the mix you're suggesting will basically perform just as he planned it, matching market returns without the volatility that some people can't stomach. Obviously the guy knows what he's doing it, but the portfolio could of returned more with a different mix and little active management. That's a fact. As far as commodities, it's definitely important to "hold" those as part of your overall portfolio. I suggest holding them though. The 01100010010000111's of gold/silver on a screen aren't going to do you much good during a real financial crisis.
 

CatDaddy4daWin

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You could of just dumped everything into the S&P since 1984 and returned 8.5%. So the mix you're suggesting will basically perform just as he planned it, matching market returns without the volatility that some people can't stomach. Obviously the guy knows what he's doing it, but the portfolio could of returned more with a different mix and little active management. That's a fact. As far as commodities, it's definitely important to "hold" those as part of your overall portfolio. I suggest holding them though. The 01100010010000111's of gold/silver on a screen aren't going to do you much good during a real financial crisis.
I think it's a good 401k plan but I also have another portfolio outside of my 401k where I try to take more risks and maximize returns.

And if there's a meltdown not even gold is gonna be a viable currency. It will be guns/ammo, food, and putang.
 

LineSkiCat14

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In a way, more confused than ever. LOL.

Some of the questions I've seen... My 401 is nowhere near 80k. I started about 5-6 years ago, but the previous employer did a 2% match and wasn't (and still not) making all that much. So even though my percentage is good, I'm only really starting to see growth with my current employer (of less than 2 years), which does 6% (I'm at 8% now, so 14% total).

I'm young enough to take risks, don't mind messing around with my 401 in the event I DO leave this company. But seeing as how I can't add to it anymore (assuming I go to new company), should I really just sit on it? Shouldn't I roll it over into the traditional IRA so I can keep adding my own money? It's only in the 20-30k range. I feel like it won't do a thing with that small amount of money unless I keep progressing it.
 

LineSkiCat14

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Thanks for the replies so far. For now, diversifying either my 401K or IRA is secondary. Sounds like something I should look into learning. But for now, seeing as the offer may be coming as soon as Friday, I need to figure out if I'd rather have that steady retirement building in the 401k or Stock Options for a chance at a bigger pay day.
 

Anon1640710541

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401k. No brainer.

You can't add into it once you leave the company, but you can start a new one with your next employer.
 

LineSkiCat14

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Well that's the thing. New employer doesnt offer one, current job does. It's one or the other. Unless you are saying 401k over SOs...

Not that these are the only criteria.. Just one of the bigger dilemmas. If i go to the company with stock options i just need to put money into an IRA each pay period and deal without a hefty match. Not a huge deal.. I'm good with saving money and putting it aside. Just not sure if that 6 percent match outweighs the SO.. Granted i have zero information on what the SO entails. Hopefully find that out soon.
 

LadyCat92

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At a bigger picture level, does the offering company offer significantly better pay and other benefits? The 401K is just an investment mechanism that companies offer, with potentially some kind of match. As other mentioned, you get lower fees, but it's still your money except for a small match from your employer. Most people like having a 401k because they never see the money and they generally have limited options within it so it takes some thought out of the process. If you're disciplined, you can put $5500 in a traditional IRA right now and if they offer a HSA you can put $6500 in it that is tax sheltered. Many online trading providing offer IRAs and you can have so much automatically invested each week, month, etc. plus purchasing traditional stock, ETFs, DRiPs, etc.

If the new company offers you a significant pay increase and other benefits are equal or better, then move. Take the difference in salary and put what you can in an IRA and then put the rest in other investments / savings.

I will say if you're moving to a startup, look strongly at their financials as well as their product offering and who the customers are. Ask a lot of questions. I was offered an executive position with a startup a couple of years ago. I was very interested but I dug into their financials and became leery. The day I was supposed to sign the offer sheet, I walked away and remained with my current company. A month later, the startup wiped out half the staff and turns out they only had enough funds to last them a few months.
 
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Why do people keep saying that 401k's have lower fees? That's not necessarily the case. Especially if you just spread your portfolio across a series of index funds like a vanguard admiral fund in a traditional or Roth ira.

Plus you need to check if your current employer has administration fees associated with an abandoned 401k. Some do and that could really eat into your returns.
 
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Dennis Reynolds

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Never heard of Ray Dalio, but this is terrible advice. If you're 70 years old, then yes 30% or even less stock makes sense. For a 30 year old though, it would be a big mistake to invest in anything less that 80% stocks. The OP has it right. A good mix for her would be like 50% large cap, 20% International, 20% small cap, 10% stable/bonds. Something along those lines.

Ray Dalio is an investment genius. Runs a massive hedge fund. If you have a billion dollars and all the time in the world to run that money, you should listen to him. But his advice should not be taken by random retail investor. He has the easy ability to transact across all asset classes with much better information than a random working man. You don't. At a young age, you want to be majority in equities. As you get older, more fixed income.

As for the options, what company is it? Are they likely to IPO? How long will you be there? If you tell me who the company is, I can give you an educated guess on that front, as I deal with about 2 dozen IPO's a year. IPO market is dead right now, but could be hopping again in 2016.