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WTH? My 401K fixed fund just dropped from 3.75 to 3.15
10-04-2019, 06:55 PM
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#1
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Recycles dryer sheets
Join Date: Sep 2018
Posts: 348
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WTH? My 401K fixed fund just dropped from 3.75 to 3.15
So, a goal of mine was to put enough money in our companies Mass Mutual 401K fixed fund to give me a guaranteed $50,000 per year. I figured that would be $1.32M @ 3.8% (the rate 6 months ago when I hatched the plan). We would have an additional $1.32M in the market to put our AA at 50/50. My wife absolutely loved the plan because her "female security genes" liked having the guarantee. We are really frugal and $50K goes pretty far for us. It dropped to 3.75% at the beginning of last quarter, which wasn't a huge deal but a few days ago at the start of Q4 it dropped to 3.15%.
How do you guys handle changes like that? Do I just continue with my plan (moving money to the fixed fund) with the hopes that it will go back up in 2.5 years when I retire or was I unrealistic with the hopes of 3.8% in the 2020's?
So you don't have to grab your calculator, $1.32M @ 3.15% = $41,600 / year. A substantial drop. I've been moving $50K per week from an S&P fund to the fixed fund. We are around 40/60 at this point in the 401K.
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FIREd @ 55 (March 1st, 2022)
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10-04-2019, 07:43 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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I handle it by already planning for what I would do if my initial plan did not pan out especially with unrealistic expectations.
It reads like you want a SPIA (single premium immediate annuity) eventually. I wouldn't, but I am not you.
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10-04-2019, 07:47 PM
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#3
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Moderator
Join Date: Nov 2014
Posts: 9,101
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Quote:
Originally Posted by rmcelwee
was I unrealistic with the hopes of 3.8% in the 2020's?
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I don’t know if unrealistic is the right word, but while the principle in a fixed fund is pretty darn secure, interest rates are fluid. The current trend is down so I suspect that your 3.15 will go lower in the future. No crystal ball here but I wouldn’t plan on rates going higher for awhile. Read up on zero or even negative interest rates. May not happen but it’s important to understand how interest rates can change. The forces that would bring rates up do not appear to exist. I’m no authority, but the only thing I know of that brings rates up is a robust economy with the thought that it’s growing and inflation. If they go up due to inflation, that’s sort of a zero sum game. On the economy, I don’t see much saying we’re in for a boom. May not get a recession, but I don’t know of anyone predicting a situation where rates would go back up in the next few years.
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10-04-2019, 07:50 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,264
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It sounds like you didn't understand that the interest crediting rate would be adjusted periodically.... but they all work that way.
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10-04-2019, 09:50 PM
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#5
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Recycles dryer sheets
Join Date: Sep 2018
Posts: 348
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Quote:
Originally Posted by pb4uski
It sounds like you didn't understand that the interest crediting rate would be adjusted periodically.... but they all work that way.
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I fully understood that it would be adjusted. 16% drop in one day was not what I expected.
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FIREd @ 55 (March 1st, 2022)
“A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness”
- Albert Einstein
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10-04-2019, 11:09 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Mar 2012
Posts: 3,931
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Quote:
Originally Posted by rmcelwee
I fully understood that it would be adjusted. 16% drop in one day was not what I expected.
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So, by the same logic, at this time it will simply take you an extra 16% of one year (2 months) to get your $50k. That's what happens in a declining rate environment. When they adjust that rate again in January, don't be surprised if they go to 3.0% or 2.75%.
There have been two quarter point rate cuts in the past quarter, so the drop in your fixed fund yield is not surprising at all since the rate adjusts only once a quarter. Did it not go up by a similar amount in one day around this time last year?
Imagine what would have happened if the Fed cut rates by 0.5% or 1.0% this last time as some had been pushing for?
This is basically a replay of what happened to retirees relying on fixed income ten years ago when rates were dropped to zero - we aren't there yet, but it may be the case that's where we are headed once again.
I keep a copy of my March 2010 cash reserves money market fund statement tacked to the wall in front of my computer to remind me and make it ok when I lock in to a 2% CD. Right on the bottom it says "30-Day Yield: 0.01%", and that is only because the fund manager voluntarily waived all management fees.
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10-04-2019, 11:27 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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There are high-yield bond funds that still pay more than 5%.
Of course there's the risk of default. This year, the largest default was by PG&E, and the next one is by Weatherford, an oil service company.
You can check out the bond fund JNK. Yes, it stands for "junk". The fund manager is not bashful.
PS. I just found some junk bond funds that pay more than 9%. Holy cow! How is that possible?
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"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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10-04-2019, 11:55 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I have never heard of these genes. Could you explain, please? Being female, I want to know as much about them as possible. Thanks so much!
Quote:
Originally Posted by rmcelwee
My wife absolutely loved the plan because her "female security genes" liked having the guarantee.
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10-05-2019, 12:04 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 1,691
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Lets think this through: bad economic times, your stocks will drop and so will your interest rate on your fixed fun, both could drop 16% or more in one day. You should be able to handle this with a yawn.
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10-05-2019, 12:36 AM
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#10
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Thinks s/he gets paid by the post
Join Date: Apr 2012
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"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for." - Epicurus
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10-05-2019, 04:42 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Jan 2017
Location: Hog Mountian
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Quote:
Originally Posted by Amethyst
I have never heard of these genes. Could you explain, please? Being female, I want to know as much about them as possible. Thanks so much!
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They're like "Guess" genes.... Honey, guess what the hell happened to our portfolio today??!!
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10-05-2019, 04:55 AM
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#12
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Full time employment: Posting here.
Join Date: Aug 2013
Location: New Jersey
Posts: 910
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Your original plan is sound - I would continue with it. When you are retired in 3 years, you could always adjust your spend plan if necessary. For most on this board that are expecting to receive Social Security, the draw down rate is not a straight line. You should expect to spend more during your earlier years until SS kicks in, at which time the draw down rate is significantly reduced. One example is a 4% withdraw rate from retirement to SS, when the withdraw rate is reduced to 1%.
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10-05-2019, 05:15 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2018
Location: Tampa
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I would also stick with your original plan. I also have a Stable Value fund at my 401k held at Massmutual.
My rate adjusts every June and Dec.
It is currently 3.97% gross, 3.83% net. I expect it to go down in Dec.
It is close to risk free and even your 3.15% rate is still a good bond substitute yield.
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TGIM
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10-05-2019, 05:17 AM
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#14
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Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,983
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Other than being unaware of falling interest rates I don't see a problem here. A 50/50 allocation with substantial assets. Continue on your path and when the time comes draw from your accounts to maintain your desired allocation. If you want to gamble that stocks are too high now, continue to put your new money into the fixed fund and slowly return to your desired allocation after retirement.
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Took SS at 62 and hope I live long enough to regret the decision.
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10-05-2019, 09:58 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Quote:
Originally Posted by teejayevans
Lets think this through: bad economic times, your stocks will drop and so will your interest rate on your fixed fun, both could drop 16% or more in one day. You should be able to handle this with a yawn.
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I have never panicked, been through much worse. But yawning, no.
I have to stay awake, and start tightening my belt. It would not be time to fall asleep.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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10-05-2019, 10:30 AM
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#16
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Thinks s/he gets paid by the post
Join Date: Jan 2018
Location: Elyria, OH
Posts: 1,937
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Quote:
Originally Posted by NW-Bound
There are high-yield bond funds that still pay more than 5%.
Of course there's the risk of default. This year, the largest default was by PG&E, and the next one is by Weatherford, an oil service company.
You can check out the bond fund JNK. Yes, it stands for "junk". The fund manager is not bashful.
PS. I just found some junk bond funds that pay more than 9%. Holy cow! How is that possible?
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Yes, I'm sitting on some Weatherford individual bonds myself, although they were not rated junk when I bought them, one of the reasons I've been moving to ETFs. I do use some "junk" bond ETFs and you do really have to look under the hood, as you should with all investments. Some are junkier than others.
A couple I'm using are USHY and FALN. Also PFF and PSK, for preferred stock. But even a long-term corporate bond ETF like IGLB or SPLB will throw off decent cash flow right now. SPYD is a nice high dividend stock ETF.
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