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I have seen broad advice against 401k loans. I question this. Why shouldn't I consider a 401k loan to myself within my bond allocation?

Assuming I have trust in my employment cash flow and taxable assets to be able to cover loan payback should I leave my job, is there any reason to not allocate a portion of my age-appropriate bond allocation to a 401k loan to myself? I'm supposed to have 30-40% bonds at my age. So how about a loan of 5-10% of bond allocation, or 1.5-4% of my total invested assets to myself?

In an abstract sense, I can assess my creditworthiness better than I can that of some writer of commercial paper.

On the loan side, I kind of don't care what I'd use this for. I don't buy "opportunity cost" as material (but convince me if I am wrong) if the amount my investor-hat loans to my daily-life hat is as an investment, limited by bond allocation.

Wearing my daily-life hat I would have to decide if a loan for consumption (say a vacation; I could have bang-up trip for 2% of net worth) would be worth it, and the payback cash flow impact acceptable. My investor-hat shouldn't care at all.

EDITED: Is this clarifying? The internet suggests at my age I should be 60/40 stocks/bonds. I am trying to choose a bond investment.

Oh, it looks like my 401k can loan $5000 to an individual at 4%. I have information to believe this individual is as safe a risk as the United States Government. 4% is a better return than a Series EE bond.

Why shouldn't I have my 401k loan the $5000 to the individual as part of my bond allocation?

For this decision, I don't believe I care what the individual is going to do with the money; it happens this individual is me.

What is wrong with this reasoning?

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    I don't quite understand your question. Are you asking whether it is reasonable to take a risk in reducing your retirement fund in order to enjoy short-term benefits (like a vacation)? I don't see how the bond allocation enters into it, or what you mean by "my investor-hat shouldn't care at all". – BrenBarn May 21 '15 at 17:17
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    If you don't think there is an opportunity cost to having your money invested, why invest at all instead of sticking the money in your mattress? Or absent that, just use the money instead of putting it in your retirement fund in the first place? – JohnFx May 21 '15 at 17:43
  • @BrenBarn I extended the question. I mentioned the use of the money to be illustrative, but I believe it is chaff with respect to the decision before me – user662852 May 21 '15 at 18:06
  • @user662852: Interesting. So you are actually considering the loan to yourself as an investment. But will you do this continuously (i.e., take out a new loan once you pay the old one off)? If not, what will you invest the money in when you pay it back into the 401k, and why not just invest it in that in the first place? – BrenBarn May 21 '15 at 18:19
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    Check the terms of your 401K plan and be sure you understand all of the conditions that call the loan back in, such as leaving your job. Any loans not paid back are treated as a withdrawal, with the associated penalties, if applicable. – Kent A. May 22 '15 at 2:22
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A better idea if applicable is to borrow 50K (max allowed) to buy a house and pay interest to yourself instead of a bank. And none of that origination and closing fees lost to the lender

  • I had asked the question mostly to challenge the conventional wisdom, and not actually have an actionable plan. Your answer has my daily-life decisionmaker considering retiring a 6.49% secondary mortgage. – user662852 May 22 '15 at 15:36
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At first blush, this seems like it makes sense - assuming, like you say in your question, that you are perfectly confident in your ability to repay (even if you need to pay the balance in full if you lose your job), then this seems like a guaranteed 4% return, and a reasonable part of your retirement portfolio.

Where it falls apart, though, is that you're paying yourself. You're just taking the money out of one pocket and putting it in another. So really you're getting a guaranteed 0% return. You're losing the compounding growth of the loan amount while it's out of your accounts, and the fact that you can afford the 4% interest means you could have been putting that into a requirement account as well aside from the loan - so it doesn't really count as "interest" in the sense that your money is passively making money for you.

So ultimately: no, it shouldn't count as part of your bond allocation.

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    +1 So really you're getting a guaranteed 0% return that's the bottom line really. – littleadv May 21 '15 at 18:33
  • Whether or not I make the loan to myself, I contribute 17500 to the 401k and 6000 to Roth IRA. – user662852 May 21 '15 at 19:05
  • @user662852 Sure, but that 4% interest you're paying yourself could have been invested in another account (maybe a taxable retirement account if you've maxed out your other options) while the loan amount, still in your 401(k), makes money on its own per your asset allocation. – Charles May 21 '15 at 19:12
  • However, if you already contribute the max to your 401(k), this is a way to contribute up to 4% more – ps2goat May 21 '15 at 20:16
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    "So really you're getting a guaranteed 0% return." That's true regardless of whether he gets a loan from his 401k or an outside source. (In fact, with an outside loan, it's lower than 0%, because an outside loan interest rate will usually be higher than the guaranteed return bond rate, so 401k is better.) You're saying it's bad compared to not taking a loan. Well of course. But the OP only says he would only do it if his "daily-life hat" considers it worth it to take a loan. So the comparison is between a 401k loan and an outside loan. Whether to take a loan is already considered. – user102008 May 21 '15 at 20:17

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