Save Early, Invest Wisely, Contribute Consistently!
Those are the keys to saving for retirement through a 401k plan – or any other employer sponsored plan for that matter. You must save early and often, invest wisely and contribute consistently to get the most from your 401k plan at work!
401k investing has it’s own set of challenges and problems:
- Limited mutual fund options
- Insurance and annuity based 401k plans are generally sub-standard
- Lack of investment education
- Poor diversification
- High investment fees
- Lack of index mutual fund options
The good news is with the new ERISA rules, investment options are getting better! The new 408b2 disclosures require all fees and expenses to be made available to plan participants. This means greater competition for your dollars as your plan sponsor can more easily shop fees.
It also means plan sponsors will now be forced to make decisions in the best interests of their employee participants. With the new rules employers must maintain a prudent watch on their investment fees, investment options and other 401k plan factors. If they’re caught sleeping on the job employees can sue for breach of fiduciary responsibility.
Save Early!
The compounding of investment growth and income over time is your most powerful weapon for retirement. Saving early is the key. Even small amounts early in your lifetime can add up to a huge retirement nest egg over time.
Pick a percentage – at least 10% if you can afford it – and save it from every paycheck. After a few paychecks you won’t hardly miss it and you’ll be excited when those quarterly 401k plan statements show up in the mail and you see your retirement nest egg growing!
Invest Wisely!
Many 401k investors make the mistake of allocating their contributions to the best performing mutual funds. This is exactly the WRONG approach! Other 401k investors allocate an even percentage to every investment option – if there are 10 mutual funds they’ll put 10% into each one. This is a poor approach as well!
The most appropriate approach to wise 401k investing is to forget the fact that it’s a 401k! Your investment plan and your financial plan trump the “type” of account you’re investing in. It’s more important to have a proper asset allocation model in place before you invest. That asset allocation model should be matched with your personal risk profile.
The problem becomes when there aren’t sufficient investment options to properly diversify your investments in your 401k. Most plans however do have enough options, though you may be stuck with a target date mutual fund or a balance mutual fund of some sort. Generally they are reasonable options for your 401k contributions however.
Contribute Consistently!
Another gigantic mistake 401k investors make is stopping their retirement plan contributions when things get rough. For example, in 2008 when the markets dropped substantially mutual fund inflows dropped. Investors stopped putting money into their retirement plan 401k’s because they were fearful of the future.
This is exactly the opposite of what a wise 401k investor should be doing. By default if you’re investing in your 401k plan you have years (generally) before you’ll retire, and years before you’ll need the funds in your retirement plan.
If you have years to invest, the best 401k investment advice is to increase your contributions if possible when the markets are down! It’s the opposite of what the masses do – but it’s the best thing to do!
When the markets are down you can buy MORE shares as lower prices. When the markets bounce back, you’ll be on top with a far greater number of shares in your account!
When tuna fish goes on sale at the store, you buy more and stock up! Investing is the same way when you’re looking forward to retirement in several years. You should stock up on mutual fund shares when the price is cheap!
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