Criticizing 401(k) plans has become a cottage industry. With great regularity, financial writers still complain about the loss of traditional pensions and say it’s asking far too much to expect people to be able to figure out how much to contribute and what investments to choose.
The most recent example is an LA Times article claiming, Your 401k Won’t Give You a Decent Retirement.
At best, such reporting is incredibly unhelpful.
The pain of the Great Recession drove many people out of the stock market, and some have stayed out, missing one of the greatest bull markets ever. Yes, the ride gets bumpy sometimes, but the stock market represents most people’s best opportunity to build the sort of wealth they’ll need to provide for their families long-term. And 401(k) plans—or IRAs, if you don’t have access to a 401(k)—are, for the most part, excellent, tax-advantaged vehicles through which such wealth can be built.
Control what you can
While it’s true that a 401(k) plan won’t give you a decent retirement, it does give you the opportunity to build the sort of wealth you’ll need for a secure retirement.
The key is to focus on controlling what you can control, such as the following three factors.
1 – How much you contribute each month. This is the most important and difficult investment decision you have to make. It requires giving up something today (spending money) for a future reward (not having to work or move in with your kids in retirement), and we seem to be hard-wired to dislike delayed gratification.
But think of it this way. A really big-picture, broad-brush ideal budget would look like this: Give 10%, save/invest 10%, and live on the rest. If you work 40 hours a week, that means the money you earn on Monday morning is for giving to God; the money you earn on Monday afternoon is for saving/investing for your family’s financial security; and all the rest—all the money you earn Tuesday through Friday—is for spending. That’s not so unreasonable, is it?
Are you setting aside at least 10% of your gross income for saving/investing?
2 – How you invest the money. Never in the history of the stock market has it ever been easier to be an investor. With the invention of target-date funds, someone with virtually no knowledge about investing can easily get some of the most important investing decisions right, such as your optimal asset allocation.
All you have to do is choose a target-date fund with the year closest to your intended retirement date as part of its name and you’ll get an investment portfolio that’s designed for someone with your investment time frame. Planning to retire in or around 2040? Choose the Fidelity Freedom 2040 Fund or the Vanguard Target-Retirement 2040 Fund or a similarly named fund from a different fund company.
As you get older, the fund will even automatically change its stock/bond allocation to become increasingly conservative. Very helpful, very easy.
Target-date funds aren’t perfect, but they’re a solid option, especially if you want to keep things simple. (If you want more customization, either to pursue better gains or add more downside protection, consider subscribing to a low-cost investment newsletter/service, such as the one offered by my day-job employer.)
3 – How long you leave it alone. A retirement account is for retirement. I know—shockingly complicated, right? The problem is that it’s really easy to get your hands on the money in such accounts well before retirement via a low-interest loan.
Don’t take the bait! Remember, a retirement account is for retirement. Add to it with automatic monthly contributions and don’t make any withdrawals until retirement.
How are you doing with this whole “control what you can control” aspect of investing?
Thanks for the info on the target date funds. I have been hesitant to do anything other than the retirement plan through the county my new employer offers. I am just starting this new career (5 months in), have hardly any retirement saved (except a very small >$2K in a Roth), and I know I need to do more than what my employer and I are doing together. (The Texas County retirement plan is great- a 12% match!- but I only have less than 11 years to retirement. I have to get more aggressive!)
You’re welcome, Tammy. That employer match is the best deal going. If it’s dollar for dollar, that’s a guaranteed 100% return on your money!
One word of caution. When you say you have to get more aggressive, I’d encourage you to not take on more risk than you should. But if you mean you need to contribute more to your retirement plan, absolutely.