“I’ll do more with my retirement plan next year.” ”I can’t afford to contribute more than I already am.” ”My 401(k) is confusing/costly/ambiguous/inappropriate.” ”I’m going to have to work forever, so why bother when I need the money now.” These are collection of statements that both drive plan sponsors crazy and offer fodder for those trying to educate the masses on the value of doing as much as you can (if not more) to secure a retirement that, if you are even paying just a little attention to the chatter, more elusive than it has ever been.
So all of those statements about retirement sum themselves up in a simple “why bother”. As we head into the holidays, arguably the most expensive month we experience in any given year, is why we don’t do more. The lingering aftermath of what the next few weeks bring makes greeting the new year less appealing from a retirement point-of-view. Here’s why you should bother and a couple of simple steps to get closer than you are today.
The Contribution
The advent of the auto-enrollment of new hires into the 401(k) has done two things: it has given those that sponsor these plans a feel-good moment much like the Sally Field acceptance speech and it has given a huge swath of people access to their company’s plan that might have otherwise not bothered. And auto-escalation, the term used for keeping you in the plan and increasing your contribution year-over-year has created a new class of investor, more passively involved in the markets than any previous generation ever was. But the vast majority of those with access to a plan are there for other reasons.
What the 401(k) did was threefold: it allowed corporations to free their balance sheets of the pension, it also, like auto-enrollment created a new class of investor more or less thrust into the process and in tandem with all of those new participants, an unrivaled bull market lasting almost two decades until 2000. And a decade after that first stock market dive, one that many of these newly minted investors had previously never experienced, we are looking at the 401(k) in a new, more skeptical light.
And that skepticism is what confronts both previously enrolled and newly enrolled investors in their 401(k). According to Carl Zimmer; “The past and future may seem like different worlds, yet the two are intimately intertwined in our minds. In recent studies on mental time travel, neuroscientists found that we use many of the same regions of the brain to remember the past as we do to envision our future lives.” We can’t separate what has happened from what we see for ourselves in the future.
Our mental wiring keeps us at bay most of the time. It suggest that we should contribute and yet also suggests that there is inherent and undefinable risk in doing so. We have sought to define risk on numerous occasions (most recently on my daily radio show Financial Impact Factor). Yet we often come up short, scratching our collective heads as to why we need risk and how to convince our past selves it is wise to take it on.
Even without much in the way of risk, not contributing is still not an option. It is better than nothing. But if your approach is based on this something-is-better-than-nothing, you are doing your future a disservice. Yes you might fear the possibility of working longer than any generation ever has. Yes you might see that as a foregone conclusion. But at the center of the debate is the contribution.
You should make more of contribution than you are making now. This statement disregards any level of contribution you might be making, from as little as 3% (the standard auto-enrollment contribution) all the way up to those that make the maximum allowed by the IRS ($17,000 in 2012 with those over fifty allowed to contribute $22,000). In either case, you have underestimated what you believe you will need. For those at low end of the contribution spectrum, five percent will, in almost every instance, not impact your take-home pay (more but still not enough). For those making the maximum contribution, open a Roth IRA, the after-tax plan.
The Match
Employers are gradually returning to a company match. This unfortunately comes at the expense of other benefits previously considered sacrosanct (such as retired and current worker health care benefits). That is no easy hurdle for the average wage earner to jump. They see the cost of simply going to work as costing more than it did just five years ago. And we remember this.
Yet this is not viable excuse to not contribute at least the match offered. For those of us without matching contributions, which is a surprising number of plans in the small business arena, the effort becomes a burden you can bear now or later (when you retire). As I mentioned, 5% is the key minimum contribution. But it is up to you to continue to tweak it upwards, until you find the financial break-even point in your budget. Keep in mind these words: you are making money now, retirement is life based on what you have saved.
The Insurmountable Memory
2011 was a literal roller coaster ride. Had you listened to the pundits, you would have missed every uptick that the market had to offer as you retreated to cash. Yes there were bad quarters that were followed by fully recovered ones. And you would have emerged from such moves with far less than you wanted to have achieved but with your principle intact.
2012 promise much of the same. What will you do differently? What should you do differently? If you are using a target date fund, a mutual fund that seeks to rebalance periodically as you grow older, pick a date a decade or two beyond your retirement target. If you are using index funds, don’t focus too heavily in any one. Spread the indexed investments over a minimum of six funds, If your 401(k) doesn’t offer a large basket of index funds, ask that they be included in the plan. If your 401(k) offer exchange traded funds, use them as well. But be cautious that you aren’t using ETFs that are too narrow. If you are buying company stock with more than 10% of your contribution, back-off a bit.
I say this because the world will still be economically evolving in the next year and you should as well. Ignoring risk (which will always be there) and relying on decisions based on what has happened as you form your vision of the future (the greatest deterrent facing most plan participants) have nothing to do with the investments, the plan or the market. Overcoming them is much harder than embracing them – but necessary.
Related posts:
- Your 401(k): When Your Plan Becomes Transparent
- As We Enter 2012: A Few Thoughts on Retirement
- Your 401(k): The Illusion of Free Money
- Retirement Planning: A Cooking Lesson
- Your Financial Future: Our Annual Attempt at Predicting the Future in 2012
Retirement and Your 401(k): Changes in 2012
“I’ll do more with my retirement plan next year.” ”I can’t afford to contribute more than I already am.” ”My 401(k) is confusing/costly/ambiguous/inappropriate.” ”I’m going to have to work forever, so why bother when I need the money now.” These are collection of statements that both drive plan sponsors crazy and offer fodder for those trying to educate the masses on the value of doing as much as you can (if not more) to secure a retirement that, if you are even paying just a little attention to the chatter, more elusive than it has ever been.
So all of those statements about retirement sum themselves up in a simple “why bother”. As we head into the holidays, arguably the most expensive month we experience in any given year, is why we don’t do more. The lingering aftermath of what the next few weeks bring makes greeting the new year less appealing from a retirement point-of-view. Here’s why you should bother and a couple of simple steps to get closer than you are today.
The Contribution
The advent of the auto-enrollment of new hires into the 401(k) has done two things: it has given those that sponsor these plans a feel-good moment much like the Sally Field acceptance speech and it has given a huge swath of people access to their company’s plan that might have otherwise not bothered. And auto-escalation, the term used for keeping you in the plan and increasing your contribution year-over-year has created a new class of investor, more passively involved in the markets than any previous generation ever was. But the vast majority of those with access to a plan are there for other reasons.
What the 401(k) did was threefold: it allowed corporations to free their balance sheets of the pension, it also, like auto-enrollment created a new class of investor more or less thrust into the process and in tandem with all of those new participants, an unrivaled bull market lasting almost two decades until 2000. And a decade after that first stock market dive, one that many of these newly minted investors had previously never experienced, we are looking at the 401(k) in a new, more skeptical light.
And that skepticism is what confronts both previously enrolled and newly enrolled investors in their 401(k). According to Carl Zimmer; “The past and future may seem like different worlds, yet the two are intimately intertwined in our minds. In recent studies on mental time travel, neuroscientists found that we use many of the same regions of the brain to remember the past as we do to envision our future lives.” We can’t separate what has happened from what we see for ourselves in the future.
Our mental wiring keeps us at bay most of the time. It suggest that we should contribute and yet also suggests that there is inherent and undefinable risk in doing so. We have sought to define risk on numerous occasions (most recently on my daily radio show Financial Impact Factor). Yet we often come up short, scratching our collective heads as to why we need risk and how to convince our past selves it is wise to take it on.
Even without much in the way of risk, not contributing is still not an option. It is better than nothing. But if your approach is based on this something-is-better-than-nothing, you are doing your future a disservice. Yes you might fear the possibility of working longer than any generation ever has. Yes you might see that as a foregone conclusion. But at the center of the debate is the contribution.
You should make more of contribution than you are making now. This statement disregards any level of contribution you might be making, from as little as 3% (the standard auto-enrollment contribution) all the way up to those that make the maximum allowed by the IRS ($17,000 in 2012 with those over fifty allowed to contribute $22,000). In either case, you have underestimated what you believe you will need. For those at low end of the contribution spectrum, five percent will, in almost every instance, not impact your take-home pay (more but still not enough). For those making the maximum contribution, open a Roth IRA, the after-tax plan.
The Match
Employers are gradually returning to a company match. This unfortunately comes at the expense of other benefits previously considered sacrosanct (such as retired and current worker health care benefits). That is no easy hurdle for the average wage earner to jump. They see the cost of simply going to work as costing more than it did just five years ago. And we remember this.
Yet this is not viable excuse to not contribute at least the match offered. For those of us without matching contributions, which is a surprising number of plans in the small business arena, the effort becomes a burden you can bear now or later (when you retire). As I mentioned, 5% is the key minimum contribution. But it is up to you to continue to tweak it upwards, until you find the financial break-even point in your budget. Keep in mind these words: you are making money now, retirement is life based on what you have saved.
The Insurmountable Memory
2011 was a literal roller coaster ride. Had you listened to the pundits, you would have missed every uptick that the market had to offer as you retreated to cash. Yes there were bad quarters that were followed by fully recovered ones. And you would have emerged from such moves with far less than you wanted to have achieved but with your principle intact.
2012 promise much of the same. What will you do differently? What should you do differently? If you are using a target date fund, a mutual fund that seeks to rebalance periodically as you grow older, pick a date a decade or two beyond your retirement target. If you are using index funds, don’t focus too heavily in any one. Spread the indexed investments over a minimum of six funds, If your 401(k) doesn’t offer a large basket of index funds, ask that they be included in the plan. If your 401(k) offer exchange traded funds, use them as well. But be cautious that you aren’t using ETFs that are too narrow. If you are buying company stock with more than 10% of your contribution, back-off a bit.
I say this because the world will still be economically evolving in the next year and you should as well. Ignoring risk (which will always be there) and relying on decisions based on what has happened as you form your vision of the future (the greatest deterrent facing most plan participants) have nothing to do with the investments, the plan or the market. Overcoming them is much harder than embracing them – but necessary.
Related posts: