Having a 401K from your current or former employer is one thing. Knowing what to do with it is something entirely different. One of the most common mistakes many people make is to assume having a 401K plan is having a retirement plan. This misconception is common, but couldn’t be farther from the truth. Many of us would have a difficult time even telling our spouse what the money in the 401k plan is invested in. Some are even embarrassed to admit they think the employer makes the decisions for them and don’t even realize they are in complete control of the money.
In its most simple form, a retirement plan is having a strategy for how assets are accumulated and saved during your working years, then gaining a general idea of how much income you will need during retirement and where that income will come from. This is obviously a very involved, important and structured process that takes considerable thought, time and planning. There are many methods and vehicles to utilize to achieve your goals, one of which is you’re company’s retirement or 401K plan.
Minimizing the importance and advantages of a 401K plan can be one of costliest mistakes you can make throughout your earning years.
For some, the reasons to make regular investments into a self directed (401K) plan is obvious, to others it can be a bit more obscure. One of the best long term benefits is what we like to call “forced savings.” This is where you take the emotion and thought process out of having to save money for you and your family – Pay Yourself First. By contributing to your plan, a percentage from each paycheck, say anywhere from 3% and higher, you are saving money each and every month whether or not you try.
One of the other long term benefits is known as dollar cost averaging. When you contribute portion from each paycheck, you are effectively purchasing investments each month at various prices as the markets fluctuate up and down. This takes the short term timing aspect out of the equation and over the long term, gives you a fighting chance.
Once you have some “real money” saved up in the account, (this number is different for everyone) then you need to begin thinking about how to invest in the most efficient and safe way possible. One one hand it’s reasonable to have your normal contributions invested in a small variety of equity and fixed income mutual funds and keep it that way for the entire time. On the other hand, the larger percentage of money accumulated in the account should be managed the same as all your other investments or assets. This is real money with a real purpose, with real consequences if done incorrectly. For example, you must realize (or get the proper advice) when it’s time to take perceived risk and when it’s time to be ultra conservative. If the stock market has just risen significantly over the last year, and your account value has risen nicely, then you might want to think in terms of adjusting the money invested in stock funds to a more conservative style. Conversely, if the stock market just decreased by a lot and most everyone is becoming pessimistic, then it may be a good time to take on a little more risk. You see, most of the time, the markets operate exactly opposite to conventional wisdom. When stocks go lower, our emotions tell us they are risky because we realize that the value of our current investments decreases, however in reality, as a market continues lower, it gets less risky. Think in terms of the recent rise in Gold. Most people think that gold is not a risky investment because it keeps going higher and the media is very positive on the investment. However, in reality, the higher it goes, the more risky it becomes because as we’ve seen too many times, anything tied to the stock market or similar investments tend to take the escalator up and the express elevator down.
Your first objective is save money. Second objective is not to lose any money. Third objective is the make a reasonable return over a long period of time.
If you are not comfortable making investment decisions and choosing the funds that are available within your plan, then seek out the proper advice to do so. DON”T IGNORE YOUR MONEY.
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