The big mistake is that we’re using misleading language when it comes to retirement.
New employees will be familiar with this: older colleagues incessantly bombarding you with advice to start saving for retirement as early as possible. Personal finance books go on about why it’s essential to save for retirement. Surveys are done and studies get published about how much you should be putting away for your golden years.
Sure, it only seems logical. You’re putting aside money for the future and letting it grow over the years, which is the definition of saving. But the very word ‘save’ has a double meaning. What you’re doing is putting money into an investment portfolio for retirement.
It’s important to acknowledge that you are now an investor, no matter if you have a 401(k) or IRA. You are now putting your money to work for you in the stock market instead of letting it sit stagnant in a savings account.
Avoid Making this Mistake
Make sure that when you are setting up your 401(k) that you are selecting actual investments, and that you are not literally saving into your account. Sure, at the maturation of your policy, you may get a decent lump sum, but it would not be enough to comfortably retire. It would also be a huge discrepancy from what you could make if you properly invest the money and reap the benefits of compound interest.
To do some simple calculations, if you end up putting an average of $500 per month into a 401(k) for 40 years estimating an average 6% market return, you would end up with $933,714.65 upon retirement. But if the money just sat in a savings account it would only yield $240,000 upon maturation based on the market average 0.01% annual percentage yield on their savings accounts. Even with the highest savings rate of 2%, the money in savings would not exceed $370,000.
If you have a 401(k) or IRA, it would be prudent to check in on it, and make sure that your contributions are going into your investment portfolio to maximize your return upon maturation.
Stop Procrastinating and Take Control
One main reason that people often procrastinate about adjusting their 401(k)s is that they don’t understand all their investment options. There are many terms like mid-cap, large-cap which can confuse and intimidate people from confronting what they do not understand.
There is rarely any guidance as to which investments are best for an individual’s risk tolerance or time frame for maturation. So how does one go about learning how to set up an investment portfolio that is aligned with their personal interests?
How to Get Started
The simplest way to make sure you are on the right track is to consider a target-date or life-cycle fund. This is directly related to when you decide to retire and these funds are usually offered in 5 year increments.
You can also set up your fund to start with an aggressive portfolio, and rebalance it to become more moderate and eventually conservative as it approaches the set retirement year. You should start off aggressive and take more risk when you have time to withstand the variations of the stock market
There are those that say that target date funds go hand in hand with higher fees, which takes away from the future you. What that means is that one can end up with an investment portfolio that starts off too conservative, missing out on critical returns in the first few years.
Whichever method you choose, make sure that your money is being invested and not saved in a retirement account. If you need any other financial advice, feel free to reach out to the Financial Helpers. We are ready to assist you.
