By now we’re all well aware that Generation Y and younger will most likely not see much if any of their social security contribution and pension plans are a thing of the past. So, you better be thinking about those golden retirement years ASAP unless you plan to work your entire life. Hopefully, I’m preaching to the choir here but I’ve spoken to way too many people who haven’t started taking advantage of their employers 401(k) or other investment opportunities to not mention it. Compounding interest, company match and tax-cuts are wonderful things and even more so if you start early.
401(k) programs are virtually impossible to mess up, but there are a few mistakes people tend to make. In his article Avoid These Four 401(k) Mistakes at Yahoo! Finance, Christopher Davis points out the following commonly made mistakes with 401(k)s. Below are his points with my commentary.
#1 – Not Investing at All: Probably no reason to beat this dead horse. If your company doesn’t have a retirement plan then I urge you to check out Roth IRAs.
#2 – Investing Without a Plan: Understand how long you have to invest and adjust your risk accordingly. At 29, a relatively young age, I can afford to be a bit more risky with fund allocations. As I near retirement age I should become more conservative with where I squirrel away my precious investment. Basically, the older I get the less time I’ll have to earn back any possible losses.
The program I’m currently in gives me the option to participate in a fund that automatically adjusts over time or I can pick and choose where to invest. A lot of companies offer this convenience; check it out with your HR manager. Keep an eye on your investment in terms of your long-term plan. Not monitoring your money leads us to mistake #3.
#3 – Letting Your 401(k) Run on Autopilot: This not to suggest a weekly or even monthly balance check-up is required, although I tend to error in this direction at times. What you should be doing is checking your balance and allocations at least once a year. Revisit your long-term plan and adjust accordingly if need be. Make sure your funds are performing well and check to see if you could or should invest in other, better performing funds.
#4 – Borrowing from Your 401(k): This is allowed but should be avoided at all cost. Any money borrowed will be missing out on that compounding interest I mentioned earlier. By borrowing from your 401(k) you may be setting yourself up for possible penalties, taxes and other fees.
I’m often amazed by how many of my friends are not taking advantage of their company’s 401(k) programs. Please. Just do it. Blindly trust me on this one and you can buy me lunch in 30+ years, as a thank you, with a very tiny amount of the hundreds of thousands of dollars (possibly millions if you start right now) you’re sure earn.
4 comments:
I know several people in the same situation. I feel for them until I see them out at the bar buying rounds. I wonder why they can't throw down $5 a week or even month toward their future. In 35yrs $5/week ($20/month) grows to 20K in a simple ING savings account (4.5% APR). Imagine if that money was going into an investment account PRETAX.
I know it's difficult or even impossible for some people to save anything at all, but I know a lot more can do it than actually do.
Sorry for the rant. I don't mean to offend anyone if I have.
We'll get our soc. sec. Remember, there will be a few gigantic waves of pop. explosion that will follo us down the pipes.
Ok. Once again AC you manage to inlighten my day....
I for the first time ever I have become employed with a company that offers 401k...with that said, you can clearly understand I had absolutely no idea what it was even about. I put in 5% off my check every payday, which isn't alot but it is something. My company matches me 3%. Even though I am quite sure I still don't understand what or where my money is going. I feel good saying "Yeah, I have a 401k!"
Ok, I am sure you have had quite enough of my idiocy for one day.
Ok, hold the phone. I just looked over and read the other comments. I need every penny I can get too, considering I only make 7.584 an hour and I went to school and got certified for what I do. BUT, I love my job and my employer and my employer didn't set my wages, our union did. So I just know that next summer when our contract is up and its time to negiotate our new one. I will be the first person in my companys history to fight for a pay increase. I am not sure why nobody has yet, but our deligate will defiently be hearing from me. So back to what I was saying, how can you not afford to put just a couple dollars away, just think of it as taxes. They take that no matter if you like it or not. That is how I look at it. I get right around 33 dollars taken from me a paycheck. So only 66 dollars a month...AC can you tell me how that would figure out for me? Since I really don't seem to know anyone that knows much about them. Or do I need to send a check first?
Leslie - Thanks again for the kind words.
I'd be happy to help out with explaining 401ks and other investment vehicles as much as I can, but do know that I'm not formally educated in finance and a lot of what I've learned is from either completely messing up my own finances and/or reading about how to fix pit-falls.
A great resource to start to understand finances is at www.bankrate.com and also to regularly read Young and Broke which you can find a link to from the right side of this blog.
Congrats on the new job!
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