Today I want to talk about how retirement does not have to be just a dream. It is not something that only the hardcore committed people that save like maniacs can achieve. It is not just for people that only eat rice and beans and set aside 60% of their take home pay in savings / investments.
In fact, you too can retire if you take some simple steps and give your investments enough time to grow. And I’m going to show you some of these simple tips in today’s article.
I’m even going to help you answer the question, “How should I invest my 401K?”
But first, I want to tell you an unlikely story that actually serves as a contrast to how easy retirement planning can be.
The Rock Star
When I was in high school (so we’re going way back here), there was a student about a year younger than me. Very bright, very intelligent, but more importantly, he was very committed to whatever he set his mind to.
And I mean VERY committed.
He became interested in playing guitar in high school. As far as I know he had no other musical background at any point earlier in his life. He specifically became interested in rock ‘n roll, especially the “hair band” variety. You know the type… a bunch of dudes with long hair, with tons of product in it, playing wailing guitar solos. Remember the 1980’s?
That’s the type.
As I was saying before, this guy was super committed to whatever he set his mind to. So he started practicing guitar every day. And not just for like an hour a day. I’m talking like 6 hours a day or more.
He bought guitar books and studied and rehearsed through them. He bought the books that showed exactly what all the big “hair bands” were playing on their albums. He practiced, practiced, and practiced.
Before you know it, he was playing wailing guitar solos that sounded just like the real musicians. And he did this in a span of say 6 months if my memory serves correct.
To put this in perspective, I had been playing guitar for years. And I never could do all the crazy guitar solos this kid was doing. -Alright, I’ll admit it…I could never do ANY of the crazy guitar solos.-
But he didn’t just stop at mastering the guitar. He took on “The Look” of an 80’s hair band guitarist. If you can remember the lead guitarist from Aerosmith, Joe Perry, that’s pretty much what this guy looked like.
And we were in high school in a small rural town. Nobody did that kind of stuff. He stood out from the crowd big time and in a good way too. He stood out, not as a loser, but more as a hero / free spirit.
My wife (we weren’t married at the time) vividly recalls a time when she was sitting in the bleachers at our team’s Friday night football game. The guitarist was there with his long 80’s “hair band” hair all over the place, looking like a complete rock star.
And then she saw a little kid come up to the guitarist with a pen and a pad of paper in hand… And asked for his autograph.
Let that sink in for a moment. We’re in a small town, at a high school football game, and this student was being asked for his autograph!
All those hours of practicing guitar, of playing in a rock band, of letting his hair grow out (that took more than a couple of months), of cultivating “The Look” of a rock star… and surprise surprise, he gets treated like a rock star… With someone asking him for his autograph.
Now that’s commitment!
What’s this got to do with retirement?
I share that story to illustrate what dedication and commitment can do for you. But I also share it to give you the good news – You don’t have to work that hard for your retirement! You just need to be committed, and it doesn’t take any extra time on your part.
You probably have some fantastic opportunities available to you that will help you retire the way you have always wanted. Do you have access to a 401K plan through your employer? Maybe it’s a 403B plan? In other words, do you have an opportunity to put aside pre-tax dollars from every pay check you earn?
If so, then the next question is, “Are you taking advantage of this opportunity?”
You may be thinking, “I want to take advantage of this opportunity. How much should I put in my 401k?” Most advisors would recommend that you at least get the employer match.
Why? Because it’s free money. If your employer will match you 50% on the first 6% you put in a 401K, then when you put in your 6%, they will add half of that (or 3%) on top of it. That’s 9% of your salary going toward your retirement and your future.
Why pass up free money?
If you do this long enough you can accumulate quite a nest egg. And the beauty of this is it is automated. You tell your HR department how much you want to contribute each pay period and it is automatically done.
So in a way you are committed long term (just like the rock star) but you don’t have to spend a bunch of hours working on it. So you have a better chance of getting your rock star retirement without having to spend hours and hours preparing for it.
What about investors age 50 and up? How should I invest my 401K?
If you are age 50 and up, there are some mistakes you want to avoid when it comes to your 401K.
And it’s really important because think about it, if you have been contributing to a retirement plan for many years there is a good chance that it has become a significant amount. Not only that, but you are getting closer to retirement. And you want to be careful what you invest your 401K in. You probably don’t want your portfolio to take on too much risk because you know how volatile some investments can be. And if you are nearing retirement, you don’t have the time to wait for a market rebound.
If you remember back in 2008 when the markets crashed, that affected a lot of people’s 401K balances. It caused many people to delay retirement, essentially because their portfolios were not big enough to support them in retirement. In a nutshell, these investors had too much risk / volatility in their 401K portfolios. And when the markets headed down in 2008 and through the beginning of 2009, they went down with it.
In other words, these people had their 401K’s invested in ways that really didn’t make sense for them.
Sadly, a lot of workers have their 401K’s invested in funds that really don’t suit them very well. And a lot of workers keep their portfolios invested like this for 2 reasons:
- They don’t realize that their 401K is improperly invested.
- Even if they did realize their 401K stinks, they don’t know what to do about it.
Well, a general rule that may help you if in you’re in this scenario, is the closer you are to retirement age, the more conservative your investments should be. Your 401K administrator should have investment options available that will help you have a more conservative portfolio.
However, a lot of people don’t know which of the many different options to choose to invest their 401K. Should I put it all in a fixed income fund, and be very conservative? Or maybe some should go in an equity fund?
If an equity fund, should I choose large-cap, mid-cap, or small-cap funds (if they’re available in your 401K plan). Or maybe I should do a blend between fixed income and equity? If I blend the two, what percentage should I put in fixed income and what percentage in equity?
If you feel confused, don’t worry. It’s not your fault. What usually happens when you start a new job is the HR department gives you a packet that describes all the different 401K investment options. Then they pat you on the back and tell you good luck.
I wish I could tell you there was an easy answer to the question, “How should I invest my 401K?” But the truth is, it’s going to be different for everyone. The types of investments you choose for your 401K are going to depend on other factors, such as:
- What is your risk tolerance?
- How long until you need the money (what’s your time horizon on this investment)?
- What will your other lifetime income sources (i.e. Social Security, pension, annuity) look like when you retire? Will they cover your estimated fixed expenses?
These are just some of the factors you need to consider when allocating any of your investments, even your 401K. Remember, other than your home, your 401K is likely to be the largest asset you own. So you need to make sure you are taking steps to invest as well as you can with it.
Because really, that’s what most people want. They want to do the best they can with the resources that they have. They want this so they can enjoy what they have saved, have a great life and not worry about finances.
The good news is, to save for your retirement, you don’t have to work as hard as my high school rock star friend. You can automate your contributions to your 401K, which is an easy form of commitment.
And as for how you should invest your 401K, you can get help with that too. We personally use Morningstar to analyze the options that are made available through your 401K. And then we can show you the numbers of how much risk your portfolio is taking and what your expected return should be based on historical numbers.
If you have any 401K questions, you can get on my calendar for a 20 minute phone conversation. Just CLICK HERE. I’d be happy to help point you in the right direction.
P.S. My rock star friend finally gave up the guitar. He moved on to other things. At one point, from what some other mutual friends told me, he became real interested in the late Steve Irwin, aka “The Crocodile Hunter.” And he may have even considered a career in that line of work. He dropped that later, and focused his efforts on being a doctor. And from what I hear is a very successful one. And I bet he’s still a good guy to hang out with too, just like he’s always been.