While you may have been investing for years, I bet there are some things you don’t know about your retirement plan.
Future contributions aren’t the same as your current account balance
When you think about it, it makes sense. What you’re contributing to your plan in the coming months is your future contributions. What you have contributed up to this point is your account balance. However, here’s where it might get tricky.
I was helping my wife go through her new retirement account after starting a job. Due to traveling we didn’t get around to it until 6 weeks had passed. When we checked her account online, we saw they had invested her contributions in a moderate fund (split between bonds, cash, and stock). This was the wrong investment for her, so I helped her change the investment for her future contributions to all stocks. Easy peasy.
Uh, wait a second. We’d only changed what’s going into her account in the future. What about what they had already pulled from her paycheck? Yep, it was still in the moderate fund. We also had to go in and change her current account balance so it reflected her future contributions.
You have to make these two changes if you want to redirect all the money in your retirement account. Just something to keep in mind when you’re reevaluating your investments.
Speaking of your investments, don’t let “advisors” tell you to change your allocation without knowing everything.
Unless you are just starting out, chances are you may have more than one retirement plan account, maybe you took advantage of the stock offering at a previous job, or perhaps you do a little investing on the side. Yet if your company provides any type of guidance on the 401k, their advice might prove too simple.
Often it’s age based. One of the oldest and worst pieces of advice is take your age, subtract it from 100, and that’s the percentage you should have in stocks. Very rarely does your investment decision align perfectly with your age. If you tend to be more of a risk taker, you may choose to invest 100% in stocks even if you’re 40. If the thought of losing a dollar makes you nervous, you may limit your stocks to a small minority of your investments no matter your age.
Plus they don’t know what they don’t know. Do they ask you about your past investments and where your other money is now? What about your partner’s investing? If they focus only on the company retirement plan, any advice they give will be incomplete.
The thing to remember is that you need to develop an overall allocation for your total portfolio that you’re comfortable with. If you have $25,000 in stocks and $1,000 in your checking account, that’s pretty aggressive. Not a bad thing, not a good thing. You just need to be comfortable with it. But when you’re investing in your 401k, do you want to keep that same level of aggression? Do you want to use the retirement plan to balance your portfolio? Make sure you’re looking big picture whenever you’re dealing with your money.
I wish I had that option. When I look at the big picture, I see student loans, a car payment, and rent.
Getting started can seem impossible. I get it. My very first investment wasn’t some well-researched stock pick. I was working for Dairy Queen and as part of the benefits I could invest in the stock at a discount and they would pull it straight out of my check. A coworker said I would be stupid not to do it, so (drum roll) I did it. No analysis, no looking at alternatives. And it worked out well. DQ was purchased by Berkshire Hathaway and I had just enough for one mighty share of B class Berkshire stock.
If you don’t have a coworker moving you into a stock plan, maybe this will provide incentive: you might be giving away free money by not participating. I hope you’ve heard this before, but here’s the scoop. Most retirement plans offer a match as an incentive to participate. Usually this match is vested for a period of time. What this means in layman’s terms – you get the money the company contributes after you’ve been there for a set time.
There are as many different plans out there as there are ice cream flavors. However, a common plan might include the company contribution of 50% of your first 6% that you invest. IE, if you make $40,000 and contribute 6% ($2,400) the company will give you $1,200.
But I just said I’m having a hard time keeping up with my bills. Where does this $2,400 suddenly come from?
Remember it’s $2,400 per year which is $200 per month. Some of you may not be able to withhold that from your paycheck. But $200 per month is only $6.67 per day. Is there something you could do to afford that?
Even if you can’t get 100% of the company match today, why not try to get 50%? Make the commitment to contribute $100 per month. Set a reminder in your phone for 3 months. When that time comes, ask yourself: have I noticed a difference? Is there anything I’m not able to do that I NEED to be doing with that money? If you answer no to these questions, consider going up to the full amount. Get every dollar the company offers.
These are just a few of the facets of retirement plans you might not be aware of. I’ll explain more in another blog post. Until then…
Money you invest in the 401k plan comes out before taxes. So if you decide to invest $100 per month, your take home pay won’t be reduced by $100. However, the difference is not a windfall. If you want to know more, there are online calculators to help you figure out the exact dollar difference. If you search for “take home pay calculator” some results will take into account your retirement plan contributions and show you the change in pay.
Photo by Med Badr Chemmaoui