This week’s post is the first in a series designed to help you manage a vital aspect of your financial life, your 401(k). I hope you enjoy them and find them useful. I appreciate your comments and suggestions.
Next to their home, the largest financial asset most Americans own is their 401(k) plan. Of all of the financial tasks you will face in your lifetime, funding your retirement is second only to the purchase and maintenance of your home. Yet the 401(k) is probably the least understood or appreciated aspect of our financial lives. Innumerable articles have appeared recently in the Financial Press that label the 401(k) a massive failure. These articles cite high fees, too many investment choices, too few investment choices, a general lack of participant education, and other issues beyond the control of the 401(k) participant as the prime culprits. These same pundits lament the disappearance of private company pensions and urge the government to take over control of the retirement system in the U.S.
I have been advising 401(k) participants for over 20 years and find that, when understood and used properly, the 401(k) plan is a very effective way to save for retirement. When properly funded and managed, a 401(k) combined with Social Security, can provide a comfortable retirement for any worker, which was the intent in their creation. I do not disagree that the 401(k) fails for many, but our experience is that the real culprits are not high fees (although the fees on some smaller plans are too high) nor any of the other issues cited by the Financial Press that are beyond the control of the participant. The real culprits are a lack of engagement in the retirement savings process and unwillingness to save money by foregoing current spending. Both of these are very much under our control.
Over twenty years of experience designing and advising 401(k) plans and advising individual 401(k) participants have taught me that the most important factors in successfully saving for retirement are:
1. How much you save
2. When you start saving
3. Whether or not you tap your retirement savings early for other needs
4. Your level of financial knowledge
5. How disciplined you are in sticking to your savings habits and investment plan
The cold hard reality of modern financial life is that the old style pension plan where you are provided with a retirement benefit with no involvement on your part is a thing of the past in the private sector. Private sector pensions will not be back, they were too expensive for private sector companies and the promises they made were unsustainable. Pensions for government workers will gradually disappear also for much the same reasons. You should hope that the government does not take over your ability to save for retirement. The government already has a mandatory retirement savings plan. It’s called Social Security and its bankrupt and unsustainable because, again, too many promises have been made to too many people that are financially unsustainable. There will be some social security benefit there when you retire but it will not be what was promised and, if it is, it will be paid with money that is increasingly worth less because it will be paid by simply printing more money.
The above paragraph seems harsh but it is the bare truth. The sole determinant of whether or not you will have a successful retirement is you and you alone. To accomplish that, the most effective tool you have is your 401(k). To effectively use that tool there are several things you must “Get”:
Get Sound advice
The purpose of this series of articles is to help you “Get” those four things. If you and I can accomplish those four things, you will be on your way to a comfortable, secure retirement.