There’s an old joke about a guy on his hands and knees looking for some lost money on the street one night. A cop pulls up and asks the man what he’s doing.
“I’m looking for $20 I lost on Mulberry Street,” the gent responds.
“But this is Maple Street,” the cop answers.
“I know,” says the man, still crawling along the pavement. “But the lighting’s better on Mulberry Street.”
When it comes to managing our 401k plans, many of us make like the guy on Mulberry Street. We try to take the easy way out, common sense or not.
The sad fact is, some people just don’t want to take control over their 401k plans, or at least don’t have the tools to do so.
Now, a new study out verifies that sentiment.
An April, 2016 study by Judy Diamond Associates, a division of New York City-based ALM Intelligence, states that the best-performing 401k plans are tied to employer involvement, especially in training and education. “Employer-sponsored plans that set their participants up for a strong and stable retirement encourage employee participation through matching contributions and educational programs about the benefits of saving for retirement,” the study states
The difference in quality employer engagement is significant. According to the report, the average account balance for an employee at a firm where 401k tools are more available is $115,000, whereas the average account balance for a worker at a firm where those tools were in short supply was only $41,000.
If you can’t get good help in managing your 401k plan, that puts more of the burden on your shoulders.
Fortunately, getting a grip on your investments and becoming a 401k master (and millionaire) is easier than you think. In fact, you can gain huge traction in getting the job done in these five income-maximizing steps:
Start Early (Or At Least Early As Possible) – There’s no substitute for getting a good start on your financial future. All the studies on the subject conclude that the earlier you get going with your 401(k), the more money you’ll have in retirement. That’s because the earlier you start, the earlier compound interest goes to work for you.
Think about it. Early-bird investors who contribute anywhere from $100 to $500 per month for 30 or 40 years are going to be mighty comfortable in retirement. At age 25 or 30, the numbers are heavily in your favor.
It’s even better when you save regularly and save a lot. The more you save each month, the more money you’ll have in retirement. Consider the experiences of four different investors, all of whom started to contribute to their 401k plan at age 35, but who contributed different amounts:
- Lynn understood the benefits of starting early, but could only afford to sock away $50 each month into her 401k plan.
- Kevin was an early-bird, too, and was eager to put a little more money away for retirement. He saved $100 monthly.
- Molly was even more aggressive, staking $200 of her pay each month toward her 401k.
- Gene was positively ecstatic about being a 401k millionaire, putting away a whopping $500 per month toward his golden years.
Here is how they made out (based on a hypothetical, 10% average annual rate of return, over a 25-year period:
Age 25 Monthly Savings Age 50
Lynn $50 $66,895
Kevin $100 $133,789
Molly $200 $267,568
Gene $500 $668,945
As you can see, Molly and Gene are well on their way to becoming 401k millionaires by the time they reach age 65. Lynn and Kevin should make it, but beefing up their monthly investing contributions would provide a big boost to their retirement fund.
The moral of the story? A steady stream of investment contributions into your 401k plan is more than worth the trouble. But if you want to make a real difference in your financial future, invest as big chunk of money as possible every month – that’s the largest game-change in becoming a 401k millionaire.
- Max Out. 401(k)’s provide a multitude of benefits for investors. One of the most beneficial is the plan’s tax-advantaged status. In short, the more you contribute to your 401(k) plan every year, the less you’ll pay in taxes to Uncle Sam. Then there’s the obvious advantage of maxing out and investing the legal limit in your 401(k). The more money you invest, the more your company might match, and the faster you’ll become a 401(k) millionaire.
If you think you can’t find any extra cash to stash in your 401k, you’re just not looking in the right places.
Try these creative ways to max out on your 401k plan:
- Maxed out on social security taxes? Social Security taxes of 6.2% levy only climb to $117,000 in earnings for 2015. If make more than that amount in income, hike your 401k payout so your 401(k) can keep more cash in your retirement plan and less in Uncle Sam’s pocket.
- Refinancing your home? If you’re saving money on a home refinancing mortgage, make sure to stash the dough you’ve saved from a lower mortgage rate into your 401k plan.
- Consolidated or refinanced your college? There are plenty of ways to consolidate your student loan at a lower rate. When you do, take the money and pour it into your retirement via a 401k plan.
- Got a raise or a bonus? There’s no law that says you have to spend a bonus, or the extra income you receive from a raise at work. Take a good chunk of it and plow it into your 401k plan.
- Too much tax withholding? So you’re receiving a tax refund this year? That may be penalizing your retirement funding program. Instead, file a new W-4 form with your company to slash your withholding. That will add more cash to your regular paycheck, and allow you to raise your 401(k) contribution by the same amount of money. In a beneficial way, you’re not really missing the money from your paycheck, but it’s doing wonders for your retirement portfolio.
- Learning is Earning. The value of good investment research is priceless. And the value of knowing enough about your 401(k) to become the master of your financial future is priceless. Read all you can on finance and investments, and make sure you read every word of the 401(k) packets, brochures, online and mobile messages and emails, and memoranda that come your way from your employer on a regular basis. The payoff for spending an hour or two a week boning up on the ways of Wall Street are potentially huge, particularly as 401(k)’s are starting to expand and go global.
- Be Aggressive. Prudence is the proper course if you’re an airplane pilot or a brain surgeon. But it’s a drawback for 401(k) investors. Studies show that to beat inflation and to make your money grow faster, a good chunk of your plan should be earmarked for higher-performing stock funds. That doesn’t mean you should be reckless. There’s no rule that says you have to put money into Portuguese debentures because your buddy in accounting did. But if you stick to conservative investments like bonds or, worse, bank savings accounts, your chances of becoming a 401(k) millionaire are virtually nil.
- Keep the Money Working. If you leave a company, and are given the option of taking the cash and rolling it over into another tax-deferred investment plan like a 401(k) or IRA or taking the money in a lump sum and using it as you wish, choose wisely. The latter is a bad move and here’s why: the government wants you to roll the money over and they’ve set up expensive traps if you don’t. The IRS can take up to 20% of your retirement plan assets away from you if you elect to take a lump sum payout when you leave a job.
Turbo Charge Your 401k Plan
When it comes to managing your 401k plan, or any retirement plan, it’s also the old ways that prove to stand the test of time.
Fundamentals like the five turbo-charged ideas listed above – investing as early as possible, maxing out your investments, learning all you can from some of Wall Street’s masters, investing aggressively, and always, always, always staying in the market are your best moves to make to push your 401k toward that magical seven-figure level.
Because when it comes to creating genuine retirement wealth, paying close attention to the strategies that work isn’t a luxury.
It’s a necessity.