Like it or not, you’re probably married to the market (when it comes to your retirement at least). That was a cover of Newsweek Magazine a number of years ago, and it’s never been more true as it is today. Since the burden of responsibility for retirement has shifted from pensions to individual retirement accounts starting in the 1980’s, the majority of Americans have no concept of an employer being responsible for their retirement years. The truth is, you’re on your own. You’re on your own to make the best decisions within the constraints of the tax laws that govern your retirement account. The best that employers are willing to be responsible for your retirement is matching what you invest up to certain percentages to add to what you accumulate for your golden years (for example, matching say 50% of your 401-k contributions up to a certain percentage, let’s say 6%). This practice has become common-knowledge nowadays and its used as an incentive for employers to keep and attract a quality workforce. What is really happening is that employers are getting an easy pass on being responsible for their employees’ futures. Unlike in the past when corporations had to use massive amounts of their capital in order to maintain pension accounts, they use 401-k matching funds as a way of shifting that burden to you the employee and they get the added incentive of using these contributions as a tax write-off on their books. It’s a win-win for the employer. Is it a win-win for you? Well it can be…
The truth is that most financial planners nowadays look at employer matching funds as free money. Extra cash you have to invest into your qualified account that you can invest and have somewhere down the road when you need it the most. However, in the past decade or so, many 401-k retirement accounts have been affected by corrections in the markets. When a person’s asset allocation isn’t appropriate for the time when they should be lowering their risk-tolerance, people can not only lose all of the interest off of the ‘free’ money they received from their employer down through the years, but they can lose part or all of their principle as well. These situations are not only tragic, they have lasting impacts on future generations as Americans approach retirement without the necessary funds to sustain a comfortable retirement. Why is this happening and how can it be prevented? It takes a shift in thinking.When a person saves a dollar for themselves they look for the best investment possible to try to gain a return. Conservatively they can get a low rate, say 2-3% guaranteed which doesn’t even keep up with inflation, or they can go into something potentially more lucrative like an emerging market fund and gain 10-15% or better. The catch is the risk you’re willing to incur in order to achieve your potential return. In either case, as long as you have your principle with compounded interest when it’s all said and done, you’ve done what you set out to do. You’ve put one dollar that was in your front pocket and put it in your back pocket, out of sight and out of mind for a time down the road when you need it more than you do today. After years of analyzing people’s individual 401-k statements and seeing the ups and downs of the markets, the people that get the most out of their employer matching funds are the ones that don’t get greedy. Ever heard of the phrase, ‘pigs get fat but hogs get slaughtered’? Greed is a dangerous thing when it comes to your retirement. Sure, its nice to think that every American is going to retire comfortably out of the market with their 401-k and everything will work just fine regardless of a person’s risk tolerance, but at the end of the day the market produces winners and losers and quite frankly not losing your money is more important than chasing a buck in hopes of having more than you ever put at risk in the first place. Americans are stuck in the 401-k system for the most part, and not everyone is going to be a winner as a result. So what’s the answer? It’s as simple as a shift in mentality.
If your parents gave you $5 for every $10 you put in your piggy bank, would you not care if you lost the $5 as long as you kept your $10? Would you look at the $5 as free money, or your money? If you went to Las Vegas and every dollar you gambled you got an extra pull or two on the slot machine you were playing, would that be free money, or your money? The point is this: When you invest $5,000 in your 401-k and your employer matches $2,500 your thoughts shouldn’t be, well that’s more money for me to now invest, it should be more along the lines of that is 50% immediate profit. Just like when your parents give you an extra $5, your goal isn’t to do anything other than to keep that money along with all of your other money you saved. Considering inflation is so high, Social Security is unstable, people are living longer no wonder people try to achieve greater and greater profits to retire off of, however, there are still only 100 cents in a dollar and the reason there are guaranteed accounts and rates of returns in this world is because they are realistic. Not necessarily what you’d like in a perfect world, but when you start to compound guaranteed interest rates on top of an initial 50% return on your investment and you keep all of your interest as well as all of your principle, it’s as close to a secured retirement as you’re ever going to get in a post-pension world. Why did pensions become a burden to employers in the first place? They couldn’t gamble with peoples’ money. They had to guarantee the stability of their pension accounts to guarantee their former employees a strong retirement fund. They had to have large amounts of principle set aside earning meager interest rates so that they didn’t break their promises. Now that you’re on your own, you should be doing the same… Not with all of your 401-k funds necessarily, but when it comes to the part that you invest and is matched by your employer you and a good financial planner should be promoting the opposite of greed, which isn’t being frugal or cheap, its being realistic with your expectations. Conservative is a taboo word in the stock world when there are potential bull markets right around the corner at all times, but when it comes to your money that you worked so hard for and your employer was kind enough to match for you, do what you can to make sure that money is there for you down the road.
In short, 100% of nothing is nothing. Find the right guidance with an advisor that isn’t driven by greed. Be realistic with your expectations and know that the best way to ensure a good retirement is to always save as much as you can. It’s a sad fact that most Americans work their entire lives to have more, yet retire on less. This doesn’t have to be your story, just be realistic with your expectations and create a new story for what your future will be. The power of a good financial advisor is key to not spinning your wheels and trying to start over every time the market dictates you have to because of a correction. 401-k matching funds, it’s your way to a safe retirement as long as you play your cards right! Talk to your advisor to make sure you have the right risk-tolerance for your future expectations.