It’s simple. Super simple. It’s a wonder more people don’t know this or that so many people fail at this.
It’s not complicated building wealth in a 401(k) plan (or it’s 403b plan equivalent). The money comes out of your paycheck before you get a chance to spend it or even see it (which avoids the loss aversion). Many times, if the retirement plan is designed correctly, there will be some auto-features set up to automatically take care of your savings: you’ll be auto-enrolled, auto-diversified, and your savings rate will be auto-increased over a period of time. Simple.
(NOTE: It used to be a choice for some employers to offer these auto features, but Congress is working to require that every retirement plan utilizes these defaults, an automatic opt in unless plan participants opt out.)
And since the 401(k) plan is meant for retirement, the regulations are setup to discourage pre-retirement distributions. This deterrent is essential, because in a moment of weakness one bad decision could wipe out our long-term savings. So, the plan for the plan is to make it as easy as possible to get money into the plan and appropriately challenging to get money out of the plan, at least until retirement.
The formula is simple. It’s almost dummy proof. And yet many struggle to build wealth.
It’s not complicated … but it also isn’t easy. In fact, some find it to be quite hard.
It can be hard to live on only 85% – 90% of what you make now. Some will insist on spending 100% of what they make; others will be tempted to spend 105% or more of what they make, a self-indulgent destructive luxury we have thanks to credit cards.
Some Americans will take their retirement vehicle off auto-pilot and hijack the entire process, opting not to save or opting not to save for the recommended 15% of their income.
Others will hijack the process by rejecting the simple, super-duper easy, low-cost, professionally managed option (either a Target Date Fund or a FREE Managed Accounts program), either by taking matters into their own hands, or placing matters into the greedy hands of some financial advisor offering a Managed Accounts program that adds additional fees. (By the way, the professionally managed option is often the default option, so an investor has to actually hijack their account and crash it into self-directed funds on purpose to mess this up.
Self-directing (taking matters into your own hands) is an awful idea. Self-directors generally make about 4%-6% less, on average, than professional management. (Which one would expect, since they are the experts who do this every day. It’s rather foolish of us to think that we can outperform the experts in the market.)
But Target Date Funds offer ALL of the expertise that the average investor needs; it is NOT necessary to pay additionally for Managed Accounts.
Still others hijack the process by utilizing a loan provision, using the 401(k) plan for cash flow rather than long-term savings.
So, it’s not complicated building wealth in a 401(k) plan, as long as you don’t hijack the plane, take it off of auto-pilot, take matters into your own hands, or burn through all of your fuel (with silly fees from Managed Accounts or loans or pre-retirement distributions).
SIX Sure-Fire Ways to Make Money in your 401(k):
- Save as much as possible as early as possible
- Then save a bit more
- Save in a broadly diversified, low-cost portfolio (preferably a Target Date Fund or a customized Target Age Portfiolio)
- Avoid pre-retirement distributions and loans
- Then give it time
- Then give it some more time
No additional spices or ingredients are required. In fact, avoid any exotic ingredients (investments) or expensive Managed Accounts programs that add unnecessary fees. These “short-cut” provisions to double your money overnight generally lose your money overnight. Get-rich-quick schemes are for fools. You can’t cook this recipe in a microwave; it takes a crockpot. Generally mistakes are made when investors try to get too cute.
But it’s not complicated.
The key is to save as much as possible.
And it takes time.
As Warren Buffett says, the “secret” … is that there is no secret. Everyone wants to read the book on how to get rich quick, but he provided a pretty good manual on how to make money slowly over a long period of time.
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