Roadmap to Riches   
how to invest your 401(k)
The Plan: Choosing the Goals of Your 401(k)
In June of 1997 the Wall Street Journal had a front page article entitled, “Waking up Rich – Retirement Accounts Stashed in Stocks Make Employees Millionaires.” The following are excerpts from that article:
“An optician and his wife (a consultant) had scant savings when they married ten years ago. They set a goal of amassing $500,000 in 10 years (including their home’s value) and hit $800,000 in the ten-year period.”
“One fund family had 700,000 retirement accounts at the end of 1995. Of these, records showed 120 millionaires. Eighteen months later, the account total is $870,000, but the millionaire figure is now 308 - two and a half times higher.”
“The retirement plan rich are changing their lives. Quitting jobs early, taking extended holidays, starting new careers - or restructuring jobs to make them more fun.”
“The ‘401(k) millionaires’ Harvard economics professor Martin Fieldstein calls them. Many people who don’t think of themselves as having any personal wealth suddenly do, and they’re feeling good about it.”
“For some people who thought they wanted to retire early, having a financial cushion has a curious effect…for many people the security of a nest egg allows them to relax and enjoy work more.”
Many people consider 401(k) plans to be for the exclusive purpose of accumulating savings for retirement. While this is ultimately true, there are many interim reasons or goals, short of retirement, for why we would choose to save money in a 401(k) account. Loan provisions in most plans today allow us to use 401(k) money from our accounts to meet pre-retirement financial goals.
Why is identifying goals such an important consideration?
- Because a fundamental cornerstone of investment decision-making is the time-frame or length of time that the money can be committed to an investment.
- Without a clear understanding of our goals, it is impossible to know for certain how much time we are allowing an investment to meet our expectations.
Why would young people, 35-40 years from retirement, be interested in a 401(k) plan? Goals for 401(k) plans can definitely be short-term for some of us. As younger people, we may have decided that the 401(k) is the fastest way to save for a down payment on a house. We plan to borrow from our account within five years and then pay the money back in future years. Children’s college may be looming on the horizon in ten or fifteen years, so we can expect to be borrowing from our plan at about that time.
If we’re in our 50’s now, aren’t we within a few years of our goal? As older employees, we may be in our fifties and only ten years away from retirement. However, we may be in perfect health today. In addition, our parents may be still living and offering evidence of “good genes” suggesting that we also will live through a long retirement. While retirement is just around the corner, our need for money over many years still constitutes a long-term goal.
Someone 50 years old today may still need money to be growing at age 85...the same 35-year time frame that a 30 year old employee is considering.
If my spouse and I are in our thirties both contributing the maximum, can we retire at age 50? According to articles in the financial press, relatively young people have been able to “retire” in recent years long before what is normally considered to be retirement age. This doesn’t mean that they have quit working altogether, but they have been able to consider career options for reasons other than compensation thanks to the substantial account balances in their 401(k) accounts.
Two spouses contributing $10,000 each will have $1.5 million in 20 years if they earn an average of 12 percent per year on their investments.
What if we lose our jobs? Is retirement the only reason for 401(k) savings? Finally, we may be employed in a volatile industry that periodically subjects us to layoffs and extended periods of job loss. Our 401(k) plan may be the best place to satisfy this reason for building a nest egg. We can tap the money at any time and use it as our own “unemployment compensation”.
Exercise
Take a piece of paper and write down all the reasons you can think of for why you would want to be saving money. Any reasons that have a time-frame of longer than five years from today are candidates for a portion of your annual 401(k) contribution.
FIVE-YEAR GOALS
TEN-YEAR GOALS
TWENTY-YEAR GOALS
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