While the traditional world of work is certainly changing before our eyes (self employment and telecommuting), there is still a sizable percentage of the population with perhaps years of time and money vested in a 401k retirement plan. If this type of IRA is the centerpiece of your Golden Years strategy, let’s talk about how to make it even more powerful. The problem is that while everyone knows they SHOULD be maximizing their IRA, not many actually do. In fact, a report from the Employee Benefits Research Institute (a Washington DC think tank) indicates the median account balance across the nation to be about $18,000.
Before we go on, let’s review why an individual retirement plan such as a 401k is a good idea in the first place.
But back to the number $18,000. Yikes. This is roughly equivalent to one year of living frugally. VERY frugally. If this describes your retirement account, better plan on working a long time because eighteen grand won’t carry you far in this world of dizzying inflation. While it’s easy to make general admonitions, here are three specific actions you can take to jump start a 401k.
Don’t Let Ignorance Carry the Day
Let’s face it, most of claim to either be too busy or too uninformed to take an active role in the company pension plan, but it doesn’t have to be this way. Most pension plans have a “default” portfolio they dump your money into unless you direct otherwise. This default is typically based around safe, low-yielding investments or a bucket collection based on actuarial tables related to your age. Please tell us you believe you deserve better than that. This is your one and only life! Don’t relegate yourself to skipping needed medicines and dining on Alpo just because you didn’t take the time to educate yourself about how to maximize your retirement plan. The default arrangement is almost guaranteed to be best for the company, but is it best for you? If not, make it so.
For obvious reasons, high fee mutual funds are often preferred by plan administrators. After all, it makes them more money. While altruism is a wonderful thing, when it comes to arranging the investments in your portfolio, it’s time to get a little selfish. We’ve mentioned this before. Most mutual funds have far too modest returns to justify anything more than minimal expenses. While an employer might require you to keep your money in mutual funds, it doesn’t have to be a high-cost fund. There are plenty of solid low-cost funds out there. Find them!
This is an important one. You don’t have to confine your IRA investments to the antiquated notion of stocks, bonds, and mutual funds. Most now allow investors to branch off into such alternative investments as oil and gas, precious metals, tax lien certificates, and our all time favorite – real estate!Should you decide to explore these non-traditional options, be prepared for your plan manager to express his shock and disbelief, perhaps claiming, “You can’t do that inside an IRA.” The truth is he’s both right and wrong. Maybe HE can’t do that inside the parameters of a company based plan but nothing’s stopping you from opening a self-directed plan. Self-directed means you get to choose which investments go inside it and if you want to invest in water in the desert, and the IRS allows it, by all means go ahead. Keep in mind that a self-directed IRA has no default fall back safety position. Any investment vehicle it contains must be put there by you. A little more brain work, perhaps, but achieving control over your portfolio should be the goal of every investor. Nobody, and we mean nobody, cares more about your future than you. Don’t forget that.
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The Heroic Investing Team
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