It’s in your hands – should you even be contributing at all?

The 4-Part 401(k) series is BACK!

…AND we’ve made it to Part 4. So I guess that means I can go home now. (I mean… I am home–typing this from my couch with a belly full of paleo chocolate chip cookie dough that tastes significantly worse than the real thing. Why do I do this to myself?)

Here’s what we’re covering today: First, I want you to feel like you have a clue as to how your retirement account should be invested throughout your lifetime, and then I want you to look hard and deep at your current ‘sitch’ and decide if having a 401(k) is really your best option.

Spoiler alert: it most likely will be, and if it isn’t, we want to fix that real fast.

So, where the heck do I put this?

And by “this,” we’re talking about your 401(k) contributions. As mentioned in Part-One, you are in charge of making these investment decisions (congrats!) and you have a few options. Actually you have several, but for simplistic purposes, I’ve narrowed it down to two because sometimes the more options we get, the less action we take, and we need to take action. 

If you haven’t touched your 401(k) yet, your company has most likely defaulted a small contribution from your paycheck each month to your 401(k) account. This amount is almost certainly going into some sort of diversified portfolio. – Great news!

But, here’s the deal, even though this is a much better alternative to what we used to do (literally nothing), you still need to get involved with your contributions-increasing them to at least the employer match-and making sure the allocations are appropriate for your current risk tolerance and how you plan to participate in the rest of the journey until you retire.

Here are your two options (as narrowed down by me):

Target Date Funds: An investment fund with your estimated retirement date in the title—rounded to the nearest 5-10 years. The fund is managed to be properly allocated with stocks and bonds, adjusting that allocation, year after year, as you approach retirement.

For example: If you’re 25 years old, and plan to retire when you’re 65, that gives you 40 years of work and puts you at a retirement year of 2056. You will pick the Target Retirement Date Fund with the year 2055. (Rounded to the nearest 5, remember?) This fund will start you out with an allocation that is heavy on the stocks and light on the bonds. As you near 2055, you will see a shift to be lighter in the stocks and heavier in the bonds. The good news? You don’t have to worry about making these changes because the fund does it for you.

Benefits here: Stellar option if you want to be really passive with your retirement account, you can be confident that it will adjust for you as you age, hands-free money growing.

Drawbacks: The fees are slightly higher than option 2, but nothing astronomical, you have less control over what funds you are invested in since the TDF picks everything for you, each fund tends to be solely invested under one company (i.e. Fidelity or T. Rowe), consider diversifying in two funds with a similar retirement date.

I recommend this to most everyone. Especially if you fit the following criteria:

  • You don’t really get the other option.
  • You have a tendency to forget to do things that involve money (like canceling the “free 30-day trial and then we’ll start billing you on day 31” Hulu subscription).
  • You really just don’t want to have to worry about it in a few years. You’re a “set it and forget it” type.

Self-selected Allocation: Here, you will still be investing in index funds (if following my recommendations) but instead of having the funds doled out for you, you will be in charge of the “doling.”

From stocks to bonds, small-cap to large-cap, domestic to international, you must set the allocation and then remember to adjust as allocations get out of balance and as you age. I like to recommend the Swenson Model – Yale University’s Chief Investment Officer, has made an average return of 13.9% over the last 20 years for Yale’s endowment. There are two additional models in the linked article that you’re more than welcome to give a go to as well.

Benefits here: You don’t pay as much in fees and have more control of your investments.

Drawbacks: You have to be on your toes when your situation changes (like every few years when you get older and older and older).

I recommend this option to all those proactive individuals. Especially if you fit the following criteria:

  • You like to have control over your investments.
  • You are on the ball about changing your money situations as your life situations change.
  • You’re super good about returning Redbox movies and remembering to cancel your Audible account after the $1 for 3 months you bought through Groupon is up.
  • You are into investing and the markets and just want to have some say in the game without, you know, trading stocks left and right.

Okay but… do I fund my retirement or pay down my debt?

Ahh the tough question of the day. Alright, let’s face the facts. If you have debt, especially that really high interest-bearing credit card debt, pay it off. Retirement can wait while you work your booty to zero. Plus, you’re not going to be making 14% returns over the next 3 years like you will be saving for yourself if you slash that consumer debt away.

What about student loan debt, you say? I’m gonna have to stick to my guns on this one and say, pay those bad boys off too. Get aggressive with it—like you would have been with your 401(k) contributions, I know it—and set a goal for yourself to have it paid off in X years.

Of course, it’s hard to leave that extra money on the table like we talked about in Part-Two, but funding your retirement just to get the employer match instead of paying your debt off, which is costing you thousands in interest every year, is sort of like spending that extra $20 in order to get the free shipping, isn’t it? (And in both cases, you’re not alone… we all do it—but let’s change that!)

I know, I know, it kills me to have to tell you not to fund your retirement plan Right. This. Minute. BUT, once you get to zero with that Debbi-downer-debt of yours, you can start hittin’ that 401(k) double-time (and maybe start livin’ a little too).

Welp, there ya have it folks! We made it through the Four-Part debunking lessons of our 401(k). Was this series helpful to you? If so, share it with someone who you think might benefit too using that “Share” link at the bottom (below the other great related blogs). Then tune in next week to the Words+Money podcast… I'm gonna be breaking down this 4-Part Series with my voice!