Perhaps the most vexing thing about being a 401(k) plan advisor is dealing with the reality that many people have a remarkable lack of interest in planning their retirements.
This goes hand in hand with a lack of curiosity about what the second half of their lives will be like, possibly stemming from an obsession with youth culture that is nurtured by advertisers and mass media. But the eventuality is that you're going to get older (which beats the alternative), you can't work forever, and you're going to need to pay for your retirement.
Another possible reason for the widespread lack of interest in retirement planning may be a basically nullified view of retirement based on a negative view of the present. The sad reality is that many people don't like their jobs. As a result, they tend to view retirement in terms of not what they will be doing, but what they won't be: They won't be putting up with a thankless job, an ungrateful boss, watching the clock all day, or commuting in nasty traffic. So if retirement is the absence of something, the idea of planning for it just doesn't jibe. You don't plan for what you're not going to do — only for what you will do.
But retirement will eventually come, unless you want to be working when you're 80 years old. It all comes down to personal responsibility to confront this eventuality now and plan for it, and that means investing. It's impossible for most people to simply save enough money for retirement, so the idea is to grow your money in the markets. The most commonly available way for most people to do this is through their 401(k) plans at work. Yet many people have little idea of how these plans, and the markets they're invested in, actually work.
The first step is to clear all the preconceptions and assumptions out of your mind, as many of them may be flat wrong. Then, without these distracting obstacles, you can get started with a clear mind and a clean sheet of paper. First, learn to view your retirement as a positive — as something other than the absence of work — and decide:
• What you want to do with your time during retirement, within realistic limits.
• How much money you will need to do this and pay basic living expenses, based on what you're spending now (a retirement budget) Then ask yourself: How much less could you live on than you do now?
• What is your current capacity to fund this budget from existing investments, savings and anticipated or actual inheritance?
• What will your spouse's likely retirement resources be?
• Based on this, how much money do you need to retire, and by what target date? One way to approach this is to ask, if you were to retire tomorrow, how much money would you need to live on comfortably, assuming that the mortgage is paid and your kids are educated and off your personal payroll? What percentage of your current income would you require?
Energized by your newfound direction and clarity on the subject, you might now go to that drawer where you keep your 401(k) statements, read them, and find that, like many people, you're not on track to build the retirement nest egg you believe you'll need because you're not adequately funding your plan.
This usually means budgeting now so you can fund your retirement budget later. By spending less every month, you'll be able to make a larger contribution to your plan. Most people don't make the maximum contribution, and fail to take full advantage of employer matching money.
This lapse is madness, because it's free money. If all this motivates you to get serious about retirement planning, it's important to remember that there's no silver bullet. It takes a lot of thinking, hard work and discipline.
Instead of looking for an easy answer, look to those who have your interests in mind. As difficult as it may be for you to believe this, your employer is among this group. That's because virtually everyone at your company is in its 401(k) plan, including top executives. If you do well in your plan, it doesn't hurt them one whit. And they want to have good choices among the investment options in the plan as much as you do. So this is a scenario of mutual interest.
To take advantage of your plan:
• Attend educational sessions arranged by your company and seek individual help from independent plan advisors, when it's available.
• If your company doesn't offer employees help from a truly independent advisor.
• Use available resources and materials to learn about the different investments your plan offers and how they work — or don't work — together as a portfolio. Your portfolio (and if all you've got is a 401(k) plan, that is your portfolio) should be fully diversified.
That means your assets should be spread over different types of investments and, within the same types of investments, in different types and sizes of companies (as with stocks). If you own shares in four stock mutual funds offered by your plan, is there substantial overlap in the stocks these funds own? If so, you're not adequately diversified and you have little protection if the companies that you're unwittingly overinvested in should tank.
• Become familiar with the fees charged to your plan and the investments you hold. These can significantly affect your net returns over time. The federal government has issued new regulations requiring full disclosure of fees deducted from your account by plan providers (companies that hold plans for sponsoring employers – typically, insurance companies) and companies that provide investments for these plans.
The disclosure of these fees in your quarterly account statements is much murkier than the new rules had intended, but your employer is supposed to have this information.
It's important to get good advice, but it's also important to learn things for yourself — because it's your retirement, and no one else's.
Anthony Kippins is president of Retirement Plan Advisors, Ltd. a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them. An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement. He can be reached at firstname.lastname@example.org. If you have a question for Kippins about 401(k) plans, please send email it and he will try to answer it in an upcoming column.