A Grumpy Old Man’s Guide to 401(k) Investing
It’s tough-love time: If you’re lucky enough to have a 401(k) plan, and you’re not filling it to the max, you’re making a rookie mistake.
Perhaps I’ve been spending too much time with my young kids, but I’ve gotten to be quite good at wagging my finger and speaking in a stern, fatherly voice. I love my kids dearly, but at times the rascals need a little discipline. And chances are, when it comes to making full use of your 401(k) plan, you do too. So, as my glasses slide down my nose, I’m going to put on my slippers, roll up my Financial Times newspaper and shake it in your general direction.
So, you — yes, you there! Sit down and listen up because this is important. And don’t you dare click out of this column. What I’m about to tell you is for your own good.
If you’re not taking full advantage of your 401(k) plan … well, shame on you. Those things aren’t free, you know. Your employer spends a lot of money administering the thing … for your benefit. So, if you can’t be bothered to log in or fill in the forms to participate, you’re just a derned fool. Do you know how many starving children in Ethiopia would love to have a 401(k) plan like yours?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
At my first job, we didn’t have 401(k) plans. I had to settle for the measly $2,000 I was allowed to contribute to an IRA at the time. Well, I maxed out that IRA, and I loved it! But what I wouldn’t have done for a proper 401(k) plan. So, show some gratitude, would ya?
I know, I know. Money saved in a 401(k) plan is money you can’t spend on some newfangled gewgaw. But if you make decent money, a huge chunk of it is just going to end up going to the tax man.
Stop and use your head for a minute. If you’re in the 28% tax bracket — and if you’re still single (at your age!), you would be in the 28% bracket at an income of just $91,150 — then you effectively earn a 28% “return” on every dollar you contribute, as of Day One. Would you rather that 28% go to the government? Yeah, that’s what I thought.
You can save $18,000 in a 401(k) plan in 2017. That’s $692 per paycheck. You can do that. Your grandmother used to feed a family of seven growing kids on $692 per year and never complained. So stop your whining, log in to your plan or call your HR department now and get your contributions on track.
Don’t make me come over there and swat you with my newspaper.
And matching … don’t even get me started on matching. When I was your age, I was lucky if my cheapskate boss matched me even 2%. These days, I’ve seen companies match as much as 6% or 7%. If you’re too big of a sissy to contribute the full $18,000 in salary deferral to your 401(k) plan, then for crying out loud, at least contribute enough to get the full matching amount from your employer. If you don’t, you’re leaving money on the table. And I don’t know about you, son, but I don’t have a money tree in the backyard. When someone offers me free money, I take it.
OK, I’m going to unroll the newspaper and push my glasses back into place for a moment. In all seriousness, this is the time of year to make changes to your 401(k) plan. If you’re not already maxing out your 401(k) for the full $18,000 (or $24,000 if you’re 50 or older) you really should make that a priority. Even if the stock market fails to return a single red cent, the tax savings and employer matching alone make it more than worthwhile.
I realize that not everyone can realistically defer $18,000 of their annual pay. If you’re young, recently started a family or have a non-working spouse, that might not be an attainable goal. But here are a few tips to get you closer.
If you got a raise to start the year, I strongly encourage you to allocate the difference to your 401(k) plan. You were already surviving at your previous pay rate; continue to live your current lifestyle a little longer, and push the salary increase into your retirement plan. Years from now, you’ll be happy you did.
If you generally get large tax refunds every year, consider chatting with your HR department about increasing the number of exemptions you claim. This will cause you to withhold less in taxes, which will boost your paychecks. You can then use your higher effective pay to contribute more to your 401(k) plan.
And finally, consider living more modestly. If you rent an apartment, consider getting a roommate or downgrading to a cheaper place. Money spent on rent is effectively money wasted. It’s better to use that money to build your future.
Listen to me, son. It’s for your own good.
Charles Lewis Sizemore, CFA is chief investment officer of Sizemore Capital Management LLC, a registered investment adviser based in Dallas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
Should You Enroll in Medicare if You Still Have a Job?
This question is being asked more than ever these days, so here’s what you can do when it comes to making Medicare decisions while you’re still working.
By Jae W. Oh Published
-
Three Big Ways That Life Insurance Can Be a Lifeline
Life insurance not only provides a safety net for loved ones and leaves behind a lasting legacy, but the cash value can also help during financial hardship.
By Steve Sugumele Published
-
Romance Scams That Target Older Adults Rising: What to Do
Here are some tips to help you avoid falling for a scam, especially when a scammer tries to prey on your affection.
By Patrick M. Simasko, J.D. Published
-
Lessons Learned From Britney Spears’ Financial Conservatorship
The pop star’s recent memoir reveals the toll her involuntary conservatorship took on her and spotlights the drawbacks of these legal arrangements.
By Stacy Francis, CFP®, CDFA®, CES™ Published
-
Four Things to Know About Managing a Loved One’s Finances
Figuring out when it’s time and knowing how to talk about it are just the start. You also need info about estate plans, insurance and health care decisions.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Avoid Surprises: Don’t Procrastinate on Your Taxes
You really should start thinking about next year’s taxes immediately after filing this year’s. Better tax efficiency could save you some serious dough.
By Jared Elson, Investment Adviser Published
-
How Gig Workers Can Prepare Their Estate and Financial Plans
Freelancers have to be vigilant to keep track of where their money goes, whether it’s to cover daily necessities, saving for retirement or other expenses.
By David Handler, J.D. Published
-
When Flying Toward Retirement, Secure Your Own Mask First
Parents often feel compelled to help their kids pay for college, but when that could result in you moving in with them later, you should put your savings first.
By Andrew Rosen, CFP®, CEP Published