Since 1998, the percentage of Fortune 500 companies offering defined benefit plans has fallen from 45% to just 5%. This places more responsibility in the employee’s hands. Because they do not receive a defined monthly payment in retirement, they rather must save, invest and then make wise withdrawals to live off their retirement savings.
So, it’s crucial for people to understand proper investing for the long term and how to use tools, such as 401(k)s and IRAs.
One of the most memorable quotes I’ve heard from someone who had turned 65 years old and did a poor job saving for retirement was, “I didn’t realize how fast I would get to 65.” This is a reality for many people, and they face this epiphany at various stages in their lives. Some realize the importance of saving for retirement and begin with their first job, while others wait until age 55 and still have hopes to retire at 65.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
While saving for retirement is an important first step, investing properly is crucial to allow your money to compound over time. Managing money for clients, I have seen the problem of people not knowing how to invest their 401(k) monies. They don't have anyone they can turn to for investment advice because the company responsible for the investment portion of the plan generally just wants to collect the fees off contributions. If you're lucky, you'll get sent to an information website.
Get over your fear of volatility
With little investment knowledge, the 401(k) participant is then asked to choose the investments on their own. This leads many to think about their personal risk tolerance. The problem here is many people do not understand the difference between loss of principal and volatility. The stock market can be a volatile investment in the short term, but longer term it can provide great returns. It is important to know that when the market drops, it is not a necessarily bad thing because this means you get to buy more shares at a cheaper price. Who doesn’t love a good sale? If investors do not do silly things by investing in risky companies with high debt and expensive valuations, they will be able to endure volatility without having a serious risk of losing principal.
By associating volatility with risk, many investors are nervous to enter the stock market. This may lead a 30-year-old who believes they are risk averse to have little invested in higher-performing assets and more in safe assets, such as a money market account. While the investor may feel emotionally better about not having to witness the volatility, financially they are destroying their future. As savings sit in a money market account, inflation is eating into them and deteriorating their real net worth.
But don’t go crazy with your money, either
On the other hand, investors who begin saving closer to retirement may feel the need to take more risk to catch up on lost time. This leads the investor to look at risky assets such as small-cap stocks and emerging markets. While there is potential reward there, investors are involving themselves in areas they know little about and that have significant potential downside. Often, we have seen investors go this route in hopes of big returns, only to witness their savings dwindle due to the large risks.
When it comes to investing retirement funds, it is important to educate yourself on what you are actually invested in. You do not have to become the next Warren Buffett, but a general understanding will help appease some of your emotions and hopefully deter you from making poor investment decisions.
- Look for investments that provide a good return, without taking on too much risk.
- Understand that you are investing this money for the long term and that volatility is not a bad thing.
- Realize that even if you are near retirement, you still have a long-term horizon, so it is important to properly invest throughout your retirement years.
For 401(k) investors, I recommend looking for a good value-based investment fund. This means the fund will look at the fundamentals of the companies it owns and look at the valuation ratios for the sales, earnings, book value and cash flow to make sure they are getting a good value. While value does not outperform every single year, over the long term it has produced the best results. Going back to 1927, value stocks have produced an average annual return of 13.5%, far exceeding the performance of the S&P 500, which saw an average annual return of 9.9%.
By properly saving and investing for retirement, investors can get to the years they worked their whole lives for and live comfortably off the nest egg they built.
-
The Most Popular Apps for Retirement Planning in 2025A J.D. Power survey ranks retirement planning apps based on customer service and satisfaction. Does your financial app make the cut?
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms
Standard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
