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The Ten “Don’t”s of 401k Investing

March 12
00:15 2013

With the coming of Spring comes that time of year when many families celebrate significant religious holidays with feasts, ceremonies and the traditional family gathering around the picture tube to watch a Charlton Heston classic or two. 1065900_48614807_Moses_stock_xchng_royalty_free_300This leads one to think, what would Moses do today if he were around? No doubt his actions would differ from the agrarian society of ancient Egypt to the post-industrial corporate world of today. Would he be known as a turn-around specialist, parting the sea of red to take companies to the Promised Land? Or imagine, if you will, Charlton Heston as the embattled HR manager, frustrated in trying to convince his people to take charge of their lives and save for retirement. He would go, alone, to the penthouse suite and meet with the Man Upstairs who would no doubt have the wisdom to provide the perfect advice to retirement investors. Perhaps Moses would have then descended from this Mount Sinai with the following Decalogue written on his tablet computer:

#1: Don’t Wait to Start. This goes along the line of “Don’t put off to tomorrow what you can do today.”  Brooks Herman, Head of Research, BrightScope in San Diego, California, says, “New savers usually think they can save more later in life when they earn more money. They should start now! Saving money is like exercise:  it’s a behavioral habit people should start early and do often.” Not only is it harder to develop good savings habits when you’re older, but waiting causes you to miss all the wonderful delights that come from compounding.

#2: Don’t Assume Everything Will be Perfect. Along the way, you’ll need to make several assumptions. You’ll even have to repeatedly update those assumptions. It’s always safer to err on the side of caution. Elle Kaplan, CEO & Founding Partner at Lexion Capital Management LLC in New York City, says, “Every assumption you make should be extremely conservative. Your savings become your paycheck and must last the rest of your life. It’s easy to find ways to spend extra money, but much more difficult to deal with a shortfall.”

#3: Don’t Fail to Plan. To paraphrase one of those ubiquitous posters: “Retirement is a journey that begins with a single step.” Such is the planning process. Jeff Stoffer, Principal at Stoffer Wealth Advisers in San Rafael, California, says, “Planning is about answering the questions, ‘When can I retire?’ and ‘Will I have enough money to last my lifetime?’ Planning starts with generating ideas about what you need and want in retirement. Visualizing what retirement looks like for you is a step in planning that tends to be overlooked. Planning for the future can seem abstract, almost like fantasizing. In order for us to get excited about it and hold it as a goal, it needs to be attractive to us. We will be more likely to put our money toward it if it is something real in our mind’s eye.” Those who fail to plan, plan to fail.

#4: Don’t Put Off Saving if Your Company Doesn’t Match. Worse than not taking the “free” money of company matching is the act of not saving just because the company doesn’t match. Stephen D. Iaconis, a financial planner at Bridgeworth Financial, LLC in Birmingham, Alabama says, “A common misconception is that ‘if my employer doesn’t match, I shouldn’t contribute.’ This is very dangerous. The only person responsible for your retirement future is you. Save no matter what your employer is matching.”

#5: Don’t Just Keep Contributing the Same Amount Every Year. Once you start to save, that’s great, but it’s only the first step. Your contribution percentages should increase as your pay increases. “Commit to increasing each year, give yourself a retirement raise annually,” says Paula Hendrickson, Director Retirement Plan Consulting at First Western Trust in the Greater Denver area. She continues, “The sooner you can be contributing between 10-15% the better chance at success – I have never met a participant in a retirement plan that told me ‘they saved too much’.”

#6: Don’t Assume You’ll Need Less Money When You Retire. Joseph F. Ready, Executive Vice President at Wells Fargo Institutional Retirement and Trust in Charlotte, NC believes too many people incorrectly say to themselves “I will need a lot less money in retirement than I do now.” He says, “Many experts recommend that people expect to spend about 80% of their annual pre-retirement household income during retirement. That may seem high, but the retirement landscape is changing, as baby boomers prepare for more active retirements than earlier generations. Job-related expenses, travel, entertainment, home repairs/remodeling, health care, and other costs can all boost the price tag of an active retirement.”

#7: Don’t Assume You Won’t Live Long. Ready also believes people convince themselves “I won’t live that long.” This is a problem, he notes. “The good news is that Americans are living longer,” he says. He adds, “But with a longer life expectancy comes the need to fund a longer retirement. Building a nest egg to sustain 30 years of retirement (instead of 10 to 15 years) can help ensure that you don’t outlive your savings.”

#8: Don’t bring a knife to gun fight. Michelle Ford, CEO of LifeLong Retirement Corp in Bridgewater, New Jersey, says, “Understand there are two parts to retirement planning. There is the accumulation phase (build the pot) and then the distribution phase (spend down). If you understand that there will be a spend-down then the accumulation phase should be planned with this in mind. In other words don’t just build the assets, put them in the right tax advantaged accounts (In line with don’t bring a knife to gun fight). The distribution phase is all about income planning so educate yourself on A- how much you actually spend, B- your guaranteed income sources and their applicable rules/choices and C- how do taxes impact your varied sources of income and how do they interlace together.”

#9: Don’t Leave Your Retirement Savings in the Company’s Plan When You Retire. Stephanie Ackler, CFA, Managing Director of Investments at Ackler Wealth Management of Wells Fargo Advisors, LLC in New York City says, “When you leave a job or retire, consider rolling over your 401k plan(s) into an IRA for easy tracking and consolidation and to continue the tax deferral status for as long as possible.”

#10: Don’t Panic, Be Patient. Karen Lee, owner of Karen Lee and Associates, LLC in Atlanta, Georgia, believes one of the most important rules and principles regarding savings is to “be consistent and patient.” Ilene Davis is a financial planner at Financial Independence services in Cocoa, Florida, wants you to avoid the very thing that prevents consistency when she advises “Don’t Panic!!!”

Whether you’ll be celebrating Passover, Easter or the beginning of baseball season, and whether you’ll be watching The Ten Commandments, Ben Hur or the original Planet of the Apes, you’ll want to heed the sage advice offered in these ten don’ts of retirement investing.

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on this subject, including how to create an investment policy statement that defines a set of menu options consistent with the “one portfolio” concept (as well as leaving room for those few remaining do-it-yourselfers).

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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4 Comments

  1. d mech
    d mech March 12, 14:25

    Shouldn’t #9 be “Don’t Leave Your Retirement Savings in the Company’s Plan; Roll It Into an IRA When You Retire”?

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author March 12, 15:23

    That “Don’t” ran away. It’s been found and placed back in its original position. Thanks for letting us know.

  3. Jeff
    Jeff March 12, 16:33

    On #5 perhaps focus on contributing a ‘percent’ instead of an ‘amount’. Then you are getting that increase every year. But still how do you convince someone whose dollar amount is already increasing with their raise to increase their deferral rate?

  4. d mech
    d mech March 12, 17:17

    Re: #5 Our plan has an auto-increase feature, (as well as an auto-rebalance feature) that allows the participant to automatically increase contributions 1, 2, 3% etc. annually and rebalance their overall investments annually or quarterly, since things can really get out of whack with the ups and downs of the investment world. I really encourage the use of such optional features whenever they’re available.

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