In a recent article by Kiplinger’s, “10 Reasons You Will Never Retire”, (Rachel L. Sheedy, 2014) they provide 10 reasons you might never retire as well as steps you can take to avoid these roadblocks. The very first reason, “you are not saving in a retirement plan”. They are referring to 401(k), 403(b) and 457 plans as well as the few defined benefit plans that still exist. In this first step, a certified financial planner talks about taking advantage of tax deductible and tax deferred savings vehicles. According to this CFP, “One of the easiest ways to accumulate wealth is to always take advantage of tax deductible and tax- deferred savings vehicles”. I take exception to this broad statement. I followed all the same advice when I was 26 and took full advantage of my employer’s 401(k) plan. However, there are very key important aspects you must follow for this account to return the values that most financial experts will lead you to expect. In the article, the CFP goes on to an example of an employee at the age of 22 beginning his 401(k) and contributing $2500 per year. At age 62 with an average return of 8%, the individual will have over $600,000. Now I am not going to dispute the article or CFP, however, I am going to give you a few more facts for this scenario to play out as it was presented in the article.
First and foremost, for this scenario to work, the investments of the 401(k) cannot suffer a negative return in any of the 30 years of the example. And why is that? Well, I’m glad you asked. You see, each time your account or investment suffers a negative return, it requires a greater return just to get back to break even. For example, suppose for the purposes of this scenario, the stock market crashed over an 18-month period and the investments of your 401(k) suffered a negative 20% return. It would require a 25% return just to get back to break even. That may not sound that difficult to achieve, but look at your existing 401(k) returns. If they are consistently achieving a return of 25% or more year after year, you may have nothing to worry about. But, I don’t think that is the case considering the average 401(k) balance at the end of 2013 was $100,000 (Selena Maranjian, 2014). That is a far cry from $600,000 as suggested earlier. This is not to say that there aren’t people out there that have large 401(k) accounts that have been investing for the last 20 years, but it is not the norm. I believe that they have followed a different path, one that requires a little education and a lot of hard work to maintain your account.
Since 1929, there have been 11 historic bear markets (NBC News, 2015). In the most recent, October 2007 to March 2009 the S&P 500 lost 56.4% of its value. If your 401(k) was invested in equities, which most are, then in 2007 to 2009, you would have seen those equities lose upwards of 30% the first year of the Bear Market, and lose another 11% the year after (These numbers were based on my 401(k)’s investment funds). You will now need a return of 42% the first year and 12% the next, just to get back to break even. Well, unfortunately, it took the stock market 6 years to get back to the levels it was at before the crash. The good news is you have recouped all your losses as long as you didn’t cash out. The bad news you lost 6 years of investing returns.
So what can you do? In this blog, I won’t be able to give you the Holy Grail of information for your retirement account. Rather, I am going to give you some actionable steps to take that will definitely help. I want to forewarn you though; every investment you make will have risk. Your education will allow you to manage that risk. You will not be able to eliminate all of your risk, as risk avoidance is a pipe dream. However, you will be able to manage that risk to be able to avoid large losses. I can’t guarantee any of the steps I give you will work for you, however, they have worked for me, but as I stated above, they are actionable steps. You must take action and above all, you must become educated.
Step one: Find a program or course that will teach you how to determine market direction. This sounds simple, but what you really need to know is how to spot a major shift in the market. In 2007, all the signs were there that the market was crashing, unfortunately, by the time main street media told us, it was already too late. If you waited until CNBC or Fox and CNN to tell you that we were in a market crash, the market had already dropped almost 30% of its value. Although you could have made corrections to your 401(k) investments, you would have already suffered a majority of the losses to your account. There are several courses and tons of information on the web, but you will find that these free courses and articles written by professionals won’t always give you clear, actionable steps. After scanning some of them, they didn’t offer much information. I would start with my favorite website, LSOT or Learn Stock Options Trading. This is where I started and was able to learn how to trade options and ultimately come across courses that taught me how to spot a stock market crash. This information is not free and can cost you upwards of $100, but ask yourself if your 401(k)’s balance is worth a $100.
Step two: Begin following the market religiously. What I mean by this is to check the market each night. I used to watch CNBC while at work and found it to be noise that got in the way of my trade plan. I also found that by the time they report something, it is already too late. So, now I check my accounts at night when the market is closed. As a matter of fact, this is when I begin to formulate my options trading plan for the next week. It takes practice and will be a while before you develop a good habit, but I promise you will be more in tune with what is really going on.
Step three: Subscribe to a paid investors magazine or newspaper. I love Investors Business Daily or IBD. They aren’t cheap, but that old adage of spending money to make money applies here. I found their system and articles to be among the best. It was founded by one the greatest investors and businessmen in our time, William J. O’Neil. Although it is pricey, it is packed with information and training that will definitely help you navigate your investment goals as it has for me.
Step four: Find a mentor. I can’t tell you that my mentor will fit your style, but you have to get out there and search. Join blogs and look for local trading groups in your area. One of the best places to start is Meetup.com. This website is packed with meet up groups in your area on just about everything. Doing a Google search for investment clubs may also help.
Step five: Learn everything you can about your 401(k); from the investments they make to fees they charge. A rule of thumb with all investments is to diversify, so be sure that you aren’t heavily invested solely in the company you work for. If you want to see the worse case scenario, watch the Enron scandal on Netflix to see what I mean. Figure out how you can transfer money between the different investing accounts within your 401(k) and take full advantage of the fees you are paying. Call the managers of these funds and make sure you understand the prospectus associated with each fund. One of the most critical aspects to find out is how you can track the fund on your own. For example, one of my funds in my 401(k) tracks small cap companies. After some basic research on my 401(k)’s site and the internet, I was able to determine the ticker symbol that investment tracks. I now have that symbol loaded in my investing platform and track its performance. This allows me to see when things may be heading down. I can sell off those shares and purchase others shares. Doing this locks in the gains I have made through the year and protects me when the fund begins to crash.
Step six: This last step is the most crucial and also one of the most difficult to follow. Limit the advice you take from the water cooler talks at the office. I found that it is best to not discuss this at all at work. Even after I figured out how to better my 401(k) and my finances, sharing that information with co-workers only made matters worse. Furthermore, I got tons of advice from people on how everything I was doing would fail. This type of advice is often freely given because they truly want to protect you, but the reality is that most don’t know what they are talking about or have had losses due to their failure to follow step one. Be careful who you take advice from and always follow this golden rule, “Trust, but Verify.” Don’t just blindly follow my advice in this or any blog I write. Do the research and verify my work. Most of what I write about is actual life lessons I have experienced. However, I do quote articles as well as experts that I have followed. This works for me, but may not for you. This blog is just the starting point to your journey and we are not chauffeurs. You still have to drive yourself.
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