Ted Benna is credited with first using a obscure provision in the tax code to create a simple, tax-advantaged way to save for retirement, the 401k. This happened in 1980 and love it or hate it, we’ve had a significant shift from defined benefit plans to 401k plans. Most private industry employers either don’t have a defined benefit plan any more or have scaled it back significantly.
Defined Benefit Plan
Pre 1980, many companies offered a Defined Benefit Plan. Essentially this plan gave employees a retirement paycheck after working 30 years for the same employer. While it was more prevalent, it did have some problems. Key was that many companies didn’t fund their retirement plans adequately. When that happens, the fund essentially goes bankrupt and those employees who were getting a retirement check, don’t get one any longer!
Current 401k
Today’s 401k plan has changed slightly since 1980, but is offered by many employers. Employers usually provide a certain percentage of salary as a ‘match’ to what the employee contributes (usually 1-1.5%). One challenge for employees is that it shifts the burden of saving and planning for retirement to them. If they don’t save enough, they may not have enough to ensure a comfortable retirement.
What to do?
The most important thing we can do is get educated. Many people take the approach with their investments of ‘set it and forget it’. They get a 401k started, set up the withdrawal amount from their pay and then never make any changes. Typically they just look at their annual statement (if that) and complain about not seeing any growth, etc.
Education is really the key. The 401k is a great way to save for retirement. But you need to get educated on the plan details. Here are a few things to look at:
- How much does my employer contribute?
- Do I have to match that contribution?
- What are my investment options?
- How frequently can I transfer money between funds?
- Is there a loan provision if I need to get cash (usually for a house, or emergency)?
Knowledge is power and if you do your research, you can use the 401k as a great savings tool for retirement.
Other Options
But also consider other options. Like Real Estate, actually buying investment property, or investing in a Real Estate Investment Trust (REIT). Another option is to create a self-directed 401k, this allows you to invest in assets beyond what your employer may offer. Could be real estate, or other businesses. Lots of rules on how to set one of these up correctly, so please do you research. Here’s a link to my article: 10 INVESTMENTS THAT MAKE MONEY WHILE YOU SLEEP! to give you some additional ideas.
Conclusion
Learning to Invest takes education and knowledge. So get educated! There are plenty of examples of people who lost their nest egg by making poor financial decisions. Don’t be that person!
Please respond in the comments below if you have any questions or a different opinion. Thanks.