Why your 401k investment returns suck
Corporate welfare days are over. Earlier companies would not only promise you lifetime job , but also a defined pension for rest of your retirement life.
Most companies today have shifted from defined benefit plans or pension plans to defined contribution plans like 401k. With 401k plans you are incharge of your own pension plan.Your retirement income will depend on how much you have in your 401k and how well you invested it.
The implications of this is clear, you need to develop skills to do this. If your skills in investing suck, your returns in 401k suck and as a consequence your retirement will suck.
If you contribute the maximum allowed at present ($16500) for say 40 years of your working life you will have $660000 as contribution in your lifetime. (this does not take in to consideration the catch up provision which allows you to add 5500 more per year after certain age and assumes you have enough income to contribute full amount). It also assumes the contribution limit remaining same. In reality it is indexed to inflation. If you have both husband wife working these figures will be much bigger. If you do not do a good job of investing it you may not even have 660000 at the end of retirement.If you can compound that money at rate of 5% over 40 years you would have 2.2 million. If you can just jack up that rate by 1% you will have 2.8 millions.If you can compound at 8% then you will have 4.9 millions.
Most people are not compounding at that rate. In fact many have lost money and lost years in the process. The reason for that is clear, average investor has extremely low skill levels when it comes to understanding how to invest. Most have no understanding of how their own plan works. People are looking for simple solution without willing to go through a learning process or putting in efforts.
Average investor spends more per month on his Cable service than he is willing to spend in a year on educating himself or enhancing his own skills.
If you spend time and effort in educating yourself about commonly used approach for retirement investment like: target date funds, index funds, lazy portfolios, William O’Neil mutual fund investment approach, fund timing based approach and understand the nuances and intricacies involved in each of those approaches, then you will make more informed and confident decisions.
The question is how much time and effort you are willing to put for that.
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