Saturday, June 30, 2007

Want to Retire Poor?

I had been putting off writing this blog post for a while now; thanks and no thanks to procrastination I might be writing a little bit off. But the information I wish to share in this post has been modified based on some experiences I had with certain young professionals during those times. In fact, I had decided earlier to write on how to set up the personal retirement account system known as 401-k within the US. But given these experiences, it is my intention to dwell on some common pitfalls you should avoid when you get that 401-k form (new or modification) next year.

It is more evident year in year out that rather smart people are falling behind on their retirement planning. It is even more incredible that professionals like accountants and engineers whom you will think are better number crunchers fall into these common traps as much as any of us. I saw a program on the 401-k time bomb on PBS and was even alarmed when some very smart buddies of mine asked me to help look into theirs with the free advice that come with it. Alarming is a benign word to use to describe how many people are making avoidable mistakes that includes but not limited to:

1. Postponing Enrollment: Let us just say it is the biggest mistake of all. 3 out of 10 workers are still not enrolled. Lottery and change in the sofa is unlikely to take care of your retirement if you fail to do so. Enroll now.
2. Walking away from a Pay Raise: Some don’t contribute up to their company match (typically between 4-10%). It is like telling your boss you don’t need a pay raise and forfeiting the tax benefits and future income on such contributions. At the minimum, contribute up to the company match.
3. Contributing Little: Truthfully, contributing up to match alone is unlikely to assure you of a nice retirement in Monument Valley. Depending on your current & planned retirement lifestyle, a little percentage or more won’t hurt.
4. Spreading It Too Thin: The pains of the market decline have made many to take the message of diversification too far. Even with already diversified mutual funds, some employees just put money in each and every fund in their plan. There is no easier way to under-perform the market. Invest in not more than 5 funds.
5. Being Conservative: Why will a 20 or 30 something years old invest in 1% bond? It is called being scared. Investing in perennial market outliers like bonds, money market or even the broad market is like putting your money under the pillow in a high inflation world. Take some risk.
6. Feeding the Broker: Why will you invest in a managed fund that charge 2% fee for a mediocre return when a low fee index fund that mimics a sector/fund family is available? Check that expense ratio in the report.
7. Throwing Darts: Investing without a plan is very unlikely to make you rich. Have a plan and stick to it. It is a known fact that certain sectors outperform the rest of the crowd. If you are young, mid-cap fund, small cap funds and global/international funds is always a plus for your 401-k
8. Walking Away: Now that you have a plan, leaving it that way is not an option. Like flowers, your 401-k needs to be tendered to. A once in a year review won’t hurt.
9. All Eggs in One Basket: Truthfully, 401-k is one of various ways to save for retirement. The more flexible Roth IRA and real estate, even gold should be in the mix.