Is a 401k Enough?

The average American commits five big mistakes when they are planning for their retirement, and these mistakes can turn a millionaire into someone in the poor house. Most people these days are paying more attention to what they are going to ear for dinner, than they do in their finances.

The first mistake that is being made is people are not maxing out their 401k plan. In fact aver 30% of Americans do not contribute at all to their retirement fund at all! Most companies match up to 6.9% according to Fidelity. That means that a person with an income of 50k would be matched up to $3450. Ok so let say that you are matched 100% on your 3450, and end up putting $6900 away during your first year of contributing. Now lets say that you work for 40 years before retiring, this means that if you continually to contribute 6.9% (assuming a 5% annual raise) that comes to a whopping total of 275k. Now Americans will live to an average age of 75. Do you think that you can live 10 years or more on 275k? No way! On top of that we know that inflation will take a nice chunk of that nest egg.

Let's talk a little about diversification. More than 25% of all American's that we contributing to their 401k have 100% of their money in one investment option. And Fidelity says that it is often in a low-yielding stable-value account. This basically provides no opportunity for growth of your capital. Most companies will allow you to choose how to diversify your account. My account through fidelity was easy to set up. You can select the year that you want to retire, and they have a plan that is suited perfectly for you. This is great because you don't have to worry about diversification or asset allocation because it is all done for you.

One thing that I have to recommend is to sell your company stock. I understand investing in your company. In fact I invest quite a bit in the company that I work for. That is because I know the market, and I am comfortable with the performance with the companies stock. There are some employees that hold on to company stock as it plummets. Why would you do that to your financial future? Yes I love the company that I work for, but if their stock continued to devalue quarter after quarter, my money would be out of there.

I have to talk a little about roll-overs. A lot of younger people are opting to cash out of their old 401k when they change careers. This is the dumbest thing that you can do to yourself. Come on you have to pay 20% in federal tax, and 10% in local. Are you kidding me? Tell you what if you would like to give away 30% of your money I bank with Wachovia and you can deposit it into account number: XXXXX. Don't do this to yourself. What you want to do is roll your old 401k into an IRA. Lets says you have 5k in your retirement account, when you decide that it is time to leave the company that you we with. Okay lets be honest you have 5k in your retirement account when your boss decides that it is time for you to move on. So you have 2 choices you can cash it out which will net you about 3k. Or you can roll it into an IRA and earn an estimated 11% return. Now by the time that you are 70 your $5,000 investment will be worth over $400,000. I wouldn't mind an account with 400k for a 5k investment that I made when I was 28!