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Retirement Planning Tip: How to Start Your 401K Account

I am a bit of a nerd, I love spreadsheets, personal finance, budgeting and 401k account planning.  Nothing makes me happier than preparing an amazing spreadsheet that tells me how much money I should be making annually on my retirement investments.

Yes, I really can be that nerdy.

I know that not everyone shares my love of retirement planning, but that doesn’t negate its importance.

Not to be political, but the chance of social security being able to take care of you in old age is pretty slim.  Even if you do have social security, you won’t be living well on the minimal amount you receive.

Social security was designed as a supplemental program, not your primary source of retirement income.

To see how much you will need for retirement, check out this post:  What is your retirement IQ.

A few years ago I set up a 401K plan at our office.  I was so excited to roll it our new plan and put a lot of time and effort into educating our employees.  It was a small office, so I took the time to speak individually with each employee.

I thought it was a slam dunk.

After all the time and effort, I got one participant – me.  Talking about a huge downer – I was so disappointed.

I sent out periodic emails to my co-workers and mentioned it occasionally and finally got one more participant.  So of the 14 employees in our office, 2 opened 401k accounts.

I know 4 other people are doing IRA’s and stuff on a personal level, but that still leaves me at less than 50% utilization.

So what keeps people from planning for their retirement future? 

I did a non-scientific poll among my friends/co-workers.   A few of them didn’t have money to contribute, but the vast majority said they just didn’t know where to start, so they did nothing.

This surprised me.  I looked through our enrollment process and it was incredibly simple.  Our employees get a step by step online tutorial.  Everything is done online and is automated.

So I started digging a bit deeper.  It isn’t the sign-up process that scares people, it is the options.  Unless you are a financial guru very few people know how to actually choose mutual funds in their 401k accounts.

This clicked with me.

The first time I signed up for a 401K plan, I randomly chose plans based purely on the names that sounded good.

I didn’t have a clue what I was doing and was too shy to ask for help.

I got lucky since this was in the early 2000’s and pretty much everything I chose went up (which may have given me a false sense of confidence).

I’m not an expert at choosing funds and am not qualified to explain the process, but I am good at researching.

Below is a couple of my personal recommendations on how to choose good mutual funds:

  • – Choosing Quality Mutual Funds – Investopedia is one of my favorite finance resources.  This particular article by Richard Loth starts out with the basics and then links to detailed information on pretty much every aspect of the process.  It looks like a lot of information, but it is well written and easy to understand.
  • Kiplinger – My 9 Rules for Picking Mutual Funds – If you only have time for one article this one will give you a bird’s eye view of what to look for when picking funds.  It is a great starting point for the average investor.
  • US News – 3 Important Things to Consider when Choosing a Mutual Fund – Quick reference guide on active vs. passive management, risk vs. return and small vs. large funds.  This one is a quick easy read.
  • Yahoo Finance – How to Choose Mutual Funds like a Professional – Basic guide to knowing our comfort level and how to do an assessment of the different funds.
  • On the opposite end of the spectrum, I love this article from The Wall Street Journal entitled “Bad ways to Pick a Mutual Fund”.   Andrea Coombes goes over five incorrect methods investors often use to purchase funds.  I will admit to making a few of these mistakes.

Everyone has different goals for retirement.  Determine what your goals are and then begin to plan accordingly. I talked more extensively about knowing your retirement goals in this article – What is the most important step in retirement planning?

Take the time to research your available mutual fund options and then chose 401k funds that are well within your risk tolerance levels.

Find the options that work best for your situation. 

I personally invest a small amount in my 401K plan and also have Roth IRA’s for both Aaron and I.  I prefer the flexibility of personal IRA’s.  It isn’t tied to any employer and my investment options are pretty much limitless.

I should clarify that 401K plans are not perfect, particularly small plans.  They are often overpriced with limited investment options.  Many employees pass on the vast majority of the fees to participants which will very quickly eat away any gains.

***Editorial Note: I got nailed with fees and as a result am completely revamping my 401K accounts – You can read about my mistakes in this post – How to Avoid Retirement Plan Account Fees.***

401K Plan Administrators are typically non-financial people and often the fiduciary standards are not upheld.  Forbes published an article entitled “Why 401K’s have Failed.”  It is a fascinating read and goes into a lot more depth on this subject.

I know that retirement planning is right up there with watching water boil.  It takes forever and is incredibly boring.

The first time you set up your portfolio is going to be torture.  It will take many hours to set your goals and then locate funds that fit in with your risk tolerance levels.

However, once you have everything set up, periodic adjustments are less time-consuming.

I typically review everything in my portfolio each year in January.  I look through my investments options, see how everything is performing and then take the time to research at least three other funds.

I change my allocations and make sure I’m getting the results I expected.  I use a program called Personal Capital for my retirement planning.  Their free online analytics made reallocation very simple.

My goal is to purchase funds that I can hold for at least five or more years.  Constant trading will eat into your profits quicker than anything else.   If you take the time to research the funds in the beginning, in theory, you will have little need for frequent trading.

Obviously, there is a lot more to retirement planning than I’ve covered here.  If you really want to be prepared for retirement you need to research brokerage firms, traditional IRA’s vs. Roth IRA’s, mutual funds, fees, taxes, wills  . . . . .  I could go on and on.

Don’t let yourself get bogged down.  Start simple.

Either open your own IRA account or opt into your employer’s 401K plan.

The key thing is to get started.

Once you start to see your money grow, it becomes addictive and you’ll be a lot more interested in doing the research to make sure it continues to grow.