Violet Beauregarde was way ahead of her time.
The ornery girl-turned-human-blueberry in the 1971 classic movie, “Willy Wonka & the Chocolate Factory,” was punished for her penchant for instant gratification. But she would have fit right in today, when advances in technology allow us to procure almost anything with a click of a mouse, and our live-in-the-moment mindsets make it hard for us to plan for next week, let alone 30 years down the road.
It’s no wonder why it’s so easy to delay or altogether avoid 401(k) investing. Retirement is a far-off land where we’re old and wrinkled. It’s much easier to focus on the present, when we still have (most of) our hair.
You might have numerous and varied justifications for neglecting to invest in a 401(k), but almost none of those excuses hold water when you look at the big picture. Let’s take a look at some of the most common 401(k) “roadblocks” and ways to overcome them:
1. Investing terminology is too confusing. Market capitalization? Compounding? Dollar-cost averaging? Investing terminology isn’t straightforward, and sometimes we’re uncomfortable participating in something we don’t understand.
You’re not alone. The 2013 Jackson Investor Education Survey showed that 42 percent of men and 55 percent of women feel as if they don’t have enough financial knowledge to make investing decisions.
The solution: Knowledge is power, and there are plenty of resources available for you to educate yourself. Use Google to search for specific terms and phrases, such as “401(k) help,” to help you find answers to any questions you might have. Get comfortable with the basics, and don’t worry about more advanced investing vocabulary for a little while.
You can learn about investing over time. No one starts out being an expert. Don’t let your naiveté keep you from 401(k) investing or planning for a secure retirement.
2. I can’t afford to contribute very much, so it’s not worth my time. The solution: Contribute as much as you’re able to, even if it’s an extremely small amount. You can increase your contribution level over time. Because of the power of compounding – the ability of an investment’s earnings to themselves earn a return – a very small investment can eventually grow into a significant amount of money.
For example, imagine you invested $500 this month. Based on an 8 percent annual rate of return, in 30 years’ time, you’d have more than $5,300, even if you never contributed another dollar. Time is one of your most powerful allies when it comes to saving for retirement, which is why it’s so important to start saving sooner rather than later.
3. The market is so high right now. It’s bound to drop right after I start investing. The solution: Invest using dollar-cost averaging, a simple practice that involves putting a set amount of money into your investment and retirement accounts each month. When you invest in your employer-provided 401(k) using automatic paycheck deductions, you’re using dollar-cost averaging, even if you don’t know it.
This investment strategy can help ease the emotional roller coaster of investing and keep your hard-earned dollars working for you. No matter what direction the market is going in, you won’t waver from your investing plan, and you’ll continue to build your investments over time.
4. I’m just lost. There are too many investing choices, and I’m afraid I’ll pick the wrong funds. The solution: First decide whether you’ll go it alone or work with an investment advisor.
If you choose the solo route, you need a plan. Any retirement savings plan should include an estimate of your retirement-income needs and how much you’ll need to save to live comfortably in retirement. You should aim to replace at least 70 to 80 percent of your preretirement income, but this number could go up or down depending on your intended retirement lifestyle.
You’ll also need to determine your risk tolerance, or comfort level with market volatility, and timeline to retirement. Typically, the longer you have until the big day, the more aggressively you’re able to invest before you need to start moving toward the more conservative end of your comfort zone.
Using the above factors, determine an asset allocation, or breakdown by percentage of which major investing classes (international funds, mid-cap funds, small-cap funds, large-cap funds, bond funds and cash equivalents) you’ll use in your portfolio. You’ll want to spread your money over three to five asset classes to maintain a diversified portfolio and minimize risk. You don’t want to invest too heavily in one asset class over another. Now you’re ready to choose funds from your 401(k) plan that fit into the asset classes you’ve chosen.
If all that work seems like it would take too much time and effort, you can look into hiring an investment advisor. If you choose to go this route, you have to do some research to find one who makes you feel comfortable and confident. An investment advisor can help you develop a retirement and investing strategy based on your unique situation. They’ll help you estimate your retirement needs, determine how much to save each month and how to invest those savings, as well as help you hone your current budget so you’re able to contribute an appropriate amount. And that’s just the basics.
These folks can be educators and provide ongoing advice as your circumstances evolve. Plus, working with an advisor can help you average nearly 3 percent greater returns on your investments annually. I’d recommend a fee-based advisor who doesn’t work on commission.
Here’s the bottom line: Getting started with 401(k) investing can be intimidating, but you needn’t feel overwhelmed. The first step is often the hardest, and you can learn the rest as you go. A 401(k) is one of the most common ways to save for retirement, so don’t let your fears today ruin the future you’ve always dreamed of.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
Corrected on 1/13/2014: A previous version of this story incorrectly referenced the movie title “Willy Wonka & the Chocolate Factory,” and its character Violet Beauregarde.