A Grumpy Old Man’s Guide to 401(k) Investing

charlesPerhaps I’ve been spending too much time with my young kids, but I’ve gotten quite good at wagging my finger and speaking in a sternrn, fatherly voice. I love my kids dearly, but at times the rascals need a little discipline. And chances are, when it comes to making full use of your 401(k) plan, you do too. So, as my glasses slide down my nose, I’m going to put on my slippers, roll up my Financial Times newspaper and shake it in your general direction.

You – yes, you there! Sit down and listen up because this is important. And don’t you dare forget this advice. What I’m about to tell you is for your own good.

If you’re not taking full advantage of your 401(k) plan… well, shame on you. Those things aren’t free, you know. Your employer spends a lot of money administering the thing… for your benefit. If you can’t be bothered to log in or fill in the forms to participate, you’re just a dernrned fool. Do you know how many starving children in Ethiopia would love to have a 401(k) plan like yours?

At my first job, we didn’t have 401(k) plans. I had to settle for the measly $2,000 I was allowed to contribute to an IRA at the time. Well, I maxed out that IRA… and I loved it! But what I wouldn’t have done for a proper 401(k) plan. So, show some gratitude, would ya!

I know, I know. Money saved in a 401(k) plan is money you can’t spend on some new-fangled gewgaw. But if you make decent money, a huge chunk of it is just going to end up going to the tax man.

Stop and use your head for a minute. If you’re in the 28% tax bracket – and if you’re still single (at your age!), you’re in the 28% bracket at an income of just $91,150 – then you effectively earnrn a 28% “returnrn” on every dollar you contribute to your 401(k) plan from day one. Would you rather that 28% go to the guv-mint? Yeah, that’s what I thought.

You can save $18,000 in a 401(k) plan in 2017. If you get started now, that’s $692 per paycheck. You can do that. Your grandmother used to feed a family of seven growing kids on $692 per year and never complained. So, log in to your plan or call your HR department now and get your contributions on track.

Don’t make me come over there and swat you with this newspaper.

And matching… don’t even get me started on matching. When I was your age, I was lucky if my cheapskate boss matched me even 2%. These days, I’ve seen companies match as much as 6% or 7%. If you’re too big of a sissy to contribute the full $18,000 in salary deferral to your 401(k) plan, then for crying out loud, at least contribute enough to get the full matching amount from your employer. If you don’t, you’re leaving money on the table. And I don’t know about you, son, but I don’t have a money tree in the backyard. When someone offers me free money, I take it.

Ok, I’m going to unroll the newspaper and push my glasses back into place for a moment. In all seriousness, this is the time of year to make changes to your 401(k) plan. If you’re not already maxing out your 401(k) plan for the full $18,000 (or $24,000 if you’re 50 or older), you should really make that a priority. Even if the stock market fails to returnrn a single red cent, the tax savings and employer matching alone make it more than worthwhile.

I realize that not everyone can realistically defer $18,000 of their annual pay. If you’re young, recently started a family or have a non-working spouse, that might not be an attainable goal. But here are a few tips to get you closer.

If you got a raise to start the year, I strongly encourage you to allocate the difference to your 401(k) plan. You were already surviving at your previous pay rate; continue to live your current lifestyle a little longer, and push the salary increase into your retirement plan. Years from now, you’ll be happy you did.

If you generally get large tax refunds every year, consider chatting with your HR department about increasing the number of exemptions you claim. This will cause you to withhold less in taxes, which will boost your paychecks. You can then use higher effective pay to contribute more to your 401(k) plan.

And finally, consider living more modestly. If you rent an apartment, consider getting a roommate or downgrading to a cheaper apartment. Money spent on rent is effectively money wasted. It’s better to use that money to build your future.

Listen to me, son. It’s for your own good.

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P.S. I write the quarterly Dent 401K Advisor newsletter, in which I help readers allocate their 401(k) funds to make the most of the market environment Harry and the rest of us expect to see over the next three months. I recently published the Q1 allocation. Take a look.