Are You Clueless When Setting Up Your 401k at Work?


Why you need to be financially literate.

The retirement plans offered by employers have evolved from pensions to 401k’s at the end of the last century. What this means is that the responsibility for saving for retirement has shifted from the employer to you. This is great for investing nerds like myself, but not as good for today’s average young professional.

Let’s role play for a second. You’re a level 1 professional with a full time job making $35,000 per year. Your employer offers you a 401k with a match up to 2%. You’ve been told by your parents that the match is free money, so you enroll and put away 2% of your paycheck each month which your employer will match.

The next step is tricky, it’s time to pick out funds. Having never looked at anything like this before, it looks like something out of the Matrix or written on the wall of an ancient pyramid. You’ve got to pick something, so you just randomly pick 10 funds that sound “cool” or “profitable.” As a result, you end up with high expense ratios, low yielding bonds, and shares of companies you know nothing about. Let’s say this works out well enough and your funds manage to produce an average of 5% compound growth per year.

Assuming the average yield, salary, and contributions remain the same for 20 years, you’ll come out with a 401k valued at about $48,000. To a novice, this might sound like a lot, but anyone that’s tried to plan for retirement knows how little of your expenses this would actually cover at a 4% withdrawal rate. Now, you’re in your 40’s and really not even close to retirement.

Because our schools don’t teach students how to create a budget, evaluate funds, or analyze a company’s EPS or payout ratio, The young professionals of the world have no clue how to approach investing for their retirement. Social Security is most likely not going to be a major contributing factor for Millennials in their retirement, and without pensions offering a “hands-off” way to invest, the burden is entirely on the individual to figure it out.

Many are not even aware of this burden. Discussing money has become taboo in the U.S., and if nobody is talking about it, how are young people going to find out?

Unless you want to work until you’re 75, you need to educate yourself on investment. Unless you want your kids to work until they’re 75, teach your kids about money, budgeting, and investing. I’ve been adding posts to a Dividend 101 category for you to get started and learn how to be a dividend growth investor. There’s no shame in starting out, but there is shame in having the ability to act and doing nothing.

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