An interesting thing has happened today: my company sent out an update on it’s 401k policy. They have increased the dollar amount of the match they ate willing to make. If you read the first part of portfolio rebalancing, you are aware that I’m no longer investing any money there. Since I made that choice, I see such enticements through a different lens. I appreciate the generosity my company has extended, but it’s important to realize companies aren’t successful because they are benevolent and generous. It is more likely a need to stay competitive with other companies and what they are offering. There are probably tax benefits as well to consider from their perspective. There is nothing sinister or wrong about this. It is simply business, and all active financial planning done on your part requires that you think like a businessman.
Did I mention active investing? When I joined my current company, I took a passive approach. I picked a handful of mutual funds from a list, and spread my contribution among them. There was no in depth analysis. Frankly, I didn’t think I needed anymore. Instead, I assumed (as I had in the past) that the mutual find manager would fo his jon and earn me s good retirement. I didn’t realize how passive and wrong I was at the time. Another dimension of passive investing was the fact that I wasn’t aware of the limit of the company match. While they will match a certain percentage, there is a hard limit in dollars of how much total match. Guess what? I exceeded the limit. Even with this new increase, I still can’t get the full percentage match. This all makes for a very manageable situation for my company. They can go to the shareholders and give a very concrete listing of the maximum liability they have in 401k funding.
This is very different than the old style of managing pensions. Instead of managing the complex and unpredictable risk of a pension fund, they can simply add up the number of employees and multiply it by the dollar limit for each year. The rest is, as they say, up to us. If you assume your 401k along with a passive investing strategy will carry you to a comfortable retirement, you’re in for a shock. I have been saving money in my 401k for 15 years. When I started back then, I maxed out to the tune of 15%. At one point they raised the limit, and I pushed it up to 18% (the IRS dollar limit). I did that for years. Then one day, I looked at what was there and realized what was there wasn’t growing fast enough to beat inflation AND fund a comfortable retirement for 20+ years. This is what allowed me to break away from the propaganda of Wall Street and it’s message of the stock market always rising.
I was listening to Dave Ramsey today while driving, and for the nth time heard bim throwing out the same “grow your mutual funds at 12%, withdraw at 8%” gibberish. Mutual funds average 7% with wide swings. In fact going back to 1951, the S&P 500 has swung from between 5.15% and 10.05% over any given 30-year period. Mutual funds tend to underperform this index, so expecting 12% is ridiculous on its head.
Advisors have been telling people to withdraw no more than 4%. Factor in that this must be based on the roller coast value of your portfolio and NOT on some average (to avoid dipping into the principal), and you must realize your mutual funds are just too risky with their horrendous track record to be your primary venue of retirement. I don’t have anything against my company. It’s just important to understand that what is best for you, your company, and the IRS do not often coincide.
UPDATE: Cross posted at http://www.turnquistwealthbuilders.com/2012/06/does-your-401k-company-match-have.html, the place where I now post all wealth building opinion.
I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.