September 6, 2013

This week we look at the importance of saving early as well as evaluating your 401k and the investments inside it. Brian and Bo examine two articles: An Open Letter to Everyone Under Age 30, from The Motley Fool and How to Grow Your Savings, from Consumer Reports.

An Open Letter to Everyone Under Age 30

This article dives into the importance of saving at a young age and illustrates the power of compounding.

Key Statistics:

  • Less than 60% of American’s are currently saving. Of those who are saving 1/3 of them have less than $25,000 saved.
  • Almost half of Americans could not come up with $2,000 in the next month if they had to.
  • Americans 55-64 have a median net worth of $180,000 or less, which is less than what they’ll likely need for health care alone during retirement.
  • The S&P 500 has an average annualized return of 6.6% after inflation. If you are 20 years old and save $1 now it will be worth $18.50 by the time you turn 65. If you save $1 at age 30 each dollar you save will be worth $9.60 by the time you turn 65.

Every dollar that you can put together now will be exponentially more valuable at retirement. Put your army of dollars to work NOW, when money begins working sooner the compounding power will be multiplied. Check this out! We always say pay yourself first: if you can save 15-20% of your income life will get much easier.

How to Grow Your Savings

Consumer Reports hit the nail on the head with 401k analysis in this article!

Signs of a dud 401k:

  • No Index Funds. These investments are super cheap and allow you to get broad diversification in one holding.
  • Fund Expense Ratios over 1%. Funds that are highly specialized or invest in inefficient markets tend to have a higher expense. High costs funds are only acceptable when they are a key part to your diversification.
  • Delayed vesting of employer match.
  • Matches only in company stock. Do not put all of your eggs in one basket, your human capital is already invested in the company; don’t have all of your financial capital into the hands of your employer.
  • Funds lack diversification.
  • Low or nonexistent employer match. Sometimes this is not always a bad thing, if other options are made available to you. (i.e., Roth options, immediate vesting)

The article refers to a study that shows:  57% of American households have less than $25,000 in savings and investments, not including their home or pensions. In about two-thirds of households with 55- 64-year-olds, the groups closest to retirement age, the average saved amount was not even equal to a year’s income.

Here’s how to change your 401k lineup:

  • Find the Fiduciary- This is your primary contact for your 401k.
  • Collect Documents- Keep annual disclosures that list your fiduciary as well as the fund line up and expense ratios.
  • Research New Funds- If the funds that you have are expensive or not well diversified, research new ones.
  • Write to the Fiduciary- Tell them the funds that you are looking for and why. This is where your research comes in handy.
  • Enlist others- Get friends at work to write a letter asking for fund changes. Often times the fiduciary will not consider changes unless they get multiple requests.

Do not fall subject to the recency bias, meaning just because we have seen recent down markets does not mean you shouldn’t be in the market. Good times will return and the only way to be exposed to the upside is to be in the market during downside.

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