You’ve probably seen the “market predictions” from financial experts sprinkled all over the internet and other media. And, as you hopefully know, no one actually knows what’s going to happen in the stock market. For every guess an expert gets right, there are undoubtedly several guesses they get wrong. The expert who’s been screaming that the market is due to crash has likely been screaming this same for prediction for the last three years.
What’s really odd is that many people somehow consider these random market predictions to be their plan for accumulation. This year, take guess work out of your investment plan. Instead, focus on the one factor you can control, and focus all of your effort on that controllable factor—your own contributions.
Your investment plan for the year ahead is to increase your retirement plan contributions by 1% of your gross pay—every month. If you enter the new year with only 3% going into your 401k, then in January you need to increase that percentage to 4%. Then increase it again to reach 5% in February. And so on, and so forth. If money gets too tight, take a break for a month and let your expenses resettle. But your expenses won’t get nearly as tight as you think they will.
Take, for example, a person that earns $50,000 per year. If they are currently contributing 3% of their gross pay toward their retirement plan, then they are adding only $1,500 to their fund for a financial future each year. A 1% increase per month equals only a $41.66 increase per month. That’s about $10 per week, initially. Your goal should be to see how far you can press this theory until it starts biting back at you. Is it the perfect solution? No. But it’s a solid strategy. And it’s certainly much better than no strategy at all.
Americans continue to do a poor job of funding their retirement plans. This is especially disconcerting because of a decrease in the number of people covered by pensions and insolvency concerns with Social Security. A recent report suggests that less than 15% of private sector employees have a defined benefit plan (pension), and doubts about the viability of Social Security retirement persist.
Personal savings and investments, often in the form of employer sponsored retirement plans, are all that remains to secure the future financial independence of young Americans. So while what a person invests his/her money into is certainly important, the most important factor in retirement planning is actually the retirement contribution itself.
It’s downright inexcusable to miss out on your employer’s 401k match by not personally contributing the appropriate percentage yourself, but it’s equally problematic to not consistently increase your 401k contributions beyond the company match. It’s not uncommon for people to stop contributing to their 401k, once they maximize the employer match. This is a huge mistake.
The goal isn’t to maximize the employer match. The goal is to contribute the maximum amount—$17,500 for people under 50 years old and $23,000 for those over 50. Because this goals seems overwhelming to some, it ceases to become a real goal, when it should be a real priority.
Peter Dunn, aka Pete the Planner, is an award-winning financial mind who has authored 5 books, hosts the popular Pete the Planner radio show and travels around the country offering financial education. His signature wit will have you laughing as you learn. You can learn more about him at www.petetheplanner.com.