401(k) Summer School: Putting $ in and Investing It are Distinct Actions
Hi Friendos,
For the next several weeks, I’m going to write about aspects of 401k’s and other workplace retirement plans that are typically not discussed in financial writing or in workplace benefits packets, but commonly come up in discussions with my clients. Since the temperature in my city is supposed to get up to 84 today, I’m declaring today the start of 401(k) summer school!
We’ll cover some topics that are considered super basic by finance writers, but I say they are only basic after you already know them.
Lesson 1: Putting money into the account is a separate step from investing the money.
This is true for 401k’s and for IRAs. Step 1 is deciding how much money you want to put into the account. Step 2 is deciding where you want the money to be invested after it is in the account. Don’t let it sit there in cash or a money market fund or a “stable value fund”! Your money will not grow much at all and it probably won’t even keep up with inflation. Get it invested in stock and bonds using low-cost index funds.
Different employers configure things in different ways, so I can’t predict what your online portal or website will look like, or your paperwork if your employer has you doing things that way. But I do know that there will be separate spots for you to indicate the amount you’ll put aside from each paycheck vs. where that money will go to after it’s in your retirement account. If you don’t indicate an investment, some employers will default you into a good choice, like a target date fund that is appropriate to your age. Others, however, are super conservative and will default you into something that is cash or like cash. Aah!
Don’t be the person who diligently saved out of every paycheck for 25 years, left contributions sitting as cash, and then learned they would have had more than 3 times as much in their account and could actually stop working now if they’d only realized there was one more step to actually invest the money.
If you aren’t sure how your 401k money is invested (or money in your 403b or other workplace retirement plan), check on it now to make sure it’s not all sitting in cash. This has the added benefit of making sure you have not lost track of your log in credentials. It’s boring but important!
-Stephanie
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