I recently read a Wall Street Journal (WSJ) article entitled, “The Champions of the 401(k) Lament the Revolution They Started” (Jan 2, 2017).
In part, this WSJ article stated, “Many early backers of the 401(k) now say that have regrets about how their creation turned out…”
The article goes onto say, “…Some say it wasn’t designed to be a primary retirement tool…Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees…”
Since the inception of the 401(k) and various other qualified plans were introduced, we have all been encouraged to believe and hope that the income from these plans will support us throughout our retirement.
But do you know what the value of your 401(k) be in one year? Five years? Ten years? That’s right, you don’t know and neither does anyone else, including your financial advisor.
What the early backers of the 401(k) are realizing, 39 years after the 401(k) became the most common planning vehicle, is this: Mutual funds in a 401(k) do not produce predictable outcomes or offer any performance guarantees.
Essentially, we are hoping to build a secure financial future on money that is at risk in the stock market. The problem is that we know how much money we’re putting in, but we don’t know for sure how much money we’ll be able to take out during retirement.
So, what do we do?
Well…we plan. We acknowledge that there’s no single product or approach that will accomplish everything we need in order to be financial sound in our retirement years.
We remember that each financial product, including your 401(k), has been designed for a specific goal or purpose.
The problem really arises when you use a financial product designed for say, growth (and which contains a higher level of risk of loss) but then also expect this same product to be a strong savings tool.
It is this type of unclear thinking that you hear when someone says they are, “saving for retirement in a 401(k).” No. They are “investing for a retirement in a 401(k).” Investments are subject to loss.
Your 401(k) is just one part of your retirement plan. How are you planning to both protect and grow your money for retirement?
If you don’t know, let me help you.