We’re joined by a previous guest. Chris Costello joins us to talk about how to retire happy when you optimize your 401K account with Blooom.
For many Americans, their 401k’s are their primary or maybe only, retirement account so we need to get the most value we can from them.
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What is a 401k?
A 401k is an employer sponsored retirement savings vehicle that allows you to invest part of your paycheck, pre-tax, into an investment account where it grows tax-free until you are ready to start withdrawing from it after age 59 1/2.
The money is taken directly from your check before it hits your checking account so it’s invested before you get a chance to spend it which makes it a great way to invest for people whose money burns a hole in their pocket.
A 401k also lowers your taxable income. If you earn $5,000 a month and invest $1,000 into your account, you are only taxed on the remaining $4,000. Some employers offer matching. If you invest 6% of your income for example, the company will match 3%. Even if you have high interest consumer debt, like credit card debt, you should invest enough to get the match because it is free money!
For 2017, you can invest up to $18,000 a year in your 401k. Your employer will offer you a few choices of different investments, most plans are made up of mutual funds that include stocks, bonds, and money market investments. This is where most people run into trouble. They simply don’t know how to pick or what makes a good pick. This is where Blooom can help.
What Does Blooom Do?
Blooom helps people manage their 401k’s. Once upon a time, only people with serious money had access to financial advice but technology has made investing and financial services more democratic and available to a much larger pool of people.
Think of Betterment and how easy it is for anyone to invest with them. Blooom has used that same kind of advancement to make 401k advice available to anyone with $10 a month.
The problem with 401k’s for many people is that they don’t understand what investment to pick, what is a good allocation, what even is an allocation. Schools don’t teach this stuff and it’s not really intuitive. And often times, the choices offered aren’t very well thought out. There is no investment strategy, just a hodge podge of choices.
Eighty million Americans have a 401k, a 403b (similar to a 401k but for employees of not-for-profits), or a TSP (Thrift Savings Account, similar to a 401k but for government employees).
If you’re among them, Blooom will do a free analysis of your account. It takes just three to four minutes and the most complicated question you’ll be asked is when you want to retire. In a play on the company’s name, you’ll see how healthy your account is in the form of a flower. The healthier your flower, the healthier your account.
When you join Blooom, you’ll pay a flat fee of $10 a month. They will show you how your money should be invested, what your allocation should be and if changes need to be made, Blooom will make them for you. They’ll also offer advice on other financial matters like refinancing your mortgage in order to get a better interest rate.
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If your choices of 401k investments are bad, why are they so bad? Is it your company’s fault for giving you such crummy options? Well, kind of. The people in your HR department responsible for setting up the 401k program may have no idea themselves what a 401k is or what constitutes a good choice or a poor one.
So they hire a mutual fund company to administer the 401k plans and that same company chooses the funds that will be offered. This can lead to a conflict of interest when the fund companies add their own funds and remove options from outside firms. Rather than having investor’s best interests in mind, they are only concerned with their own profits and investors often suffer.
So how can you pick the best fund? Blooom can help but there are certain things you can look out for. A target date fund is a long term set it and forget it choice for most investors. The target date is the date you think you are likely to retire.
These funds will have a year in the name like Target Date Fund 2050. The investments within the fund change as it gets closer to that year, becoming more conservative over time. You don’t have to worry about changing your allocation, that’s what these funds are designed for so they do it automatically.
If there is no target date fund among your choices, you can choose by risk profile. You will usually see words like “aggressive,” “moderate,” and “conservative.”
Generally, the younger you are, the more aggressive you want your investments to be because you have a long time to ride out the natural ups and downs of the market and you want to use as much of that time as you can to reap the rewards of a riskier allocation of stocks to bonds.
Three Keys to Successful Investing
Take the Emotion Out of Investing
The most important part of investing isn’t picking the right investments. None of us have a crystal ball that we can use to see which stocks will do well. We mostly have past performance to judge by and that is never a reliable indicator of future performance.
The most important part of being a successful investor and what Blooom imparts to its clients is to control their behavior. Don’t listen to all the noise and scare tactics in the news, don’t listen to Jim Kramer jumping up and down screaming on CNBC. Ignore all that, expect your account to sometimes lose money. But know that the stock market always rebounds.
You have to treat buying stocks like you treat buying anything else you shop for. If you go to the grocery and there is a sale on apples, and you really like apples, do you buy fewer apples? No of course not. You buy more apples because they’re cheaper than usual. That’s when you buy stocks, you get more for less when the market dips.
Avoid Excessive Fees
Sure, a 1% fee sounds low, it leaves 99% for you right? But even seemingly low fees can take a substantial chunk out of your investments over the decades.
If you invest $100,000 in a fund with a 1% annual fee, which is less than average, it will cost you nearly $28,000 over twenty years, according to Securities and Exchange Commission calculations. If you had that $28,000 to invest, you would have earned another $12,000.
Allocation simply means how much of your portfolio is in stocks versus bonds. What determines the right allocation for you is your time horizon, how long until you retire. If you’re 20 years old, you have decades before you retire so you have enough time to absorb the risk that stocks represent compared to bonds.
The younger you are, the more heavily weighted your allocation should be in favor of stocks. The closer to retirement, the more it starts to tip towards bonds. There are all kinds of theories and formulas to arrive at the best allocation but a quick and dirty rule of thumb is the 110 rule. Subtract your age from 110 and that number is the percent of your portfolio that should be in stocks, with the remainder in bonds.
If you’re 30 for example, you would have 80% in stocks and 20% in bonds. Some people will argue that this is too conservative but remember, it’s just a starting place. You can tinker with it by taking into account personal factors like your likely salary trajectory, how much debt you have, if you plan on having children etc.
Don’t let all the weird numbers and acronyms and strange vocabulary surrounding investing in general and 401k’s in particular intimidate you or worse, paralyze you from doing anything other than shoving your money under the mattress.
If you feel like you need some guidance, Blooom has made the kind of advice that was once only available to high rollers available to us all. Take a few minutes and let them do the free assessment of your 401k.
Voodoo Ranger Atomic Pumpkin: A seasonal beer packed with pumpkin, Saigon Cinnamon, and Habanero peppers.
Blooom: See how healthy your 401k is today.
Linkedin: Chris’s profile.