It may sound like “pie in the sky” to be able to make a 100% return per year in any investment, including your 401k, but it may be a real possibility depending on the plan your company offers. And I’m not talking about taking unnecessary risk or getting involved in obscure investments that you don’t understand or rolling the dice and hoping that your market timing is correct. I am also not referring to your ability to know which mutual funds are going to be the best performers from one market cycle to the next. In fact, you could keep your 401k funds completely in cash and still make a risk free 100% return each year by following this approach.
So let me explain. Let’s say you’re company’s 401k plan offers a 100% matching contribution up to 5% of your income. And let’s assume that you are making $50k per year and decide to bite the bullet and redirect 5% of your pre-tax income ($2500) into your 401k. Based on the 5% match offer, your company will then deposit another $2500 into your account and as a result, your $2500 investment will instantly grow to $5000 regardless of what the market does. So basically, with no risk at all, you just made a 100% return on your money by simply participating in the plan.
Now obviously, depending on how you choose to invest your money after it gets into the plan, you have the potential to either grow that money and push your rate of return for that year over 100%, or you could lose in the market and shrink your rate of return to less than 100%, but either way, who cares? Regardless of how things turn out going forward, in this scenario, the “Double Your Money” (DYM) deal is done.
Unfortunately, statistics show that many people miss this great opportunity by not contributing to their 401k up to the full company match, or even worse, not contributing at all! Within the context of the 401k-company match, many people are missing out on what could be one of the easiest, lowest risk, highest performing investments of their lifetime.
When talking to people who do not participate in their company 401k, I often hear, “I just can’t afford it” or “I have plenty of time to think about retirement” and a whole host of other excuses.
The reality is that we all have the ability and choice to allocate our money to many different areas of our lives, and with little or no effort we can adjust things here or there to make everything work. It all comes down to priorities and free will and the choices that we are and are not willing to make. The sad truth is that long-term needs are nowhere near as much fun to plan for as short term wants. We are all human so you are not alone!
I don’t know about you, but for me, the DYM deal gets my attention and money every time. I might have to get a Tall latte instead of a Venti, or hold off on upgrading my cell phone for the tenth time or trading in my car every few years or whatever, but I promise you that these minor adjustments today will be worth big bucks whenever I decide to retire and attempt to replace my income from work with income from my investments.
So you might want to take a look at your 401k or similar plan and ask these three questions:
- Does your employer offer a match?
- How much is it?
- When is the soonest date you can get enrolled or increase your contribution up to the match?
Oh, by the way, don’t be afraid to ask for a little help. Although the internet has a tremendous amount of information, knowing what to do with it is a whole other challenge.
If you need help or have questions about your 401k or other retirement plan, we offer a free 30-minute review to help you understand your options within your specific plan. Please click here and use my contact form.