Young Americans have heard countless times that if they have access to a 401(k) plan, they should use it, or that they should be mindful of their spending so they can save for the future — but those pieces of advice, although helpful, are just the very basics for long-term retirement security.
MarketWatch spoke with Roger Ma, certified financial planner and founder of advisory firm lifelaidout, as well as Jully-Alma Taveras, a financial educator and founder of personal finance site and community Investing Latina, to discuss what people in their 20s, 30s and 40s should know and do beyond opening up an individual retirement account or meeting the employer match.
The conversation was the first of a three-part retirement planning series MarketWatch is hosting with Barron’s Live, a daily podcast featuring discussions between journalists and experts in various industries. The next episode will be on Wednesday, April 28, and the topic is alternative sources of retirement income. You can register for it here.
The playback for the conversation with Ma and Taveras is here. Here are a few of the takeaways from the discussion:
Picking the right investments for your retirement accounts
Choosing the proper investments for your retirement accounts can be confusing. Investors may be asked to pick the investments they want in their 401(k) plan or when opening an individual retirement account, and the choices can be paralyzing. There are stocks, bonds and alternative options, but then subsets of each asset class, leaving the typical novice investor overwhelmed.
The first step is to consider the time horizon. For someone just starting out, the time until retirement could be 30 or 40 years, versus someone in their 50s, who may have only five to 15 years before they exit the workforce. The asset allocation of a retirement portfolio will depend on a few factors, but Ma suggests someone with a goal that is less than four years away might want to stay primarily in cash. Comparatively, a goal with a time horizon of five to 15 years would use a mix of stocks and bonds, leaning toward bonds, and those with goals 20 to 40 years away would have a more equity-based portfolio.
Target-date funds are a great way to “set it and forget it,” where investors pick a fund that is tied to an approximate retirement year. These funds will automatically adjust to be more conservative as time goes on.
For all investments, individuals should look at fund fees. A target-date fund, which may be referred to as a “one-fund” portfolio, might cost a bit more than a selection of funds the investor chooses, but the latter will also involve more work on the investor’s part. Every year or so, these portfolios will have to be checked in case they need to be rebalanced. “What you’re trying to balance is simplicity and efficiency,” Ma said.
Being more active in the fund selection can provide investors with more personalization, but it will take diligence. “Do a lot of research to make sure that you’re making choices that are aligned with your timeline but also your values and your goals,” Taveras said.
When to roll over your old accounts
Younger generations have been known to be more likely to change jobs in an attempt to boost their salaries or find more attractive company perks. One of the consequences, however, is numerous employer-sponsored retirement accounts left to wither.
Some individuals might want to consider rolling over their old 401(k) plans, either into their current 401(k) or in an individual retirement account, Ma said. First, check to see if your current employer allows for a rollover into your current plan, and if so, look at the fees associated with those investments “to make sure they’re competitive with the prior 401(k) or a traditional IRA,” he said. Generally, fees that are 0.3% or lower are good options.
If the fees are too high, consider rolling that money over into an IRA.
Resist the bitcoin
Bitcoin and dogecoin are not the right investments for retirement goals, although younger investors may be tempted to invest in the next hottest option on the market.
“Oftentimes they are taking on the risk and putting all of their money into some of these speculative products, which are products that require much more research and strategy so that you don’t lose the shirt off your back,” Taveras said. “If I want to try putting my hand in cryptocurrencies or just riskier types of investments, how much can I afford to lose and what is my timeline on that?”
Want actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column
The biggest mistakes
One of the biggest mistakes retirement savers make is not investing enough. The goal should be around 10% of your salary, but if that’s not possible try to meet the employer match and make a plan for how to eventually attain a contribution of at least 10%, Taveras said.
Another mistake is not understanding vesting schedules, which is the time the employer requires an employee to work at the company before the money the employer contributes to the worker’s retirement plan is 100% theirs, Ma said. Employees who leave before the requirement is met are at risk of losing out on potentially thousands of dollars.
But the biggest mistake investors make? “The number one mistake is not getting started,” Taveras said. “You can always make adjustments. You can always change things… as you learn, as you grow in your own personal journey, even as your life changes — things in your life can change and you may need to make adjustments — but the most important thing is really truly to get started.”