Why You’re Stressed About Your 401(k) — and How to Get Over It

By on

If you’re lying awake at night wondering if your 401(k) is properly invested, it’s not much comfort to know that millions of other Americans are probably losing sleep over the same thing.

Safely saving for retirement doesn’t have to be as complicated as we make it, however. Money Talks News founder Stacy Johnson explains how to make it simpler in this video. Check it out, and then read on for more help about reducing stress over your retirement accounts.

Confused?

We “lack the confidence to effectively manage” our retirement savings, a poll by Charles Schwab concludes. It found, in a nationwide survey of more than 1,000 401(k) plan participants, that:

  • More than half (52 percent) find explanations of their 401(k) investments more confusing than explanations of their health care benefits (48 percent).
  • Fifty-seven percent wish there was an easier way to figure out how to choose the right 401(k) investments.
  • Nearly half (46 percent) don’t feel they know what their best investment options are, and one-third (34 percent) feel a lot of stress over correctly allocating their 401(k) dollars.

The crazy thing is, anxious investors are right. Our 401(k)’s were never intended to be a primary path to retirement. They were developed, in the 1980s, for high-paid corporate executives to shelter additional investments from taxes – a supplement to their companies’ old-fashioned pension plans, Teresa Ghilarducci tells PBS’ Frontline in “Why the 401(k) is a ‘Failed Experiment.’”

Eventually companies decided to offer them to employees in place of traditional pension plans.

Although 401(k)’s may not be ideal, they’re what a large proportion of Americans have to work with. Here are seven ways to wring the most out of your retirement accounts:

1. At the very least, max out your employer contribution

Find out if your employer matches your 401(k) contribution and, if so, what the maximum contribution is. For example, if your employer matches your contributions dollar for dollar up to 6 percent of your $4,000 monthly salary, you’ll get $240 free in your account for the first $240 you save. If you don’t take advantage of your employer’s match, you’re throwing away free money.

Don’t stop there, though. If you can, add more to your 401(k). The maximum the IRS allows you to save in a 401(k) in 2013 is $17,500. Add another $5,500 if you’re 50 or older.

2. Bone up on 401(k) investing

To start, watch this 90-second video primer for beginner investors. Your 401(k) allows you to choose among three types of investments:

  • Stocks. When you see the word “growth” in the title of an investment option within your 401(k), that’s a clue that stocks are involved. Stocks — basically ownership in a company — offer the most potential for reward, but they also offer the most risk.
  • Bonds. When you see “income” as an investment option, you’re probably looking at a fund that contains bonds. While stocks are an “ownership” investment, bonds are “loanership.” You’re lending money to a company (corporate bonds), local government (municipal bonds) or Uncle Sam (treasury bonds). Bonds pay a fixed rate of interest, come due on a certain date and are backed by the company or government agency that issues them — all things that generally earn them the reputation of being safer and more stable than stocks.
  • Cash. When you see the words “money market,” you’re probably seeing a fund that’s basically a cash equivalent. Like a savings account, these funds don’t earn much but the risk is lower than either stocks or bonds.

3. Decide how much to put in each investment type

Here’s a simple rule of thumb: Subtract your age from 100. That’s the maximum you should have in stocks. Say you’re 20. You could have up to 80 percent in stocks under this rule of thumb. But if you’re 70, keep it to 30 percent because stocks are riskier and, at 70, you have fewer years to make up any losses. You don’t want a market downturn just as you’re about to retire.

These percentages aren’t set in stone. It’s just a guide. Adjust up or down to suit your needs and your risk tolerance.

What Stacy suggested in the video above was to divide the remaining part of your 401(k) equally between an intermediate (meaning neither long- nor short-term) bond fund and a cash equivalent fund.

4. Keep expenses down

Investment fees can dig deep into your profits. Focus on keeping expenses super low. The best way to do that: Invest in index mutual funds.

Explains CNN: “One of the most common indexes is the Standard & Poor’s 500, known as the S&P 500, which represents a broad cross section of 500 large American companies.” So an index fund is a great way to own hundreds of big companies, and because it requires little management, an inexpensive way as well.

5. Don’t stress over timing

No one expects amateurs to know when to buy and when to sell. Even the pros can’t seem to get that right. Fortunately, there’s no need to worry if you use a simple system called dollar cost averaging. Make your investments in fixed amounts — for example, $100 every month.

This method gives you insurance against market dips because you’re buying more shares when they’re cheap, and fewer when they’re more expensive.

6. Forget the experts

Ignore actively managed funds. They’re more expensive. They often don’t outperform index funds. And they require you to try to figure out which experts you should invest with. While some managed funds have had excellent results, identifying the winners can be a crapshoot. The Los Angeles Times writes:

In the 10 years that ended June 30, $10,000 invested in the average fund that owns a diversified mix of large-capitalization, or blue-chip, U.S. stocks grew to $18,840. But the same amount invested in the Vanguard 500 Index fund, which tracks the Standard & Poor’s 500 index, grew to $20,002 — $1,162 more than the average fund, according to data from financial research firm Morningstar Inc.

After 25 years the Vanguard 500 Index Fund had accumulated $99,503 — $24,000 more than the average actively managed fund over the same period.

7. Get the lowdown on target date funds

These popular mutual funds are appealing because they take a lot of the work out of investing. You choose the date when you want to retire — 2030, for example — and the fund is supposed to do the rest, rebalancing your investments periodically to meet your goals.

But target date funds have relatively high fees, says USA Today. Also, the returns can be extremely disappointing, points out this Forbes critique, which tells how to emulate one of the better target date funds on your own, cutting the fees in half.

Are you confident that your 401(k) will produce the money you need when retirement comes? Share your thoughts below or on our Facebook page.

Stacy Johnson contributed to this post.

Sign up for our free newsletter

Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's "205 Ways to Save Money" as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash. It doesn't cost a dime, so why wait? Click here to sign up now.

Check out our hottest deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,218 more deals!

Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • ProfBillK

    The major factor regarding the amounts in the 401k accounts, is the amounts contributed, not the investment options chosen. If you are conservative, start with 50% bonds/50% stock (index funds). If you are aggressive, start with 70% stock funds/30% bonds (index) and educate your self (Money magazine, books by good writers, such as J.B. Quinn, and the educational info. on Vanguard), then modify your investments when you are comfortable to do so.