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Why you're stressed about your 401k

Our 401k's are a source of confusion and fear for many of us. Here's what you need to know about them.

By MSN Money Partner Oct 25, 2013 11:48AM

This post comes from Marilyn Lewis at partner site Money Talks News.

Money Talks News on MSN MoneyIf you're lying awake at night wondering if your 401k 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. Let's look at some ways to reduce your stress about your retirement accounts.


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

401k © Don Farrall, Photodisc, Getty ImagesThe crazy thing is, anxious investors are right. Our 401k'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 401k is a 'Failed Experiment.'"

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

Although 401k'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 401k contribution and, if so, what the maximum contribution is. For example, if your employer matches your contributions dollar for dollar up to 6% 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 401k. The maximum the IRS allows you to save in a 401k in 2013 is $17,500. Add another $5,500 if you're 50 or older.

2. Bone up on 401k investing

To start, watch this 90-second video primer for beginner investors. Your 401k 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 401k, 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% in stocks under this rule of thumb. But if you're 70, keep it to 30% 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.

Consider dividing up the remaining part of your 401k 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 401k will produce the money you need when retirement comes?

Stacy Johnson contributed to this post.

More on Money Talks News:

Oct 25, 2013 10:05PM
The worst thing to do is not start a retirement account at all. Start one, put in the most you can afford every payday, forget about it, and check on it every 2 or 3 years. You'll be surprised how it will grow and you probably won't miss the money that automatically goes into the plan.
Oct 28, 2013 7:37AM
 I've followed much of this article's advice for well over 30 years as it is what my dad basically told me to do. I used the 100-age for % stock recommendation, and started with the  amount my employer  matched. If I got a raise in a given year, I'd then increase my 401k contribution by half (or more) of the raise - so I still saw more money in my pocket, but I also was adding more. I likewise have relied heavily on index funds with low fees. Within about 7 years I was at the max the govt. allows per year. then, after 50 I added the catch-up 

 I'd add live below your means - don't get a huge house that you don't need but one that is big enough to be comfortable. Also, I drive cars till they drop - my current daily driver economy car is pushing 200k miles now; I would estimate a person can save an extra 150-200k for retirement over a career just driving cars for 7-8 years vs. 3-4 years.  More if you are buying cars i in the 35-50k range (Euro cars, big SUVs, etc,).

 The advice in this article and the above can get you well over a million in a 401k in about 35 years.
Oct 27, 2013 10:18AM

Go to Vanguard, even the Target Date funds are cheap. You don't even have to think, just get the money from your paycheck sent automatically (if your company allows investing in Vanguard). Vanguard is the best thing going for the average investor.

Oct 28, 2013 12:06PM
401(k)s are not a scam.  They are a way tor employers to put the risk of investing on the employee.  Considering how many companies have gone under because they could not keep up with their pension requirements and considering that the PBGC has regular liquidity crises, 401(k)s are a pretty rational choice for employers.  Everything you do involves risk.  If you invest in the future, you risk losing some or all of your money.  If you don't invest in the future you risk being poor.  If you invest in stocks, you risk principal.  If you invest in debt securities (bonds, CDs) you risk losing purchasing power.  YOU CANNOT AVOID RISK.  The only choice you have is deciding what kind of risk you are willing to take.
Oct 26, 2013 11:45AM
The whole 401K idea was a scam to do away with guaranteed pensions and allow the wall street crooks and big corporate thieves to gamble with our life-long savings. Workers were so much better off with pensions before the huge 401K lie was forced on workers.
Oct 28, 2013 12:42PM
If people are really that confused about something so simple, it's no wonder this country is going down the tubes.
Oct 28, 2013 12:12PM

Employers should offer to pay for the employee to receive education on investing.  The classes can occur on company time and be taught by someone other than the provider of the 401K plan.  It is the least the employer can do considering all they money the company is saving by not offering a traditional pension. 

The high schools need to do a better job of educating kids on person finance.  Keep the banks and investment professionals out of the high schools.  The classes need to be taught someone who has nothing to gain by what he is teaching. 

Oct 28, 2013 10:50AM
Here's the two biggest conspiracies with 401ks:

1. They are employer-sponsored. They should be self-directed like IRAs such that you would have thousands of investment choices available instead of the 2 dozen that you're employer decided are best for you.

2. You can't roll them into an IRA unless you leave your job. That's the biggest scam of all because you eventually encounter the law of big numbers; the longer you're at your job and the bigger your balance becomes the more important good financial options/choices come into play. So I have to quit my job to convert it into an IRA, how absurd is that!

Contact your politicians and demand that the 401k link to your employer be ended!!!
Oct 28, 2013 9:51AM
Why I'm concerned about my 401? - no investments are safe, and it's not going to be enough to retire.
And I don't understand why we can't use some of our 401Ks to invest in precious metals.

Oct 28, 2013 10:01AM
It's not right that our principal contributions should be subject to any losses at all....the principal contribution should be guaranteed and only the potential gains should be volatile.

While it's unlikely, in reality we could lose everything in our 401Ks the way they are now.
Oct 27, 2013 10:52AM
The thing we forget is 401k's are allowed to loose money and we have little control over how it is used. Mine was through IGA and I lost more then I gained on interest.. Sure it looked good having money there but it was not paying anything more then I paid in. I took a chance and cashed it in and bought a house that went up 50000 in two years. much better return and wall street made nothing on me. I like it.  
Oct 28, 2013 9:02AM
I don't invest why bother Uncle Sam is going to take it all away any way.
Oct 28, 2013 6:13AM

If you live in Texas  I can show you how to self direct your  IRA  to real estate and  make 100% on your money in 3-10 yrs  guaranteed. I am a licensed Texas realtor,but my main focus is  rental property using 401K money. 401 rollovers are  easiest as many companies won't allow you to  withdraw all or part of your current plans.

If  your interested  ,reply to this message and  I will receive a email .

If you are not in Texas  I can assist you in finding a self directed  company in your state and then locate 1 of my partner realtors to assist you  in a purchase

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