A recent study by Putnam Investments, carried by CNNMoney , finds that the secret to retiring rich isn’t about where you invest but that you invest in the first place, specifically your 401(k). Putnam played around with some numbers for an Average Joe’s 401(k) and found, not surprisingly, that the single most important aspect of retirement was the contribution amount. While not ground breaking, it’s always nice to see mainstream media doing some responsible reporting.
They suggest a 10% minimum contribution level: My contribution is currently at 7% and that was lowered from as high as 20% because I was planning on buying a house (which I did). You should figure out the minimum amount required to receive your company’s matching funds, if they offer it, and put in as much as you can. If you had the chance to start when you were young and with fewer fixed expenses (homes hurt in the fixed, and variable, expenses department) then you should put in as much as possible. It’s better to put in a huge chunk now and then have it grow than to let contributions trickle in and sit on a fat checking account. Learn to live on a leaner budget and it’ll pay off in the future (I hope anyway).
Asset allocation trumps specifics: “A number of landmark studies show that asset allocation has a bigger impact on returns than the specific funds you hold,” says the article. I have nearly (95%) of my 401(k) in stock based funds. That may be a bit extreme for most people but I figured if they suggest that someone young should be mostly in stocks, I’d probably do well to put it all in stocks.
If you’re squeamish about being reckless like me, and you probably should, here are their tips for picking what to get:
Feel free to take the easy way out by opting for index funds. Or for an even simpler solution, go with a targetdate or life-cycle fund (offered by nearly 40 percent of plans), which gives you a diversified portfolio appropriate for your age.