401(K). We should ALL participate

Those who should participate in 401(k) plans don’t and therein lie major problems in inequality, health and quality of life especially in old age. Anyone in the groups: young, poor, single parent, minority or less educated American fairs badly when it comes to investing in general and more so in investing for the future. Some people may belong to one or more of these groups and the more boxes one ticks the greater the chances of an insecure economic outlook.

If you are young and get into the habit of saving and contributing towards your retirement early your contributions will grow the most and yield the most due to the power of compounding and all that. Unfortunately for young people retirement is a far away destination you start to consider when you become “RESPONSIBLE.” If you are poor there is no likelihood of inheriting anything since you most likely come from a poor background. Minorities are mostly burdened by a lot of social and economic issues so retirement savings falls to the backburner. Less educated people work physically demanding, low paying jobs and the demands of daily living sucks all the resources resulting in little to no 401(K) participation.

Why should these groups care?

Social programs like Social Security, Medicare and Medicaid may help but for most people its not enough. I should know I worked at a 3rd rate nursing home and saw, on a daily basis, how devastating and heartbreaking poverty in old age can be. Most employers have since the 1980s switched from traditional pensions to 401(K) type retirement plans. This means the risks and responsibilities of a secure retirement are solely in our hands. So it’s time we wake up and realize that our financial future, especially when we are most vulnerable, is too important to ignore.

How can you participate.

Go straight to your HR department and sign up. If you want to start small just take the plunge. An average American contributes about $50 a week. If in your case that is a bit much $20 or $30 for starters will do. A typical working family nearing retirement has about $110,000 and while this may sound a lot to anyone in the group mentioned above, it breaks down to $400 a month in retirement. That ain’t gonna pay the rent bro.

Unlike countries like Australia where retirement option is an opt out setup, in the good ol’ USA we have to be proactive and informed to opt-in hence the reason for you to drop everything you are doing and call your HR. Increasingly companies are signing their employees to the opt-out plans but we need to do more on this front.

So what’s all this 401(K) business (The other dreaded four letter/numbers word.)

A typical 401(K) plan is a scheme where an employee contributes some money every so often and the employer may match some of that contribution towards the employees’ retirement plan. These funds are managed for you by some company somewhere and grow over time and when you reach retirement age you can draw down on your investments

Most of the funds, about 66% are invested in stocks or stock funds. BORING!!! Maybe so but do you know how much of your money is in the stock markets? Do you know what stocks in particular? Do you know how they are performing? Do you know the various options and which ones are better than others? BORING!!! Most of us are tied to the stock markets and don’t know a damn thing about stocks. AND could care less. When such issues come up we reach for the Nachos and turn on a ballgame.

Cumulatively we have over $4.6Trillion in assets invested on 401(K). We got there by contributing your $40, my $30 and her $100. If you are part of a plan, how much do you contribute and how much has that grown to? What are the returns? Do you need to contribute more? These are all personal decisions but we all need to be aware, informed and educated.

IRA ANYONE

Those who participate in 401(K) are more likely to participate in an IRA as a way to boost their savings and investments towards a more secure retirement. The total assets invested in IRA and similar accounts have grown to $7.6 Trillion. Are you in that pool or should you jump in. Since there is a cap on how much you can contribute and control your 401(K) plan, IRA accounts are increasingly important and give you more control.

Understand stocks.

Most people have experienced or lived through the tech bubble (1999–2000) and the terrible recession (2007–2008). Retirement accounts were slashed in half and young people are understandable leery when it comes to the markets. As a 10 year old my buddy Eric witnessed his family’s financial struggles after the bubble bust only to graduate from college at the height of the worst recession since the depression. Leaves a mark!

Eric and other young people may be most jaded about the markets but will be the best investors since their experiences prepare them to be realistic.

I strongly believe that with more education people will see what the real markets are and how they function. For instance don’t assume markets are a get rich quick scheme. Bill Gates YES because he created a successful business. Warren Buffett YES because he is an investing phenom. An average person should expect the historical 8% returns. Some years are great while others are not: be realistic. Anyone who talks about guaranteed returns in stock investments should be escorted out the door by the scruff of their neck. Boom times and RECESSIONS are part of our economic cycles. On average we will have 8 years of growth and then a recession. With such knowledge we can position ourselves to cut losses in a slowdown or take advantage when the stocks go down. We have an annual ritual called black Friday. We position ourselves knowing that we can grab some great stuff at great discounts when that time of the year comes. When recessions hit stocks go on discount and that is the best time to buy. Dividends are your best friend. More than 60% of your returns will come from dividend and dividend reinvestment so don’t look down on those maligned investments. Investments are about risk and the degree of risk varies. I’m not endorsing it but Coca Cola Company has been publicly traded since 1920. There are similar household names you can dig up and invest in.

Company stock

A company stock comes with obvious risk: your job and retirement are tied to that one company. On the other hand if you are informed and educated company stocks may (and this depends on the company) be a great option. You may get a discount purchasing company stock and if it pays dividends, reinvestment is free. There are dwindling programs like DRIP where one can purchase investments directly from the company without going through a broker (fees)

Professionals, academics and others will say there is not room for “dumb money” (that’s what they call retail or small investors) in the stock market. I beg to differ. It cheaper to buy stocks than it was 20–30 years ago. I should know I stuffed envelopes at a stock broker’s office in 1995. There is more research and information out there for just about anyone to learn and be great at investing. That stuff was not freely available in ’95. As long as we don’t get caught up with the language and games that professionals play we can curve our own lane and participate in our economic liberation. W can do this by investing in what we know and what we understand. If you pay a utility bill, a phone bill, eat out, buy clothes, eat cereals, brush your teeth, or partake in any such daily habits and task you can find a company you can invest in. There are resources that show what the experts invest in: monkey see monkey do.

They may claim that we are not sophisticated enough for the markets but if we learn and keep learning we will get there. It gets easier the more you know. Psss we got Google, YouTube, library books start learning. You know what else form or join an investment club. Some people have book clubs, bowling Wednesdays or poker night why not investing Tuesdays.

Why not real estate.

When you are in the group mentioned above you do not have the funds to invest in real estate Through the stock market though you can participate in REITS (Real Estate Investment Trust) sort of like stocks but for tax purpose (and since they churn out money like crazy) you get great dividends. How do they work? A company owns the local mall, apartments, or an oil pipeline. Whatever rent/ revenue is coming in pays some bills and the rest comes to you. A way for us small-timers to be in real estate without all the upfront big spending and if you don’t like the investment click, click, sell and buy something else.

Lessons

If you are young or poor, single parent or a minority, disenfranchised or less educated, participate in the stock market either through 401(K) plans, IRA or even a taxable account. This is one of the ways we can start chipping at our economic plight. Even though there all those funds in retirement accounts, 40% of the participants have less than $10,000. It’s either you participate or blame yourself at a later time: regrets and cat food should never be part of your meal.

If you are part of the group mentioned we have financial leaks embedded in us, whether it’s cultural or economic: we spend more in proportion to our take home than any other group. We spend $3 to cash checks at Wal-Mart something no one in the middle will ever do. We use Rushcards and other high fee financial instruments (Payday loans, Rent-a-center) to access banking and financing while credit unions are all around us. We cook less and eat expensive unhealthy food. My buddy spends $10-$15 every Friday on lottery tickets and he has been doing it for 25 years. His birthday is special so he drops $30 or more depending on how lucky he feels. So is his mother’s birthday, his dads, lady lucks’ birthday. Win some no wins it comes down to he could have built a sizable nest egg if put that towards his 401(K).

Anyone in these groups has habits and lessons to learn and pass along. New traditions to start and pass down. We may be born into some situation but we don’t have to die in them. If you are poor you do not have to pass on poverty, you can offer lessons and hope. Learn something so that the next generation can have a better start. Invest some and give them a head start. You may be the one who broke the cycle.

It may be daunting at first but we endure much in life and keep on chugging. We all have to learn the rules of the road: yield, merge, respect the car, law enforcement, and other crazy drivers. The modern economy is complex but we have access. Learn about GDP, Markets, index funds, oh the joy of it all. Take a free tax class with H&R Block or somebody; learn to budget, how to cook, all valuable skills that will last you a lifetime. When you learn, teach others. The middle class cracked the code and it’s about time we did too.

Financial literacy is the armor of life. It should keep us safe from stupid financial mistakes, give us confidence to face uncertain futures and prepare us for the unknown.

If you are young or poor, single parent or a minority, disenfranchised or less educated start a new tradition. Invest regularly and this will make it a habit. If you want to support a habit, that’s a great one to support. Where else do we have the opportunity to put away small amounts of money over a long period of time and watch it grow?