If you are like most Americans, you have been told that in order to retire you should be putting money into a company sponsored retirement plan like a 401k or an individual plan like an IRA. We are told that if we do this, our money will grow and between the gains in this account and Social Security, we should expect long and fully funded golden years.
The problem is that when we look at our account statements, those golden years look more like rusted tin. Our accounts are not growing as we need them to so we have to postpone retirement, or worse, we realize we may outlive our money, forcing us to return to work after having attempted to retire. Let’s examine the problems you are facing with the traditional financial advice you are receiving and then see what solutions there are.
Now, if you are offered an employer contribution for your 401k, you should absolutely take it. It is free money! So, don’t turn it down if your company matches a portion of the money that you contribute into the retirement plan. Many employers will match up to a certain dollar amount every paycheck. You should take advantage of this, but do not contribute above that amount.
What’s Wrong With Traditional 401ks?
The problem with traditional 401ks and their equivalents is that the choices as to where your money is invested is limited. Mostly you are offered investment opportunities in mutual funds. A mutual fund is a group of stocks that are purchased by a company and placed in a basket. You are offered shares of ownership in that basket as a way to diversify your investments as it is less expensive than trying to buy the individual stocks themselves.
There are several problems with mutual funds. The main one is with the management. The mutual funds offered in most retirement plans underperform the indexes they are supposed to be following. Additionally, there are high fees associated with these funds. So why are they the only choice offered in your retirement account? Because the mutual funds are big money makers for the brokers and people involved in offering you your 401k. These funds not only charge you to pay their managers, they also pay the brokers and trustees! Guess where the money to pay these people comes from? That’s right, your account!
What is the alternative to paying these high investment fees?
The markets offer an alternative to the mutual fund called an Exchange Traded Fund (ETF). An ETF is also a basket of stocks but this basket is passively managed so the fees are minimal. There are additional advantages for the ETF versus mutual funds.
Mutual fund shares can only be redeemed after the close of the market day. This is not a big help when the markets are crashing and you need to get out of your position. ETFs are traded on an exchange so you can enter or exit a position whenever the stock market is open.
Another advantage that ETFs offer is that many of them are optionable. This means that you are able to trade options on the ETFs in order to protect an investment, increase the return (profit) you receive, or even buy the ETF at a discount. If you are not being advised on how to do this, then you need to fire your investment advisor and learn how to plan for your retirement yourself.
If you are sticking with your mutual funds and your 401k, at least learn how to time the markets so that you can protect your principle when the markets drop. Online Trading Academy’s Core Strategy can be applied to your mutual funds in order for you to avoid the large losses that occur with market drops and allow you to increase your investment when the markets are ready to rise. This dynamic 401k management can yield results far above that of most advisors and the markets themselves.
Ask yourself when you plan to retire and then look at your retirement accounts to see if you are on track to meet that target. If you aren’t, take action today and learn how you can retire when and how you want to by using Online Trading Academy’s Core Strategy.