An article I read recently about maximizing your 401(k) contributions had some advice in it that was so wrong, so out of touch with reality, I had to tell you guys about it.
Most of the article was pretty standard stuff, but one area just blew me away it was so bad.
I hope no one out there watching this is doing what was suggested.
The author was talking about how important it is to fully fund your 401(k) and how it is about the only way most people, we average folks, will be able to have any kind of life in retirement. And he’s right.
Ninety percent of those who do not have an employee-sponsored retirement plan have less than $1,000 put aside for retirement. That’s how important it is.
But, as the article mentioned, fully funding after age 50 is $23,000 a year. That for many folks is impossible. And the author acknowledged that fact. But, and here’s where he lost me, he suggested that if you don’t have or won’t be able to fully fund your plan, you have to hope for better returns from the stock market.
I have heard of taking a little more risk to get better long-term returns from positions than you might not usually hold. I have even heard of selling covered calls on your positions to increase your return, which by the way is a very good and safe strategy. But hoping for better returns from the stock market? NO!
If you are hoping the market will return enough for you to retire, forget about it. It will not happen. I won’t even give that one a percentage guess of happening.
In fact, depending on how long you have to retirement, in cases where you aren’t comfortable with how much money you will have, if anything a big portion of your money should be in more conservative investments where you have an idea of how much you will earn and, more importantly, a much better chance of not losing money.
The problem with the idea of hoping for better returns isn’t so much about how much you can make, but how much you can lose. And if any group cannot afford to lose money, it is the ones who don’t have enough already.
Remember my rule of thumb: your age as the percentage of your money in predictable, reliable, conservative investments (corporate bonds, dividend-paying stocks, etc).
This way you always know no matter how bad things get you will be earning something, but, more importantly, you will know the minimum you will earn – the coupon or the dividend. And have a much lower risk of losing money.
Try a covered call strategy, corporate bonds, dividend-paying conservative stocks… but, for God’s sake, stop hoping the market will get you through your golden years.
P.S. If you want a great place for conservative dividend-paying stock recommendations and corporate bonds that can pay up in the double digits, check out Marc Lichtenfeld’s monthly newsletter at The Oxford Club called The Oxford Income Letter.
Each month, Marc provides subscribers with a new dividend-paying opportunity to profit from and I relay my expertise about bonds. It’s perfect for anyone who is retired or wants to. For more information about The Oxford Income Letter and what opportunities we’re looking to profit from now, click here.