An American economist has just dropped a real bombshell, revolutionizing the retirement and pension market throughout the United States. According to this economist, 401(k) plans tend to benefit the wealthiest Americans. And these words are really controversial, especially at a time when other plans are gaining popularity.
401(k) retirement plans are those sponsored by your employer. Formal employees who wish to make their paths in such plans contribute an amount per month to their fund, and their employer contributes an additional amount to increase the retirement fund.
That incendiary economist is Teresa Ghilarducci, an economist at the New School in New York, who told the New York Times (NYT) that the “40-year experiment with pensions that one can do for oneself” has been “a complete failure.”
Are These Plans Any Risky?
According to Ghilarducci, the shift from defined benefit plans that guaranteed a secure return on pensions, to defined contribution plans such as401(k), which are self-directed and without guarantees, means that many Americans are taking very high risks in terms of their financial security during retirement.
This change especially affects those who have middle or low incomes, since not everyone can manage the risk of the stock market or save enough in case of a sudden stock market crash, as has happened several times in the last 25 years.
Although it may be true that pensions still exist, but they are usually reserved for union-backed jobs, leaving out a large number of employees without a financial safety net for their retirement. This creates a situation in which only people with high incomes, and those close to it, can cope with the financial challenges associated with defined contribution plans such as 401(k)s.
However, despite these difficulties, there are still ways to take advantage of a 401(k) even if you are not among the richest 1% of the population.
401(k) Retirement Plans Worked, Indeed
Recently, prominent personal finance figure Dave Ramsey observed that teachers have to retire with over a million dollars in their 401(k) retirement accounts. That’s not a number many people can reach, and it’s become almost an extraordinary goal. How did the teachers achieve this? Well, like many people, they made sustained and generous monthly contributions to their 401(k) accounts.
In fact, many of them chose to automate these contributions, meaning they didn’t even have to think about it, as they were automatically deducted from their payroll to move into their 401(k) retirement fund.
The interesting thing is that you don’t even need to earn millions of dollars to retire with a solid retirement fund. By just saving a small amount of money each month and letting compound interest work its magic, it is possible to accumulate a significant fund over time that will give you a dignified and even prosperous retirement.
However, it’s critical to make sure your 401(k)s investment portfolio is diversified and commensurate with your risk tolerance. In 2008, many 401(k) funds collapsed due to the financial crisis, prompting Ghilarducci to argue in an op-ed in the NYT at the time that the government should bail them out, just as it did the banks.
Simple Strategies to Grow Your 401(k) Retirement Plan
There are at least five simple and practical strategies you can apply to make your 401(k) fund fruitful and grow over time. If you apply them, you will improve the chances of having a much larger fund when you reach your retirement age to be able to cover all your expenses.
Start saving earlier, because the sooner you start contributing to your 401(k), the more time you’ll have for compound interest to work in your favor. There is no small amount; any contribution helps you to have a good financial cushion that grows over time.
As I mentioned before, automating your monthly contributions ensures that you’re consistently saving every month. Consistency helps compound interest to yield better results. Also, don’t settle for just one investment; that is, don’t put all your money in the same place. If this one-time investment fails, all your savings may be affected.
Additionally, don’t settle for setting up your investment plan and forgetting about it. Remember to periodically review your investment portfolio and make adjustments whenever necessary to ensure that your contribution is aligned with financial goals and your risk tolerance.
Also, the adjustments in the amounts you contribute per month should keep pace with inflation. Finally, don’t become self-sufficient in your retirement savings project. While articles like this can be of great informative help, they are never intended as professional advice. Therefore, it is advisable to seek financial advice from experts in retirement and savings. Without a doubt, these professionals can help you design an investment strategy that adapts to your financial needs and goals.