Guiding the Next Generation: What Your Kids Need to Know About 401(k)s
In 1981 the IRS issued regulation that allowed employees to fund 401(k) accounts with payroll deductions. Since then, 401(k)s have amassed an astounding 8.9 trillion dollars. Few things have had a greater impact on the financial lives of everyday Americans.
401(k)s help take the fear out of investing by making it easier to understand and get started. Here are a few benefits:
• Enrollment is often automatic, but even if you must opt in, they make it easy
• Contributions are taken directly from your paycheck, so you don’t “miss” that money
• Many employers incentivize participation by offering a company match
• The average number of investment options is 20, usually including a Target-Date series
• Regardless of up or down markets, you keep investing
#1 – Start Now
If investing has a superpower, it is compound interest. The number of clients who have told me “I wish I had started investing earlier…” is too high to count. In short, the earlier you begin investing, the longer your investments have to grow, the larger they become. No less than Warren Buffet and Albert Einstein have sung the praises of compound interest:
“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” - Warren Buffet
“Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” - Albert Einstein
I don’t think I can add more to the conversation than those two gentlemen, so if you give your kids one piece of financial advice, tell them to start using their 401(k)…now.
#2 – Max Out the Company Match
Investors are always looking for an edge. A fund that earns 1% more than the competition in a given year is king of the hill. What if I told you I knew where you could get a 50% return on your money, every single year? You wouldn’t believe me…correction…you shouldn’t believe me.
4 out of 5 employers offer a company match on contributions to 401(k) plans, with the most common being a 50% match on 5% employee contributions. This is a 50% return, every single time you contribute to your 401(k). I can’t stress this point enough – if your employer is willing to give you free money to invest in your 401(k), you must do it. And since contributions are made before you are paid, you won’t even notice it coming from your paycheck.
#3 – Make Investing a Habit, Not a Chore
Most things in life see results when turned into habits that fit into your daily life – diet, exercise, quality time with family – and investing is the same. There is a term for consistently investing over time –Dollar Cost Averaging. Whether the market is up or down you keep investing, and over time the price you pay for your investments averages out.
The beauty of this approach is that it removes emotion from the equation. When markets drop, many people panic and pull back – but with automatic contributions, you keep buying at lower prices. Over time, this discipline can help you build wealth steadily, without needing to perfectly time the market (which even the pros struggle to do).
#4 – When In Doubt, a Target-Date Fund Is a Smart First Step
With over 8,500 mutual funds available, narrowing the list down to a typical 401(k) menu of 20 options is a big help – but even then, choosing the right investment can still feel overwhelming. Target-date funds are a special kind of investment designed to make retirement planning easier. They do two key things:
• Help ensure your money is invested in a mix of assets – like large and small companies, growth and value stocks, and international markets
• Automatically shift your investments to become more conservative as you get closer to your target retirement year, which is built into the fund’s name
The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.
#5 – Ask For Help
We like to say that we are a family office for every family. Your kids are important to you, so they are important to us. Your team at Sequoia Advisor Group is happy to help answer any questions you or your kids may have. It’s never too early to start talking with a financial advisor.
Seeking advice and trusted advisors in all areas of life is a wonderful habit to share with your kids, especially as they move into adulthood. Helping them get their arms around complicated topics like estate planning, taxes and investing is a great way to set them on a firm foundation. Sequoia would love to be a part of the legacy you leave.
Disclaimer: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing includes risks, including fluctuating prices and loss of principal. Stock investing includes risks, including fluctuating prices and loss of principal. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.