If you compare your current 401(k) menu options against what your plan offered ten or fifteen years ago, you are sure to notice something: there are far fewer choices. That may be frustrating if you have a passion for investing. But for most people, a streamlined investment menu is a good thing. That’s because most people aren’t interested in investing; they are interested in retiring.
What’s the difference? Investing is a means to the retirement end. It’s important to choose wisely, but in the past, having too many choices had unintended consequences. Some felt like they had to be experts to decipher the menu, got discouraged and made no choice at all.
Others thought entirely in terms of “beating the market” and took on more risk than may have been appropriate for the age, income and savings balance. Focusing too squarely on investing can divert attention away from what participants can control – saving and planning.
Even if you are a passionate, successful investor, when it comes to your 401(k) you should stop being Warren Buffet every once in a while and refocus on the retirement part of your retirement plan. Here are a few suggestions for how:
1. It’s spending now or spending later. Let’s start with the most basic decision you have to make every time you get a paycheck: spend it now or spend it later. Think of it this way: if you live for 30 years beyond retirement, you have to pay for 70 years of spending from 40 years of paychecks. It helps to think of saving as a conscious choice to “spend it later” on the things you will still enjoy after you’ve stopped working.
2. Think holistically. It’s easy to get lost in the details and lose track of your ultimate goal – being able to retire when you want. Does it make sense to focus on small differences in return if you are not contributing enough or you are undermining your savings with loans or withdrawals? Successful investing can augment or preserve your savings. But think about what can have the biggest impact on your retirement goal first.
3. Think outside the nest egg. Save as much as you can, invest wisely and build your nest egg. That’s good advice. But a nest egg can seem more formidable than it is, especially in comparison to our yearly salary. It’s not the size of the nest egg that counts; it’s how you are going to spend it or draw income from it.
4. Know what you own. The suggestion that you shouldn’t think of retirement primarily as an investment problem doesn’t mean you can safely ignore your portfolio. But when you do look, look beyond your returns. There are many factors that may put your goal of retiring on time at risk, including not taking appropriate risk for your age, in particular by parking in cash. ( 63% of respondents in a recent survey say two thirds of their savings are held in cash.) Too much risk is also a concern for pre-retirees, such as holding extensive company stock or some other concentrated position. Reviewing your portfolio at least once a year, preferably with a professional, is a good habit to build.
Chip Castille, Managing Director, is head of the BlackRock US Retirement Group. You can find more of his posts here.