Early in my career, as most young advisors who are just out of college and trying to build a business do, I met with a lot of people who had not saved a single cent for retirement.
But because I got into this profession to help, I would talk to virtually anyone about saving, investing, retirement, and how to improve their financial situation.
Many of those thousands of early conversations are now a blur, or long forgotten, but a few stand out.
One that I still remember occurred after an investment workshop I had hosted. It was with a woman named Lainie who was 25 years old and making $28,000 a year. I remember this, because Lainie simply did not believe that she would ever be able to save enough to retire.
During our conversation, she mentioned that her employer, a large law firm, offered a 401(k), but she could not be convinced that on her then-modest salary that she would be able to contribute enough to make any real difference in her future.
Curiously, she did not know whether her employer offered a “match contribution,” so I gave her my card, asked her to find out, and then suggested she call me.
I remember that a few months had passed before she finally contacted me. She had indeed done her research and found that she was in-fact eligible for a full 6% employer match. That meant, if she could just spare 6% of her pre-tax monthly income, or $140 ($70 per paycheck), her employer would “match” her contributions, for a total of $280 invested on her behalf each month.
“That doesn’t seem like very much,” she said.
I asked her to hold on. I got out my calculator, crunched a few numbers, and when I got back on the line, I said, “Lainie, you are almost certainly going to earn a lot more than $28,000 in the future, and so you’ll have more to contribute. But these early dollars are important because they have more time to accumulate compound interest. But even if you never do earn more than you do right now, you are 25, and if you and your employer match put a total of $280 in your 401(k) each month, in 40 years, at 8% yearly interest, you will have over $900,000 saved.”
That $900,000 number impressed her.
And then I told her that of that possible $900,000, $770,000 would come from interest, and that meant that only $130,000 was from savings/contributions.
I then told her that the best part was that half of that roughly $130,000 would actually be contributed by her employer.
In short, if she could manage to save roughly $68,000 in equal monthly increments over the next 40 years, all other things being the same, and even if she only made that same $28,000 for the rest of her career, she could accumulate that $900,000.
Before saying thank you and goodbye, Lainie assured me that she was going to start contributing to her 401(k) right away.
Pre-tax withdrawals. Employer matching. Tax-deferred growth. Distributions. When it comes to 401(k)s, while there are any number of things to consider, something you almost never read or hear about are statements.
As in, do you regularly receive one, and, if so, what should you prioritize when you read it?
What follows are two 401(k) statement essentials that everyone needs to know.
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The law requires that you receive a quarterly statement
Some people check their 401(k) balance each day (I would not recommend that), while others rarely, if ever, do.
Many people don’t realize that, either via regular mail, or electronically (if you’ve knowingly or unknowingly gone paperless), your employer is required to send you statements within 45 days of the end of each quarter.
If you have not received, or do not remember seeing, a recent 401(k) statement, you need to contact your HR department and get your access dialed in immediately.
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Learn to read between the graphs and charts
A 401(k) statement is typically a jumble of numbers, lists, graphs, blocks of words, and charts, but try not to feel overwhelmed. Simply, the essential information is there, you just need to know where to look.
For most 401(k) plan participants, the two sections you will want to focus your energies on are the “summary” and your “investments.”
Your summary section includes important things like where your balance was at the beginning of the quarter and where it is at the end. It has your contribution amounts, your employer’s contribution amounts, and your gains or losses.
The investment section has a detailed breakdown of how your money is allocated. But here is something essential: The closer you get to retirement, in most instances, though not all, the more conservative your allocation should become.
In short, if you have not adjusted your 401(k) investment selections in 10 or 20 years, or you are within 10 years of retirement, you should seek out your fiduciary advisor to appraise your allocation. While markets have historically risen over time, short term losses close to retirement could put a serious damper on your future. A quality advisor will be able to help protect your future by quickly appraising whether the contributions in your 401(k) are invested in a manner that are aligned with your personal risk tolerances and time horizon.
