Understanding Mutual Funds: More than a roll of the dice

Each month I meet people, including clients, who own mutual funds, but either aren’t sure what they are or what role they can play in their retirement planning. I blame 401(k) and 403(b) retirement funds for this. One opportunity to learn more is via my new class Mutual Funds and Merlot!

What I mean is that very often, companies of all kinds (including employers, financial services reps and the information you receive from your Benefits department leads you towards the decision tree of “We have these 20 funds for our plan – pick one now”  – and go!  By the way, you have five minutes. Whether it is five minutes or five days, sometimes; indeed many times, the information is not understood by the employee.  Despite everyone’s best efforts, employees may not understand the foundation of how mutual funds work. And without wine!

Feel like the market is just a roll of the dice? Mutual funds are more like the Monopoly houses than the dice. Photo via Flickr woodleywonderworks

I’ve created an opportunity for you to spend some time with me and a glass of Merlot, in order to better absorb the information about what mutual funds are, (yes, an index fund is a type of mutual fund), how to use them, and why they can lower the risk in your portfolio (retirement or other investment account). Like wine, mutual funds are both simple and complex, full of sin-or part of daily life, global and local, and some are meant for holding a long time in your cellar (or your retirement accounts).

Please join me at my office for an after-work, pre-weekend, informative way to put some fun in mutual funds!

More information and registration is here.         

Registration via Brown Paper Tickets.

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Employer Retirement Plans: The Power of 1%

Did you fail to grab some cash last year?

Here’s the scoop on how many people left employer matches on the table last year. I read this study from Financial Engines and was astounded at the billions of dollars unclaimed.

What if you can’t set aside even the minimum for the employer match? Then what?

I would not be living up to this blog’s title, if I didn’t address this issue. Here are some reasons I’ve heard for not participating in an employer retirement plan:

• I can do better on my own.  Really? Tell me about it then.

Wring out your own retirement dollars….and show me the money.

• The plan is too complicated. That could be true, but there is no excuse for not asking for guidance in order to figure it out. Sometimes the guidance, advice, information is free. Begin with your company resources, then go outside the company if their resources and/or people cannot help you make sense of it all.

Seek assistance, whether it is virtual or from a live human!

• I don’t have enough money. If you are living in a basement, eating noodles and drinking Mountain Dews [for the calories] , this could be true. However, even 1% in the traditional 401(k) or federal thrift savings plan (TSP) will lower your taxable income and you might not miss it. At $15.00 per hour, or $30,000 per year gross income, let’s see what that looks like over 45 years (67-22) until retirement, with minimum salary increases (1% annually). See chart below:

Results Summary
Current 401(k) balance	$0
Years to invest	45
Annual rate of return	7%
Annual salary	$30,000
Expected annual salary increase	1%
Percent to contribute	1%
Your 401(k) contribution*	$300.00 per year
Your employer’s 401(k) match	$0.00 per year This is a 0% employer match to a maximum of 0% of your annual salary.
Total you will contribute over 45 years	$17,113.77
Total your employer will contribute	$0.00
Total at age 67	$100,836

(chart constructed with Index of Retirement Calculator)

With minimal effort, while not making much money, you could save $100,836 for your future. Note: this example assumes an average annual return of 7%, which would mean not being in a bank account, but at least in a mutual fund composed of a combination of stocks and bonds. (Posted rate for illustration purposes only. Not FDIC insured…)

Visit your company intranet or HR department now. No time like the present to begin saving!

What Your Mother Said…about Money

I don’t always quote other people’s mothers, but when I do, it’s usually about money.

My last work conversation on a recent day ended like this. Me to former colleague: Are you in the 401(k) plan in your new job?

Him: “I know, I know, I should be, my mother keeps reminding me!”

Me: “Well?”

What else did your mama say to you? She may not have said “a penny saved is a penny earned”, a la Ben Franklin, but I bet she had a few words to say about money over the years.

Taken in Philadelphia, Pennsylvania, in April 2006. Sculpture of Benjamin Franklin at the University of Pennsylvania. (Photo credit: Wikipedia)

Whether Mom gave you advice or not on your retirement savings, she probably would agree that you should not overlook free money. And many people do. If your boss offered you a 3% raise-in addition to anything else, you wouldn’t turn it down, would you?

Here’s the benefit my colleague is currently passing up:

100% match of 401(k) contributions of up to 3% of your gross income

Now this company has some other wonderful benefits, but let’s focus on the extra 3% of compensation that I allude to above.  This is the same number as the predicted average raise in the US for 2013.

Some numbers:

• 3% of $75,000  = $2250 each year
• 3% of $50,000  = $1500
• 3% of $40,000  = $1200

This will become your money quickly. Usually you are fully vested in employer matching contributions in three years. Plans do vary, so ask your 401k administrator:
When do the matching contributions vest (or when will I own these contributions?) 

Money – Black and White Money (Photo credit: @Doug88888)

There may be some free money lying on the floor right in front of your desk. Reach out and take it!

Related articles

• 401k: A Great Way to Save (creditrepair.com)
• Why Saving for Your 401(k) Matters (allstate.com)
• 401k vs Roth 401k: Calming the Confusing Chaos (fatwallet.com)