Preface
How do you imagine your dream retirement? Are you relaxing in the sunshine on a sandy beach? Do you see yourself traveling from resort to resort or playing in a seniors’ tennis tournament? Are you volunteering for the Peace Corps? Or are your grandchildren eagerly visiting you at your beautiful retirement home? Stop dreaming! This is not just a fantasy. Your dreams and those of every American can become real with 401(k).
This book is the practical tool and information guide that will make your retirement dreams come true. But before we begin building your retirement success, there’s something you need to know: This golden time of retirement has not always existed. Whether sitting behind a desk or hunting and gathering, human beings have historically worked until they died. When the Social Security retirement age was set at 65 years old, few were expected to live long enough to collect—and as recently as the 1930s, nearly all Americans did pass away before they could retire. But the constant life-changing improvements begun in the 20th century are affecting more than just science and industry. These dynamic changes are allowing new freedoms and possibilities. In addition to a longer life span and a better quality of living, you are also enjoying an entirely new philosophy of employment—working to live, not living to work.
We have been given the opportunity to throw off the limited thinking of the past and go where people have not gone before, especially in our golden years. However, each of us is responsible for making these new possibilities a reality. With life spans now pushing 100 years or more, future retirees may spend several decades in retirement, and many whose retirement is based on early models will be caught unprepared. New retirement realities call for new approaches. Fortunately, a wonderful tool has been developed to help you accomplish your dreams—your 401(k) plan.
The 401(k) Way Traditional retirement approaches assumed two things: (1) Retirees would not live long; and (2) Retirees would need much less money in retirement. Under these assumptions, low monthly pension payments and Social Security would be enough to keep retirees going. Because the time frame for these payments was expected to be just a few years, the expense to the system would be minimal. But all this has changed. In the twenty-first century, retirees can expect to be healthy and live for 20 years or more after retirement. Retirement is now about enjoying your final years, not just watching television in a retirement home. Because we will continue to lead active lives, we will all need at least 70 percent of our preretirement income.
While the government still provides a foundation of retirement income, growing numbers of Americans are turning to 401(k) plans to ensure their financial success. By the end of 2000, there were nearly 35 million Americans participating in more than 350,000 401(k) plans—a huge increase from 1984 when there were only 17,000 plans with 7.5 million participants. These numbers continue to rise as more and more people request that their companies offer 401(k) plans.
Don’t worry. This is not a trend or a fashionable fad. The government will not suddenly take 401(k) plans away or decrease their benefits. In fact, both the government and your employer want 401(k) to stick around. Employers use 401(k) to add satisfaction to your employment relationship and reward you for staying longer at the company, while the government (which wants you to have enough in retirement) has been increasing 401(k) limits. Basically, all aspects of the system—employers, employees, and the government—have recognized the power of 401(k).
So why are 401(k) plans so popular and financially successful? The 401(k) way is based on two simple principles: taking control of your retirement and becoming a lifetime investor.
Taking Control = Having It Your Way We’re all familiar with the advertising slogan "have it your way." The expectation of getting a specialized item tailor-made to fit the individual, rather than a generic product made for the masses, typifies the way Americans think. We like freedom and choices. Unfortunately, for a long time we were receiving the equivalent of mass-produced food when it came to paying for retirement.
Then 401(k) came onto the scene. 401(k) perfectly fills this need because it is not designed for one specific type of investor. It can be simple or sophisticated; hands-on or hands-off. If you have a lot of time to customize and care for your retirement plan, 401(k) will let you. If you want to spend as little time as possible on your 401(k) approach, you can do that too. Think of 401(k) as a tool that can be personalized to fit everyone’s different needs. Regardless of what your goal is and how you want to attain it, 401(k) will work for you.
Why settle for a one-size-fits-all retirement plan that may provide you with far less than you need? Once you take control, you can relax knowing you have a very comfortable future ahead—one that is right just for you.
Lifetime Investors Beat Inflation Here’s the bad news: Because retirees will be living so much longer, your biggest financial risk is inflation. You may save a considerable amount of money when you are younger, but your purchasing power will decrease every year due to inflation. For example, 3 percent inflation (the typical rate) halves the value of your money in 24 years. In the 1960s, a fast food hamburger cost just 15 cents. Today it will cost you $1. While 85 cents is not a huge increase, the percentage of the increase is an indication of how much items will cost in 40 years—6.6 times more! Consider how much big-ticket items such as appliances, cars, clothes, and trips will cost 40 years down the line. In order to keep up with this rise in costs, your money has to grow as well.
But here’s the good news: 401(k) plans do not simply keep up with inflation, they beat it. Because 401(k) assets are invested for the long term they ride out the general ups and downs of the market, earning a steady average return over the years. Thanks to this long-term increase in your assets (along with pretax contributions and an employer match) you will definitely come out ahead when you retire. Ever heard of a 401(k) millionaire? Ever thought of becoming one yourself?
What This Book Will Do for You Are you ready to take control of your financial future and become a lifetime investor? If you’re like me, now that you have a glimpse of the success that is in your reach, you are ready to grab it.
Think of a 401(k) plan as a retirement vehicle; in other words, it is a car you can drive to your retirement goal. If you have not already joined your company’s plan, the time to get behind the wheel of your 401(k) is now. This book will provide you with all the mechanics of your car, a traveler’s guide to help you pick the best retirement destination, and a road map that shows how to get where you’re going. All you have to do is get the motor humming by signing up and starting to save.
Some of the questions this book will answer are:
• How do 401(k) plans save me money on taxes?
• How can I make my money grow?
• How much money will I need in retirement?
• Why is a company match so great?
• How do I get my money out in an emergency?
• How can I avoid big fees and paperwork?
• How do I choose the right investments?
• How does long-term investing work?
• What happens when I retire?
Remember: You’re in the driver’s seat. You’re in control. Ready? Set. Go!
