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February 20, 2000
You've all heard the saying: "A penny saved is a penny earned", but what Ben Franklin didn't say was: "How you save that penny makes a difference on what you earn". It's true that investing in highly volatile risky investments has its downfalls, but playing it too safe in ultra conservative investments also has its risks – the low return may prevent you from reaching your retirement goals.
Luckily many companies today offer some sort of retirement program such as a 401(k) plan. However, very few offer investment guidance. So we are off on our own trying to make important investment decisions with limited information. As women, we tend to lean more toward security. Many of us were taught to diligently save our money and have often heard people say: "For heaven sakes, don't try to invest in some risky aggressive stock fund or you'll lose a bunch of money like Uncle Bob did!" So when the company 401(k) sign up form comes around we allocate most of our contributions into a very safe money market fund and put only a little bit into a stock fund….and we go along life thinking we've taken the proper steps to save for a comfortable retirement. Little do we know that even if we contribute the maximum amount into our 401(k) program, it's highly unlikely that our retirement account earning a paltry 5% or 6% will generate enough money to comfortably retire on unless you're planning to inherit a lot of money.
The reality is you NEED to invest in stocks! If you are like most people and plan to leave your 401(k) alone until you retire (and you won't be retiring for at least 20 more years), you cannot afford to be heavily invested in a money market fund. Even relatively conservative stock funds like S & P 500 Index funds have generated a 18% average annual return over the past 10 years versus money market funds returning only 5% -- the difference between retiring comfortably on your own or having to rely on family to support you.
At times you will be fighting your emotions, because guaranteed the stock market will take a dive sometime in the future and it may be tough to look at your quarterly 401(k) statement and see a 10% to 20% loss, but if history repeats itself, in the long-term stock funds will outperform money market funds, hands down.
In addition to investing too much into low returning money market funds, many people invest too much into their company stock. Although your company may be doing well, your financial well-being may be too highly dependent on the performance of your company (i.e. both your current income and retirement income are contingent on how well your company does now and in the future). Make sure that you evaluate the investment in your company stock as an independent investment, separate from the fact that you work there. Unless your company is doing extremely well (like Microsoft or Cisco Systems) keep your investment in company stock to around 10% - 15%. Remember even Bill Gates, the founder of Microsoft, maintains a well-diversified investment portfolio. If your employer only offers company stock make sure you contribute to an independent retirement account.
Defining the proper strategy for retirement is a battle between risk and reward, but remember time is on your side (401(k)s are usually long-term investments). The key to insuring a comfortable retirement is to contribute as much as you can and if possible, also try to save even more outside your 401(k) plan. Yes, you may have to "tighten your belt" at times to set aside enough money for retirement, but it will be worth it to go to bed each night knowing you've taken the appropriate steps to guarantee YOUR financial future…and not have to worry about whether social security will be available or whether your family can take care of you.
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