Average Joes 401K Guide
Ok, ok. So this is probably the most worn out topic ever. However, based on recent survey data, only about a third of the workforce that is offered a 401k, are enrolled and contributing to it. This is a ridiculous statistic considering the average company match is 4%. Think of it this way, if your boss asked you if you would like a 4% raise, would you take it? I sure hope so. If not close this web page, there is no hope for you. All kidding aside, take a look at the numbers below to see how much FREE money you are missing.
| Current Salary | Employer Match | FREE Money | Total Contribution |
| $20,000 | 4% | $800 | $1,600 |
| $30,000 | 4% | $1,200 | $2,400 |
| $50,000 | 4% | $2,000 | $4,000 |
| $100,000 | 4% | $4,000 | $8,000 |
The calculation is easy. Take your earnings, before tax (Gross) and multiply it by the employer match.
Ex. Current salary is $36,000 per year with a 5% employer match.
$36,000 * .05 (The employer 5% match) = $1800. The total contribution is simply the employer match * 2. The other half is what you need to contribute. Hence the employer “match.” So for this example, the total is $3600 per year total contribution. Remember, this is FREE money. All you have to do is contribute your portion first.
What investments does my 401k use?
Most 401k plans consist of mutual funds that target different objectives. Most plans offer a little something for everyone. Some funds are more conservative while others are much more aggressive. The mutual funds offered are typically stock funds, bond funds, target funds, index funds, real estate funds, and more.
Stay tuned for more on how you can determine your risk tolerance and other factors on determining what funds you should invest in.
401K Balances Drop Over 30%
The financial crisis hit individuals at all career levels. The average 401k balance fell 30% to $45,500 from about $65,000.
The good news is, the recent rally has driven account balances back up to near pre-crisis balances.
The 401k hits affected everyone differently. A 20 something that just started his of her career isn’t going ot be affected as much as someone nearing the retirement age. Many people nearing retirement age didn’t have much focus on their retirement savings and never realocated to lower rusk securities. This lack of action likely prevented many people from retiring as it was too late to correct the damage.
It also affected people in the middle age group. Most of this group was also weighted heavily in stocks within their 401ks.
Unfortunately, many 401k contributors either lowered or stopped contributing all together when the markets started to drop. While this seems like a good plan, generally 401k participants who continue to contribute at the same levels through down turns, make out better in the long run. This is because you are able to but at a lower cost. You get more shares for your money. Over the last 100+ years, the market has made an average 11% return. Based on statics, you can bet your accounts will grow again. When you continue to contribute through a recession, your cost average per share goes down. Example below.
You buy 100 shares of a stock or mutual fund for $10 each for a total of $1000.
You then buy another 100 shares or the same stock or mutual fund when the market is down. Say the price is now $5 per share, or $500 total.
Your cost average is is now $7.50 per share.
Assuming the stock or mutual fund price continues to rise to say, $20 per share, you would have actually made more money on your investment by sticking in through the down trend.
Keep in mind that accounts like 401k are long term investment vehicles, usually 30 years or more. Don’t let emotions drive your long term investment goals. Stick with the facts. The market on average, returns 11% per year.
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