You know you need to invest for the future, but you procrastinate getting started because it all seems so overwhelming. You become paralyzed with indecision, inertia takes hold and you delay—or never get started—investing. Sound familiar? Fortunately, getting started is not as hard as you think it is, and there is a way for that inertia to work in your favor.
With pensions a rarity these days, a common retirement investment vehicle is the employer-sponsored 401(k) plan. For many of you, the opportunity to sign up for a 401(k) is part of your onboarding with a new job. You complete the necessary forms and each month a predetermined percentage of your paycheck is invested into your company 401(k) plan. While you will pay taxes on any withdrawals from a 401(k) once you’re retired, (and heavy penalties if you withdraw before the age of 59 ½) any contributions you make are pre-tax. Which means that your taxable income for that year is reduced, and you pay less income tax. Not bad.
Now some of you may have put that 401(k) information to the side thinking you wanted to educate yourself first about investing. Or, you were going to get around to it later. Or, or, or…, fill in any reason. Here you are three, five or eight years down the road and you still haven’t started investing. Don’t panic, because you can change this by taking one simple step. Contact your employer benefits department or person today and ask how you can enroll in the 401(k) plan. It’s as easy as that. Send an email, pick up the phone, whatever works best for you. Be prepared, though, because a couple of procrastination worthy decisions will need to be made: what to invest in and how much to invest. As for the what, consider investing in a target date fund. Target date funds are diversified mutual funds that are invested with your chosen retirement year in mind. In fact, the retirement year is included in the name of the fund. As for the how much to invest question, start by investing enough to get your full company match, usually 1–5%. Otherwise you’re just leaving free money on the table.
While the above is how 401(k) participation has been routinely handled—you have to opt-in to it—some companies are now automatically enrolling their employees in the 401(k) with a beginning investment of 3% or so. Using good old inertia, you have to make the effort to opt-out if you don’t want to invest. The good news is, you may already be investing and not even know it. So again, check with your benefits department.
If you do nothing else with your 401(k), if you never look at it again, you will continue to invest your chosen percentage of your salary year after year. If you want to kick things up a notch, increase your contribution. If you’re already investing 3% today, in six months up that percentage to 4%. Next year, invest 5%. See how that feels. Does that extra percentage point make you feel squeezed? If so, stay put for now. With your next raise – which may be 3% or higher, add 1%, or more, of those percentage points to your 401(k), before you even notice your raise kicking in.
Now that you’ve got inertia working in your favor, you are on your way to investing for a financially secure retirement!