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History of 401k
For our parent generation, the main source of retirement income were social security and pension. They can live comfortable lives with them. 401K were not popular back then. In fact, it was just a supplement to allow taxpayer (mainly high bracket people) to defer income for tax break reason.
Why 401k is important to you?
People are living for much longer now. Social Security wouldn’t promise the amount that we receive from an annual statement. Many companies are underfunded and unable to keep up the promise of their pay for pension plans. In fact, they stop providing pension plan or freeze their existing pension and switch to 401K plan instead. Without the promise of those two incomes, 401K becomes a sole one.
If 401K is important, why people forego it?
The main reason is people are lack of knowledge about 401K. For me, I never heard about this vehicle until I graduated from college and started my career. I remember when i went to the HR orientation on my first job. I was intimidated by massive information and I was too shy to ask right questions. I knew that i need to put money into 401k. But, i didn't know how much i need to set aside and what kind of funds i should’ve invested. HR representative didn't provide any clue and advice. My ignorance wasted my precious early year to invest and my portfolio grew very slow.
I watched a documentary about the gamble of retirement. The documentary talked about the retirement between old generation and new generation. Traditionally, when companies offer pension plan, employee just needs to know the rules and number of year of services. They will figure out how much money they were going to get when they retired. Unlike for 401k, everything from contribution, investment, distributions have become the burden of employee shoulders. The documentary showed the video of a XYZ company (fake name) new hire orientation. Employees were very confused when they were explained about their 401k retirement plan. Then, journalist asked XYZ Company CEO "Would you let one of those confused employees to manage your own 401k plan?” CEO immediately replied said "No way. Of course not". Journalist asked "Why?” CEO replied "They have no knowledge about this and I can't risk my retirement upon their hand."
Isn't it sad, but truth about many American retirement are in jeopardy. Unlike that CEO who have financial planner or investment manager to manage his retirement plan. Many of us who doesn’t have an expert to manage our 401k plan leave us in a despair.
My story
As i mention earlier, i only contribute minimal percentage into 401k. So, my portfolio grew very slow. Eight year ago, I commit myself to increase from 5% contribution into close to maximum now. My portfolio is in a much better shape now. With this small change i did back then, it is given a big effect now, thanks to compound interest.
Do you think you will build a decent 401K portfolio when you retire? If not, what kind of consideration do you need to take now?
For our parent generation, the main source of retirement income were social security and pension. They can live comfortable lives with them. 401K were not popular back then. In fact, it was just a supplement to allow taxpayer (mainly high bracket people) to defer income for tax break reason.
Why 401k is important to you?
People are living for much longer now. Social Security wouldn’t promise the amount that we receive from an annual statement. Many companies are underfunded and unable to keep up the promise of their pay for pension plans. In fact, they stop providing pension plan or freeze their existing pension and switch to 401K plan instead. Without the promise of those two incomes, 401K becomes a sole one.
If 401K is important, why people forego it?
The main reason is people are lack of knowledge about 401K. For me, I never heard about this vehicle until I graduated from college and started my career. I remember when i went to the HR orientation on my first job. I was intimidated by massive information and I was too shy to ask right questions. I knew that i need to put money into 401k. But, i didn't know how much i need to set aside and what kind of funds i should’ve invested. HR representative didn't provide any clue and advice. My ignorance wasted my precious early year to invest and my portfolio grew very slow.
I watched a documentary about the gamble of retirement. The documentary talked about the retirement between old generation and new generation. Traditionally, when companies offer pension plan, employee just needs to know the rules and number of year of services. They will figure out how much money they were going to get when they retired. Unlike for 401k, everything from contribution, investment, distributions have become the burden of employee shoulders. The documentary showed the video of a XYZ company (fake name) new hire orientation. Employees were very confused when they were explained about their 401k retirement plan. Then, journalist asked XYZ Company CEO "Would you let one of those confused employees to manage your own 401k plan?” CEO immediately replied said "No way. Of course not". Journalist asked "Why?” CEO replied "They have no knowledge about this and I can't risk my retirement upon their hand."
Isn't it sad, but truth about many American retirement are in jeopardy. Unlike that CEO who have financial planner or investment manager to manage his retirement plan. Many of us who doesn’t have an expert to manage our 401k plan leave us in a despair.
My story
As i mention earlier, i only contribute minimal percentage into 401k. So, my portfolio grew very slow. Eight year ago, I commit myself to increase from 5% contribution into close to maximum now. My portfolio is in a much better shape now. With this small change i did back then, it is given a big effect now, thanks to compound interest.
Do you think you will build a decent 401K portfolio when you retire? If not, what kind of consideration do you need to take now?