Mar 23rd, 2007
For a long time I had been meaning to have a look at my girlfriend’s 401(k). She knew she was putting money into it but other than that she hadn’t looked at it much. Both of us assumed that it was just chugging away piling up and doing what it should. She is a very smart woman with good financial sense but doesn’t have the interest in personal finance that I do…so when we got online and looked at her current portfolio we both had a bit of a surprise. Her money was doing almost nothing.
In fact, it was automatically putting her money 100% in a default money market fund. Oh it gets worse. I did the calculations and she returned around a whopping 3% for the year! Thats right, a little over half of the return on high yield savings account.
To put this in perspective if she had been index fund that is available through her company she would have returned roughly 10%. When I showed her the difference in cash she was uh, “not pleased” to say the least. I went ahead and reallocated her funds into a mix of the index fund, a small market cap fund, and an overseas fund. The latter two just being a small portion for fun. Just for fun I showed her a scenario of what we might have just saved her. At her current rate of return, versus a 10% return on JUST the money that was already in there (ie not counting any new contributions) off the top of my head, she would have had about $70,000 more by age 60. I should have told her I will be charging a 10% fee. Hey, that’d buy a boat…and when I retire, I would like to have a boat.
Also as it turns out she was also not maxing out the company matching so we added her extra 2% to get the extra company 1%. What difference did this all make in the end? To take it one step further, with continuing contributions, if she never got a raise in her life, and worked until 60, with proper allocation (assuming the market keeps rising at its average that is has risen at for the past 100 years) it made literally a million dollar difference. Thats right $1,000,000.00. Talk about a change in personal finance.
There are lessons to be learned here:
1) Just because you are contributing to your 401(k) does NOT mean you are doing your due dilligence toward having a good retirement. Don’t assume that the company is doing the right thing for you. If you are young you should not be completely invested in a low risk portfolio.
2) Max out your company match. It is free money, and compounded over 40 years it is a TON of free money. It’s a truckload of free money.
I imagine a truckload of free money to look something like this:
Just in case you are wondering, and since the name of this blog is The Penny Saved …that truck is a standard 18 wheeler and if you do not count the weight of the truck itself, it could legally carry about 14,514,955 post 1983 pennies. That comes out to $145,149.55
So really that million dollar savings would take more than more than 7 of these trucks full of pennies to haul.