It’s Easy to Fall Behind on Retirement Because It’s Hard to Choose a Plan
May 27, 2015
Study after study about retirement indicates that Americans are worried about their ability to live comfortably later in life. Savings statistics also indicate that we aren’t saving enough for retirement.
One of the problems is that it’s easy to fall behind on retirement because it can be hard to choose the right retirement plan for you. The good news is that there are tools and strategies you can use to reduce the difficulty associated with saving for retirement.
Employer Retirement Plans
Choosing a retirement plan with your employer can be a daunting task, depending on what’s available. Some plans are limited, with only a few options available, while others have a long list. Having too many choices can intimidate us, since we don’t like the idea of choosing “wrong.”
First of all, realize that, while you can usually do better in your choice, the reality is that almost nothing is worse than not saving at all. So any fund that you choose from your employer’s list of funds is likely going to be better than doing nothing at all. This is especially true if your employer offers a match. When possible, contribute the amount necessary to get the maximum employer match.
Once you have calmed your nerves about choosing a plan, you can make matters easier by simply choosing something with broad market exposure. Most employer plans are going to have index funds that reflect the performance of major indexes, such as the S&P 500 or the Dow. You can also find index funds that reflect the performance of the market as a whole — including all publicly traded companies. This type of broad exposure to the market means that all you have to do is be along for the ride. Stocks, as a collective, have yet to lose over a 25-year period. This means that if you start now, and keep investing (especially with an employer match) for the next 30 years, there is a very good chance you will come out ahead.
Next, after you’ve decided on getting an index fund that covers a broad market, you can look at fees. Many index funds have very low management fees, and that means a better return for you. You might also have to pay plan administration fees. These should be fairly transparent now, thanks to recent regulations. As long as your fees are reasonably low, your employer’s plan is probably a fine choice.
Retirement Plans Beyond Employer Offerings
Not everyone has access to retirement investment plans at work. If you don’t have access to a plan, or if the cost is too high to justify investing more than what you need to get a match (you should also go for a match, since it’s free money), you might need to set up your own plan.
If you are looking to get started, don’t be put off by all of the choices available to you. Instead, start simple. Almost any online discount brokerage offers an IRA option. You can open an IRA with a brokerage and start investing. Most brokerages offer low-cost index funds and index ETFs. Get a broad, all-market index fund or ETF and you can save money. Many brokerages even offer their own ETFs with no transaction costs. It’s possible to find an index ETF with costs of between 0.05 percent and 0.25 percent without too much trouble. Use the brokerages proprietary ETF, and you won’t even have to pay transaction costs.
The important thing is to get started. Put in as much as you can to begin. Over time, as your resources improve, and as you learn more about investing and the opportunities open to you, it’s possible to look into other types of retirement accounts. The self-employed can use SEP and SIMPLE plans, as well as solo 401(k) plans. But the easiest thing to do is start with an IRA. Once you get started, and see how easy it is, then you can branch out.
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