The 401k advice I received from my first employer made the plan seem like the best thing since sliced bread.
What I learned, fortunately very early, is that the 401k advice you hear when things are going wrong doesn't make sense. It opens up the can of worms about 401k investments.
Let's discuss the one piece of advice that I believe is risking your retirement.
When the stock market is getting beat up like a punching bag and your 401k retirement plan cannot even keep up with your son's piggy bank, what do you hear from Dave Ramsey and Suze Orman?
Buy more stock because it is on sale.
Isn't this interesting? You have been losing money consistently in your 401k...so what should you do? Put more money into the system that keeps going downhill.
Who came up with these 401k tips?
Where in life would this actually make sense? I mean, would you:
How close are you to wealth without risk if you keep buying stock and your money is consistently losing?
Why would people do this with their money? Why should this apply to your 401k plan advice? I believe I know why. It's because of one thing: The Recovery
In Roulette, if you have been losing to Red, logic tells you to double your bet and place it on Black because it must win sooner or later. But no one knows when.
If you keep losing on Red, let's bet on Black. This is smart...right?
Bet #1 $20
Bet #2 $40
Bet #3 $80
Bet #4 $160
Bet #5 $320 <--it grows quickly doesn't it?
Bet #6 $640
Bet #7 $1,280
Bet #8 $2,560
Bet #9 $5,120
Bet #10 $10,240
Now, is this a good strategy to recover the money you lost?
This is what people depend on when they are buying stocks on "sale" through their 401k. They figure, "I'll recover." But, they still don't know when, or if, it will occur. High risk does not mean high reward.
Let's say that you invest $100 in your 401k. With a 50% decline, you are left with $50.
A 50% increase will only get you to $75.
You have to experience a 100% increase to just get back to where you started!
Like the above example, with losses, you have to "put more in" and win big to get back in the game. How likely is that to happen? Is this really the best way to invest money?
How long can you keep throwing into the system and wait for the upswing. What about those individuals waiting to retire next year? What about the individuals already retired? How long do they have to gamble?
If your plan has been losing, when should you cut your losses? One strategy is to just stop contributing altogether. I did. I just let my employer put whatever they wanted to in there. Unfortunately they wouldn't just give me the profit sharing directly.
I began to ask questions? Could I invest in other private investments? Would it be beneficial to pay off credit card debt? I just didn't want to risk my money anymore with this qualified retirement plan. So, I decided to take a 401k withdrawal.
I'm not sure about you, but a secure savings strategy shouldn't be like this. It's too much like gambling. Heck, even depending on Social Security retirement benefits is gambling to me.
Savings should be secure and under your control. My 401k advice:
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