My Dad loved his garden. It was one of his passions in the summer when he wasn’t coaching his kids in soccer, baseball and softball or shuttling us to one of our many activities. We still have his “Garden Tours” sign proudly displayed outside, with a tin can accepting $0.25 donations for access. In fact my Aunt recently repainted it.
Garden work started in February and early March for my Dad when he would plant starter seeds under a UV light in the laundry room. He’d baby his plants, coaxing them to grow until it was warm enough outside to transplant them into the garden soil.
June brought the first harvest, asparagus, which grew as a perennial in the garden. By mid-July, the rest of his plants would produce a bountiful harvest. We didn’t have to ask – we knew we’d be having green beans for supper most nights into the early fall.
It wasn’t just the garden, either. My Dad lined the perimeter of our house and deck with pots, planters and hanging baskets. Explosions of color, including delicate red geraniums, vibrant yellow and orange marigolds, lavender pansies, hot pink petunias and multi-colored impatiens among others.
When cancer forced my Dad to retire in January 2000, he turned his steel-toed work boots and his green Northern States Power lunch pail into geranium pots. My Mom still plants in them each year.
So what does any of this have to do with your 401(k) and retirement?
More than you might think.
As my Dad taught me, start early. Not just in your career, but as soon as you can participate after you join a company. Check to see if there are participation waiting periods, or company-match waiting periods. Make sure you’re taking advantage of the company match as soon as you’re eligible. It’s free money, a guaranteed return on your investment.
More companies have adopted automatic enrollment and automatic escalation features in their plans where you’re automatically included as a plan participant at a base percentage with the contribution escalating annually. In fact, you might be required to opt-out if you don’t want to automatically participate – we opted-out when Cara accepted a position with Anthem because there was a one-year waiting period on company matching contributions. We decided to use her money elsewhere and wait to participate until she was able to take advantage of the company match.
Generally these automatic features are a benefit to those employees who wouldn’t otherwise participate – and it’s promoted to employees as such – but be aware that your employer has a vested financial interest in driving the size and assets of its plan with the company’s plan sponsor. It’s not all benevolence on your employer’s part.
Know the rules
In Minnesota, traditional wisdom says you’re risking the survival of your less hardy plants if you have them in the ground too much before Memorial Day, and certainly not before Mother’s Day unless you have a way to cover and protect them from frost.
Investing for retirement, you need to know the rules, too. Know the vesting schedule for your company match. Understand that money you invest generally will not be available to you until age 59 ½ unless you’re withdrawing it under a special exception, and you’ll still pay taxes on this withdrawal. If you do withdraw money early without meeting the criteria, you’ll be facing the tax hit plus a 10 percent penalty. Not smart.
Know the rules about taking a loan from your 401(k). Or better yet, don’t do it unless it’s a last resort.
Know your options
Just as in your garden, you’ll have a variety of options from which to choose when you plant your investment seed.
Before doing so, if your employer offers the choice, you might have to decide whether to go with a Roth 401(k) or a traditional 401(k). That’s a complicated topic worthy of its own post.
Next, you’ll need to decide what kind of investor you are. Are you disciplined? Can you stomach seeing a decline in your balance when the market hits a rough patch? Generally, the younger you are, the more exposure you should have to stocks – and even as you approach retirement age and into retirement, you’ll want exposure to stocks to outpace inflation.
The old rule of thumb is to divide your investments between stocks and bonds according to your age – if you’re 30 years old, have 70 percent invested in stocks, 30 percent in bonds. If you’re 50 years old, your investments would be 50/50 stocks and bonds. Personally, I’d advocate more exposure to stocks in your later years than this model proposes, but the idea is to re-adjust your exposure to risk as you’re closer to retirement.
I’ll go deeper on the topic of fund selection and investment mix next time, but these are obviously important choices you’ll need to make when selecting the actual fund(s) to invest in from your company’s plan.
Watch it grow
Don’t touch those plants or seeds! Keep cultivating the garden, weeding, watering, protecting your plants and you’ll start to see results.
Keep investing paycheck after paycheck, month after month, year after year, and you’ll see your balance start to snowball. Do some periodic rebalancing and also weed out any poor performers from your plan, but whatever you do, stay invested. If the market drops, it just means your next paycheck withdrawal is buying you more shares.
Likewise you’ll have to do some transplanting from time to time. When you change jobs, you might be able to stay invested in your company’s 401(k) plan, and that could be a good option if the investment options are strong. Otherwise think about rolling over your balance to an IRA using a low-cost fund family like Vanguard, Fidelity or T. Rowe Price. Rather than having to keep track of your plans at multiple employers, it can be easier to have your retirement money in one place. Explore your options.
We’ve done this a few times when I’ve changed jobs. It’s not hard and it ensures your money stays invested – plus you avoid the early distribution penalty and taxes.
You can even convert your rollover IRA to a Roth IRA. Pay the taxes now, let your investment grow tax-free, take distributions on your contributions and earnings tax-free someday – or use it as a back-up emergency account today after you meet the five-year ownership period (you can withdraw your contributions tax and penalty-free after this 5-year period, but not your earnings). For higher earners who don’t qualify to contribute to a Roth IRA directly, there are no income limits for converting from a traditional IRA to Roth – a backdoor entrance to funding a Roth IRA.
Enjoy your harvest
I can’t speak authoritatively on this one yet. Someday.
Pass it on
Just like my Dad’s boots and lunch pail serve as a reminder to us every spring and are used for replanting, I hope with a lifetime of saving there’s something left from our 401(k) and other retirement accounts to pass on to our kids, grandkids and great grandkids (God willing). Maybe some of our seed money will be reinvested by them and continue to grow.