I’m still receiving questions and comments regarding this post: Will you ever put a penny in your 401k again?
I can see how some people couldn’t stomach the additional risk of Real Estate investing…and thus the decision to get a company match in a 401K is an easy (near automatic) choice. For me, I want to determine a return that is reasonable for each option, and then compare it to the associated risk before I make a choice.
There are two wrong ways to look at this whole question, and one right way.
First the wrong ways:
1. Shouldn’t I invest in the 401k to get the tax benefits and the employer match?
2. What do I do if the choice between the 401k and the other choices that I’ve been looking at seem close?
You see, the first question aims at maximizing company benefit, and the second aims at maximizing investment returns. These are not the same thing … and neither are they the thing!
The one and only question that you need to answer is:
3. What do I need to do in order to get to my Number?
If you don’t know your destination, any road will do …
… but, once you do have your destination clearly in mind, typically only one road (and, you may have to look hard to find it) will usually jump right out at you!
For one person it may be that the save-and-forget 401k option is right, but for another only a more active form of investment will get their to their Number.
The rule of thumb: the longer the time frame that you have available, and the smaller your Number (say $2 million in 20 years) the more likely it is that the 401k + own-your-own home + remain-dent-free strategies will work for you.
But if your Number is larger/soon (say, $5 million in 10 years) then you have to do something more or you simply won’t make it …
Picking the right road for you is the best analogy on this topic and one I really like. I think before we master any concept, we are thinking so broad-based, general and non-focused, that we really don’t know what we want.
Achieving financial success for yourself is like acquiring any other skill, knowledge or profession, you must continue to narrow your focus. In this case narrow your focus onto your requirements, aka, your NUMBER and the DATE you need it and then put the blinders on to all else except what CAN get you there only.
Remember, a master is one who focuses on the ever finer details of that which he/she loves…so find out what you truly love about your purpose, your number and when you need it, then focus on the ever finer details on how to get there and ask questions like; will this 401K road get me there?
A Scott – sounds like a plan 🙂
You are right…you need a goal to strive for and that goal will help direct your investment strategy. But, how do you know your goal is reasonably attainable?
Is $2 million in 20 years a reasonably attainable goal? How about $5 million in 10 years? …or $20 million in 5 years?
The only way you can tell is by looking at available investment options and the likelihood of receiving your desired return through those options. Whether you investigate the investment options before you set your goal, or set your goal and then investigate your investment options (and then revaluate your goal based on the investment options), seems to be moot…so long as you do both.
@ Jeff – there’s a difference between involvement (when you set your goal on what is reasonably attainable) and commitment (when your goal ‘seems’ too high). If you need to understand the difference, think about your Sunday morning bacon’n’egg breakfast: the chicken was ‘involved’, but the pig was ‘committed’.
If you are going to get rich, the mountain WILL seem higher than the available investment options seem to be able to deliver.
“If you are going to get rich, the mountain WILL seem higher than the available investment options seem to be able to deliver.”
Why is that? I would think that a savvy investor could calculate an expected range of returns for an investment option (given the inherent risks of the asset and the financing they choose) and then set their goals accordingly?
Is this a perception issue, i.e., is the investment option able to regularly deliver enough return to climb the mountain, but investors just can’t appreciate the true value of the investment?
Or is it that the investment option needs to provide an exceptional return (or at least better than average return) to meet your goal–climb the mountain? In other words, does your system require investors to aim high, invest in high-risk investments, and hope to catch a few breaks (or get lucky for lack of a better term) in order to reach their goal?
@ Jeff – Check out these two posts from my ‘sister site’, where I’m conducting the 7 Millionaires — In Training! ‘grand experiment’
These might help to show you “where I’m coming from” …. 🙂
This is really a perception issue and it assumes living in the USA. If I strive for 5 million in 7 years and only achieve 2.5 million in 5 years. Though I am not on course to meeting my set goal, I still have accoomplished more than most and could easily sail off in to the sunset (outside of the USA of course)
@ Luis – getting to $2.5 million is 5 years requires a HIGHER compound growth rate (120%) than getting to $5 Million in 7 years (90%) 🙂