The Best Investment In The World

Photo By: dbking

By this point in people’s lives they are well aware of the merits of 401(k)s and other retirement accounts.  Most people have wisely made them a part of their investment strategy, however many misconceptions still persist about them.  While most people do contribute, many of them spend very little time allocating their funds and instead make other hasty decisions based on misconceptions.  So here are some important things to know about the best investment in the world: tax-deferred retirement accounts.

Always Max Your Match

This advice is usually followed, but there remain people, particularly in this downturn, who have ceased contributions.  If your company matches your contributions at any level, this is one of the most amazing investments available to you.  Many times it may even behoove you to defer paying down debts to maximize your contribution.  While paying a debt may make you 20% tax-free on your money, a 33% match would make you…33%.  This doesn’t even take into account the fact that your contribution is pre-tax, which actually makes it an even more compelling option.  It is almost never a good idea to leave this kind of money on the table, barring extreme circumstances.

Be Aware of Your Options

The most common reason people are breaking the first rule is because of the markets.  Many people have ceased contributing to their retirement accounts because of the insecurity in the stock market.  They are waiting for things to “recover” before they contribute.  There are several problems with this approach, but not the least of which is that almost all retirement accounts have non-stock options.  That means you can usually put your retirement account money into a fund that is not dependent on the stock market.  There are exceptions, and I am not aware of all plans, but why forgo tax-deferment and employer matching when there’s an option to put that money into a secure fund?  It’s simply a question of having your cash in a taxed account or a non-taxed account.

Follow Your Strategy

If you were dollar cost averaging, don’t stop just because the market is down.  That’s the whole point of dollar cost averaging.  Now that prices are lower, you should bring your average cost down quickly if you continue contributing.  I can’t promise you that the markets will resume, but if you ever plan to resume dollar cost averaging, stopping because the market is down is counter-productive.

You also need to be aware of when it’s time to get out of stocks and move to less risky options.  As you get closer to retirement, you no longer have years for things to “average out.”  It’s time to start moving money to safer investments.  Don’t let the lure of additional returns keep you in the market for longer than is safe.  Many baby-boomers are learning that lesson right now.  While 3% may seem unappealing, it’s considerably better than losing money when at the doorway to retirement.

Never let temporary factors cause you to overlook the best investment in the world.  Tax-deferrment has huge implications on your eventual bottom line, so you should be making every effort to maximize your contribution.  Why save 65% of your net when you could save 100%?  And why pay taxes on the earnings of those investments?  You may have more limited options, but they would have to be severely inferior to overcome the huge benefits of preferential tax treatment.

One Response to “The Best Investment In The World”

1. WiseMoneyMatters says:

   January 29, 2009 at 10:48 am

   Great advice. When my 401K plan starts to take effect at my new job, I’m going to be putting the maximum matched amount into it. It just makes sense. It’s free, tax-free money. You can’t argue with that.