I have written at length about my research into the wealth-killing traps of 401(k)s, IRAs, 403(b)s, and Roth plans… and how to avoid them.
In this post, I’m going to talk about the trap of retirement plan unpredictability, and I’ll start by asking you a critical question:
Do you know what the value of your retirement account(s) will be on the day you plan to tap into them… and in 20 or 30 years?
If your answer to that question is “no,” then you don’t have a plan – you’re gambling.
Yet isn’t the money you’ve earmarked for retirement money you can’t afford to lose? On top of all of life’s stresses, do you really want to have to worry about when the next market crash could wipe out 50% or more of your life’s savings – as has happened twice just since the year 2000?
Market Volatility Has Proven to be a Cause of Health Problems and Even Early Death
Studies show that even relatively small stock declines are linked to early death. In fact, if you have just 10% of your wealth in the stock market and experience only a 10% loss, your risk of dying earlier or having a major health problem or depression increases significantly.
The Wealth-Killer Hiding in Half of All 401(k)s
If you have a 401(k), it’s very possible that your money is in a Target Date Fund (TDF) – even if you didn’t authorize or request it!
In fact, the latest available data shows that more than half of all 401(k) accounts had fully 100% of their assets in TDFs. That’s because most employers choose TDFs as the “default” investment – the one they automatically choose for you unless you specifically opt out of it.
So what’s wrong with Target Date Funds? They are mutual funds that – in theory anyway – shift from higher-risk to lower-risk investments as participants approach their retirement date. Yet, in practice, they have been a disaster!
During the Great Recession, investors in the largest TDF lost as much as 31% of their money, even though the Dow Jones Industrial Average lost only 1.6% during the same period!
And some TDFs designed for participants planning to retire in just two years lost considerable value – over 40% in one case, according to a report from the Government Accountability Office.
Can you imagine being just months from retirement, only to see your nest egg take a 40% hit?
These are just a few of the problems with government-controlled retirement plans that I’ve covered.
Listen to My Interview with the Wall Street Journal About the Dangers of Letting Your Employer Decide Where to Invest Your 401(k) Funds
The Time-Tested Strategy that Ensures Your Retirement Dreams Don’t Turn into a Nightmare
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