For those just getting into the workforce, a 401(k) seems like something that you should dump extra change into and leave to accrue interest until you retire. But if you are not careful that chump change could end up jeopardizing your future- just like Mike West, a once hopeful young person.
“Back then everyone was saying you should put as much money as you can into your 401k. I distinctly remember that really sweet benefits lady at employee orientation saying it.” says West.
“I still wasn’t sure, but my company matches something like 75 cents on the dollar so I thought- maybe I should do this? This can’t be that bad, after all I have managed to read 3 or 4 investing books by Cramer.”
However, nothing could prepare West for what lie ahead. Particularly those really crazy options they provide in 401ks.
“I just picked whatever was in there that had the best one year average. I almost never read those statements, but one day I got stuck on the toliet so I opened it up. So far so good, disclosure this, disclosure that, our goal is to make you lots of money, blah, blah, blah. Then I turned to the part where it talks about my actual return and it said ($80,000). For a second I thought, holy c***, 80,000, I’m Peter Lynch! But then I realized by the upside down bar chart that it meant negative EIGHT thousand dollars. I had to call the brother of a friend, who used to day trade, before the dot com bust, to explain this."
He said, “First, it is eighTY thousand dollars, not eight. Second, it seems that the investment you chose, ‘Safety First’ was engaged in cross border swaps and was hedging the dollar with a straddle between the t-bill and the Icelandic Kroner. When the Kroner looked like it was going to freeze up they shifted your money into Merrill Lynch. When Merrill Lynch went down to $.01 per share they took a gamble and naked shorted it to make money on further collapse from there. Unfortunately, just then the government forced Bank of America to buy Merrill Lynch and its stock went up to $2.00 before Safety First could buy back the shares to close the position, so they had to buy those shares for more money than they sold them for, and ultimately you lost $80,000. What is funny is that without your company match you would have only lost $20,000. This is called leverage. Don’t feel so bad, everybody lost money in this market. You’ll be fine- just keep a strict ramen noodles diet and an extra Snuggie (the blanket with sleeves) to keep warm, and keep on putting money into your 401k, it is called dollar cost averaging.”
Where to from here? ‘No Pain, No Gain’ they say
Matt Lloyd, chief investment strategist at Advisors Asset Management, says “When determining what amount to allocate toward retirement, investors should look at their expenses and what they don’t mind giving up to unscrupulous traders at places such as Goldman Sachs.”
"You should put in what you can afford, maybe to the point of sacrificing other things. If you have a car that's 25 years old, maybe you can squeeze another year out of it," says Jeffrey Hearn, senior vice president at Raymond James & Associates, who makes "sick" bonuses from financial markets.
People might be reticent to put a more sizable amount into their 401(k) because they're worried it will really f**** up their lifestyle. "They are probably right" says Ginger Snyder, senior vice president at Raymond James and Associates
