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The 401(k) Conundrum

The good news is that you have the freedom to invest your retirement any way you choose.
The bad news is that you have the freedom to invest your retirement any way you choose.

Since the 401(k) was introduced in 1983 to replace a guaranteed pension plan, the responsibility of accumulating retirement proceeds has been taken away from the corporations and put squarely on the shoulders of the working public. Most people, as you might guess, may not be prepared to be money managers and compete in the open marketplace against experienced investors and mutual fund managers.

“This 401(k) thing has been good for corporate America, which needed to shed the costs and liabilities associated with defined-benefit pensions. And it’s been good for investment firms, which have collected millions upon millions of dollars in fees since 401(k) plans were first introduced 25 years ago. But I’m not so sure baby boomers have benefited from being asked to bear the burden of building their own nest egg.”
Robert Powell CBS MarketWatch.com Nov.12, 2003

There is good news!
A 401(k) offers savings before taxes and many plan sponsors will match a portion your contributions. This matching can be valuable! If your sponsor (employer) matches 50% of your contribution — you just made 50% on your money! This contribution allows you to grow your money faster — money that can be used to provide a steady stream of income for you at retirement.

The problem however, is that

  • Most people are not saving enough money, and
  • They lack a reliable and profitable approach by which to invest their money.

So while 401(k) and similar retirement plans offer a potentially excellent vehicle to reach your retirement goals, the average person lacks the know-how to effectively manage their money to ensure there is enough at retirement. Thus, the conundrum.

The truth be told

$19,398 is the Median account balance for 401(k) participants at the start of 2006
Profit Sharing / 401(k) Council of America, Investment Company Institute, Employee Benefit Research Institute

This shocking statistic points out the scary, but inevitable truth: the average person may not have the needed funds to sustain a retirement income that is adequate to provide sustenance, let alone quality of life.

What about social security?
The average Social Security benefit as of December 2001 is $874 per month. Social Security is expected to come under severe pressure as the 76 million American baby boomers begin turning 65, the heaviest burden starting around 2013. Probable fixes being discussed include delaying benefits until age 67 or longer and increasing taxes while lowering benefits. At any rate, it's obvious that Social Security will increasingly have a diminished value as a portion of retirement income.

Hunches, tips, intuition - do not a good investment make
Left to their own, the average investor does not fair well when picking mutual fund selections and often these investors, people like you and me, are fooled into believing that the myriad of free stock market information available through the media and on the internet is any better than hunches, tips and intuition.

Investors have no idea how much they're losing. A recent study of fund-investor behavior by Dalbar, an independent research firm says: "The situation is so bad that the average equity investor earned a paltry 2.57 percent annually compared to yearly inflation of 3.14 percent…”
Paul B. Farrell CBS.MarketWatch.com Jan. 26, 2004

If that isn’t bad enough — according to data compiled by New York University economist Edward N. Wolff, adjusted for inflation, the amount of money that the average American family had set aside for retirement did not increase between 1983 and 1998, despite the strongest stock market surge on record. This only confirms the fact that a soaring stock market is not enough. One must first contribute enough and second, invest wisely.

The Solution
We believe what is needed is education, motivation, goal setting, direction and a means to monitor success. This is what PerformanceSignal is about. We look to provide a roadmap that includes these ingredients in a clear step-by-step approach. Additionally, we look to provide you with timely information to help you outperform the general market without increasing risk. This added performance can significantly lower the number of years it takes to reach your savings goals or radically increase the amount available to you at retirement.

Step 1: Set Your Goal