“Funding” Your Retirement Account Is Not the Same As Investing
If you have a retirement account—whether it’s a 401k through your employer or an individual retirement account (IRA)—you’re already on your way to ensuring financial success later in life. But you can’t stop at just adding money to your retirement account. You really need to choose investments that can be purchased with cash.
An IRA or 401k is just a vehicle, not an investment in itself, and unless you buy assets with your contributions that align with your financial goals, such as a target date fund or a collection of index funds, your money won’t benefit. t grow (and may even lose value over time due to inflation).
Why is it important to invest your pension contributions?
A study recently released by brokerage firm Vanguard found that 28% of investors who rolled funds into their IRAs from another account, such as a previous employer’s 401k, still had those assets in cash a year later. That number jumped to 55% for investors who made direct contributions to their IRAs.
The Vanguard report also found that cash rollovers taken after one year are most likely to remain in cash seven years later, and account holders aged 20-29 are the least likely to switch from cash to investments. Because the time your money sits in the market is usually more important than the amount you invest (due to the way compound interest works to grow money exponentially rather than linearly), investors who leave their funds in cash are potentially losing millions of dollars. line.
How to make sure your investments are invested
If you have an employer-sponsored 401k, you likely had the option to select your portfolio when setting up contributions, which are typically withheld from your paycheck, deposited directly into your retirement account, and used to automatically purchase the funds you select. . But if it’s been a while since you signed up for your retirement plan, you should log into your account with your plan administrator to make sure.
If you’re self-contributing to a Roth IRA, traditional IRA, or other type of retirement plan—or if you’ve transferred funds from an old employer’s plan to an IRA or new employer’s plan—you should definitely check that you actually selected the investments you purchased as well. If your money is currently held in a cash or money market account or settlement fund rather than in mutual funds, bonds or other investments, do a little research or perhaps consult with a financial advisor to determine your risk level and choose a portfolio , as soon as possible.
Finally, if you make regular bi-weekly or monthly contributions to your IRA, you may want to set up automatic investments with your brokerage so you don’t have to manually purchase funds after each deposit (increasing the likelihood that they will stay in cash for a long time time). longer).