Set Your Goals and Wake Up Rich

The Wall Street Journal published an article titled "Waking Up Rich—Retirement Accounts Stashed in Stocks Make Employees Millionaires." The article's author stated, "The retirement plan rich are changing their lives. Quitting jobs early, taking extended holidays, starting new careers—or restructuring jobs to make them more fun." These retirement-plan millionaires are people who never thought of themselves as having any personal wealth and suddenly they realize that they do. They are feeling good about it.

Another interesting insight for the article was this: "For some people who thought they wanted to retire early, having a financial cushion has a curious effect ... for many people the security of a nest egg allows them to relax and enjoy work more."

Today, many people approaching retirement have had an opportunity to participate in a 401(k) plan for the past thirty years. The first plans were rolled out in the early 1980s, and almost all major companies adopted them immediately. Even most small companies offered some retirement-plan opportunity, even if they could not afford an employer matching contribution.

Most people who have been contributing for this entire thirty-year period have somewhere between $300,000 and $1 million in a combination of their current, company-sponsored retirement plan and the rollover IRA account (or accounts) formed as they changed jobs over the years.

If these numbers sound high, consider the example of someone who earned $40,000 a year back in 1980 and who saw steady increases in pay until reaching $70,000 a year today. These are rough average pay levels for American workers over this period. At an average contribution level of 6 percent of pay per year (the nation's average retirement-plan voluntary contribution), and assuming an average rate of return of 10 percent per year, this typical employee would have accumulated just over $500,000.

In most cases, the employer has been contributing at least some amount of additional money over and above the voluntary contribution from the employee, so the total percentage contribution would have been higher than 6 percent of pay. Moreover, the average mutual fund through the '80s and '90s actually increased in value at a rate of more than 15 percent per year instead of the 10 percent historical average stock-market return used in our calculation above. Factor in these reasons for improved results, and we can see why a $1 million account balance is within reach for many people.

The underlying facts speak for themselves. Today $3 trillion is invested in 401(k) plans, and an estimated $3 trillion more is invested in rollover IRA accounts resulting from previous retirementplan contributions. The total amount in all mutual funds today is $9 trillion, so we can assume that two-thirds of that figure is attributable to the 401(k) plan phenomenon.

If you're young, with thirty years of work ahead of you, those numbers should be inspirational. If you're older and partway up the ladder, you can assess what course correcting, if any, you may want to do to reach your intended goal. If you're close to retirement and these numbers seem unreal or certainly not applicable to you, then you have made one or more of three mistakes along the way.

1. You're not committed enough to saving.

2. You've spent big chunks of what should have been rollovers when you left your job.

3. Or you've made some bad investment decisions.

The purpose of this book, regardless of your retirement-plan stage in life, is to provide you with the tools you need to make constructive, informed decisions that will help you reach your goals.

Identifying Goals: An Important Consideration for an Investor

Let's start with Warren Buffett, who says, "You shouldn't buy any stock that you're not prepared to hold for ten years." In the meantime, the stock market can be volatile for reasons having little to do with the intrinsic value of the companies in which our mutual funds have invested. When J. P. Morgan was asked what he thought the stock market would do, he answered, "It will fluctuate."

To invest intelligently then, we need to understand the following: a fundamental cornerstone of investment decision-making is the time frame or length of time that the money can be committed to an investment.

Without a clear understanding of our goals, it is impossible to know for certain how much time we are allowing an investment to meet our expectations.

There Can Be Confusion about the Time Frame of Goals

For young people, a common misconception is that the company-sponsored retirement plan is exclusively for retirement savings and that their only investment goal is long term, thirty-five to forty years. In fact, younger employees can often have short-term goals for portions of their retirement-plan money, thanks to the fact that retirement-plan loans offer access to what is generally long-term retirement money. Down payments on homes, educational expenses, and many other financial objectives short of retirement can be reasons for using the retirement plan, since the pretax dollars make this the fastest way to accumulate wealth.

The Young Are Different ...

Younger people are also different in that their lives are in flux. This means that they can expect to be unemployed from time to time until they get settled in a career. Between jobs, it's not a sin to tap retirement-plan accounts to pay for rent and food. Moreover, retirement-plan money can be a source of support while taking a year or more to go back to school.

There are extremely important reasons, well short of retirement, to be saving money. There is no more powerful savings "machine" than a 401(k) or 403(b) plan with automatic payroll deductions, tax savings, and even employer matching contributions in many cases. Any young person who would rather not move back in with parents or live on a friend's couch, should jump at the chance to sock away some retirement-plan money. Anyone who has an occasion to tap this...