Whether through inertia or trepidation, investors who put off important investment decisions might consider the admonition offered by motivational speaker Brian Tracy, “Almost any decision is better than no decision at all.”¹
This investment inaction is played out in many ways, often silently, invisibly and with potential consequence to an individual’s future financial security.
Let’s review some of the forms this takes.
Your 401(k) Plan
The worst indecision is the failure to enroll. Not only do non-participants sacrifice one of the best ways to save for their eventual retirement, but they also forfeit the money that any employer matching contributions represents. Not participating holds the potential to be one of the most costly indecisions one can make.
The other way individuals let indecision get the best of them is by not selecting the investments for the contributions they make to the 401(k) plan. When a participant fails to make an investment selection, the plan will have provisions for automatically investing that money. And that investment selection may not be consistent with the individual’s time horizon, risk tolerance and goals.
Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions. The 10% early withdrawal penalty may be avoided in the event of death or disability.
Non-Retirement Plan Investments
For homeowners, “stuff” just seems to accumulate over time. The same may be true for investors. Some buy investments based on articles they have read, or based on the recommendation from a family member. Others may have investments held in a previous employer’s 401(k) plan.
Over time, we can end up with a collection of investments that may have no connection to our investment objectives. Because the dynamics of the markets, an investment that may have once made good sense at one time may no longer make sense today.
By not periodically reviewing what we own to cull inappropriate investments — or even determining if the portfolio reflects our current investment objectives — we are making a default decision to own investments that may be inappropriate.
Whatever your situation, your retirement investments require careful attention and benefit from deliberate, thoughtful decision-making. Your retired self will be grateful you invested the time today.
1. Brainy Quote, 2013