It has come to my attention that there may be a particularly disastrous beginner retirement fund mistake we’ve failed to warn our readers against. As they say in the extremely dramatic anime I’m currently watching: moushiwake arimasen!
Worse, it’s exactly the kind of mistake we proudly specialize in addressing: a mistake that makes you feel so freaking inept and self-conscious that you act like it didn’t happen, never speak of it again, and quietly add to the self-critical monologue that plays inside your head on nights when you cannot sleep.
No? Just us? Humph! Very well.
This mistake has to do with your retirement funds. I can’t sugar-coat this one: it’s a horrible mistake to make because there isn’t really a way to fix it. It’s like burning your popcorn: what’s done is done, there’s no way to un-burn it. But the faster you yank that stanky shit out of your microwave, the sooner you can chuck it and move on with with your life. And a fresh batch of popcorn. Make it kettle corn. Invite me!
For those of you who don’t have retirement accounts yet, read on anyway. Trust me! This is something you’ll want to keep in the back of your mind for whenever you finally do.
Quick refresher on retirement accounts
Retirement funds are monies saved for the long-term of your future dotage.
Retirement accounts are special accounts designed to hold these funds. They have more rules than a simple savings account, but also more benefits. They include IRAs, 401(k)s, and 403(b)s.
IRAs are Individual-ass Retirement Accounts. They come in two main flavors: traditional and Roth. If you forgot what the difference is, Piggy’s got your back! Go read her delightfully non-boring traditional vs. Roth breakdown.
401(k)s and 403(b)s are other forms of retirement account, but they’re tied to your employer, and have slightly different rules. There’s no significant difference between the two, other than their source. The former comes from for-profit companies, the latter from non-profits and governmental jobs.
IRAs are the most universal—if you’re an American adult, you should have one. So I’ll default to that term often, though this advice is pertinent to all forms of retirement accounts.
The disastrous, easily avoidable mistake
So what’s this potential mistake that’s got me so nervous—scratch that—fucking petrified?
I’m afraid that some people may think it’s enough to put money into your retirement account and stop there, as you might with a savings account. If that’s all you’ve done, you are not done yet. There’s one more step. And if you don’t take that step, you could screw yourself out of years of growth, adding up to a total I don’t even want to think about.
When you put money into your retirement accounts, you must also go in and allocate those funds in order for them to start growing.
This isn’t something that’s done automatically for you, because each individual will want to allocate their funds differently. But once you do it, you can safely go back to completely ignoring your IRA for months or years at a time, as I do. And you don’t have to get it “right” the first time! You can reallocate later if your goals change, or you’re unhappy with the pErFoRmAnCe of your pOrTfoLliO.
But until you pick something, your money is sitting there, completely useless, doing absolutely nothing. Like my dog Sunny.
Seriously, is this what you want your money to be like?! A sad, depreciating lump that’s never worked a day in its life?!
How fund allocation works
Think of it this way: Having money in your retirement accounts is like having a large, bomb-ass bridal party. This is a group comprised of your oldest friends, your closest family members, and your most capable core squad members.
But when the day of your wedding comes, they’re gonna sit there and smile politely, sipping champagne and adjusting their hair, until they’re given a specific job to do. Because no matter how capable they are, it would be presumptuous for them to jump in and start Doin’ Shit™ unless asked. It ain’t their wedding!
Allocating funds is like giving these people orders. “You—set up the chairs! You—wrangle the cousins for the big family photo! You—go warn the bartenders about Aunt Heather! You—for the love of god and all the saints, go find us a plate of bagels or something!”
Your money works the exact same way. You need to allocate your money (give it orders) for it to leap into action and start making even more money. Otherwise, it’s gonna sit there. Slowly depreciating. Like my faaaaaaace.
What kinds of orders can I give my money?
“What can you afford to lose?”
That’s the main question that drives fund allocation.
If you’re sixty years old and looking to retire in a few years, you can’t afford to lose much! You’ll need that money soon, so you’ll probably make extremely safe choices. Safe, predictable investments are best for them. This kind of investor is called “risk averse.”
The most risk-averse IRA would be 100% bonds, with 0% stocks, because bonds have lower risk and lower reward. (Did you forget the difference between stocks and bonds? Once again, Piggy has your ass covered so well she’s taking business away from Depends. Here’s her explanation of stocks vs. bonds.)
But if you’re twenty years old, and you plan to work for another 50 years, you’re what’s called “risk tolerant.” You can make riskier investments, and reap the juicy rewards thereof, because you have a lot more time to recoup any losses.
The most risk-tolerant IRA would be 100% stocks, with 0% bonds, because stocks have higher risk and higher reward.
Most people will have something in between these two extremes. Because I know y’all love it when we spill our personal secrets, I’ll tell you my own IRA is currently allocated at 80% stocks and 20% bonds. What?! You misconstrue my cynicism at the self-perpetuating tenacity of capitalism as generalized optimism about the performance of the so-called free market?! Draw your sword, you knave!
If the idea of researching individual companies and pegging your lifelong livelihood upon them sounds exhausting and intimidating, I have great news! Turns out that’s a terrible investment strategy anyway! Index funds and mutual funds are big pre-selected bundles of individual stocks. Way easier to choose, and way more prudent.
Plus there are more choices than ever for socially responsible funds than ever before! If you want to avoid investing in shit like tobacco and guns, embrace shit like renewable energy and sustainable agriculture, or only give your money to companies that actively promote diversity, you can!
(BTW, if that’s a topic that interests you, let us know in the comments below. If there’s enough interest, we’ll cover it in a future article!)
Okay but, how do you actually do that?
I would love to give you a step-by-step tutorial. Unfortunately, every investing platform is different. Frowny face!
Generally, you’ll need to find out who manages your account, log in to their website, click on your IRA or whatever, and see if there’s a button or tab for asset allocation. It should be relatively easy, and take you less than ten minutes. I have retirement accounts spread out over three different investing platforms, and all three offer some kind of goal calculating feature. Don’t take them as gospel—they’re not calibrated for FIREy folks! But they can at least give you a ballpark recommendation to start with.
If you’ve reached 100% allocation, it should be obvious. But if it’s at all ambiguous, don’t be shy about calling or chatting with a rep to verify. If your retirement account is provided by your employer, ask for help from HR! You’re not being annoying; helping employees navigate their benefits is a key part of their job. And if your company doesn’t have HR staff, try your manager or mentor. I’ve helped walk a lot of younger employees through setting up their first-ever IRAs. It warms my heart and brightens my day to know I’ve helped!
You can also tell by looking for frequent changes in the total value of your IRA. Invested funds fluctuate daily. So if its growth over time is a flat line, something ain’t right there.
Why is this mistake so easy to make?
A lot of our readers are young. Babies. Teeny tiny babies. And we love our little lambs, even though they’re so small we need the world’s most powerful microscope to even see them.
The way many young people start their IRAs is through their first big-kid job. To get there, they’ve gone through an arduous process of refining their resumes and cover letters, searching for jobs, preparing for everything, surviving interview after interview, getting their hearts crushed by near-misses, and burning through hella deodorant (we hope) while negotiating their first paychecks (we hope).
Oh, and the most important step: styling the same black blazer you wore to the last interview with the sleeves rolled up so that it maybe looks like a different black blazer. Pretending to be a “two black blazer kind of gal” is the first, most elemental lie a young job seeker tells.
So when you finally get your job, you think the hard work is over. Until your first day, when someone from HR hands you a fat stack of utterly incomprehensible tables comparing healthcare options, legally dubious non-competition contracts, and other byzantine horrors of the modern workplace. Somewhere in there is a big pamphlet asking you how much you would like to contribute each month to a retirement account. Or as I thought of it: how much money would I like to take out of my paycheck and gift to Old Kitty, a loathsome old bat who will definitely think bananas cost ten dollars?
Given how little financial education Americans get, most people probably pick a number they think they’ve heard before, and move on to the next piece of paper. “Was it five percent? Ten percent? Thirty percent? Am I allowed to say zero?! Fuck if I know, I’m still trying to figure out if the dot in the middle of my new work email address actually matters, or if I can omit it, or what!”
So if this is something you’ve done, don’t beat yourself up. It’s an understandable mistake. Ain’t like anybody taught you this shit!
Yeah, it sucks that you’ve missed out on valuable time for your money to grow. I think it would be awesome if investment platforms proactively reached out to people more to prompt them if funds have been sitting unallocated.
But hey! Look at it this way. Your money is still there, and today is a new day. As the old saying goes: the best day to plant a tree is twenty years ago, and the second-best day is today!
More shame-free investing tips for beginners:
- Ask the Bitches Pandemic Lightning Round: “Is This the Right Time to Start Investing?”
- A Hand-Holding Guide to Getting Your First Credit Card
- The Investing Deathmatch Series: