Imagine if your first job out of college were to create a comprehensive investment portfolio guaranteed to provide financial security for an entire family for 25 years of retirement. And one more thing: You have to supply the money.
Congratulations: That's the exact job you actually have.
It's called your 401(k) plan, and if you screw it up, you and your loved ones will be living out of trash bins when you're too stooped to greet customers at Wal-Mart anymore.
Fortunately, it's harder to get out of bed in the morning than it is to create, monitor and guide a successful retirement portfolio.
Frankly, finance professors can't do it any better than you. I know; I've interviewed four Nobel economic laureates in my career, and each time I've asked them how they have set up their personal retirement plans. All four said the same thing: Vanguard index funds.
Vanguard because it's a not-for-profit company and is therefore the cheapest to hire. Index funds because they reliably track benchmarks with proven records of success. Even if you don't have Vanguard as your plan provider, you can buy index funds from the provider you do have. And any plan allows you to do the other two things that will deliver the highest total returns: start early and contribute the maximum. (For a look at Vanguard's best funds, click here.)
Here are five moves anybody can make to construct a powerhouse 401(k). Over any significant period -- 15 years or more -- these steps have never failed to generate returns two or more times higher than such noninvestment alternatives as savings accounts or stable-value plans. Any American family that contributes faithfully and invests prudently can expect to amass a kitty of $1 million, in today's dollars.
Join, you dummy
Even though a pension reform act from 2006 makes it possible for companies to enroll employees automatically, it also allows employees to opt out. Only 81% of qualified employees actually belong to their plans, according to the Profit Sharing/401(k) Council.
The two excuses most people use to avoid participating are that they can't afford it or that their plan isn't very good. My response: You're living beyond your means, and you're wrong.
You need to be smart enough to pay yourself first -- and that's what retirement savings are, a payment toward your personal future -- or no self-help article