The Twenty-Something’s Guide to the 401(k) Retirement Account

The Twenty-Something’s Guide to the 401(k) Retirement Account

If you’re in your mid-twenties, retirement probably feels extremely far away. Your thoughts are more likely to be focused on today or your weekend’s plans than on pensions and retirement.

But just like in a chess match, where the end seems very far away from the beginning, but you move your pieces with a strategy to achieve your end goal, your financial life pieces need to move strategically from the very beginning.  By adopting the three chess tactics below and adapting them to managing your 401(k), you will hopefully achieve your long-term financial goals:

Equal trades

All else being equal, a chess player won’t swap a bishop for her opponent’s pawn. She’ll look to get a matching piece. In the same way, when managing your 401(k) retirement plan, don’t leave money on the table. If your company offers to match up to a certain amount of your 401(k) contribution, make sure you’re putting in enough to qualify for the maximum matching contribution. How much? Experts vary on this, but a common benchmark is to set aside 15% of your pay, and get as high a match from your employer.

Note: Under IRS rules, the maximum contribution is $17,500 this year. (However, current regulations allow those over 50 to put away an additional $5,500.)

Multiple lines of attack

When you play against a really good chess player, you’ll probably find that by the middle of the game you’ll have no place to go. That’s because your opponent is diversifying her attacks. She opens up several attacks so that even if some fail, others will likely succeed. You should treat your 401(k) plan’s investments in the same way.

For example, don’t put all of your money into your own company’s stock. This may happen due to subtle pressure to invest in the stock of the company that employs you, making you feel disloyal if you don’t do so.  While there’s nothing wrong with putting a small amount of your money there, you should diversify and put most of your funds elsewhere.

Similarly, some types of stocks become a trend. For example, during the late 1990s, when technology stocks were all the rage, tech funds soared. When the market crashed in 2000, though, all the tech funds took a beating. In 2002, U.S. small-cap stocks dropped over 20%, only to fly up by almost 50% the following year. Then commodities topped the sector race, returning over 21% in 2005, until they lost their vigor in 2006, returning almost nothing. Soon thereafter, real estate funds became hot… until they imploded in 2008. Then people celebrated 30% to 40% growth of foreign stocks in 2009 and 2010, only to watch their profits begin to slip away in 2011 with a 12% loss. 2012 ended with fixed income returning about 4%, half of what it had done the previous year.

By diversifying your investments, if one goes bad, the other, more successful ones will hopefully help you to minimize your loss.

Resist timing the market

While it may be tempting to seek your fortune by timing the market, you may well find that it won’t do you any good anyway. Listen to Rich As A King Episode 19, where I explain how it is not only impossible to time the market, but even if you could, it wouldn’t really make that much of a difference in the long run.

By following these three “mid-game” tactics now, you should create the foundations for a strong endgame… retirement.


Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You A Grandmaster of Investing, avid chess fan, international investment advisor and Certified Financial Planner (CFP®)