Mind Your Business…
Now I’m going to talk about some dirty laundry. Don’t you just hate how it’s always there, stacking up? Sometimes you can push it out of your mind and really just forget about it for a while, but without fail, that hamper will fill up and stink. That hamper is guaranteed to get stuffed full even though you have a washing machine sitting right there next to it, or a short walk away. A bad post opening, but I promise all of this comes into play later.
There’s something unique about investing, usually a lazy investor outperforms a highly active one. That’s a statement that needs to be clarified very quickly. Let’s say that Larry Layzie and Bob Bizzy both open an account and invest the same amount of money every month. Bob watches the stock market intensely every day and trades in and out of funds to try to produce greater returns. Larry picks some mutual funds or ETF’s that have a good track record and changes nothing for 40 years. By the time they retire, it’s actually very likely that Larry will have more money!
*Record scratch*
This post is actually about business investment plans. So, what do Larry Layzie and dirty laundry have to do with it? This.
A lot of people have access to a business investment plan (maybe 401k, SIMPLE IRA, or SEP IRA sound familiar), which is fantastic, and a great employee benefit! The problem is that sometimes they think they are all set for retirement. They assume that they never need to think about it again, they just need to put money in every month and the laundry will do itself. They are confident that because they have a 401k (washing machine), they will be able to “open their laundry room door” (account) at retirement to find a nice pile of money (freshly washed and folded shirts). Instead, they act all surprised when they are greeted by a heaping pile of smelly clothes (a small and disorganized collection of investments yielding low returns).
The truth is that the lazy investing that yields the best returns is not lazy at all. It just looks lazy because all the work is front-end loaded. Employees have to take the time to understand what they are investing in, the risk and expected returns of each investment, the tax implications of their account, and so forth. Then they have to set it up to match their risk tolerance and financial goals. Only then can they sit back and watch the laundry do itself.
So, what is a business investment plan, and how does it work?
It’s very similar to a traditional IRA (discussed in the previous post), with a couple tweaks. Like the traditional IRA, contributions are invested before they are taxed, which means that they (along with the gains) will be fully taxable when they are withdrawn. Also similar to the traditional IRA, contributions also must be earned income, which means you can’t invest more than you made that year. Here’s what’s different:
Sometimes your employer can also contribute to your account (401k and SIMPLE), often done through a “match program”. Basically, the employer incentivizes you to put money into the account by matching your contributions dollar for dollar (or 50 cents per dollar) up to a certain amount.
Sometimes the employer is the only one that contributes to the account (SEP), and you only get a say in the fund allocation.
The contribution limits are significantly higher than those of a personal IRA. As of 2024:
SIMPLEs allow $16,000, or $19,500 if over the age of 50.
SEPs allow the employer to contribute up to 25% of the employee's salary, with a maximum of $69,000.
401ks allow $23,000, or $30,500 if over the age of 50.
You don’t get to choose who is the advisor on your account or elect to not have one. The plan comes with one built into the whole setup.
The plan has an approved investment lineup for you to pick from, which means your investment options are very limited.
What are the big takeaways?
Just because you have “investments with your work”, doesn’t mean you are good to go, or that you can take a back seat in the investing car.
Educate yourself or get in contact with your plan’s advisor so you are set up properly.
Do your laundry.
Here’s another unrelated motivational quote I’d like to share, it’s funny to me how the source seems to discredit the wisdom.
“If you only do what you CAN do, you will never be more than you are now.”
Questions? Concerns? Better quote?
brett@centennialsec.com or use the “Contact” tab above
