Indiana Trust and Investment Management Company

Indiana Trust & Investment Management Company

Making Your 401(k) Work for You
by Archie Spangler, Vice President/Administrator Indiana Trust and Investment Management Company

Many Americans participate in employer-sponsored retirement plans, the most common being a 401(k) plan. Planning for your financial future in retirement can sound daunting; however, through simple strategies such as managing diversification and paying attention to rate of return you can greatly increase the amount of savings you will have for retirement.

It is risky, as we have seen in recent years, to invest solely in one stock. Over time diversification across a broad range of quality investments is a more preferred strategy in reducing risk and growing portfolio value.

This point is underscored by a recent study conducted by Martin Gruber and Edwin Elton of New York University’s Leonard N. Stern School of Business and Christopher Blake of Fordham University’s Graduate School of Business. The study found that investors with a broadly diversified plan – drawing from a mix of funds – saw increases in returns from 7.5% to 10.7%. Three percent may not sound like much, but the worker with higher returns who contributed $5,000 a year over thirty years would build a nest egg of nearly $950,000. The worker with lower returns would accumulate around one-half as much, or just over $500,000.

To see how important even a small difference in rate of return can be, economists use the “Rule of 72” to illustrate the impact of percentage points on investments. The rule states that to determine how long it will take to double your investment, divide your percentage rate of return into 72. For example, if you invest $1,000 at three percent it will take 24 years (72 divided by 3) to double your money. However, at a six percent rate of return, you would double your money in only 12 years.

This has an enormous impact on your investments. For instance, someone who invests a single sum of $10,000 today after 36 years would accumulate $40,000 at 4 percent, $160,000 at 8 percent and $640,000 at 12 percent.

You are never too old to educate yourself about investing for your retirement. Through tested strategies such as diversifying your investments and watching your rate of return, you can help ensure that you will have grown your retirement account wisely. The time to start is now. The greatest risk you can take with saving for retirement is putting it off to tomorrow.

Archie Spangler serves as Vice President/Administrator with Indiana Trust and Investment Management Company. He has been in the trust and investment management business for over 30 years. Archie obtained his B.S. and M.A. degrees from Ball State University and completed the three-year ABA Trust Graduate program at Northwestern University.