It’s Friday, and for the last couple of days the market (at least the Dow Jones that most folks are familiar with), has taken a pretty big hit. I’m on a big text messaging chain with about a dozen friends from college, and whenever there’s a week like this, the text chain heats up with a bunch of doom and gloom about the market tanking.

I’m 30 years old, and to me, I’m actually somewhat excited when I see this happen. My articles are geared towards people relatively close to my age, so keep in mind I’m writing this from that age perspective. If you contribute regularly to your 401(k), you can take a bit of solace in a downturn too. Why? Because you will be buying low. Last week I wrote about target date funds, and how a relatively young individual has a long time horizon to retirement. Think about a market downturn with that in mind. Say you got paid today, Friday. Now say you have elected to invest in “x” mutual fund in your 401(k) with each contribution. Let’s pretend that the money will be invested (the shares will be purchased) on Monday. When Monday comes around, say “x” mutual fund shoots up to a price of $100.00 per share, and you have $200.00 withheld each pay check. That means you will own 2 shares of “x” mutual fund at the end of the day Monday.

Conversely, let’s say that like recent days, the market significantly drops on Monday, and mutual fund “x” is only worth $50.00. Now you will purchase 4 shares of the fund with your $200.00 contribution. Obviously, it’s better to own more shares than less, and when the market rebounds, which history tells us it eventually will, you will forever own more shares based on the price of the share on the day that you bought it. This represents the old adage you may be familiar with of “buy low sell high.”

Now, again, this does assume that you are not in a hurry to make money. As a 30 year old like myself, I still have (optimistically) 30+ years until retirement. So, if I can buy 4 shares now instead of 2, even though at this specific point in time the overall value of the shares are lower, I’m banking on the fact that in 30 years, I will be better off owning more shares once the value of the shares eventually increase.

Here’s an anecdotal story to leave you with. Back when I used to work for a large Los Angeles based Wealth Management firm, I was right out of college in 2008. You may remember that in 2008 there was a financial crisis. I remember dealing with several older individuals, who were so scared of the precipitous drop in the market, that they moved their entire 401(k) to cash (or some money market equivalent) as they watched the market tank day after day, selling their shares for a fraction of what they bought them for. They thought that this would shield them against further losses. The market ended up rebounding, but by the time that they were confident enough to buy back in, the share prices had rebounded so that they were buying far less shares than they sold. I literally watched people lose 50% of their portfolio value, and then buy back in at a huge premium, never being able to recoup the amount of shares they sold.

Moral of the story is, a market downturn, while a bit hair-raising, isn’t always the worst thing in the world.

As they say, HODL!

(hold on for dear life)

As much as I hate to delve into politics, in the last decade or so there has been a really cool new trend that makes 401(k) savings much more understandable, especially for those not in the industry. Legislation has moved towards making 401(k) saving less complicated and more streamlined to encourage participation in 401(k) Plans.

When you take a look at the investment options in your employer’s 401(k) Plan, there are probably a lot of words an numbers that can be confusing. Vanguard Financials EFT? Fidelity Contrafund? Franklin Small Cap Growth? Now, I could spend the next 2,000 words on what these mean and why they are different and why any of it actually matters. The underlying investments that make up those mutual funds are wildly different. But instead, for the next 400 words or so, I’d like to focus on the point of this article, Target Date Funds.

Target Date Funds (TDFs from here on out) make choosing an investment in your Plan easy. All you need to remember is one number. The year you are “projected” to retire, which is typically 65 (check the fund’s prospectus for more detail, let me know if you need help with where to find that). Most TDFs you will see will be something like “Vanguard Target Retirement 2050.” They are typically in five year increments, and are designed for you to choose the one that is closest to the year you will reach normal retirement age, or 65.

Let’s say, for example’s sake, you are going to turn 65 in 2049. The “Vanguard Target Retirement 2050” would be the fund that you would choose. The best part about these funds is that you can operate under the “set it and forget it” mindset. This is because, unlike choosing individual mutual funds, the TDFs AUTOMATICALLY reallocate the underlying investments based on a concept called glide path.

Glide path means that your investment needs are much different as a 35 year old with 30 full years, at minimum, to retirement, than the investment needs of a 60 year old. Every TDF allocation is a bit different, but big picture, the 2050 fund mentioned above will be heavily allocated towards more risky equities now (while still holding some “safe” investments as well), but as we move towards 2050, the fund will change without any action on your part towards safer bond and cash funds. You can survive a market downturn at 35, but at 62? Not as much. Thus, we get the term “glide path” as the fund “glides” from one allocation to the next as the years progress. Theoretically, this allows you to take advantage of market swings at younger ages while shielding you against the huge risk of losing a large amount of your portfolio once you achieve a certain age (think 2008 financial crisis).

As I mention often, I’m not your financial advisor, so you should definitely consult with whomever you run your financial decisions by, but these can be a great tool if you are new to investing, or simply don’t want to do the research into every fund offered in your Plan.

I have some quick thoughts on employer match in your 401(k). Let me start by saying I completely understand that you may not be able to contribute a huge amount to your 401(k). I advocate many times on social media to contribute as much as you can, even if it is only $10.00 per month. The concept of compounding interest can turn even small amounts into nest eggs over time, but an in-depth article on that concept will be coming soon.

But today I wanted to talk about free money. Employer match means that for every dollar you contribute to your 401(k) via payroll deduction (i.e., 3% of each paycheck), your employer will match up to, or in some cases, all of, that money. Note when I say “match” I mean they will contribute it to the Plan as well into your account. They are not going to send you a check. They are giving you FREE money, for doing nothing other than investing in yourself via your 401(k) portfolio. Typical examples are 50% of the first 6% of compensation deferred, but in case this is a new concept for you, let’s start with a basic example. Let’s say my employer will match “100% of the first 3% of compensation deferred” into my retirement Plan. That means that if I elect to defer 1% of my paycheck into my employer’s 401(k) Plan, my employer will match that, dollar for dollar, on my behalf. If I defer 2%, they will again match it dollar for dollar, same with 3%. However, if I elect to defer 10% of my paycheck into my Plan, only the first 3% will be matched.

As you can see, in order to maximize the amount of free money that I receive (free money being the employer’s contribution on my behalf), I need to elect to contribute AT LEAST 3% of my pay in order to take full advantage of that benefit. Let’s say I only contribute 2% to the Plan. My employer would have given me that extra percent of pay, if I was able to contribute it myself as well.

That’s why I definitely advocate for those who have either just joined a retirement Plan or have not paid much attention in the past contact their Plan Administrator (typically start with your HR department), and inquire what the match rate is, as you may be missing out on some free money.

I hear a lot about apps on your phone that can round up purchases and take that money and invest it. I have some thoughts on the effectiveness of these apps that I’d like to share…and then you can make up your mind from there as far as the usefulness of them in your own lives…

Pros:

-Obviously, you have to start somewhere when making savings goals. If you buy lunch at work on a random Tuesday and it’s $7.29…that’s a quick $0.71 that will be invested in some type of basic investment vehicle (typically some type of predetermined portfolio from a big investment house like Vanguard/Fidelity/etc., you’re not going to be buying Apple stock). Quick caveat, most investments require you to make a minimum purchase, so typically the app will keep track of the rounded-up amount and withdraw it from your account once it hits a certain threshold, like $5.00.

-If you are someone who uses their debit card a lot, these small round-ups can add up to a non-inconsequential amount of money saved. Most of the apps have forecasting information as well that will show an estimate of how much your money can grow over certain periods of time if you keep it invested (obviously not guaranteed).

-You’re gaining investment knowledge. If you’re someone who is starting at square one from an investment perspective, this can expose you to buying and selling real investments without a huge amount of risk. Also, it gives you a good reason to be reasonably familiar with the conditions of the market.

-It’s kind a “set it and forget it” type of thing. Due to the relatively small amounts, you probably won’t notice the money coming out of your bank account. Most of the apps do allow you to setup additional auto transfers (i.e., $5.00/week) to beef up your brokerage account.

Cons:

-If you’re only rounding up, it’s really going to take you a long time to generate any type of actual accumulation of money. When I used one of the popular apps for awhile, it would end up depositing, on average, about $5.00 per week. At that rate, even with a good market environment, you’re looking at multiple years before you even get to $1,000.00.

-Tax implications. You’ll need to be aware that if you are buying and selling securities, you’re going to start to have to wade into the world of tax reporting. You’ll want to speak to a tax professional to see how this would impact you. Having to deal with extra tax forms may not be worth the relatively small earnings an account like this will generate.

I think these can be good tools for experiencing the world of investments without having to really put yourself out there risk-wise, or if there is something you are saving up for that you find yourself having a hard time setting aside money for. If you’re thinking this will pay for your kids college fund, I’d probably look elsewhere. Your employer’s 401(k) Plan or a high yield savings account could produce much of the same fruit.

Whenever somebody asks me “so what should I do with my 401(k)?” I always have one answer for them. ROTH. No investment advice, no market-timing, just ROTH. For many people, they have never heard of the term, so let’s start with the basics. A traditional employer sponsored 401(k) Plan (or IRA) is contributed to using “pre-tax” dollars. Meaning, once your employer calculates your gross pay, the amount contributed to your 401(k) is removed before taking out any taxes.

However, with a ROTH 401(k) election (which you will have to make affirmatively), the taxes are calculated and withheld BEFORE calculating the amount to contribute to the 401(k) Plan. Let’s look at a basic example:

Let’s say I made $100 this week before taxes. I elect to have 10% withheld into my 401(k). In a traditional model, there would be $10 withheld from my check (10% x $100 = $10).

Now, let say I make an election to have 10% withheld, but instead on a ROTH basis. For my $100 check, let’s assume that 20% will be withheld in taxes. So, my employer withholds 20%, leaving me with $80.00. I’m left with $80.00…withholding 10% of the $80.00 leaves a ROTH 401(k) contribution of $8.00.

You may be saying…well wait a minute Jake…that’s $2.00 less per contribution…won’t I end up with less money?

Well…probably not. Conventional wisdom says that you will increase your savings rate as you progress in your career, and make up the vast majority of the difference (again remember, not giving official financial advice here). But here’s the real reason to suggest ROTH contributions…THEY ARE ALREADY TAXED.

Let’s move from your $100 a week paycheck to the end of your career. You’ve made a substantial amount of money, and amassed a 401(k) portfolio of $500,000.00. In a traditional setup, that entire nest egg is 100% taxable when you withdraw it. If you’ve retired and need to withdraw funds from your 401(k), you could be hit with a heavy tax burden. Without diving too deep into the weeds, at a certain point the IRS will mandate that you withdraw from your 401(k) account, and if you have been contributing on a ROTH basis the whole time, those funds will be 100% TAX FREE!!! I repeat, 100% TAX FREE. Even the earnings on those contributions will be tax free, assuming a few other regulatory conditions are met, feel free to reach out to me on what those are. Happy to share but a bit beyond the scope of the basics presented here.

One last thing to note: an employer is not required to offer the ROTH option, though most do these days. You will want to check with your HR department or 401(k) Plan Administrator to confirm the option is available.

I think the ROTH approach is great for anyone, but especially younger people. In ever-changing socio-political and economic times, we may not know where tax rates will be in the next 10-20 years. Taking care of that burden now and not having to worry about how much you will owe the government later can be a big help and provide peace of mind for those beginning on their journey to retirement savings.

My name is Jake Wright and I’m a born and raised San Diegan. I’ve spent 7 years in the Wealth Management and Retirement Services world. So many of my contemporaries are very smart people with, honestly, a very poor idea of how to save both for the present and retirement. I wanted to start this (as well as a more fast paced version on twitter) to introduce easy money savings tips and strategies to better position folks for the future.

**DISCLAIMER: This is NOT TO BE CONSTRUED AS TAX and/or FINANCIAL COUNSELING. Before making any major financial decision you should consult with a Financial Advisor or Tax Professional.**