Avoid these two roadblocks when it comes to building your Railroad Retirement 401K.
Welcome everyone to another edition of the Highball Advisor Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors. Today, we're going to talk about the Railroader's 401K, and two big mistakes that I see that people aren't really thinking about or strategizing around, planning for, all those types of words when it comes to your 401K. I'll just walk through them.
The first one is the Target Date Funds. 401K companies, your Powers, your Vanguard, they give you that target date and a lot of people will just set it and forget it type of thing. Check out my video on Five Ways that the Target Date Funds Miss Their Forever. Check out that video. That goes really in depth on Target Date Funds, but I'll give the high level stuff here. The objective of the Target Date Funds are to reduce risk, prepare that retirement income, diversification, simplicity. That's the beauty. On what date am I retiring? 2040. I'll set the Target Date Fund for 2040. Very simple. It doesn't much get simpler than that.
However, these companies, these 401K providers, they're not going to talk to you about Railroad Retirement. They just lump you in with all the other workers out there, all the Social Security workers. The Target Date Fund is built for those people. Why is that? Those people need additional guaranteed income in retirement, so that nest egg is very important to them. They're building up that nest egg because when they retire they got to go exchange that for some guaranteed income, and a lot of that comes in through annuities and stuff like that. So, they get very risk averse in those final years of your building of your 401K. They'll start positioning a lot of that to fixed income/interest rate type products.
As we know, interest rates are very, very low so you might be getting in those final years, if you have a Target Date Fund, you might be getting a negative real return in those final years because of the interest rates. They're very, very low. Not a big fan of the Target Date Funds. I don't feel like the providers are really talking to railroaders when they come into that, so watch out for those. Reach out to your 401K providers and maybe they can explain to you about the Railroad Retirement. The other thing is inflation. You got to start thinking about inflation now, right?
This is important in the 401K planning. If you start saying, "I see a lot of funds, they have this stable fund," well that's basically cash. That's a negative real return. The return you 1% or whatever, inflation is almost 6% now, with negative real return of 5% a year. That's brutal. Then even your typical portfolio of let's say a 60/40 portfolio, the 40% is fixed income and that's kind of troubling also now. It's safe, I get that, but if interest rates go up higher that's not going to be a great investment in those 60/40s. So, you have to watch out for inflation. It's a killer. It really is. Then obviously the low interest rates that we talked about is a big issue there.
What's the solution to all this? How do you want to be as a railroader thinking about your 401K? To me, it all starts with the guaranteed retirement income. How much money do I need in retirement? I'm going to build my 401K around that. If I have all my expenses covered with my guaranteed return of income, maybe I'm a 30 year railroader or a 32 year railroader, I might have a lot of that covered. Why am I putting the money into a stable fund when it's going to have a net real return of -5%? It's something to think about only if you're interested in building wealth. If you just wanted to "Hey, I just want to know the money is safe. It's in the bank." That's fine. I get that. But if you're interested in building wealth, you want a customized portfolio that's positioned for growth.
The market's got to come down, but you've got your guaranteed retirement income covered, you're willing to take that because over time, as we know over time, the markets will always outperform. That's what I want you think about when you think about the 401K. Just don't set it and forget. There's really some thought and strategy behind doing that, because you're working all these years, working hard in the railroad, and you want to take advantage of all the benefits that come your way, and one of them is to position your 401K properly.
I hope you found this helpful. Reach out to me if you need, have any questions. Sign up for my Boarding for Railroad Retirement Process. We'll take a look at your glide path into retirement and make sure it's set properly, that's for sure. Sign up for that. Subscribe to YouTube channel, click on the notifications, share this video with other railroaders, especially the ones who are signing up for their 401Ks. You should be looking at the 401Ks every year, so this will be a good one to share with other railroaders when they choose their investments 401K.
Until next time everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.