5 Ways to Overcome Your Fear of a 401(k)

By Christine Giordano

To some, few things are scarier than investing in a 401(k) or IRA.

Generation Y has already lived through two bear markets and had their job prospects shaped by the Great Recession, and Generation X watched helplessly as their stock investments plummeted by 40 percent during that recession.

And among people 55 and older, nearly 29 percent don't have retirement savings or a traditional pension plan, and many rely on Social Security, according to 2015 analysis from the Government Accountability Office.

But calculations show that those who start saving $2,000 a year at age 35 with an average annual return of 8 percent may only amass around $245,000 by retirement -- an amount that likely won't go too far 30 years from now, considering how prices rise.

"Pension systems are few and far between in the public sector. We are not sure what the Social Security system will look like in the future. The ability to successfully retire will solely be based on the financial decisions you made during your working years," says Brian White, a financial adviser at Mandell, White & Associates in Melville, New York.

Putting aside money for retirement is so important that Illinois is creating a savings program that requires companies with at least 25 employees to automatically transfer a set amount from employees' pay to a Roth IRA unless a worker opts out.

Regardless of your skittishness, you need to find a way to take care of your 80-year-old self someday. Here are a few considerations that can chase your investment fears away.

Regard the pain of loss as inevitable, but temporary, before a rebound. Some people remember pain more than profit. Investors may have gotten nervous when the average employee retirement account shrank from $91,864 in 2010 to $87,668 in 2011. But they may have missed it when balances plumped up to $119,804 in 2013 -- an increase of more than 30 percent from 2010, according to numbers from the Employee Benefit Research Institute. In those years, the median Roth IRA grew more than 51 percent, and traditional IRAs grew 28 percent.

"We are going to have bear markets, and you are going to lose money at some points; It's just a question of whether you have the stoicism and education to know the pain is temporary. You have to be ready to withstand it if you're going to reap the benefits in the long term," says Jesse Mackey, chief investment officer of 4Thought Financial Group, based in Syosset, New York.

If you hate risk, you can reduce it. Generally, the younger you are, the more your portfolio can take risks and the more stocks you can be invested in, as opposed to bonds and cash. The theory is that you won't need your retirement fund while you're in your 20s, 30s and 40s, and the stocks carry the highest rate of return despite being more volatile.

%VIRTUAL-WSSCourseInline-734%As you get older, you should change the ratio to maybe only 50 percent stocks, Mackey says. And, in case of a crash, you need to have the time to allow your investments to rebound, "You should expect to have to hold a portfolio for 10 years-plus."

But let's say you want to put aside money for a college fund without the risk. Consider investing in bonds that will mature when you need them to, Mackey says. "You can take a portion of a portfolio to do this. You can use individual bonds that are laddered to when you want them to mature."

Diversify not just by asset type, but also by method of investment.Different approaches work for different markets. In down markets, more active approaches tend to excel. Liability-driven investing, typically used by very large institutions like banks, insurance companies or public pension funds, transfers risk by finding assets to offset it. Selective or concentrated investing, used in private equity funds, focuses on the stocks they hold. Index funds should be a large piece of any investor's portfolio, but they tend to do best in bull markets, with asset prices rising and relatively low investor anxiety in the marketplace, Mackey says.

"Consider including an opportunistic or tactical element within your broader strategically allocated portfolio that will potentially be able to defend against or capitalize on volatility and market slides. This will require professional assistance or the purchase of a specialist fund," he says.

Take the free money. If you've got a 401(k) with an employer matching a percentage, consider it free money. "At a minimum, you should take advantage of the full match. For example, if your company provides a dollar-for-dollar match up to the first 4 percent, you should contribute at least 4 percent," White says.

Let's say you're making $40,000 and your employer offers you a match of 4 percent of your salary. That would likely amount to $1,600 in free money by the end of the year.

It's a no-brainer, yet leaving money on the table is more common than it seems, with Americans likely leaving $24 billion in unclaimed company-match dollars each year, according to a 2015 research report by the workplace financial advisory services firm Financial Engines. Overall, one out of four employees doesn't avail themselves of matching funds, with the typical employee leaving $1,336 of potential "free money" on the table each year, according to the report.

Think of compounding interest like a windfall. Compounding interest, which means you will earn interest on your interest, accrues much faster than stuffing money in your mattress. "Start with a penny and double it every day; in 28 days, you will have $1 million. So even saving a small amount every paycheck will make a big difference over time," White says.

The younger you are, the more time your money has to compound before you retire. One example of this is if your relatives placed $100 in a trust fund for you in 1927, at the average rate of return of the stock market. Seventy years later, that money would grow to $263,000, according to economic writer Stephen Moore.

Online investment calculator tools can tell you how much you will need to put away each month to likely reach your retirement target. If you start saving $2,000 per year at age 25 at an 8 percent annualized return, you'd have $560,000 -- more than double what you'd have if you start saving 10 years later.

Of course, you should always check out the fees associated with the funds, because a fee of 1 percent can quickly chip away at a 3 percent return. You also want to see how well your fund performed by checking out its performance and ratings. And consider fund managers who have been around two or more years.

Get started as soon as you can. After all, what could be scarier than waking up one morning with less than 10 years until retirement, and with no retirement savings?

Christine Giordano is a freelance business journalist with a passion to help consumers make educated decisions. Also a columnist for Newsday, you can follow her on Twitter@chrisgiordano.