How Even Average Joe Can Retire Rich
Great fund picking? Brilliant asset allocation? Nah, the secret to a cushy retirement is simpler than that.
By Walter Updegrave

(MONEY Magazine) – Listen to advisers and the financial press blather on about the importance of picking top investments, and you'd expect a grim retirement unless you're a mutual-fund-picking wizard.

Tune out that static. You needn't be an investing genius to retire with a big 401(k) balance. In fact, when it comes to the three main choices you have in your retirement account--how much to contribute, how to allocate your money between stocks and bonds and which funds to choose--a recent study by Putnam Investments shows that investing prowess isn't what matters. It's how much you sock away.

In other words, saving more leads to, well, more savings. Not exactly a revolutionary idea, true, but it's surprising how big a bang you get by upping the percentage of salary you put in and how slight the payoff is from being a fund savant.

• The Story of Average Joe

Putnam created Average Joe, a hypothetical 28-year-old who made the least of his 401(k) between 1990 and 2005. He contributed too little (just 2% of his pay, starting at $40,000), invested too conservatively (only 30% of his assets in stocks) and owned funds that ranked well below their peers. Putnam then measured how different moves would have increased Joe's balance. It turns out that picking better funds and adopting a more growth-oriented strategy would have led to modest improvement. But by raising his contribution from 2% of salary to 6%, Joe would have tripled his 401(k) balance, nearly an $80,000 increase. That's even if he remained invested in underperforming funds. Superior fund picking alone would have netted him a mere two grand. "It pays to focus on what matters most, which is how much you're putting in your 401(k) for the majority of your career," says Putnam research chief Peter Chiappinelli. "You can have the greatest funds, but it doesn't mean much if you have only a small amount of money in your account."

I agree, with the caveat that you shouldn't take this study as license to pick funds by throwing darts at your 401(k)'s investment menu. In later years, performance matters. As your 401(k) bulks up, better returns can mean more than bigger contributions because those returns are on a much larger balance.

Fortunately, in real life you can do more than one thing to improve your 401(k) results. But this study gives you a sense of how to set your priorities.

• Save, Then Allocate

The first step is to salt away as much as possible. Contribute at least enough to get the full match--anything less and you're leaving money on the table. If you can't manage that all at once, increase your contribution by a percentage point a year. Eventually you want to be contributing at least 10% of your salary and, if you can, the 401(k) maximum of $15,000.

Next, focus on your mix of stocks and bonds. A number of landmark studies show that asset allocation has a bigger impact on returns than the specific funds you hold. (For help, check out the Fix Your Mix tool at

As for funds, look for ones that have low fees and consistent investing strategies, like those in the MONEY 50 (see page 76). Feel free to take the easy way out by opting for index funds. Or for an even simpler solution, go with a target-date or life-cycle fund (offered by nearly 40% of plans), which gives you a diversified portfolio appropriate for your age.

Then, the next time some expert rattles on about his foolproof fund-picking system, just slip in your iPod earplugs.