Getting rich quick is always alluring, said Cramer, but in fact the best way to build wealth is not overnight, it's slowly and carefully over time. That's why accounts like IRAs and 401(k)s should always be your first line of offense. Their tax-deferred nature and employer contributions may seem small and insignificant now but over time they'll add up big. Cramer said it's also possible to be too cautious, too prudent and too risk-adverse. You should invest for retirement, he continued, not save for it. Savings implies just socking money away in something with a low return. Unfortunately, that strategy rarely works. When saving for retirement, many investors may think bonds are the way to go since they afford less risk. But loading up on bonds in your 20s, 30s and 40s because you fear risk will never allow you to generate enough money to live comfortably. It's not enough to rely on a 3.9% Treasury bond, because those vehicles rarely keep up with inflation, let alone allow you to get ahead of the curve, Cramer advised.
Adjust as Necessary
So investors have their credit cards paid off, they have health and disability insurance, they're contributing to their 401(k)s and they've decided to take on a little risk and invest in stocks rather than bonds. Now they'll get rich, right? Well, not quite. Cramer said conventional wisdom will tell you to just passively have a percentage of your paycheck sent to your 401(k) every month. But if you think about it, that doesn't really make a lot of sense. After a big market rally, when stocks are expensive, ideally you'd want to invest less that month. Conversely, after a big market selloff, you'd ideally want to back up the truck and buy all you can. Cramer said any time the S&P 500 falls by 10%, investors should be doubling down and buying twice what they normally would. Will this strategy make a big difference over four or five years? Probably not, he admitted. But over 40 or 50 years, this alone could mean tens or even hundreds of thousands of extra dollars in your account. "That," Cramer said, "is the right way to manage your retirement portfolio."
For as great as 401(k) accounts can be, however, Cramer said they do have plenty of downsides. First, many have high management fees and administration costs that eat away at your savings. But more important, they lack a choice in investment options and that means a big loss of control. Investors ideally want a well-diversified portfolio of individual stocks, said Cramer, and 401(k)s just don't offer that level of granularity. Fortunately, IRAs do, which is why Cramer recommends only investing in a 401(k) plan to meet the employer's match, then putting as much as you're eligible for into an individual IRA, which you can control. The limits on individual IRAs are $5,500 a year if you're under 50 and $6,500 a year if you're over 50, an investment that's definitely worth making. To watch replays of Cramer's video segments, visit the Mad Money page on CNBC. To sign up for Jim Cramer's free Booyah! newsletter with all of his latest articles and videos please click here.-- Written by Scott Rutt in Washington, D.C. To email Scott about this article, click here: Scott Rutt Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC