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How to screw up your 401K

I’ve recently been listening to the audiobook Nudge, by Nobel Prize winner Richard Thaler and Cass Sunstein. I had to double check the copyright date on it (2008) because their

Financial planning, James Comey, and the least bad alternative

Not to decide is to decide -Harvey Cox I’ve been fascinated to listen to James Comey describe his decision process on the interviews with George Stephanopoulos and Stephen Colbert. When

Business travel expenses: A black hole for your budget?

For a year or two after I graduated from grad school, business travel seemed very glamorous. That was until I realized you actually had to work at those cool destinations,

Financial planning and college acceptance

If you have a senior in high school, this is an anxious time. College acceptances and rejections are rolling in, and it’s tough. It’s an emotional drain and the decision

Don’t put your money where the guns are

As anyone who has tried it knows, investing in socially responsible funds is a thorny problem. Even if you drill down to a mutual fund’s holdings, it’s really hard to

How to screw up your 401K

I’ve recently been listening to the audiobook Nudge, by Nobel Prize winner Richard Thaler and Cass Sunstein. I had to double check the copyright date on it (2008) because their advice on 401ks has definitely not gotten through to many of us. They give a lot of advice on how you should go about investing in your 401k but since it seems that, ten years later, it’s still ignored, I’m going the other way and telling you how to really screw it up. It’s my theory that there will then be a better chance of doing it right.

Don’t worry about where your investment advice is coming from. Especially don’t find out whether the “advisor” has any qualifications. Who cares how he or she is getting paid?—you’ll still get unbiased advice even if they work for a specific company and just happen to get a bonus for that company’s products. A broker is every bit as good as a CFP, right, and who knows the difference anyway?

A robo-advisor is perfectly acceptable. Filling out a questionnaire sure beats talking to someone about your personal situation. Cheaper and easier, too. And a computer program will definitely have your best interests at heart.

Content yourself with whatever default selection the company puts you in. So what if that’s a money-market fund and you make .03% for the next 20 years—you’re invested, right?

Better yet, choose your own. Want some fun? Choose two or three target retirement funds, with different years. Who knows when you’ll retire? Sure it’s the same investments, but with different proportions, so that’s diversification, no?

Let’s be fancy. Maybe a target date fund seems a little boring, so let’s mix it up with a stable value fund and an S&P 500 fund. Now we really have no idea what the risk factor is for the overall portfolio, but, well, diversification is good, right? Even better if you see the words growth, high income, or special situation in the name of the fund, that’s the one for you, because everybody wants those qualities.

Buy a lot of your company’s stock. Maybe you can even get it at a discount. Management will surely smile on this. And if the company takes a big downturn, not only can you get laid off, but at the same time you can lose all your retirement. But that’s not going to happen because you can be sure the company will be sold and you’ll get rich off the buyout. Just ask the former employees of Enron and Worldcom.

Never contribute more than the company will match. Because who wants tax savings? Who wants investments to grow tax free? And besides, you’re saving 3% so that ought to be enough for retirement, right?

Never increase your savings rate. Even if you get a raise, why should you waste it on savings?

Start as late as possible to contribute. Your fifties seem about right. You’ll have plenty of time to enjoy life down to the last penny now, and can worry about retirement later. And later.  And later.

Never offer any input on the plan when you have the opportunity.  We can all trust our employers to be much more concerned with retirement than we are. They’ll worry about keeping fees low for employees (not how much the plan costs the employer) and will make sure you have plenty of low cost index funds to choose from. They know best.

When you change jobs, either cash out the account or forget about it. Cashing it out is the most fun, until tax time rolls around. But the easier way is just to forget about it, and not bother with whatever it’s invested in. That way you’ll never know how much you have, be bothered worrying about the return, and it might just go to the state as an abandoned account.

Okay, folks, because this is the internet, I want to be perfectly clear that this is satire, not advice. No one should act on investment advice without consulting an advisor (or doing sufficient research) to reach decisions based on your personal situation.  But I think Thaler and Sunstein might agree that doing the opposite of what’s in this post might be the better course.

 

 

 

Financial planning, James Comey, and the least bad alternative

Not to decide is to decide

-Harvey Cox

I’ve been fascinated to listen to James Comey describe his decision process on the interviews with George Stephanopoulos and Stephen Colbert. When discussing his decisions surrounding the Hillary Clinton email revelations and retractions, he is adamant that there were no good options and he believes he chose the least bad alternative.

As always, it depends on what standards you use, what time period you’re talking about, and where your loyalties rest. Here’s where I think Comey went wrong—he seems to have considered the least bad alternative for the reputation of the FBI, not the country. I haven’t read the book (although I intend to) but am just gleaning his statements at the moment. However, who among us hasn’t made decisions by what we thought was true at the time and then found, to our horror, that the consequences were completely different? That describes an awful lot of marriages that end in divorce. (He believed Clinton had a significant lead and although he knew his revelations might hurt her, he didn’t seem to think he would turn an election).

Let’s take a frequent example where we’re faced with all bad alternatives: you haven’t saved any, or enough, money to put your kid through college and they get into a great one with no, or inadequate, financial aid. Do you drain your 401k, co-sign a loan, or tell the kid they’re not going to that college? For a lot of parents, out comes the pen (or they drain the 401k). So you think you’ve demonstrated loyalty and caring to your family, and the co-sign seems like the best alternative. Until the kid drops out, or gets sick, or can’t get a job that will cover the loan payment. But with a little longer time horizon of consequences, you might have (should have) concluded differently.

I’d propose that, in many financial decisions and also the one Comey made, it would have been better to cast the situation in a slightly different role: choose the best alternative among the ones available to you. (Note: this is NOT the theoretical best that could possible exist in some alternate universe, but what’s available to you at the time.)

Phrasing a decision this way often opens up more options than either/or. Comey has repeatedly said there were only two doors he could open, and he chose the least bad. Had he instead considered the “best available” he might have waited until the emails had been reviewed, taking the long view that going off half-cocked had a very good chance of electing a president far more profoundly careless than the woman he was investigating. And since, at the time he was also beginning the Russia probe, he might have considered several other available alternatives: reveal everything about everyone if you’re choosing to disclose unfinished investigations, or wait until investigations actually have evidence before disclosing anything at all, or valuing the good of the country even beyond the supposed impact on the reputation of the FBI (which hasn’t always been stellar for non-partisanship; I’m looking at you, J. Edgar Hoover). These would have required taking a longer view, and perhaps a higher loyalty.

Similarly, the financing-of-college decision can look a bit differently when we look for best available and take a longer view. Here, best available might be negotiating with the school, taking a gap year for the student to earn money, going with the school you can pay for, or having a serious discussion with the student about the possibilities and drawbacks of taking on debt for which they alone will be responsible. It may be deciding to rein in spending (if possible) so that you might help the student pay off debt if and when they graduate. Asking “best available” rather than “least bad” seems, to me, to generate more possibilities.

Comey, and all of us, have made decisions which were agonizing at the time, still seem like they were the only possibility, and yet are tortured by the consequences. The decision to pay off loans or credit cards rather than save for retirement, stay with the spouse for the children, invest in your brother’s now-failed business, report a sexual harasser to the ruin of your career, and dozens of other life decisions that seemed right but have terrible consequences, are simply unavoidable over the course of a life. We can’t make it all perfect, but there is a kind of peace in knowing you chose the best available to you at the time.

So too with investments. No one makes an investment believing they will lose money. But you have a much better chance if you’ve balanced all the alternatives and made the best choice available based on your research and belief in the future. And, you insure your decisions if you consider multiple alternatives rather than a hot tip, and act out of careful consideration and a long view rather than fear, desperation, or unwarranted pessimism.

 

Business travel expenses: A black hole for your budget?

For a year or two after I graduated from grad school, business travel seemed very glamorous. That was until I realized you actually had to work at those cool destinations, and most of the time everything was closed by the time the workday ended. Later in life, I had a husband who traveled frequently for business. In both cases, horrendous travel bills would roll in, and the reimbursements never quite matched the bills incurred. And because I did the bookkeeping, I was never sure how much money we’d actually have after a job, because I hadn’t seen the expenses and he kept terrible records.

If you travel for business, you may have noticed that your company (or contractor, if you’re self-employed) may not be in a terrific rush to process your expense report and issue a check. Particularly in the case of a contractor, your client may see your travel expenses as just part of your overall payment, and that payment may not show up for 60 or 90 days. Depending on your credit card interest rate,  slow pay can eat significantly into your income or profit.

Here are my tips for damage control:

Get an advance.

For some reason, freelancers are very, very reluctant to ask for any money up front. Learn from your plumber or carpenter—no tradesperson buys materials without an advance, or commits time without seed money. I’ve suggested this over and over, and once the client (and my ex) screwed up their courage and asked, they’ve never been denied. Even if you have to do a rush job, they should be able to cut a check and have it waiting when you arrive on site.

Have them do the booking.

If you can’t get an advance or there’s company policy forbidding it (unlikely but possible), see if you can get them to book airfare or a hotel for you, putting it on their credit card. Then they’re bearing the risk of slow payment or no-show, not you.

One credit card only for business travel.

If the card has to be in your name, not the company’s, make sure you segregate that card and use it only for reimbursable business expenses. No, that’s not necessarily obvious—I see people mixing expenses regularly. If you bought your spouse some perfume at the duty-free shop, put it on a different card. That way, absolutely everything on the card should be submitted for reimbursement, or can be easily tracked as a business expense.

Look for the lowest interest rate card you can find, find one that accumulates travel points or offers perks, and pick the closing date as far as possible from when you begin using it (you can request  a change in closing dates). Unless you’re on that bus in the sky every single week, don’t even consider paying for a super-premium card (unless your company or your contract will cover it and you can pass on the cost).

Put a sticker on it that says biz travel only. If you’re using an app, make sure the charges are going to one account only.

 One checking account only for business travel.

This should be opened with your travel advance. If you have to seed it with start-up money, go back and look at your travel cost for the past few years, and divide them by the amount of trips. You need to seed it with at least the average cost of one trip (more, if there are lots of short ones in quick succession).

It’s less common to need cash nowadays, but sooner or later you’re going to pull cash to pay for something, and that record will almost certainly be lost and you won’t be reimbursed. Pull from this account with a debit card and you’ll have that record.

Obviously, pay your business credit card from this, and only this, account.

Process expenses immediately

As in, on the plane home. Every night at the hotel if possible. The longer you leave this go, the worse it gets. Also, it’s very unlikely that you’re going to be reimbursed immediately. You want to be on the soonest reimbursement processing possible, or the closing date and payment due will come faster than your reimbursement. No excuses.

Buy a sturdy accordion file with dividers.

No matter how you strive to keep everything paperless, it still accumulates.  Outfit this file with a stamp or two, an emergency check, hide extra pens, paper, and some post its—all the stuff you don’t have the one time you really need it. Into this file goes any travel documents, every single receipt handed to you, and post-its reminding you of any cash you spent. Now it’s not rattling around in your backpack, messenger bag or brief case.

Stay within your per diem.

You can find a hotel within your allowance—federal government employees do it all the time. Ask for the corporate (or federal rate if you can), the AARP rate, the AAA rate, whatever.  You’re working—this isn’t a vacation and you can live with a moderately priced chain. Save the luxury for your vacation, or when someone else will pick up the much larger tab. If you truly cannot  book within the per diem allowance, you need to talk this over with your corporate travel department and get them on the job.

Offer a discount for swift payment

This only applies to freelancers, of course. But somehow it always works better to say 5% discount

for payment within 15 days of invoice than it does to say 1.5% per month added for late payment.  You’ll never get the penalty interest, but you might get swifter payment. Figure the possibility of a discount into your overall charges if necessary, but it’s cheaper than paying 29.9% annual credit card interest for 90 days.