Archive for Retirement Planning

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.

 

Financial resolutions for 30 and 40 somethings

I’ll control the amount of money I spend on a house. What lenders will loan you is not necessarily what you should spend. Your housing decision drives the costs of many other things in your budget: upkeep, insurance, repair costs, and maybe status decisions such as where you send your kids to school and what car(s) you drive. Once you commit, it’s a fixed cost that isn’t easy to reduce. Keep your housing cost (mortgage+interest+taxes+homeowner’s insurance) to 28% or less of your gross and you’ll reduce stress and free up money for savings.

I’ll increase my retirement savings with every raise. Try to add at least half of every raise to your retirement savings. Aim for the maximum allowable contribution of $18,500 to your 401k/403b and fund a Roth if you can. In which order depends on your income, employer match, and investment options in the workplace plan.

I’ll start saving something for my children’s education as soon as they’re born. Just as with retirement savings, the earlier you start, the less you have to save later. No, they won’t earn their own way. No, they’re not so smart they’ll get a full-ride scholarship. Just. No. Save something—anything is better than nothing.

I’ll hold on to my bonuses and any inheritance. Too many people get used to depending on a bonus for their regular lifestyle, but a company can go south and the first thing eliminated is the bonus. Try to regard the bonus as bonus savings—for investment, emergencies, etc. What to do with an inheritance depends on the size, but consider no more than half of it available for spending, and make that spending a worthwhile purchase (such as real estate) that has some potential to grow. Windfalls don’t come that often in life, so don’t blow it.

I’ll do everything I can to become debt free. I don’t think I need to belabor the point about credit cards, but by your 40s it’s time to chip away school debt as well, before you have to start paying for your kids’ college.

I won’t cosign any loans. If the bank doesn’t think the person is creditworthy, why should you? And if were talking about guaranteeing a college loan, understand that if your child drops out, or becomes permanently disabled, or dies, you’ll probably still owe the money. You can always help the kid pay off the loan in the future if you can afford it—just don’t cosign it!

I’ll carefully consider the financial costs before deciding to stay at home with the kids. Deciding to quit employment to be with your children is, of course, not exclusively based on finances. I did it, and I’m glad I did. But there are costs—depending on how long, you can significantly impact your Social Security benefit, as well as your future employability, advancement, and re-entry salary. Most likely, you will have no disability insurance, and if you or the wage earner become ill or disabled, or you get divorced, it can be catastrophic. I urge most clients contemplating this to keep their professional networks alive, keep abreast of their field, and, if possible, get extra training or continue working at least part time.

I’ll expect my kids to contribute to household upkeep and earn money as soon as they’re able. Not only does this build life skills, but it conveys to the children that you respect them as being able to produce value and have worth. Any kind of outside job shows kids a world, life choices, and consequences beyond what they can learn in their family, and gives them the experience of being evaluated without the protection of a family or age cohort. Even the difficulty of finding one, and the perhaps soul-less experience of a really boring or difficult job can teach the kid a lot of motivation.

And, do take a look at my post for millenials–it’s still applicable to you.