Archive for Retirement Planning

Don’t make this mistake with your 401K

It’s no secret that I love Roth IRAs. Don’t tune out because you think you make too much money to have one!

Let me count the ways they’re great:

  • No required minimum distribution at 70 ½, so you can leave the money to grow into old age if you wish.
  • Grows tax free and you pay no taxes on any of it when you withdraw after 59 ½.
  • Can always withdraw your contribution tax free.
  • Can be used for medical emergencies and a $10,000 down payment on a first house (but don’t—leave it alone for retirement!)
  • Your heirs will pay no taxes on withdrawal if any is left
  • And the biggest benefit in my opinion—if you need a lump sum in retirement (dental implant, hearing aid, relocation expenses, buying into a continuous care community), you can withdraw it tax free. If you have to withdraw from a traditional IRA or 401K, you’re going to need to withdraw what you need + taxes on the withdrawal, so much less of your money is preserved going forward.

But, you make too much money, you say? Have you checked whether your 401K at work offers a Roth 401K option? Several clients in the past month have told me they don’t have a Roth 401K because they “make too much money”. It’s true that individual Roth IRAs have an income limit of $189,000 joint and $120,000 single, but the limit DOES NOT APPLY to workplace Roth 401ks. These Roth 401ks have exactly the same limits as your current plain vanilla 401k.

One of the biggest drawbacks of an individual Roth IRA is that you have a limited amount you can contribute each year: $5,500 with $1,000 additional after 50. But this is a relatively small amount, so many Roths never get large enough to fund a retirement. NOT SO with Roth 401ks, where you can deposit $18,500, with $6,000 extra after 50. Note: your employer’s match contribution will still go into the regular 401k.

Roth 401ks were relatively uncommon just a few years ago, but now many employers are offering the choice. It’s much underutilized. Sure, you lose the current tax deduction, but in the future, you should save far more in taxes on the appreciated amount. Check out this chart to see if you’d be better off with a Roth or traditional. In almost every instance, a Roth does better. Special alert to new grads: choose the Roth! Then you’ll never get used to the tax deduction.

If you don’t know if your employer offers it, ask. And agitate for the option if you need to. It shouldn’t cost the employer much extra, if anything. And it will really pay off for you.

 

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.