A friend of mine recently sent me a link to this much talked about Frontline episode called “The Retirement Gamble” on the problems in our current retirement system. The show points out that half of all Americans say they can’t save for retirement and lays the blame on several main culprits:
1) The shift from traditional defined benefit pension plans to defined contribution plans like 401(k)s has shifted the risk and responsibility of retirement planning to employees.
2) Many employees are raiding their retirement accounts to pay for things like emergencies and education expenses.
3) Many employees put too much money in their company stock.
4) Many employees suffered significant investment losses in their retirement accounts.
5) Wall St is taking too much out of retirement accounts in the form of mutual fund fees and trading costs.
6) Many financial advisors are really just glorified salespeople pitching overpriced financial products.
7) All of this is too complicated for people to deal with.
I agree with all of these except for the last one. In my view, personal finance is a lot like dieting and exercise. Yes, there’s some controversy about the healthiness of certain foods and diets and whether one type of exercise is better for you than another. Yes, we’re bombarded by marketing that may not be in our best interest. But the reality is that the fundamentals are pretty basic: avoid junk food, exercise at least 3 times a week, and eat your veggies.
We just don’t want to do them because all the pain is upfront and the gain comes later. (I can be as guilty of this as anyone.) It too often takes a life-threatening event like a heart attack to motivate people to change their behavior and by then, it may be too late.
There are similar controversies in the financial world and similar marketing pressures. But the fundamentals are just as simple. Here they are:
1) Run a retirement calculator to see how much you need to save for retirement. Ours takes only a few minutes. (You can get an estimate of your Social Security benefits from their web site but you may want to reduce it by at least 25% to account for the projected funding shortfall, especially if you’re under age 50.) Your employer may even have a program that pulls together your Social Security and other retirement benefits to estimate your retirement income for you. It’s not a pension, but it’s a nice benefit if you use it.
2) Start setting those retirement savings aside before you even have a chance to spend them. (Keep in mind that even after your retirement saving, lots of people are living on much less than whatever income you have left.) The easiest way is to contribute to your employer’s retirement plan since it’s deducted right from your paycheck. You may also be eligible for a match from your employer. But if you don’t have any emergency savings, you may want to start with a Roth IRA since you can access the sum of the contributions without tax or penalty if you need to withdraw it early for an emergency. Anything you don’t withdraw can grow tax-free for retirement.
3) Don’t put more than 10-15% of your portfolio in any one stock, especially if it’s your employer’s. If something were to happen to your company, you don’t want to lose your job and your nest egg at the same time.
4) If you don’t know how to pick investments, see if your employer or retirement plan provider offers a program like Financial Engines or GuidedChoice that provides personalized investment recommendations at no cost to you. You can also opt for a target date or other asset allocation fund that’s already fully diversified. The most important thing is to have something that you can stick with through all the ups and downs in the market. As long as you’re properly diversified, you’ll do fine in the long run and considering how long you may live in retirement, you’ll probably be investing for the long run even if you’re approaching retirement.
5) If you’re picking funds on your own, don’t waste a lot of time researching various options. It turns out that lowers costs are a better predictor of mutual fund success than even Morningstar ratings. Instead, consider following Warren Buffet’s advice and just go with index funds, which outperform the vast majority of actively managed funds because of their low fees and trading costs. Where else is the lazy, cheap route also the most successful one?
6) Avoid dipping into your retirement savings for college unless you have extra money that you know you won’t need for retirement. After all, there’s no financial aid for retirement.
7) If you need help with any of this, ask your employer if they provide access to unbiased financial education or guidance at no cost to you. You can also search organizations like the Alliance of Cambridge Advisors and the Garrett Planning Network to find unbiased financial advisers that don’t sell products.
Follow these simple steps and your retirement shouldn’t be a “gamble.” The hardest part will likely be the adjustments you may need to make in your lifestyle to accommodate any additional saving you may need to do. Hey, I just said it would be simple, not that it would be easy but few things really worth doing are. Did we really expect that becoming financially independent would be any different?