The Three Most Useless Things a Financial Columnist Tells You

September 11, 2014

I often like to question much of the conventional wisdom of the financial services industry so I was intrigued when I saw this article titled “The four most useless things financial advisors tell you” by Howard Gold. Instead, I found myself questioning most of the conclusions in the article itself as pretty useless (with one exception). Let’s take a look at each of these “four most useless things:”

Your biggest retirement risk is outliving your money. Gold mentions inflation, a stock market plunge, cognitive decline, and not having enough to retire as being potentially bigger risks. But what’s the worst case in each of those circumstances? Outliving your money! Outliving your money is a nice catchall for all the things that can go wrong. That’s why our “How Long Will Your Savings Last?” calculator includes inflation, investment rates of return, and your retirement plan balance (to cover Gold’s concerns) as well as monthly income (not having enough in Social Security and pension income), expenses (may be too high), and number of years (longevity). Think of it this way. If we don’t outlive our money then none of those were really a problem for our retirement (heirs are another story).
Wait until you’re 70 to claim retirement benefits. Gold has two objections here. One is that you’ll probably have to live to age 84 just to break even with collecting earlier. The second is that the “vast majority” of people won’t have enough money in savings to delay. Well, if you don’t live long enough to break even, do you really care? The real risk is living a long time and suddenly not having enough money (see point #1) due to higher than expected expenses or lower than expected savings balances. That’s where the higher Social Security benefits from waiting until age 70 can be a savior. (You might also be able to maximize total benefits by collecting spousal benefits while you delay.) Of course if you don’t have enough savings to delay, it’s all a moot point. But for the many who do, waiting until 70 can make a big difference in their later retirement years.
The only good IRA is a Roth IRA. Gold’s point here is that Roth IRAs don’t allow you to reduce taxable income during your peak earning years to free up tax money for other purposes. He ignores a few things though. First, if you have a retirement plan at work that you haven’t maxed out, you can already reduce your taxable income by contributing more to it. Second, many people (especially those who can afford to max out their employer’s plan) earn too much income to deduct their traditional IRA contributions. Finally, Roth IRAs have another advantage. That is you can access the contributions anytime without tax or penalty. That means your all of your contributions can be “freed up” for other things, like an emergency, while only the tax savings from IRA contributions are freed up. Yes, there are good reasons why some people might prefer a traditional IRA but there are also good reasons Roth IRAs get more attention overall.
Why accept “mediocre” returns when you can beat the market? Gold makes a good case here for investing in index funds rather than trying to actively trade to beat the market. He actually undersells his case though in implying that complex trading strategies are suitable for wealthy, sophisticated investors. Don’t believe me? See the results so far of Warren Buffett’s bet that a simple S&P 500 index fund will beat a group of top hedge funds using those complex strategies for wealthy, sophisticated investors.

Gold concludes by saying “Instead of the useless ideas outlined above, I’d suggest buying and holding far less than 60% to 70% of your money in equity index funds; waiting until you turn 66 or 67 (not 70) to take Social Security, and saving as much as you can in a tax-deductible IRA or 401(k) while you’re employed.” But each of those suggestions depends on your specific situation. If you’re not sure, talk to a qualified, unbiased financial professional. Don’t just take blanket advice from a columnist who doesn’t know you or your particular needs.