#retirement

Ready for a brain teaser? Robert Laura is a prolific writer on retirement readiness and the professionals who help people with it. In the following article, he uses a teaser to illustrate how simple mistakes made by everyday people can lead to wrong conclusions about retirement. Then, he turns the tables on advisors themselves, pointing out the ultimate trick most professionals would miss. See how you do: https://www.fa-mag.com/news/the-ultimate-brain-teaser-for-retirement-55906.html?section=47&page=2 Common Mistakes As one example of a common retirement readiness mistake, Laura says, "People assume that retirement is nothing but a big plus sign. That more freedom, time and leisure will suit them well and result in the life they have always dreamed of. But the reality is that problems, stress and boredom can multiply if people don’t have some structure, goals, direction and purpose for this phase of life." Making the assumption that "retirement is nothing but a big plus sign" is equivalent to missing a key part of the brain teaser equation (such as seeing a multiplication sign as a plus sign.) Oops! Unfortunately, the equation - both in retirement and the brain teaser - have several key parts which are easily missed, and can lead to bad outcomes. The Professionals' Common Mistake The actual answer can be solved in at most a couple of seconds, but the teaser lures the more detail-oriented, analytical, and math-obsessed person into a rabbit hole of complexity. Because we get so jazzed about solving complex problems, we miss the simple answer. (He got me on that one.) Professionals can be this way. There are some retirement questions that don't need statistical simulations, multi-year tax spreadsheets, or portfolio performance matrices. The quotation, "Everything should be made as simple as can be, but not simpler," is attributed to a paraphrase of a speech given by Albert Einstein. Making the complex simple is hard work. How many hours did it take Einstein to come up with the simple equation E=mc²? Keeping It Simple Hans Hofmann said, "The ability to simplify means to eliminate the unnecessary so that the necessary may speak." In the world of retirement finance, whether online, in media, or even in textbooks, there's a whole lot of unnecessary. Most people turn to professionals to help them eliminate it, not add to it. Brain Teaser Lessons Several lessons emerge from the brain teaser that we can all keep in mind when planning for retirement:- Remember to focus on the big picture; i.e. what "retirement" means.- Given that answer, you can focus only on the details that truly matter.- Always look for a simpler, more understandable way to answer the question.- Once solved, use the answers to help discern what's important and what's not. Retirement Readiness Resources For a short online course teaching what's necessary and what's not for retirement readiness, see our Simple Finance Retirement Readiness page here: https://bit.ly/3p3BkXE For more tips on the psychology of money, subscribe to the award-winning monthly e-letter, "The View From the Porch," at https://bit.ly/3t2uwfn.

How is saving for retirement affected in each age decade? Shortly after the 2008 financial crisis, I saved a Money magazine article on the topic of 401K investing, curious to see if I would change their advice two to three years later. Now it’s over 10 years later, and most of that advice is still relevant. Following is a synopsis. For the 20s, 30s, 40s, and 50s, not much has changed. But for the 60s, note how the article leaned toward armageddon, contingency planning, and worst case scenarios. There was nothing in the article about staying the course. It’s interesting to reflect back on the mood at that time. [The following are both direct quotes and paraphrasing of the main ideas of the article. The sources listed are attributable to Money magazine.] Saving In Your 20s In your 20s, the challenge is that retirement isn’t even on your radar. Debt is accumulating instead, and most 20-somethings, understandably, are focused on the goal of getting out of debt first. According to the Project on Student Debt, "More than six in ten (62%) college seniors who graduated from public and private nonprofit colleges in 2019 had student loan debt and they owed an average of $28,950." (www.ticas.org, January 20, 2021). Nevertheless, it's important for 20-somethings to pay off high-interest debt like credit cards and start funding a 401(K). Nearly half of all twenty-somethings with a 401(k) plan turn down the company match by not contributing the full qualifying amount – essentially free, tax-deferred money. What can a 20-something do? Money magazine suggests small steps like start brown-bagging lunch. For someone making $30,000 a year, setting aside $35 a week is all it takes to sock away 6% of salary. An additional pitfall at this stage is job-hopping. When switching employers, many are tempted to pull out their 401(k) savings. But, while $5,000 may not seem like a whole lot of money, if invested, that amount will be substantial by the time you retire. People who begin saving for retirement in their 20s, however small, have far more choices in their 40s. Saving In Your 30s By this decade, just being enrolled in the retirement plan isn’t enough. How the money is invested begins to take on more importance. According to a survey by investment advisor Financial Engines, 40% of all 401(k) participants make investing mistakes that impede their portfolios’ growth. The two most common mistakes are: 1) investing too conservatively in money market funds, therefore not beating inflation; and 2) investing too narrowly in a single stock (typically, the employer’s). To catch up, learn to diversify according to “asset allocation.” Embrace both stocks and bonds. Combining the two will bring a cushion against market drops. If your 401(k) has a Roth feature, and you believe your income tax bracket (the percentage of your income that actually goes toward taxes) will be higher in retirement, use that feature to invest after-tax dollars now for tax-free withdrawals later. Once you have your portfolio fine-tuned, revisit it on a regular basis but no more…