Recently, I had the distinct privilege to join Sheinelle Jones on the Today show, discussing some rapid-fire personal finance issues in Simple Money style. Is now a good time to buy stocks? Is it a good time to buy, sell, refinance or renovate a home? We even discussed a version of the Simple Money Portfolio and my top two picks for cash flow apps that can improve your financial situation. Click HERE or on the image below to view the segment.
Much—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.
I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:
1) Life is liquid, but most retirement savings isn’t.
Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.
The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.
2) There are too many competing priorities.
Millennials are dropped into the middle of a financial should-fest. You should pay down school loans, save up for a home down-payment, drive a cheap ride, purchase the proper level of insurance, enhance your credit and save three months’ worth of cash in emergency reserves. All while supporting a healthy Apple-products habit and maintaining your commitment to sample every India Pale Ale micro-brew in production? No chance.
Most personal finance instruction tells you what your priorities should be, and if you’re looking for that kind of direction, I’m happy to help in that regard as well. But it’s also not a mortal money sin to employ some Solomonic wisdom and compromise between, say, two worthy savings initiatives—like short-term emergency reserves and long-term retirement savings. Therefore, while I can’t go so far as to suggest that you bag the idea of building up cash savings in lieu of a Roth, I’m comfortable with you splitting your forces and dipping into your Roth IRA in the case of a true emergency. The challenge we all face is to define “true emergency” without self-deception. (And no, upgrading your vinyl collection or investing in beard balm aren’t true emergencies.)
3) Roth contributions cost you less today than they will in the future.
Despite my sincerest attempt, I couldn’t avoid the more technical topic of taxes—and nor should I, in this case. That’s because it only stands to reason that you’re making less money—and therefore paying less in taxes—at the front end of your career than you will be in the future.
Therefore, in addition to beginning tax-free compounding sooner, Roth IRA contributions—which are not tax-deductible—will likely “cost you” less as a career newbie than they will as a seasoned executive. At SpaceX. On the first Mars colony. Furthermore, you can also make too much to contribute to a Roth IRA, progressively phasing out of eligibility at income of $118,000 for an individual and $186,000 for a household.
Like Coachella tickets, the opportunity to invest in a Roth IRA may not be around forever. Tax laws and retirement regulations are constantly evolving, and who knows what the future may hold. This increases their value for everyone, but especially for those who could benefit from them the most—Millennials.
In a recent Forbes post, I offered five reasons for why analog task management can be more productive than a digital alternative. But in addition to the WHY, I pledged to offer specifics on exactly WHAT and HOW I’ve applied the Bullet Journal system in my own pursuit of productivity.
For fans of my online productivity system hack using Trello, please know that it still works just fine! You will see the familiar blend of Steven Covey as well as David Allen’s GTD principles in my analog system, with just a few modifications and some new Bullet-friendly verbiage.
Before you jump in, I do recommend that you watch a short video in which Bullet Journal founder Ryder Carroll explains the system in his own words. Then, here is precisely how I’ve adapted the concept for my own purposes as a financial advisor, writer, speaker and productivity seeker:
Michael Brundage had everything working for him: a great marriage, healthy children and a successful career in commercial real estate. But something—something big, but invisible—was missing, and the result was a depressive streak that led my friend and colleague to pursue therapy.
Then, in the middle of an early session, his therapist discerned the problem, which she immediately shared with Michael: “You hate your job. That’s the problem.”
Initially, Michael protested, somewhat confused. He was good at his job—very good—and it paid well, ensuring a more than comfortable lifestyle for his family. Wasn’t that what a job was supposed to be about? Indeed, several generations of Americans have bought into the notion that our work is primarily—if not solely—a means, not an end in itself.
“As a culture, we’ve collectively bought into the lie that work has to be miserable,” writes career expert Jon Acuff in his newest book, Do Over.
Michael had learned, in his words, “what a long shadow not liking your job can cast over the rest of your life.” So he decided to do something about it.
He read voraciously, including Do Over, in which Acuff offers a method to career management regardless of where you stand on the love/hate job continuum.
Acuff’s counsel applies to four different types of career transitions that everyone faces:
Investing is a pursuit best liberated from short-term analysis that tends to mislead more than edify. But 2016 was one of those rare years that provided a lifetime’s worth of education in a brief period.
Here are the three big investing lessons of 2016 that can be applied to good effect over the long term:
1) Discipline works.
January was greeted with panic-inspiring headlines like, “Worst Opening Week in History.” While hyperbolic, the truth in headlines such as these may have been more than enough to scare off investors frustrated by seemingly unrewarded discipline in recent years.
With threats of international instability (Brexit) and domestic volatility (historically wacky election cycle), there were ready reasons to cash in even the most well-conceived investment plan, opting for observer status over participant. But to do so would’ve been a huge mistake.
Indeed, the S&P 500 logged an impressive 11.9% for the year, with small- and value-oriented indices pointing even higher.
2) Diversification works.
How can a simple, balanced 60/40 portfolio have better outcomes than investors who try to “beat the market”? Through diversification. In 2016, a portfolio that invested 40% in watching-paint-dry short-term U.S. Treasuries — and that also diversified its equity holdings among asset classes that evidence indicates expose investors to outperformance — had a good chance of matching or even topping the S&P 500’s return for 2016.
Ordinarily, translating any single year’s performance into a lifelong investment strategy would be a regrettable mistake, but in 2016 the market mirrored the historical evidence suggesting that certain factors direct us to particular investment disciplines worthy of emulation. Or in simpler terms, stocks make more than bonds, small-cap stocks make more than large-cap stocks, and value stocks make more than growth — and it may be a good idea to reflect this in your portfolio.
3) Prognostication doesn’t work and punditry doesn’t help.
“Man plans and God laughs,” according to a Yiddish proverb. No, I’d never attribute divinity to the imperfect market, but I’m happy to attribute fallible humanity to those who attempt to divine the market’s next move.
Every year, Wall Street oracles discern what the market will do through notoriously errant forecasts. Every day, an endless stream of talking heads rationalize the meaning of past market moves and presume to postulate its future direction. More often than not, they’re just plain wrong.
Or, as my colleague Larry Swedroe bluntly advises, “You should ignore all market forecasts because no one knows anything.”
Great Britain’s exit from the European Union was supposed to unhinge the global economy, but most have already forgotten the meaning of Brexit. The market then sent clear signs that it preferred one presidential candidate over the other, followed by a rash of recessionary predictions in the case of an upset. But the markets processed the monumental election surprise before the next day’s market close — doing precisely the opposite of what the “smart money” said it would do.
I don’t mean to suggest that the market will always ignore macroeconomic events and political surprises in search of higher ground. But.
The market is going to do whatever the heck it wants, regardless of the balderdash-du-jour pundits and prognosticators say it will do. It will peak when it “should” plummet and it will sink when it “should” sail.
The market’s most predictable trait is its unpredictability. But that, of course, is why we also expect a higher long-term reward for enduring the market’s short-term risk.
Again, there is more danger in drawing too many conclusions from a single year’s worth of market history, but these lessons learned in 2016 are worthy of application every year.
American retirees are screwed. The 401(k) experiment has failed. Social Security’s going bust. Savers haven’t saved nearly enough and don’t have the means to improve the situation.
However hyperbolic, this is the message that has been sent and, for many, is indeed the way it feels. But how do the facts feel?
- Many companies have abdicated the role they once played in helping support employees’ retirements through defined benefit pension plans by promoting and then under-supporting defined contribution plans, like the 401(k).
- Most pensions that remain — even those run by states and municipalities — are “upside down,” lacking sufficient funds to pay what they’ve promised. The entity conceived to insure underfunded pension plans is also underfunded.
- Some large financial firms have filled many of the 401(k) plans they manage with overpriced, underperforming funds, and offered little in the form of substantive education for the masses now left to their own devices.
- After a six-year effort to ensure that financial advisors who manage retirement assets would be required to act in the best interests of their clients, there’s a corporate and political movement afoot for firms to reclaim potential lost profits if they were forced to do right by their clients.
- Even some of the individuals who initially conceived the 401(k) concept and lobbied for it have recanted their support, regretting it ever started.
Social Security Facts:
- The program intended only to be a safety net has become the primary financial resource in retirement for too many.
- The surplus funds received when the huge baby boomer generation paid in — which are now being used to help replace the inherent shortfall of smaller generations — are projected to run out in 2034, thereby reducing the system’s ability to pay benefits by 25 percent.
There — how does that feel, now?
It is in better understanding ourselves that even the most confounding financial decisions are made simple. Therefore, it’s entirely possible for a seemingly non-financial book to have a meaningful impact on your financial life, while the reverse is also true.
Consider, then, this list of my choices for the top five (mostly) recent books that can improve your life, work and financial serenity in 2017:
5) The Whole 30: The Official 30-Day Guide To Total Health And Food Freedom is not your typical diet book. I don’t do those. But I am fascinated by various “life hacks,” small behavioral changes we can make in our diet, exercise and sleep patterns that make life more livable.
My adopted home of Charleston might have been ranked the “Best City in the World,” but the state of South Carolina is earning a less distinguished label as a harbinger of the country’s worst pension crises. And yes, that’s crises—plural—because U.S. state and local government pensions have “unfunded liabilities” estimated at more than $5 trillion and funding ratios of just 39%.
What does that mean, exactly?
When a company or government pledges to pay its long-term employees a portion of their salary in retirement—a pension—the entity estimates how much it (and its employees) will need to set aside in order to make those payments in the future. An underfunded pension is one that simply doesn’t have sufficient funds to make its promised future payments.
Corporate pensions in the United States are in trouble, with the top 25 underfunded plans in the S&P 500 alone accounting for more than $225 billion in underfunding at the end of 2015. But states and municipalities are in even worse shape. This week, the Charleston-based Post and Courier estimated that South Carolina’s shortfall alone was at $24.1 billion, more than triple the state’s annual budget!
How did we get here?
There are two glaring reasons: poor investment decisions and greedy assumptions.
Advisors to President-elect Donald Trump have been vocal about rescinding the Department of Labor’s new fiduciary rule, introduced earlier this year to protect retirement savers from advice that isn’t fully in their best interests. The rule has already been under fire from the securities industry, and lack of presidential support could spell its ultimate demise.
As someone who has worked on both the fiduciary and non-fiduciary sides of the industry, I think revoking the rule is a bad, even dangerous, move. My rationale for such a position starts with my experience, early in my career, at one of the nation’s largest insurance companies.
“Look, you can set up your business any way you see fit after you’re successful. But right now? With a young family? You need to put yourself and your family first, and that means selling A-share mutual funds,” said my sales manager.
In other words, you must put your interests ahead of your clients’.
As a brand new financial advisor, I was having a heart-to-heart with my supervisor after laying out my plan for creating a fee-based business within the agency, which would have meant recurring revenue for the firm but apparently in much smaller increments than were preferable.
“A-share mutual funds” are a variety with some of the largest up-front commissions—for both the salesperson and the company they represent. Variable annuities were even better, generating more of a “front-end load.” Whole life insurance was the pinnacle of up-front commissions.
In the newbie bullpen, we were encouraged to sell in various and sundry ways. The general agent in charge of the Baltimore metro area—the self-proclaimed “big dog”—was, indeed, a large man. A former starting lineman for a recognizable college football team, I’m quite sure that he routinely watched the classic Alec Baldwin “motivational speech” from Glengarry Glen Ross (turn the speakers down if you’re at work or children are nearby).
I recently discussed this topic on the Nightly Business Report (at the 9:05 mark)
My favorite anecdote from that time, though, was my general agent’s big fish story: “When you get a big fish on the hook, I want you to set a noon lunch meeting at the Oregon Grille.” (The Oregon Grille is an excellent restaurant north of Baltimore in pastoral horse country, where most of us had never dined.) “Go to the restaurant 30 minutes early and introduce yourself to the maître d’. Let him know that you’ll be returning shortly to the restaurant with a guest, and that you’d like to be referred to by name.”
Who does the stock market “want” to win?
Hillary Clinton. This isn’t a partisan statement, but simply a statement of fact. There may be several indicators to which we could point, but the glaring one is this: When the FBI announced last Friday that a new slew of emails had been discovered that could impact its investigation and shed further negative light on Clinton’s handling of classified emails, the market sold off. Period.
But why? Is the market more Democrat than Republican?
No. In fact, you may recall the George Bush/Al Gore recount in 2000, when the market seemed to cheer in Bush’s favor. But what the market really doesn’t like is unpredictability, and it has asserted its opinion that Donald Trump is a more unpredictable candidate than Clinton.
Big bank fees are at an all-time high while the interest they pay is at an all-time low. Worse yet, evidence recently has come to light of the criminal abuse of a practice common among large banks since the fall of Glass-Steagall: cross-selling.
Cross-selling is rooted in consumer research that large financial institutions tend to salivate over. It shows that customers are more profitable for longer when they own more products. How else could they get us to settle for deposit products for which we pay them? Does this absurdity leave you wanting to bolt the big banks?
Fortunately, you have alternatives. Here are the top four:
1) A good option for most is to flee the big brick-and-mortar bank for its younger virtual sibling: the online bank. Online banks, which lack the overhead of their more traditional rivals, can offer higher interest rates, lower fees, free ATM withdrawals and low or no minimum balance requirements. And they do.
I’ve been using an online bank for several years now and haven’t paid a single ATM fee for that entire time—and I can go to any ATM in the known universe (seriously). In the past year alone, I’ve received more than $200 in ATM fee rebates!
I recommend that you choose an online bank that best serves your needs and lifestyle. Mine, for example, offers unlimited ATM reimbursement, but others will cap the reimbursement amount or restrict you to a (typically large) number of “free” ATMs. Those banks, however, may pay a higher level of interest than my bank. Nerdwallet did an excellent job summarizing the best online checking accounts of 2016.