Top 3 Reasons For Millennials To Choose A Roth IRA

Originally in ForbesMuch—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.

Filling That Career-Shaped Hole

Originally in ForbesMichael 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.”

do-over-cover-2Initially, 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:

What 2016 Taught Us About Investing

Originally in ForbesInvesting 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.

Top 5 Books To Put The ‘Personal’ Into Your Finances This New Year

Originally in ForbesBecause personal finance is more personal than it is finance, just about every step we take in our personal development aids us in financial planning, and vice versa.

top-5It 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.

American Pension Crisis: How We Got Here

Originally in ForbesMy 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.

Why I’m Hoping The Trump Administration Doesn’t Kill The DOL Fiduciary Rule

Originally in ForbesAdvisors 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’.

Fiduciaries are required to put their clients' interests ahead of their own.

Fiduciaries are required to put their clients’ interests ahead of their own.

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.”

What The Stock Market Wants This Election, And What You Should Do In Your Portfolio

Originally in ForbesWe’ll know soon enough who America chooses as its next president, but the market has already voted.

Who does the stock market “want” to win?

Hillary Clinton. This isn’t a partisan statement, but simply a statement of fact. election-2016There 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.

You Won’t Get Fooled Again: Understanding the Availability Heuristic in Investing

Originally in ForbesYou’re no fool. But let’s imagine for a second that a major public figure said something—something false—over and over (and over) again. Regardless of its questionable veracity, is there a chance you’d be more likely to believe the proclamation simply because you’ve heard it often and recently?

Like it or not, the answer is an emphatic “Yes.”

You and I are more likely to believe something is true when it’s readily available—that is, when we’ve heard it frequently and, especially, when we’ve heard it lately. This phenomenon is dubbed the “availability heuristic,” and even though it was discovered and named (by Amos Tversky and Daniel Kahneman) more than 40 years ago, it likely hasn’t caught on in the broader public awareness because its title includes the word “heuristic.”
Nonetheless, the availability heuristic’s power to persuade is not lost on marketers, salespeople, lobbyists and politicians. They use it on us all the time. But let’s explore the errant biases in investing, in particular, that while readily available often lead to sub-optimal outcomes.

Active vs. Passive

The debate rages (and no doubt will continue to do so) over whether active stock pickers are able to beat their respective benchmark indices. The implications seem simple: If fee-charging money managers aren’t persistently outperforming their benchmarks, we likely should not be paying them for underperformance, right?

You May Not Drive A Racecar, But You Still Need Life Insurance: Lessons from Danica Patrick

Originally in ForbesSince her early 20s, Danica Patrick has driven a racecar for a living, speeding 200 miles per hour around a crowded track bordered by concrete walls. It’s dangerous. Really dangerous. And she recognizes that.

“There are things that happen in the car that you can’t plan for and that are out of your control, like a tire blowing on you or an engine blowing up or a crash that happens in front of you or someone hits you,” Patrick told me in a recent interview. “So no matter what your skillset is, those things just happen. Absolutely it is a risk.”

But it’s a risk that she has chosen to manage, in part, with life insurance. Patrick has owned life insurance since she started racing, and the subject is important enough to her that she now advocates on behalf of Life Happens, a nonprofit founded to help consumers make smart insurance decisions.

Commendable though it sounds, I wanted to know more about why. Why was she motivated to buy life insurance at an age when most people don’t even think about it? Why did she feel she needed life insurance—then and now?

How Fantasy Ruins Football (and Investing)

Originally in ForbesIt’s that time of year again, where the heat of summer recedes, sweatshirts make a comeback and businesses lose billions in flagging productivity due to fantasy football. But it’s not just businesses losing out—fans and players come up short as well.

How, after all, can I truly dedicate myself to rooting fully for my beloved Baltimore Ravens if I took Le’Veon Bell—who, for those not acquainted with the best rivalry in football, plays running back for the Steelers—second in the fantasy draft? It can’t be done. It’s just wrong.

I’m kidding, right?

Partly. But there are more serious personal and financial implications to embracing fantasy (sports or otherwise). The danger in fantasy is its distance from reality. It’s “betting on a future that is not likely to happen,” according to Psychology Today.

Our fantasies tend to sensationalize what we’d prefer to imagine while ignoring what we’d prefer to not. Then, when our actual spouse, child, parent, friend or co-worker falls short of the impossibly high bar we’ve set for them, we—and often, they—are crushed.

“Emotional suffering is created in the moment we don’t accept what is,” says Eckhart Tolle, who, perhaps unintentionally, delivers a potent dose of truth that especially informs us in our personal dealings with money.

Here are a handful of financial fantasies, followed by their unvarnished truths: