It should be no surprise, because Social Security is an incredibly complex animal. Did you know that each U.S. married household represents potentially thousands of different Social Security options? It’s likely that you’ll need to confer with a financial advisor specializing in Social Security distributions in order to determine how you can get your maximum benefit.
Collectively dubbed “robo-advisors,” companies such as Betterment, Personal Capital and Wealthfront have managed in just a few years to do what the financial industry has failed to accomplish during a couple of centuries: provide quality investment guidance at a cost accessible to most demographics. It is a long time coming.
Adam Nash, Wealthfront’s chief executive, however, isn’t fond of the robo-advisor label.
Separating true financial priorities from flash impulses is an increasing challenge, even when you’re trying to do the right thing with your moola — like saving for the future, insuring against catastrophic risks and otherwise improving your financial standing. And while every individual and household is in some way unique, the following list of financial priorities for your next available dollar is a reliable guide for most.
Once you’ve spent the money necessary to cover your fixed and variable living expenses (and yes, I realize that’s no easy task for many) consider spending your additional dollars in this order:
Historically, retirement planning has been likened to a three-legged stool — consisting of a corporate pension, Social Security and personal savings. Baby boomers saw the pension fade from existence, leaving them to balance on retirement planning stilts. For younger generations, however, the retirement situation can seem even worse. Sometimes, it feels like it’s all on us. We’re left with only a retirement planning pogo stick.
Further complicating matters, doctors suggest that the length of life Generations X, Y and Millennials can expect may exceed that of our parents and grandparents. We’re likely to live a long time, but our quality of life — to the degree that it is improved by cash flow — is in question because of the heightened savings burden.
Last week, I shared two “silver bullets” — MOVE and WORK— for hopeful boomer retirees who may fear that a 14-year stretch of economic uncertainty has put their goal for a comfortable retirement out of reach. Here’s how these two concepts can be applied to younger generations:
I always enjoy talking to Tyler Mathisen and Susie Gharib on PBS’ Nightly Business Report. They ask important questions well, like, “What are the hidden risks in target date funds?”
|Date:||July 7, 2014|
|Appearance:||The Hidden Risks in Target Date Funds|
|Outlet:||Nightly Business Report on PBS|
“Wow, those guys must be millionaires!” I can recall uttering those words as a child, driving by the nicest house in our neighborhood—you know, the one with four garage bays filled with cars from Europe.
The innocent presumption, of course, was that our neighbors’ visible affluence was an expression of apparent financial independence, and that $1 million would certainly be enough to qualify as Enough.
Now, as an adult—and especially as a financial planner—I’m more aware of a few million-dollar realities:
1) Visible affluence doesn’t necessarily equate to actual wealth. Thomas Stanley and William Danko, in their fascinating behavioral finance book, The Millionaire Next Door, surprised many of us with their research suggesting that visible affluence may actually be a sign of lesser net worth, with the average American millionaire exhibiting surprisingly few outward displays of wealth. Big hat, no cattle.
2) A million dollars ain’t what it used to be. In 1984, a million bucks would have felt like about $2.4 million in today’s dollars. But while it’s quite possible that our neighbors were genuinely wealthy—financially independent, even—I doubt they had just barely crossed the seven-digit threshold, comfortably maintaining their apparent standard of living. To do so comfortably would likely take more than a million, even in the ’80s.
3) Wealth is one of the most relative, misused terms in the world. Relatively speaking, if you’re reading this article, you’re already among the world’s most wealthy, simply because you have a device capable of reading it. Most of the world’s inhabitants don’t have a car, much less two. But even among those blessed to have enough money to require help managing it, I have clients who are comfortably retired on half a million and millionaires who need to quadruple their nest egg in order to retire with their current standard of living.
The teacher couple, trained by reality to live frugally most of their lives, don’t even dip into their $400,000 retirement nest egg or their $250,000 home equity because they have two pensions and Social Security that more than covers their income needs. Their retirement savings is just a bonus.
But the lawyer couple, trained by reality to live a more visibly wealthy existence, aren’t even close to retiring with their million-dollar retirement savings. In order to be comfortable, they’ll need to have at least $4 million.
A million bucks, then, may be more than enough for some and woefully insufficient for others.
There’s no magic to a million in retirement, but as the Baby Boomer generation begins making the transition, it’s a question oft posed. In this Nightly Business Report clip, Sharon Epperson (CNBC) and I answer the big question: Is a million enough?
|Date:||June 5, 2014|
|Appearance:||Is a million dollars enough to retire?|
|Outlet:||Nightly Business Report on PBS|
We need not look far to learn that 401(k) plans are imperfect or worse, so instead of lumping on more criticism about how you and your employer have botched your 401(k), let’s discuss how to make the most of a not-so-great situation.
Step 1: Don’t blame shift. There is a time for criticism, so keep reading, but too many people use the imperfections in, or a lack of understanding of, their retirement plan to feed the self-deceptive siren’s call to inaction.
While most of the commentary these days regarding retirement is about the math and “science” of cash flow and portfolio management, there is also an art to retiring well. Making a graceful transition from the vocation that marks your life into whatever follows helps form your legacy—for better and worse.
Led Zeppelin was the best rock band of all time—at least in their time, and for many of us, still. Jimmy Page was the musical mastermind behind this super-group of savants, but it’s hard to imagine that they could’ve reached legendary status without Robert Plant. Every generation since has attempted to replicate Plant’s voice and stage presence. Although the band’s retirement was unplanned after drummer John Bonham’s death in 1980, Plant and Page’s work since is a fascinating case study in retirement.
Retire like Robert Plant…not like Jimmy Page
Robert Plant has explored, experimented and remade himself several times since retiring from Led Zeppelin. As I write, I’m listening to one of my favorite albums, Raising Sand, a Grammy-award winning collaboration between Robert Plant and Alison Krauss, a legend herself in the realm of bluegrass.
Maybe since it was his baby, Jimmy Page has struggled to ever let go of Zeppelin, a fact that was evident in his 2012 Rolling Stone interview. He’s struggled to retire well. He seems to have lived between a handful of attempted (and certifiably mediocre) Led Zeppelin reunion gigs, and implies Robert Plant is at fault for resisting a full-out remarriage.
It’s not easy to retire from the best gig you’ve ever had, but unwillingness to acknowledge that it’s over can be even more painful. Loosening your grip on the past, however, can free you up for a fulfilling and rewarding second act.
Retire like Michael Strahan…not like Brett Favre
I had to recuse myself from using my beloved Ravens’ Ray Lewis as the favorable example in this gridiron comparison to preserve objectivity, but objectively speaking, Michael Strahan’s exit from the winning New York Giants in Super Bowl XLII may indeed be a better example of one of the very few NFL players who managed to truly go out on top. Strahan capitalized on the Giant’s surprise win over the New England Patriots to position himself for a second and third career that now pits him against the less-than-menacing Kelly Ripa.
Brett Favre, on the other hand, who was the most exciting quarterback of a generation, couldn’t let go. He leads the NFL in retirement threats, retirements and comebacks, finally ending his career in a concussive fog as a Minnesota Viking. Favre wisely turned down a request from the St. Louis Rams just this week to replace injured Sam Bradford, citing his many concussions and subsequent memory loss. He can only hope to forget the sexting scandal that marred his good-old-boy reputation at the end of his career.
When you excel at your craft and you’re competitive, it’s hard to let go, but holding on too long can destroy your reputation, damage your legacy and hamstring the team you leave behind.
Retire like Sallie Krawcheck…not like John Thain
Sallie Krawcheck’s retirement was involuntary—she was fired from her position at Bank of America—but she still managed to do it gracefully. Krawcheck is the former lots-of-things Wall Street, having been at the helm of major divisions at Citi and more recently Bank of America, as the head of Global Wealth and Investment Management (including Merrill Lynch and U.S. Trust). But she doesn’t talk or act like most Wall Street execs, and not just because she’s a woman. She’s taken surprisingly principled stances on conflicts of interest, like the “cross-selling” mandate pushing Merrill brokers to sell banking products, and the touchy topic of regulatory reform within the industry. While maintaining her principles may have led (in part) to her forced departure from Wall Street, in retirement her striking combination of competency and transparency have earned her respect that few of her scandal-ridden colleagues enjoy.
John Thain has handled himself, well, differently. He’s the former Merrill Lynch head who infamously gave his office a $1.22 million dollar upgrade and paid out billions in bonuses to country club cronies as the American financial system came crashing down. Even the financial industry couldn’t stomach him and he was “tossed out on his ear” by then CEO of Bank of America, Ken Lewis. Thain is Wall Street excess personified and an easy target for the 99%, but don’t feel too bad for him; while he may have traded a $35,000 in-office toilet for “plastic and Formica,” he’s back on the scene with the $2 billion bailout beneficiary, CIT.
It’s much better to make a graceful early departure than to be thrown out in disgrace.
Three Keys To A Successful Retirement
What retirement lessons do Robert Plant, Michael Strahan and Sallie Krawchek teach us? Three keys to a successful retirement are to know when to leave, leave well and retire to something meaningful. You don’t have to be a rock star, a professional athlete or Wall Street royalty to model and benefit from these practices.
Last week, in my review of the Frontline program, “The Retirement Gamble,” I promised to follow-up with a short blog series giving concise direction on how to demystify some of the more confounding elements of personal finance, beginning with the foremost culprit of “The Gamble” (aside from J.P. Morgan Chase, of course)—the 401(k):
Recent action by the Labor Department requires more transparency in the reporting of fees in 401(k)s. “While the intent and spirit of the legislation was good, I’ve found the implementation was pretty ineffective,” says Josh Itzoe, author of Fixing the 401(k). “It’s possible to be compliant from a regulatory standpoint and still make the information totally confusing and unclear. I think that is where we are.” While you’re overcoming your shock that the government has failed to simplify the regulation of [anything] to a satisfactory degree, consider taking these three steps to unlock the mystery of your 401(k) or other employer sponsored retirement savings plan:
1. Educate yourself on the structure of your 401(k) and the associated fees. Yes, I know this likely falls just below rolling in poison ivy on the totem pole of ways that most of us would like to spend our time, but we sacrifice the privilege of voicing our displeasure with the state of our primary retirement savings vehicle when we don’t even understand its basic structure. Start with what you already likely know: Do you get a company match, and if so, how much do you have to contribute to reap its full benefit? Then, move on to the fine print describing your company’s requirement to actually follow-through on its match (they can likely skip matching in certain circumstances) and when it is paid. Review your investment options and their short-, mid- and long-term performance.
If you’re not satisfied with the amount of information provided, plug your mutual fund options into the “Quote” box in the top-center of Morningstar.com to see what they think of the fund. Theirs is not the last word, but their findings can add to the context of your decision-making. And while I believe that it can be worth it to pay truly gifted fund managers for outstanding work, 401(k) mutual fund options are notoriously mediocre. This means that finding the lowest cost funds in your composition of a diversified portfolio is of paramount importance. Emily Brandon’s article, “What You Need to Know About 401(k) Fee Reports,” offers a process designed to enlighten us on making the most of the new fee disclosures, which unfortunately are cryptic enough to render them nearly useless without guidance. If you end this journey of discovery just as (if not more) confused as when you began, get some help; preferably from someone who won’t turn your confusion into a sales opportunity.
2. Speak up! It’s a tiny minority of us who can go into the office the next day and restructure our employer-sponsored retirement plan, but wheels don’t squeak unless you turn them and we all know which wheels typically receive oil and in what order. “You may not have the power to change the plan, but you can and should provide feedback to your employer about the plan,” says Roger Bair, director of retirement plan services at the Financial Consulate, Inc. The chances are also good that your employer would benefit just as much from improving your 401(k) as you would, but it won’t be easy to affect change for numerous reasons. (Among those reasons, your boss might lose a golf buddy if the plan is replaced!) I wouldn’t necessarily recommend going quite as far as Maya in Zero Dark Thirty, writing the aggregate number of days you’ve been waiting for action on your boss’s office wall every morning, but pleasant persistence can go a long way.
3. Control what you can. My biggest concern with Frontline’s “The Retirement Gamble,” as well as other notable critiques of the financial industry’s retirement plan mismanagement, is the less-than-subtle implication that the financial industry is so bad and 401(k)s are so complex and the effort of saving enough is so monumental that the majority of Regular Joes can do little more than raise the white flag and give up on retirement savings. I agree with almost all of the criticism, but I’m unwilling to concede that the battle is lost. Bair guides that “you should use the best investments and make the best asset allocation you can given the tools that you have.” Itzoe encourages that the primary determinants of successful nest egg building—the amount saved, being globally diversified and choosing the best available funds with the lowest possible costs—still fall within our control.
In the 401(k), we see the mess created when corporate self-interest, profit motive in the financial industry and regulatory bungling collide, but for most of us, the 401(k) is still the best gig going for increasing the probability of a comfortable retirement. So get to know your plan. Better.