Avoiding Mistakes with Your Largest Assets – Part 1

file7001246481267For many individuals, their house and retirement plan represent their largest assets (aside from human capital, the ability to produce income). Financial mistakes, particularly mistakes later in your working life, can have long lasting impacts on lifestyle choices. The philosophy and approach towards managing these assets can make all the difference. In this article, we will discuss retirement plans and then review financial issues with your house in part 2.

 

“Chocolates or Banana?”

Pioneering research on human behavior and messaging in retirement plans by Professor Shlomo Benartzi at UCLA present us with some interesting insights. His TED video on “chocolates or banana is funny, yet true. As the video describes, many investors confront difficulty with decisions that bring “tomorrow into today”. Our 3 decades of experience in working with individuals in the run-up period before retirement, ( the 5-15 years prior), echoes his findings that good intentions don’t necessarily equate into actions.

There have been thousands of articles written about the shortcomings of 401(k) plans (and their cousins 403(b) and 457 plans). In many of these plans that we see, plan sponsors often confuse more choices with better results. Actually, because of “the choice paradox”, if the number of choices is too large, many individuals can’t decide. Costs can also be an issue. Despite all these problems, tax-deferred savings plans can represent a smart way to prepare financially for retirement.

 

Something is Better than Nothing

Sometimes, the quality of the 401(k) is so lacking that employees opt not to participate in favor of saving outside the plan. This may be the classic “chocolates or banana” syndrome as most investors can’t muster the discipline needed to save regularly without the 401(k) payroll deduction routine.

Recent statistics have shown a slight drop in 401(k) plan participation despite auto-enrollment features ,(where you have to “opt-out”), at many employers. This coincides with a sharp increase in 401(k) plan loans, hardship withdrawals and cashing out the entire plan. In these cases, the plan balances represent an asset that is often tapped when employment circumstances change. While it seems benign, it can represent a big mistake when these assets are not available later for their intended purpose. This “leakage” of assets is a huge socio-economic problem going forward. Some estimates peg the cost of the untimely withdrawals and foregone earnings at $1 trillion over the coming decade.

Some retirement savings is always better than no retirement savings. Individuals who are starting late are still ahead of those who never start. That is the message we need to convey. True, most individuals aren’t saving enough but let’s address one issue at a time. The biggest mistake is to just put it off another day. Ready for a real conversation?

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