very interesting and timely perspective. states those 35 and under shouldn’t be 100% equities and should actually have a more balanced allocation, in aggregate. though this conclusion probably doesn’t affect us BSDs with 100% job security, giant emergeny funds and huge paychecks, it is probably appropriate for the masses.
The real solution is to educate these folks on why and how you use a 401K. This is not an emergency savings fund and thats why the government fines you 10% for pulling the money out early. If a company is giving a large match on savings, then sure take advantage of it and face the penalty if need be.
If their company isn’t giving a match or only gives a small one, then these young professionals need to be taught that a 401K isn’t the best place to save their money. Every dollar put in should be dedicated for retirement and if other needs, such as an emergency fund or credit card debt, haven’t been met then put that dollar into a more appropriate place. The advice shouldn’t be “keep putting your money into a 401K, just invest less aggressively because you might want to pull this cash out at an inopportune time”.
For those who have established an emergency savings fund and utilize a 401K dedicated for retirement, I would suggest that their long time horizon supports a large, if not 100% equity allocation.
^ i agree somewhat except during tail events where people with generally stable jobs and large emergency funds are unemployed so long that they need to dip into retirement savings dictates that 100% probably isn’t appropriate.
also, despite the good intentions, and often adequate knowledge, of the ~50% of young adults who raid their 401(k)s, they continue to do just that. i’m sure most who withdraw aren’t oblivious to the 10% fee. as advisors we only really have influence on asset allocation and have very little influence on clients’ withdrawal decisions.
studies have been undertaken about financial education and it is proven to be wholly ineffective in changing behaviour. this is why very little has been done to boost financial education in grade/secondary school despite calls for it over the past decade.
Yeah, you gotta wonder why all those minimum wage workers aren’t allocating properly to their 401ks.
The lure of 100% equities must be too tempting for them.
:-p
Financial education will never work because most people don’t care. They all say they should, but don’t. Good luck keeping the attention of someone while talking about time horizons over 6 months.
I was talking to a HCB the other day and she told me that it’s her husband’s job to take care of “money issues”.
“hmm, there are 8 choices so they all must be equally rewarding. I’ll just 1/n it.”
I was talking to one of the skirts at work a few months ago, she had been with the company 18 months and while the group of people were talking about the 401k plan she said she had never logged in to check it. Just set her % contribution on day 1 with HR and never looked again.
^ The truth of the matter is they don’t need to care if they’re hot. Their best 401k plan is convincing their husbands not to get a prenup.
401(k) - 100% Small Cap Index for me.
^ BSD
FT, Matt - What do you think about this article from a Canadian perspective?
I’m young (24) and I have a couple thousand in both RRSP and TFSA. I have enough money sitting in my chequing account to put more in both but I don’t have 100% job security. My TFSA is only cash but I plan on changing it soon. In my RRSP, I have a balance of both bonds and stocks but judging by the comments in the “what percentage of your personal portfolio is in bonds?” thread, I’m thinking of doing 100% in equity (passive investor of course). Maybe Vanguard such as VUN and VCN.
Thoughts?
because there is no penalty for withdrawing from a TFSA, and no “net” penalty from withdrawing from an RRSP in a low income year, the article states that you should certainly not be 100% equity if your job security is average or worse for the age group. basically, if there is ANY chance of you needed to liquidate these accounts to supplement your spending in the next 3-5 years, then you should have a balanced portfolio. as your degree of job securitiy is subjective, so too should be your asset allocation decision.
that said, i’m 30, have near 100% job security, relatively high family income, and i’m 50/50 right now for tactical reasons. i don’t buy into the “passive beats active always” because the average money manager does do better than his benchmark (when not including fees) over time. also, why would i be in this business if i didn’t think i could do better than people who know nothing about markets? for every nincompoop who blows up his retirement fund, there has to be a professional who captures that gain.
The average person does not need to go so far as to calculate their optimal asset allocation. The problem is not that they poorly diversified - it is that they are just not saving money in the first place.
The US savings rate is 5% - the Chinese savings rate is 50%. The median US car costs $31k. The median net worth of Americans between the ages of 35 and 44 in 2013 was below $50k. The average home size in the 1960s was 1600 sf. The average home size today is 2400 sf. Average household debt in the US is above $100k and 4x the average level in 1980, adjusted for inflation.
Before we can get people to really care about the strategy for optimal retirement savings, we must get them to give more than zero Fs in the first place.
When you have to dip in your funds for emergency, the TFSA is your first line. Therefore, have 100% of your RRSPs in equity. Have a more balanced approach for TFSA if you think you might need to dip in.
Don’t put 100% of your cash right away in equity as I sense you are not ready. You can DCA your funds.
Yup, you have a few financial planners saying “save”, but you have all the rest of society screaming from all directions “CONSUME, INCREASE DEBT, PUMP UP GDP NOW DAMMIT”! Now, add to that the internet, ApplePay, and an attention deficit disorder epidemic…
Last three years we saved 50%, 60%, and 70% of net household income. I’m retired now, early 40s. But most people are locked into the work-forever plan, if you can call it a plan.
My father is a couple years from retirement. I finally got my mother to let me check out their 401K. My father told me that his allocation was conservative, as he told the 401k years ago when he would retire and it adjusts accordingly. I assumed this meant a target date fund. Turns out the calculator put him in a very aggressive profile, because he was much younger then. The description of funds he was investing 70% in was extremely aggressive and significant time to retirement.
I have a friend who had a job for three years and never checked her 401k. Turns out the entire time, her 401k contributions plus 10% match were being held in 100% government treasuries. She started work in 2008, to give you some perspective on the expensiveness of that decision.
What’s the expense ratio?
This is spot on. People spend too much time worrying about what target date fund to put their money into when they should be more concerned that they’re not saving enough to retire at a reasonable age no matter what fund they put it in.
In general, people need to save 15% of their income (that number includes any company match) to meet their retirement goals. Once you’re saving that much, pretty much any target date fund can get you where you need to be. Though, obviously, you should buy ours.
i agree this is the prime issue. the article was more for advisors/planners who could potentially advise somebody like this one day. its how the financial industry can adapt to a growing problem and serve these irresponsible or down-on-their-luck clients better. those in the advisory business know there are handfuls of clients with great savings intentions but no follow through.
Depending on how you look at it, I have a ton of bond exposure. I owe $250k on my house at 4.4%, a ton of student loans at 6.8%, and a home-improvement loan at 9.9%. Does this count toward my allocation?