The $20,000 retirement plan
The average middle class American has only $20,000 in retirement savings, according to a new survey that shows large swathes of the public are aware of those shortfalls and feeling anxious about their golden years.
Wells Fargo surveyed more than 1,000 middle class Americans about the state of their savings plans. Roughly two-thirds of respondents said saving for retirement was “harder” than they had anticipated. A full one-third of Americans said they won’t have sufficient funds to “survive,” a glum assessment that flared out among the older respondents. Nearly half of Americans in their 50s shared that concern.
But perhaps the most startling response came from the 22% of Americans who said they would prefer to suffer an “early death” than retire without enough funds to support a comfortable standard of living.
You can now save more in your tax-deferred retirement accounts.
Good news: The IRS has bumped up retirement account contribution limits for 2015 to reflect cost-of-living increases. So if you’ve been wanting to sock away more in your tax-advantaged accounts, next year is your opportunity.
Today’s announcement raises the annual contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan by $500 to $18,000. The catch-up contribution limit for employees over age 50 also increased from $5,500 to $6,000.
IRA contribution limits and IRA catch-up contributions, however, will remain the same, at $5,500 and $1,000, respectively, meaning older workers can still set aside $6,500 a year in these accounts.
This follows Wednesday’s announcement that retirees will see a 1.7% cost-of-living bump in their Social Security benefits next year.
Contribution limits are reviewed and adjusted annually to reflect inflation and cost-of-living increases. Last year, 401(k) and IRA limits remained unchanged from 2013 levels because the Consumer Price Index had not risen enough to warrant an increase.
For more details about the changes and more information about the new gross adjusted income limits for certain tax deductions, see the table below or the IRS website.
Read more from the Ultimate Retirement Guide:
- How to Start Saving for Retirement
- How Much Money You’ll Need to Save for Retirement
- Why 401(k)s Are Such a Good Deal
Next year retirees will see their benefits rise by the inflation rate. But that may not be the best measure of seniors' true spending.
Social Security’s annual inflation adjustment is one of the program’s most valuable features. But it’s time to adjust the adjustment.
Retirees will get a 1.7% bump in their Social Security benefit next year, according to the Social Security Administration, which announced the annual cost-of-living adjustment (COLA) on Wednesday. Recipients of disability benefits and Supplemental Security Income also will receive the COLA.
That reflects continuing slow inflation in the economy—the COLA has averaged 1.6% over the past four years—but it’s not enough to keep up with the higher inflation retirees face.
My in-box fills up with angry e-mail messages about the COLA every year. So if you’re gearing up to accuse Washington politicians of conspiring against seniors, please note: By law, the COLA is determined by a formula that ties it to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is compiled by the U.S. Bureau of Labor Statistics (BLS).
There is good news about this year’s COLA: Beneficiaries will keep every penny. There won’t be any offset for a higher Medicare Part B premium, which typically is deducted from Social Security payments. The premium will stay at $104.90 for the third consecutive year.
Still, the COLA formula should be revised as part of the broader Social Security reform that Congress must tackle. Many economists and policymakers say the CPI-W doesn’t measure retiree inflation accurately.
“From an ideal math perspective, what you want is a calculation based on an index that matches retirees’ cost of living,” says Polina Vlasenko, a senior research fellow at the American Institute for Economic Research. “The CPI-W is constructed to measure spending patterns of urban wage earners, and it’s pretty clear that retired people spend differently than wage earners.”
A recent national survey by the Senior Citizens League illustrates the cost pressures seniors, especially those living on fixed, lower amounts of income, face. Half of retirees said their monthly expenses rose more than $119 this year, while an even higher percentage (65%) said their benefits rose by less than $19 per month.
Other research by the group, based on BLS data, shows that Social Security beneficiaries have lost 31% of their buying power since 2000. Among big-ticket items, the largest price hikes were for property taxes (104%), gasoline (160%), some types of food and healthcare expenses.
Low COLAs also cut into future benefits for Americans who are eligible for benefits (ages 62 to 70) but haven’t yet filed. When you delay taking benefits until a later age—say, full retirement age (66)—you get full benefits increased by the COLAs awarded for the intervening years.
COLAs are prominent in the debate over Social Security reform that is likely to be rekindled in the next Congress. COLA reform could involve more generous adjustments – or a benefit cut. A cut would be achieved by adopting the “chained CPI,” which some say more accurately measures changes in consumer spending by reflecting substitution of purchases that they make when prices rise. The Social Security Administration has estimated the chained CPI would reduce COLAs by three-tenths of a percent annually.
A more generous COLA would come via the CPI-E (for “elderly”), an alternative, experimental index maintained by the BLS that is more sensitive to retirees’ spending. That index generally rises two-tenths of a percent faster than the CPI-W.
Congress has been gridlocked on Social Security, but public opinion is clear. The National Academy of Social Insurance (NASI) released a national poll Thursday that shows 72% support raising benefits. The survey also asks Americans to say how reform should be paid for. The most popular options (71%) included a gradual elimination of the cap on income taxed for Social Security ($117,000 this year, and $118,500 in 2015) and a gradual increase over 20 years on the payroll tax rates workers and employers both pay, from 6.2% to 7.2%.
Poll respondents also backed adoption of a more generous COLA, such as the CPI-E.
“Seniors are noticing the very small COLAs, and they just have a feeling that prices are going up more than that,” says Virginia Reno, NASI’s vice president for income security policy. “If you measure the market basket separately for seniors, average inflation has been a bit higher because they spend a larger share of their money on healthcare, and for things like housing and heating.”
Read more from the Ultimate Retirement Guide:
Though they have an aversion to it, they'll find it'll be a staple in the elderly care programs they will eventually join
On Oct. 21, senior citizens in Merrimack, N.H. participating in the Meals on Wheels service waited eagerly to be delivered platters of frozen turkey meatloaf with mashed potatoes, corn, kidney beans and flax-seed bread. Those with slightly more traditional palates opted for a dish of liver and onions—frozen, too. But tell any millennial about the menus of programs like Meals on Wheels, a global delivery service of mostly frozen dishes to the elderly, and the response isn’t likely to be as welcoming.
It’s no secret that millennials have an aversion to frozen food. The marketing of TV dinners targets empty nesters, and those dropping frozen meals in their grocery carts are getting older and older. Younger generations are instead flocking to services like GrubHub, which delivers hot restaurant meals, or AmazonFresh, recently launched in New York City, which delivers fresh groceries.
In fact, research suggests that millennials have a fear of the lifestyles commonly associated with frozen food eaters: lonely elderly people whose only social interactions are with delivery volunteers, or physically limited seniors who stockpile food in the freezer in lieu of grocery shopping. Millennials have made it a goal to avoid that kind of life, studies say. According to a report by Edelman, millennials distinguish themselves from Generation X and the Baby Boomers by living more often with others, a testament to a shared fear of being alone. And a collective desire for a healthy lifestyle has made them more conscious in resisting the forces of aging, according to research by Nielsen and the National Marketing Institute.
The inescapable reality, though, is that someday millennials will age. While millennials’ preferences for convenience and health have driven the evolution of online food delivery services, the options for seniors, particularly those who are alone, low-income or face dietary restrictions, remain unchanged.
Part of the reason is science: flash freezing meals not only is convenient, but it also prevents bacterial growth, according to Greg Miller, CEO of Magic Kitchen, which serves many elderly customers. Additionally, Miller said that when thousands of dollars are spent to analyzing their specially-made meals’ nutritional content, freezing the meals is often the only viable option for elderly who require, for example, a week’s supply of low-sodium meals. “There’s always going to be a need for this particular group of individuals,” says Ellie Hollander, CEO of Meals on Wheels, which partners with companies like GA Foods and Golden Cuisine to craft similarly specialized meals. “That’s not going to be replaced by [online food delivery services]. That’s just a fact.”
Still, some reports have argued that America’s “love affair” with frozen foods is over. That may only be true for the commercial frozen food industry, which includes brands such as Lean Cuisine, Marie Callender’s and Healthy Choice. The industry’s sales are in decline: U.S. revenue fell 2% between 2013 and Aug. 2014, the first drop in recent years, according to Nielsen data. Similar to research on millennials’ preferences, a 2012 survey found that shoppers were turning away from commercial frozen food for nutritional reasons. But that doesn’t mean the demand for senior services’ frozen foods—meals individually tailored to dietary needs—is also melting. It’s actually the opposite: Miller says Magic Kitchen has grown more than 40% year-over-year, while Meals on Wheels now serves over 1 million meals each day.
Part of that demand growth is attributed to fewer federal investments in the Senior Nutrition Programs authorized by the Older Americans Act, which was passed in 1965 to provide community services to elderly citizens. As a result, seniors’ nutrition appropriations, which subsidize meal delivery services, have plummeted since 2009.
The lack of federal funding will only boost the proportion of American seniors who face “the threat of hunger,” which was 15.3% in 2012, according to a recent report by the National Foundation to End Senior Hunger. The percentage, which has risen from about 11% in 2001, also varies widely across state, but the lowest rate is still 8% in Minnesota. (Click on states in the map below to learn their exact rates.)
The figures are perhaps the most unsettling for millennials, some of whom, barring significant changes, will inevitably find themselves someday as senior citizens unsure where to obtain their next meal. Worse, demographic trends are making it harder for millennials to escape this fate. The 60+ U.S. population is projected to double between 2010 and 2050, with the proportions of single-person American households higher than ever, according to the Census Bureau. Meanwhile, the prevalence of cooking meals at home has decreased significantly across all socioeconomic groups since the 1960s, according to NIH research.
In other words, the stars are aligned for some millennials, whether they believe it not, to subscribe in their sunset years to elderly food services that serve frozen meals. And that’s only if they’re fortunate enough to obtain access to programs like Magic Kitchen or Meals on Wheels that carefully craft dishes to meet their nutritional needs.
Still, services popular with millennials now, like GrubHub or AmazonFresh, have the opportunity to remain popular with millennials by tapping into the expanding market of elderly meal services. In fact, both GrubHub and Amazon aren’t opposed to filling the smaller yet critical market of individualized elderly meal plans. “We’ve found that we have a wide range of customers,” an Amazon spokeswoman said in response to AmazonFresh’s target demographic. “Our job is to listen to our customers, invent on their behalf, and let them decide.” A GrubHub spokeswoman similarly said that while GrubHub is “focused on the opportunities within our current market,” that doesn’t mean “[an elderly meal service] isn’t something we may look into in the future.”
After all, data makes clear that senior services are in need assistance, too. And these programs, like Meals on Wheels, are more than ready to adapt to the digital platforms currently serving their future customers. “[Meals on Wheels] is a great public-private partnership,” says Hollander. “And there’s no reason why we can’t be excited that [services like GrubHub] may become partners as that same population ages.”
It's no joke. As part of its rebranding campaign, investment firm Voya will give money to the newest of new parents.
Lucky for you if you’re in labor right now.
A company called Voya Financial has announced that it will give every baby born today—Monday, Oct. 20, 2014—500 bucks.
The promotion, timed to coincide with National Save for Retirement Week, is part of a marketing campaign to alert the public that the business that once was the U.S. division of ING is now a separate public company with a new name.
Get out the castor oil and order in Indian if you’ve already hit 40 weeks, because the offer is only available to those who exit the womb before midnight tonight—though soon-to-be-sleep-deprived new parents have until December 19 to register a child.
Voya estimates that it may have to kick in as much as $5 million, since there are about 10,000 babies born every day in the U.S.
While the company has promised that families will not have to sit through a marketing pitch to get the money, and that the baby’s information would be kept private, this special delivery still comes with a catch.
The money is automatically invested into Voya’s Global Target Payment Fund, which according to Morningstar has above-average costs and below-average performance.
Regarding the fees, Voya’s Chief Marketing Officer Ann Glover says that the funds Morningstar uses as comparison are not apples to apples. In any case, Glover says families are free to sell out of the fund if they so choose. “Of course, we would hope people would hold on to the investment,” she adds.
But hey, money is money, so if you’re due, you may as well take what you’re due.
And for those mamas and papas whose progenies aren’t quite ready to make their debuts? While you won’t get money from Voya, you may have other opportunities to get big bucks for your little one.
Start by checking in with your employer to see whether the company helps with college savings. A growing number do. Unum, for example, offers its workers with newborns $500 towards a college savings account.(Our Money 101 can help you find the best 529 college savings plan.)
Also, in several communities around the country, charitable or government programs seed savings accounts for kids. For example, residents of northern St. Louis County in Missouri can get $500 through the 24:1 Promise Accounts. Babies born in Connecticut get $100, plus $150 in matching funds by age four, thanks to the CHET Baby Scholars program.
“This is gaining significant momentum nationwide,” says Colleen Quint, who heads one of the nation’s most generous free savings program, the Harold Alfond College Challenge. Started by the founder of Dexter Shoes, the charity gives every resident newborn in Maine a $500 college savings account.
In fact, Mainers can get the most free money for their children according to a survey of such programs by the Corporate for Enterprise Development, which has gathered details on at least 29 free childrens’ savings programs.
Besides the $500 college savings account, a state agency will match 50¢ for every $1 parents contribute each year up to $100 a year and $1,000 over a child’s lifetime. So Mainers can, in theory at least, get up to $1,500 in free college savings money on top of any additional freebies they can get from companies.
That should be more than enough to buy a chemistry textbook in 2032.
Worried about your children's retirement? With the help of a few carnival tickets, says one financial adviser, you can get them started early on saving.
A new type of retirement worry has recently surfaced among my clients. These investors are concerned not just about their own retirement, but about their children’s and even grandchildren’s retirement as well.
Much of our children’s education is spent preparing them for their careers. But in elementary school through college, there is little discussion about what life is like after your career is over. Little or no time is spent educating children about the importance of saving — much less saving for their golden years.
When it gets down to the nitty-gritty, parents want to know two things: One, at what age should they start teaching their children about saving? And two, what tactics or strategies should they use to help their children understand the importance of saving?
While parenting advice can be a very sensitive subject, discussing these questions has always worked out well for my clients and me. I keep the conversation focused around concerns they have brought up. In a world where student debt is inevitable and other bills such as car loans and mortgage payments add up quickly, parents are concerned for their child’s financial future. We now live in a debt-ridden, instant-gratification society, so how can our children live their lives while still saving for the future?
Here is what I tell my clients:
You can start teaching children the value of saving as early as two years old. At this age, most children don’t necessarily grasp the concept of money, so instead I recommend the use of “tickets” or something similar — maybe a carnival raffle ticket. As a child completes chores or extra tasks, he or she receives a ticket as a reward. The child saves these tickets and can later cash them in at the “family store.” This is where parents can really get creative: The family store consists of prepurchased items like toys or treats, and each item is assigned a ticket value. The child must exchange his or her hard-earned tickets to make a purchase.
I’ve seen first hand, and been told by others, that the tickets end up burning a hole in children’s pockets. They want immediate gratification, so they cash their tickets in for smaller, less expensive prizes. This is where parents can begin to really educate kids. Through positive reinforcement, they can encourage their children to save their tickets in order to purchase the prize they are really hoping for.
Eventually, saving becomes part of the routine. As children receive tickets, they stash them away for the future with the intentions of buying the doll, bike, video game or whatever their favorite prize may be.
As the child gets older, parents can transition to actual money using quarters or dollars. Now the lesson has become real. Parents can also implement a saving rule, encouraging the child that 50% of the earnings must go straight to the piggy bank. By age five, most children can grasp the concept of money and can begin going to an actual toy store to pick out their prizes. By starting out with tickets, parents are able to educate children about the power of saving at a younger age. By switching over to real money, children can then begin to learn the importance of saving cash for day-to-day items while still setting aside some money for later.
While this tactic may seem like it’s just fun and games, I have received feedback from several clients and family friends that it does in fact instill fiscal responsibility at a young age. Most importantly, I have seen it work first hand. My wife and I used this system with our five-year-old daughter. She was like most children in the beginning and wanted to spend, spend, and spend. Now, it is rare that she even looks at her savings in her piggy bank. She has graduated to real money and seems to really value its worth. She identifies what she wants to buy and sets a goal to set enough money aside for it. Before purchasing, she often spends time pondering if she actually wants to spend her hard earned money, or if she wants to continue saving it. In less than a year, she developed a true grasp on what it means to save and why it is important.
By implementing this strategy, financial milestones like buying their first car, paying for college, or purchasing their first home could potentially be a lot easier for both your clients and their their children. And the kids will learn the value of saving for their retirement, too.
Sean P. Lee, founder and president of SPL Financial, specializes in financial planning and assisting individuals with creating retirement income plans. Lee has helped Salt Lake City residents for the past decade with financial strategies involving investments, taxes, life insurance, estate planning, and more. Lee is an investment advisor representative with Global Financial Private Capital and is also a licensed life and health insurance professional.
Q: I want to invest $5,000 for my 35-year-old daughter, as I want to get her on the path to financial security. Should the money be placed into a guaranteed interest rate annuity? Or should the money go into a Roth IRA?
A: To make the most of this financial gift, don’t just focus on the best place to invest that $5,000. Rather, look at how this money can help your daughter develop saving and investing habits above and beyond your contribution.
Your first step should be to have a conversation with your daughter to express your intent and determine where this money will have the biggest impact. Planning for retirement should be a top priority. “But you don’t want to put the cart before the horse,” says Scott Whytock, a certified financial planner with August Wealth Management in Portland, Maine.
Before you jump ahead to thinking about long-term savings vehicles for your daughter, first make sure she has her bases covered right now. Does she have an emergency fund, for example? Ideally, she should have up to six months of typical monthly expenses set aside. Without one, says Whytock, she may be forced to pull money out of retirement — a costly choice on many counts — or accrue high-interest debt.
Assuming she has an adequate rainy day fund, the next place to look is an employer-sponsored retirement plan, such as a 401(k) or 403(b). If the plan offers matching benefits, make sure your daughter is taking full advantage of that free money. If her income and expenses are such that she isn’t able to do so, your gift may give her the wiggle room she needs to bump up her contributions.
Does she have student loans or a car loan? “Maybe paying off that car loan would free up some money each month that could be redirected to her retirement contributions through work,” Whytock adds. “She would remove potentially high interest debt, increase her contributions to her 401(k), and lower her tax base all at the same time.”
If your daughter doesn’t have a plan through work or is already taking full advantage of it, then a Roth IRA makes sense. Unlike with traditional IRAs, contributions to a Roth are made after taxes, but your daughter won’t owe taxes when she withdraws the money for retirement down the road. Since she’s on the younger side – and likely to be in a higher tax bracket later – this choice may also offer a small tax advantage over other vehicles.
Why not the annuity?
As you say, the goal is to help your daughter get on the path to financial security. For that reason alone, a simple, low-cost instrument is your best bet. Annuities can play a role in retirement planning, but their complexity, high fees and, typically, high minimums make them less ideal for this situation, says Whytock.
Here’s another idea: Don’t just open the account, pick the investments and make the contribution on your daughter’s behalf. Instead, use this gift as an opportunity to get her involved, from deciding where to open the account to choosing the best investments.
Better yet, take this a step further and set up your own matching plan. You could, for example, initially fund the account with $2,000 and set aside the remainder to match what she saves, dollar for dollar. By helping your daughter jump start her own saving and investing plans, your $5,000 gift will yield returns far beyond anything it would earn if you simply socked it away on her behalf.
Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.
It started with leaving my boyfriend my share of the rent — then things got complicated
I’m going to die, I reminded my boyfriend. My eventual death was something I’d been mentioning to lots of people, on Facebook and at engagement parties and at my high-school reunion.
It wasn’t that I thought death was going to come any time soon or in any special way, it’s just that, as they say on Game of Thrones, all men must die. So I was writing a will. I’d downloaded a template. I’d filled it out. I just hadn’t signed it yet, and in the mean time it had become my favorite topic of conversation: I’m going to die, we’re all going to die, I’m filling out paperwork about it, what’s new with you?
I asked my boyfriend: Is there anything else you want me to leave you? Besides my share of the rent. Besides the fish tank and the fish. Besides the coffee table, the pots and pans, the things that I call ours that are legally mine.
He said: Yes, but don’t tell me what it is. Make it something special.
That was a good answer, which wasn’t surprising. He takes deep questions seriously, and we’re well past the point where you have to act like it’s awkward to imply that your relationship will exist more than a few years in the future. So of course he had a good answer — but it was also a difficult one. What object that I owned could possibly say what I needed it to? There was, it must be said, not too much to choose from.
That’s a big part of the reason why young unmarried people with no children — that’s me: 28, legally unattached, childless — don’t usually bother with a will. Unlike a medical directive, which everyone should have, wills are something we can do without. The law of intestacy, the statutes that cover what happens when you die without said last testament, should take care of you just fine unless you’re very wealthy, whereas I fall into the It’s A Wonderful Life category: worth more dead than alive. I’m living comfortably, but my life-insurance policy is my most valuable asset.
Plus, most young people don’t need a will for an even more basic reason. Most of them don’t die.
However, even if death is a constant, life has changed. Last year, the U.S. Department of Health and Human Services released a report finding that nearly half of American women 15–44 cohabitated with a partner prior to marriage, using data from 2006–2010. That was a major increase from past studies, and by now the numbers may well be even higher. A cohabitating partner is entitled to nothing when the other dies. Marriage and children are also coming later in life, which means that people are acquiring more wealth before the laws regarding spousal inheritance kick in and before they have to choose a guardian for their child. So for people like me, without a will, there’s no way to say give this thing to my friend, give this thing to my brother, donate this thing to charity.
Hence, my will obsession. If all goes according to plan, it will be the umbrella that keeps the rain from falling, rendered obsolete within a few years. Marriage and children and my inevitable Powerball victory will change my priorities, and I’ll have to write a new one. But, as anyone who’s ever thought about a will must have realized, not everything goes according to plan.
Given changing social norms, estate planning ought to be a mainstay for millennial trend-watchers, except that there’s no way to know how many of us are actually out there thinking about the topic. There’s no way to know how many wills there are, period. Lawrence Friedman, a professor at Stanford Law and the author of Dead Hands: A Social History of Wills, Trusts and Inheritance Law estimates that — though there’s no way to track them — wills may be getting more common as popular awareness increases. A century ago, even counting the super-wealthy, he thinks probably half of the population gave it a thought. But, he says, the role of wills is also changing, as people live longer and are more likely to give their children money while everyone is still alive.
What’s not changing is that wills are fascinating to think about. Whether it’s the buzzy economist Thomas Piketty discussing the way inherited wealth affects society or a historian analyzing Shakespeare’s bequeathing his “second-best bed” to his wife, people who look at wills see more than what the dead person wants to do with his stuff. “I used to say to my class that what DNA is to the body this branch of law is to the social structure,” Friedman puts it.
Though it may seem obvious today that each adult has the right to leave his property to whomever he chooses, that privilege isn’t necessarily a foregone conclusion. Historically, there have been two competing theories behind inheritance law. One side holds that having a will is an inalienable right; the 17th century scholar Hugo Grotius wrote that, even though wills can be defined by law, they’re actually part of “the law of nature” that gives humans the ability to own things. John Locke agreed: if we believe property can be owned, it follows that we must believe that ownership includes the right to pass that property to whomever the owner chooses.
On the other hand, there’s just as long a tradition of the idea that wills are a right established by government and not by nature, because, not to put too fine a point on it, you can’t take it with you. If ownership ends at death, the state should get to decide how inheritance works, for example by saying that all property must always go to the eldest son, or by allowing children written out of a will to appeal to the state. Perhaps due to colonial American distaste for the trappings of aristocracy, the U.S. ended up with the former system — and Daniel Rubin, an estates lawyer and vice president of the Estate Planning Council of New York City, says it’s a right worth exercising. “For most young people, it’s not going to be relevant. But it’s a safeguard. People should appreciate the opportunity to do what they want with their stuff,” he says. “We’ve got a concept in the United States of free disposition of your wealth. You can choose to do with it whatever you want.”
Most wills written by young people won’t be read — except maybe by our future selves, nostalgic for the time when a $20 ukulele was a prized possession — and the ones that will be seen will be sad. If I die tomorrow, that will be what’s known as an unnatural order of death, the child going before the parents. Inheritance is not meant to flow upward. On that, tax law and the heart agree. It’s one area where millennials’ will-writing and older generations’ diverge: usually, estate law is a happier field than one might expect, something I’ve been trying to keep in mind. Rubin says he cannot imagine practicing any other area of law and finding it so rewarding.
“It’s never sad. Sometimes people are reluctant to deal with these issues. Perhaps they feel it brings bad luck although they rarely express it that way. It’s probably that they just don’t see the need to do it because they don’t think they’re going to die soon,” he says. “It’s almost uniform that even the most reluctant clients will sign their wills and then leave my office and feel great.”
Of course, it’s not as if “what if I die” is a rare thought, even for people under 30. Tom Sawyer took it to extremes; Freud thought we’re all itching to find out. People will be sad, we hope. Maybe we care about funeral arrangements, like the tragic Love, Actually character whose pallbearers march to the sound of the Bay City Rollers. Maybe we think we know what comes next; maybe we think nothing does. Maybe we’ve thought about who gets the heirlooms, the things that always carry a whiff of death about them.
What happens to the ordinary stuff that fills our homes is less likely to cross our minds. And lot of what we have, or at least what I have, is just crap on some level, mostly. That used starter-level Ikea, left behind by an old roommate who moved to California, isn’t exactly something I’d pass down. My most valuable possessions are mostly Bat Mitzvah gift jewelry. And my favorite possessions aren’t necessarily valuable. And if I did give these things away, how would they be received?
Once, I got a gift from a family friend days before she died. It was a beautiful silk scarf. The death was not unexpected, but I didn’t write a thank-you note in time. The envelope meant for that task was on my desk for years. It was hers, though she never got it, so I couldn’t send it to someone else. Nor could I bring myself throw it away. So I put it aside, indefinitely, until I moved apartments and it was lost in the shuffle, quite literally, in a box marked “stationery.” I didn’t want my crap to become that envelope, useless and painful and eventually lost. Potential candidates: an Altoids tin full of spare buttons, my half-filled journals, decade-old mix tapes; pens and pencils, giveaway tote bags, decks of cards, reference books; nice things like a painting, a laptop, that scarf; the stuff that goes unnamed in the will, under the clause that includes the words “all the rest of my estate.”
The things we leave behind can be heavy. Perhaps the most special something I could leave my boyfriend would be the freedom not to carry me with him. I was reminded of a poem that the rabbi always reads during the memorial portion of the Yom Kippur service. “When all that’s left of me / is love, / give me away,” it ends. I’d never really thought I was paying attention during that part, but it was there, in my brain, waiting for such a moment. (I looked it up; it’s called “Epitaph,” by Merrit Malloy).
That’s the other option — and, for a while, despite having spent so much time thinking about my will, I was tempted. I could write a simpler will, with only the instruction to give everything to charity, or I could follow the long-standing young person’s tradition and just scrap the whole endeavor.
Except stuff is the only language left to speak. Even Rubin, who says his work is 97% concerned with money rather than objects, knows the feeling: he has a samovar that came to America with his family when they left Eastern Europe with almost nothing. It’s worth little but referred to throughout his life by his mother as his yerushe, Yiddish for inheritance. And “leave me something special” wasn’t all that my boyfriend said. It’s sad to think about, he said, but I like the idea of being named in your will. It’s a privilege to hear someone speaking to you when you thought the chance was gone, he said. No matter what it says in the will, he said, I’ll be happy to hear your voice. He has a point. After all, the verb “bequeath” is from an Old English word meaning “to speak.”
So I decided not to give up on the will. I’ll give my junk and my money to the people I love — though I did end up adding two more clauses before I felt finished. First, I added a few sentences in my own words to the legalese of the template I’d found online: don’t feel bad if you have to get rid of something, I told my heirs. Legally enforceable? No. Worth saying? Yes. Second, I found that something special, something not too heavy.
I printed the will. I found some witnesses and we signed the paper. I folded it up and put it in an envelope and put that envelope somewhere safe. And then I went back to my life.
Maybe a 401(k) loaded with stocks isn't the best savings tool for some young people.
If you are in your 20s or early 30s, and you ask around for retirement advice, you will hear two things:
1. Put as much as you possibly can, as soon as you can, into a 401(k) or Individual Retirement Account.
2. Put nearly all of it into equities.
There’s a lot of common sense to this. Saving early means you can take maximum advantage of the compounding of interest. And your youth makes it easier for you to bear the added risk of equities.
But life is more complicated than these simple intuitions suggest. Here’s a troubling data point: According to a Fidelity survey of 401(k) plan participants, 44% of job changers in their 20s cashed out all or part of their money, despite being hit with taxes and penalties. Switchers in their 30s were only a bit more conservative, with 38% cashing out.
You really don’t want to do this. But let’s get beyond the usual scolding. The reality that so many people are cashing out is also telling us something. Maybe a 401(k) loaded with stocks isn’t the best savings tool for some young people.
The conventional 401(k) advice—which is enshrined in the popular “target-date” mutual funds that put 90% of young savers’ portfolios in stocks—imagines twentysomethings as the ideal buy-and-hold investors, as close as individuals can get to something like the famous, swashbuckling Yale University endowment fund. Young people have very long time horizons and no need to sell holdings for current income, the thinking goes, so why not accept the possibility of some (violently) bad years in order to stretch for higher return? But on a moment’s reflection on what life is actually like in your 20s, you see that many young people are already navigating a fair amount of economic risk.
Take career risk. On the plus side, when you’re young you have more years of earnings ahead of you than behind you, and that’s a valuable asset to have. Then again, you also face a lot of uncertainty about how big those earnings will be. If you are just gaining a foothold in your career, getting laid off or fired from your current job might be a short-term paycheck interruption—or it could be the reversal that sets you on a permanently lower-earning track. You may also be financially vulnerable if you still have high-interest debts to settle, a new mortgage that hasn’t had time to build up equity, or low cash reserves to get your through a bad spell.
This is why Micheal Kitces, a financial planner at Pinnacle Advisory Group in Columbia, Md., tells me he doesn’t encourage people in their 20s to focus on building their investment portfolio. You almost never hear that kind of thing from a planner, so let me clarify that he’s not saying you should spend to your heart’s content. (Kitces is in fact a bit stern on one point: He thinks many young professionals spend too much on housing.) He’s talking about priorities. For one thing, you need to build up that boring cash cushion. Without it, you are more likely to be one of those people who has to cash out the 401(k) after a job change.
Even before that’s done, you’ll still want to aim to put enough in a 401(k) to max out the matching contributions from your employer, if that’s on the table. (Typically, that’s 6% of salary.) So maybe all or most of that goes in stocks? An attention-getting new brief from the investment strategists Research Affiliates argues “no”—that instead of putting new savers into a 90%-equities target date fund, 401(k) plans should get people going with lower-risk “starter portfolios.”
I’m not sold on all of RA’s argument, which drives toward a proposal that 401(k)s should include unusual funds like the ones RA happens to help manage. But CEO Rob Arnott and his coauthor Lilian Wu offer a lot to chew on. They make two big points about young people and risk. One’s just intuitive: If you have little experience as an investor and quickly get your hat handed to you in a bear market, you could be so scarred from the experience that you get out of stocks and never come back. At least until the next bull market makes it irresistible.
The other is that 401(k) plan designers should accept the fact—all the advice and penalties notwithstanding—that many young people do cash them out like rainy-day funds when they lose their jobs. And so the starter funds should have a bigger cushion of lower-risk assets. That’s especially important given that recessions and layoffs often come after big market drops, so the people cashing out may well be selling stocks at exactly the wrong moment, and from severely depleted portfolios.
RA thinks a portfolio for new savers should be made up of just one third “mainstream” stocks, with another third in traditional bonds and the last third in what it calls “diversifying inflation hedges.” That last bit could include inflation protected Treasuries (or TIPS), but also junk bonds, emerging markets investments, real estate, and low-volatility stocks. Whatever the virtues of those investments, it seems to me that a starter portfolio should be easy to explain to a starting investor. “Diversifying inflation hedges” doesn’t sound like that.
But the insight that new investors might not be immediately prepared for full-tilt equity-market risk is valuable. Many 401(k) plans automatically default young savers into stock-heavy target date funds, but they could just as easily start with a more-traditional balanced fund, which holds a steady 60% in stocks and 40% in bonds. Perhaps higher risk strategies should be left as a conscious choice, for people who not only have a lot of time, but also a bit more market knowledge and a stable financial picture outside of their 401(k).
The trouble is, most 401(k) plans don’t know much about an individual saver besides their age. The 401(k) is a blunt, flawed tool, and just putting different kinds of mutual funds inside of it isn’t going to solve all of the difficulties people run into when trying to save for the future. Arnott and Wu’s proposal doesn’t do anything about the fact that using a 401(k) for rainy days means paying steep penalties. And it doesn’t help people build up the cash reserves outside their retirement plans that they’d need to avoid that.
As boomers head into retirement, we’ve all become very aware of the importance of getting people to prepare for life after 65. But millennials also need better ideas to help get them safely (financially speaking) to 35.