MONEY advice

Help! My Friends Aren’t Saving For Retirement. What Can I Do?

Here's your chance to give your financial advice in the pages of MONEY magazine.

Did you ever want to be a personal-finance advice columnist? Well, here’s your chance.

In MONEY’s “Readers to the Rescue” department, we publish questions from readers seeking help with sticky financial situations, along with advice from other readers on how to solve those problems. Here’s our latest reader question:

What can I do about my friends who are 15 years from retirement and not saving for it?

What advice would you give? Fill out the form below and tell us about it. We’ll publish selected reader advice in an upcoming issue. (Your answer may be edited for length and clarity.)

Please include your contact information so we can get in touch; if we use your advice in the magazine, we’d like to check with you first, and possibly run your picture as well.

Thank you!

To submit your own question for “Readers to the Rescue,” send an email to social@moneymail.com.

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MONEY Markets

Warren Buffett Tells You How to Handle a Market Crash

Berkshire Hathaway Chairman and CEO Warren Buffett
What would Buffett do? Nati Harnik—AP

Are you starting to panic? Heed the advice of the Oracle of Omaha.

Warren Buffett has never been shy about packing lessons for successful investing into his annual letter to shareholders. That letter is a treasure-trove of insight, presented in a folksy manner that is not only easy to read but incredibly entertaining.

With the market tumbling we’re all likely in need of a few doses of Warren’s unpretentious advice, so I dug through his past shareholder letters to find some gems that may help us navigate the current market drop and build a bigger nest egg for retirement.

1. “It’s better to have a partial interest in the Hope diamond than to own all of a rhinestone,” wrote Buffett in 2013.

Buffett is always hunting for great companies that he can buy for Berkshire Hathaway shareholders, but if he can’t buy the whole company, he’s OK with owning a smaller piece of it instead. Applying this advice to our own investments means spending less time considering how many shares of a company we can buy and more time figuring out where we believe the company will be in ten years. Doing that will help us avoid the pitfall of foregoing investments in great companies like Amazon AMAZON.COM INC. AMZN -0.7484% ) or Priceline THE PRICELINE GROUP INC. PCLN -1.6346% when they’re on sale to buy lower quality companies with smaller share prices.

2. “A ‘normal year,’ of course, is not something that either Charlie Munger, Vice Chairman of Berkshire and my partner, or I can define with anything like precision,” wrote Buffet in 2010.

Sure, the average annual return for the S&P 500 has been 8.14% over the past decade, but assuming that will be our return this year, next year, or any year is folly. Returns are volatile and will continue to be volatile, so we should focus less on the returns for any one period of time and instead focus on buying great companies and socking them away. Consider this point: While the S&P 500 has experienced plenty of fits-and-starts over the past 10 years, those who have owned it all along are up 103%.

3. “Long ago, Charlie laid out his strongest ambition: ‘All I want to know is where I’m going to die, so I’ll never go there,'” wrote Buffett in 2009.

Buffett avoids businesses whose future he can’t evaluate. Instead, he focuses on finding businesses that offer a predictable profit for decades to come. Taking the long-haul approach to finding great companies goes far beyond identifying the next big thing — after all, during the Internet boom there were plenty of Internet companies that soared on expectations rather than profit, and many of those companies have since gone bankrupt. Instead, we should be investing in companies we can understand that are likely to remain winners.

4. “We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback,” wrote Buffett in 2009.

Warren’s cash stockpile is a thing of legend, and while that cash hoard holds back his returns in periods of growth, it also protects him when markets turn sour. Importantly, it also gives him the financial flexibility to take action and buy when prices are right. That plan-ahead mentality is something every investor can embrace by making sure there’s always some dry-powder around to deploy during the market’s inevitable declines.

5. “We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly — or not at all — because of a stifling bureaucracy,” wrote Buffett in 2009.

Buffett doesn’t hesitant when he’s presented with an idea that hits the mark. He recognizes that he won’t be right every time, but he also believes that taking action is critical to realizing the potential of an opportunity. As investors, we can emulate Buffett’s approach by making sure that once we’ve done our due diligence and picked our favorite investments we take action and buy, regardless of the market’s short-term machinations.

6. “Unlike many business buyers, Berkshire has no ‘exit strategy.’ We buy to keep. We do, though, have an entrance strategy, looking for businesses in this country or abroad…available at a price that will produce a reasonable return. If you have a business that fits, give me a call. Like a hopeful teenage girl, I’ll be waiting by the phone,” wrote Buffett in 2005.

Buffett keeps strictly to his investment discipline, but he also keeps an open mind to great ideas that fit into his strategy. Those ideas can come from various places. His acquisition of Clayton Homes, for example, was sparked by an autobiography of Clayton’s founder Jim Clayton which had been given to him as a gift by some University of Tennessee students. Keeping open to opportunities, regardless of their origin, may help us find worthwhile investments for the long term, too.

7. “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful,” wrote Buffett in 2004.

Buffett knows that emotion is a dangerous weapon that, if used incorrectly, can result in significant loss — and, if used correctly, can result in significant gain. Emotional reactions to surging or descending markets can make people buy when they should sell and sell when they should buy. Buffett often compares taking advantage of market slides to shopping for groceries. Last week on CNBC he summed it up by saying, “If you’re buying groceries, you like it when prices go down next week. And you like it if they go down further the next week.” Just as we like getting a good deal on the items at the grocery store we would be buying anyway, we should also be fans of getting a good deal on our favorite companies.

Following in Buffett’s footsteps

Buffett has no idea whether he’ll outperform the S&P 500 over the next year, but he does know that Berkshire Hathaway’s book value has grown a compounded annual 19.7% over the past 49 years. Similarly, we don’t know if our investments will outperform the market daily, weekly, or yearly, either. What we can feel pretty good about is the knowledge that investing in great companies like Coca Cola THE COCA COLA CO. KO -0.1475% and Wells Fargo WELLS FARGO & CO. WFC -0.555% — two companies that are long-standing Buffett holdings — may help put us on a path to a less-worrisome retirement.

MONEY mortgages

The Surprising Threat to Your Financial Security in Retirement

House made out of dollar bills with ominous shadow
iStock

More Americans could face a housing-related financial hardship in retirement, according to a new Harvard study.

America’s population is going to experience a dramatic shift during the next 15 years. More than 130 million Americans will be aged 50 or over, and the entire baby boomer generation will be in retirement age — making 20% of the country’s population older than 65. If recent trends continue, there will be a larger number of retirees renting and paying mortgages than ever before.

A recent study published by Harvard’s Joint Center for Housing Studies describes how this could lead an unprecedented number of America’s aging population to face a lower quality of life or even financial hardship. However, the same study also points out that there is time for many of those who could be affected to do something about it.

Housing debt and rent costs pose a big threat

According to the data Harvard researchers put together, homeowners tend to be in a much better financial position than renters. The majority of homeowners over 50 have retirement savings with a median value of $93,000, plus $10,000 in savings. More than three-quarters of renters, on the other hand, have no retirement and only $1,000 in savings on average.

While renters — who don’t have the benefit of home equity wealth — face the biggest challenges, a growing percentage of those 50 and older are carrying mortgage debt. Income levels tend to peak for most in their late 40s before declining in the 50s, and then comes retirement. The result? Housing costs consume a growing percentage of income as those over 50 get older and enter retirement.

How bad is it? Check out this table from the Harvard study:

Source: "Housing America's Older Adults," Harvard University.
Source: “Housing America’s Older Adults,” Harvard University.

More than 40% of those over 65 with a mortgage or rent payment are considered moderately or severely burdened, meaning that at least 30% of their income goes toward housing costs. The percentage drops below 15% when they own their home. If you pay rent or carry a mortgage into retirement, there’s a big chance it will take up a significant amount of your income. In 1992, it was estimated that just more than 60% of those between 50 and 64 had a mortgage, but by 2010, the number had jumped past 70%.

Even more concerning? The rate of those over 65 still paying a mortgage has almost doubled since 1992 to nearly 40%.

The impact of housing costs on retirees

The impact is felt most by those with the lowest incomes, and there is a clear relationship between high housing costs and hardship. Those who are 65 and older and are both in the lowest income quartile and moderately or severely burdened by housing costs spend up to 30% less on food than people in the same income bracket who do not have a housing-cost burden. Those who face a housing-cost burden also spend markedly less on healthcare, including preventative care.

In many cases, these burdens can become too much to bear, often leading retirees to live with a family member — if the option is available. While this is more common in some cultures, this isn’t an appealing option to most Americans, who generally view retirement as an opportunity to be independent. More than 70% of respondents in a recent AARP survey said they want to remain in their current residence as long as they can. Unfortunately, those who carry mortgage debt into retirement are more likely to have financial difficulties and limited choices, and they’re also more likely to have less money in retirement savings.

What to do?

Considering the data and the trends the Harvard study uncovered, more and more Americans could face a housing-related financial hardship in retirement. If you want to avoid that predicament, there are things you can do at any age.

  • Refinance or no? Refinancing typically only makes sense if it will reduce the total amount you pay for your home. Saving $200 per month doesn’t do you any good if you end up paying $3,000 more over the term of the loan. However, if a lower interest rate means you’ll spend less money than you do on your current loan, refinance.
  • Reverse mortgages. If you’re in retirement and have equity in your home, a reverse mortgage might make sense. There are a few different types based on whether you need financial support via monthly income, cash to pay for repairs or taxes on your home, or other needs. However, understand how a reverse mortgage works and what you are giving up before you choose this route. There are housing counseling agencies that can help you figure out the best options for your situation, and for some reverse mortgage programs you are required to meet with a counselor first. Check out the Federal Trade Commission’s website for more information.

All that said, avoiding financial hardship in retirement takes more than managing your mortgage. A big hedge is entering retirement with as much wealth as possible. Here are some ways to do that:

  • Max out your employee match. If your employer offers a match to retirement account contributions, make sure you’re getting all of it. Even if you’re only a few years from retiring, this is free money; don’t leave it on the table. Furthermore, your 401(k) contributions reduce your taxable income, meaning it will actually hit your paycheck by a smaller amount than your contribution.
  • Catching up. The IRS allows those over age 50 to contribute an extra $1,000 per year to personal IRAs, putting their total contribution limit at $6,500. And contributions to traditional IRAs can reduce your taxable income, just like 401(k) contributions. There are some limitations, so check with your tax pro to see how it affects your situation. Also, while contributions to a Roth IRA aren’t tax-deductible, distributions in retirement are tax-free.
  • Financial assistance and property tax breaks. Whether you’re a homeowner or a renter, there are assistance programs that can help bridge the housing-cost gap. Both state and federal government programs exist, but nobody is going to knock on your door and tell you about them. A good place to start is to contact your local housing authority. The available assistance can also include property tax credits, exemptions, and deferrals. Check with your local tax commissioner to find out what is available in your area.

Stop putting it off

If you’re already in this situation, or know someone who is, then you know the emotional and financial strain it causes. If you’re afraid you might be on the path to be in those straits, then it’s up to you to take steps to change course.

It doesn’t matter whether you’re a few months from 65 or a few months into your first job: Doing nothing gets you nowhere and wastes invaluable time that you can’t get back.

MONEY Financial Planning

How to Be Charitable…and Hold Onto Your Money

Bench in Yosemite Valley.
Bench in Yosemite Valley. Geri Lavrov—Getty Images

You can inexpensively plan for a donation from your 401(k) while retaining access to the account if you need it.

After they got married, I met with Luke and Jane, both 33, to think through how much they are going to spend and how much they are going to save. Luke is a gentle soul. It took him many years to find work that he could feel good about, and he currently has a good-paying job. He wants to keep working forever.

Part of him seemed shocked, although happily so, by his fortunate financial situation. He feels that he and his wife together make a lot more money than they need.

If he knew their finances were always going to be the way they are now, he’d give more money away. He gets a lot of satisfaction from financially supporting changes he feels are positive in the world.

One of the things that Jane loves about her husband is his philanthropic bent. But she’s also concerned they might give a lot of money away and then regret it. They plan to start a family within the next five years. How can they decide to give money away when they might need it later?

I left our meeting somewhat frustrated, because I didn’t have a great answer to their conundrum.

Meanwhile, I was working on a book about connecting all areas of finances with meaning. Previous authors have explored how to consciously spend or invest. But I wanted to write about not only spending and investing, but also taxes, estate planning, and insurance — all areas of personal finance.

The book idea sounded good. Then I had to write the thing. I know a lot about the subject, but when I got to the chapter about estate planning, I drew a blank.

After what I deemed an appropriate length of procrastination, I started writing the dreaded estate chapter. I found myself thinking about Luke. At the same time, I was reviewing everything I do when I talk to clients about estates, focusing on the angle of more meaning. More meaning.

Then some ideas started sparking.

Reviewing 401(k) beneficiaries, for instance, is something I talk about during estate planning meetings. Seems mundane, but wait, there could be something there. This is cool, I thought as I wrote.

What if Luke designated someof his 401(k) — or all, if he really wanted — to charity? Say, the National Parks?

It wouldn’t cost Luke a dime now. Plus, it’s totally revocable before he dies. If and when Jane and he have kids, he’ll revoke the designation. So during his critical period of family financial responsibility, he can leave his 401(k) to Jane and the family. But if it’s just Jane and him, setting aside some money in case of his untimely death is one answer to the conundrum — how to give more without regretting it.

Other details I uncovered when I wrote and researched this strategy: Larger, well-established charities are more likely able than smaller ones to handle a 401(k) donation. The theater company down the street generally won’t.

Setting up this designation doesn’t cost anything; Luke doesn’t have to talk to an attorney. Jane will have to sign off on it, but she’s fine with it.

Other perks? He might be able to designate what his 401(k) donation is used for, in the case of his death, and the charity might recognize him on a plaque at his favorite park. Charities vary on how they recognize these gifts. The recognition isn’t just for ego gratification; it encourages other people to give, too.

Luke doesn’t have to risk their retirement, and I’ve got a good idea for my estate chapter.

————————

Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.

MONEY pension benefits

California Judge Rules That There’s Nothing Sacred About Pension Promises

A bankruptcy judge rules that bondholders are on equal footing with pensioners in California, sending tremors through the cash-strapped pension world.

In a shot heard round the pension world, a California judge has ruled that in municipal bankruptcies, public employees are no more protected than bondholders. The ruling opens the door for financially strapped towns across the state to cut pension obligations by filing for bankruptcy.

This is just the latest blow to public pensioners. A federal judge ruled similarly in Detroit. The giant California Public Employees’ Retirement System had argued as part of the closely watched case in Stockton, Calif., that different laws applied and required that public pensioners in California be paid in full before anything went to creditors.

But U.S. Bankruptcy Judge Christopher Klein decided against CalPERS, an influential institution that has been leading efforts to preserve defined-benefit pensions nationwide. The Stockton decision, coupled with rulings like the one in Detroit, has public pensioners in every struggling municipality across the country fearing for their retirement security.

CalPERS essentially argued that it was above bankruptcy law because of its statewide charter. For its part, Stockton wants nothing to do with reneging on promises to police and other public employees, arguing that they would leave and the town would not be able to function. But Judge Klein ruled that public pensions are just another contract, and adjusting contracts is what bankruptcy is all about. He came down on the side of Franklin Templeton Investments, a mutual fund company that had about $36 million of Stockton’s debt.

Like many private businesses in decades past, Stockton and other municipalities lavished unrealistic pension guarantees on employee unions while times were booming. The private sector began its reckoning first as autoworkers and airline employees, among others, were forced to take benefit concessions. Now teachers, police and other public employee unions are feeling the sting of flagging finances—part of the fallout of the Great Recession.

The Stockton ruling is a harsh reminder of how frail the retirement system in the U.S. has become. Scores of both private and public pensions are underfunded, and Social Security is scheduled to become insolvent in 2033. The system is not going to disappear. But change will come and almost certainly result in benefit cuts for some. Young workers are especially vulnerable because they have not paid much into the system yet and have many years left to save for themselves. So take a cue from the Stockton case and start saving now.

 

MONEY 401(k)s

What Bill Gross’s Pimco Departure Means for Your 401(k)

The people who tell companies what retirement-plan investments to offer employees are questioning the value of the giant Pimco Total Return bond fund.

Bill Gross’s sudden departure from Pimco and the Total Return Fund he ran for 27 years was the last straw for Jim Phillips, president of Retirement Resources, a Peabody, Mass. firm that advises 401(k) plans with $50 million to $100 million in assets. He’s advising clients to head for the exits.

After 16 straight months of outflows and a 3.5% return over the past year, worse than 75% of its peers, the $222 billion Total Return Fund is failing Phillip’s standards when it comes to meeting the retirement needs of his customers.

“We do not have ongoing confidence in the way the fund is being managed,” Phillips said. “We are recommending to clients that we replace this fund with another one.”

Philips said he joined a conference call Monday with Pimco chief executive Doug Hodge and some of the company’s portfolio managers, but said the conversation “doesn’t change any actions that we have planned.”

About 27,000 of the largest corporate 401(k) plans in the country had money in the Total Return Fund as of the end of 2012, according to the most recent data from BrightScope, which ranks retirement plans. The roster includes Walmart’s $18 billion plan, the largest in the country by assets, as well as Raytheon’s and Verizon’s.

Total Return holds $88.3 billion of the $3 trillion in 401(k) assets listed in BrightScope’s database of more than 50,000 of the largest plans, the biggest mutual fund in the database.

Walmart didn’t return calls, and Raytheon and Verizon declined to comment for this article.

Phillips isn’t alone in his dissatisfaction with the fund — investors have pulled $25 billion from Total Return Fund so far this year. But a bad year that began with a public falling out between Gross and top deputy Mohamed El-Erian in January and has now seen the Pimco co-founder quit is causing many 401(k) plan consultants and advisers to put the Total Return Fund on their watch lists, and in some cases start replacing it.

Though companies usually make decisions about where to invest their retirement funds during investment committee meetings, which typically occur quarterly, Gross’ exit could prompt companies to have meetings or calls sooner than scheduled, said Martin Schmidt of H2Solutions, a Wheaton, Ill. consultant for 401(k) plans with assets from $150 million to $4 billion.

“I have sent out emails to clients telling them that we need to start looking at alternatives,” Schmidt said. He said he hasn’t heard from anyone at Pimco.

Once an employer decides to switch a fund out of its plan, it can take three to five months to make the change and give employees the required 30-days’ notice.

Jump Ship

Gross’s new fund, the $13 million Unconstrained Bond Fund from Janus Capital, is unlikely to be the destination for any funds that decide to jump ship on Total Return, given that it’s only been in operation since May and has produced a negative 0.95% return since inception, according to Morningstar.

“We have to see at least a three-year track record and we actually prefer five,” said Troy Hammond, president and chief executive officer of Pensionmark Retirement Group, a Santa Barbara, Calif. adviser that serves over 2,000 small 401(k) plans across the country.

There is also the question of whether Gross will have the same level of support and resources at Janus as he did at Pimco.

“If Bill were leaving with the top 10 people from Pimco, like Jeffrey Gundlach did when he left TCW, that would be different,” said Mendel Melzer, chief investment officer for the Newport Group, a Heathrow, Fla. consultant to institutional investors, including 401(k) plans with assets between $20 million and $1.5 billion. “But this is just Bill Gross leaving on his own, and it is hard to say that the track record he accumulated at Pimco should translate into the Janus fund.”

Melzer is advising clients to see how the new Pimco team does with the Total Return Fund, which has been on Newport’s watch list since earlier this year.

“We will keep it on a very short leash,” Melzer said. “If it does not improve in the next two quarters we will look at alternatives.”

TIME society

The Right Way to Ask Boomers to Retire

Millenials Baby Boomers retirement
Jacob Wackerhausen—Getty Images

How ‘polite’ Millennials can convince a generation of workaholics to give up their jobs

Millennials (born 1982-2003) have a problem when it comes to their path to promotions and career advancement. Unless more members of the Baby Boom generation (born 1946-1964) start stepping down soon, younger generations will find themselves blocked in their careers by people who haven’t shown any inclination to leave, especially after the Great Recession devastated many Boomers’ retirement portfolios.

It’s time for Millennials to have that tough talk about retirement with Boomers. But using logic or making appeals to intergenerational fairness aren’t likely to be successful strategies. And suggesting that it’s time for Boomers to shuffle off the stage might seem selfish or cold-hearted to most members of the remarkably well-mannered Millennial generation. Nor is any suggestion that Boomers retire likely to meet with a positive response from that generation of workaholics. Instead, the talk needs to be couched in the language of Boomers and attuned to their fundamental values.

We have written three books on the Millennial generation in which we used the theory of generational cycles, first proposed in 1991 by authors William Strauss and Neil Howe, to make our own predictions about America’s political future. Along the way, we studied volumes of research data, and created some of our own, on each of the current generations of Americans and the dynamics of their interactions with each other.

Boomers are an “Idealist generation” to use Strauss’ and Howe’s name for a generational archetype that is focused on deeply held ideological beliefs. Previous American Idealist generations—the Transcendental generation (born 1792-1821) and the Missionary generation (born 1860-1882)—had one key characteristic that is clearly evident in Boomer behavior today. All Idealist generations are driven by strong beliefs about what is right and wrong and what is good and evil. Members of this type of generation resist compromise and are determined to impose their beliefs on the rest of society—even if it means tearing down existing institutions.

By contrast, Millennials are a “civic generation” in Strauss’ and Howe’s categorization. Their historical predecessors were the GI generation that came of age during the Great Depression and World War II and the Republican generation that won the American Revolution and developed the constitutional order by which America has been governed since 1787. All of these civic generations can be characterized as “pragmatic idealists.” Today’s version, Millennials, is interested in working together to make the world better. It is this desire to find mutually agreeable solutions to problems that makes having the “talk” with their Boomer colleagues so hard for Millennials.

But there is a way to turn the discussion into the type of “win-win” outcome that Millennials favor. The key is to appeal to the very ideals that have driven Boomers’ lives ever since they first burst upon the nation’s consciousness in the 1960s. Since then, no matter on which side of the Cultural Revolution they have fought, Boomers have devoted themselves to their work. They are the source of the term “workaholic” and take pride in what they accomplish at work each day. They define their very self-worth by their work, leading them to start conversations with new acquaintances by asking, “So what do you do?” To suggest to Boomers that it might be time for them to retire is almost the equivalent of asking them to die—clearly not the way to start a productive conversation.

Instead, Millennials should begin the conversation by asking Boomers about their ideals and values. Get them to talk about what motivated them when they were young to make the life and career choices they did. Most Boomers love to talk about their youth. They think of it as the best time in their lives. So starting the conversation in this way is likely to make the opening of the “talk” both pleasant and productive.

The next step would be to pivot from the past into the future by asking Boomers what they believe they have yet to accomplish. This should be followed by a suggestion that now might be the time for the Boomer to take up the work that remains undone on their ideological bucket list before it is too late and they lose their ability to make a difference. Assure them that there are other people, maybe from Generation X, if not the even younger Millennial generation, that can pick up the work in which Boomers are now engaged and see it through to completion.

But, crucially, Millennials should also make it clear that no one but Boomers have the wisdom and experience, coupled with the ideals, to take on the challenges they have been too busy to tackle. At that point, moving out of their jobs—and on to their unfinished business—will become something Boomers think they should do, rather than something that is being forced upon them.

The history of previous Idealist generations underlines the importance of having these conversations sooner rather than later. Strauss and Howe, in their book Generations, summarize the very different outcomes that resulted from the choices made by members of Idealist generations at this crucial point in their lives: “Where the angry spiritualism of Transcendental youth (born 1792-1821) culminated in the apocalypse of the Civil War, the Missionaries (born 1860-1882) demonstrated how a youthful generation of muckrakers, evangelicals, and bomb-throwers could mature into revered and principled elders—wise old men and women capable of leading the young through grave peril to a better world beyond.” Members of this generation, such as Franklin Delano Roosevelt, Winston Churchill, Douglas MacArthur, and George C. Marshall successfully mobilized the civic-minded GI generation to undertake and complete the task of remaking the world according to our democratic ideals.

By analogy, suggesting that it’s time for the current generation of Idealists, Boomers, to lead this increasingly dangerous world to a better place by putting aside their current work and taking on their last and most important challenge is the best way for Millennials to convince Boomers it’s time to move on. The current state of affairs makes it clear that it is way past time for Millennials to start this difficult conversation. Our advice to Millennials: Don’t wait another minute to have the “talk” with a Boomer you know.

Mike Hais and Morley Winograd of Mike & Morley, LLC are business partners whose combined careers include entertainment and media market research (Frank N. Magid Associates), a stint in the White House (Clinton-Gore second term), technology and communications (AT&T), and academia (USC’s Marshall School of Business and the University of Detroit). Based in Los Angeles, Mike & Morley speak, write and consult on the role of Millennials in remaking America. They are the co-authors of Millennial Makeover (2008), Millennial Momentum (2011), and Millennial Majority (2013).

This article originally appeared on Zócalo Public Square.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY Investing

Why We Feel So Good About the Markets—and So Bad—at the Same Time

Investor and retirement optimism is at a seven-year high. Yet most people believe their personal income has topped out. What gives?

Investors are feeling better about the markets than at any time since the financial crisis, a new poll shows. But most also believe they have topped out in terms of earning power, and that the Great Recession continues to weigh on their finances.

Buoyed by stronger GDP growth, record high stock prices, and a falling unemployment rate, investors in the third quarter pushed the Wells Fargo/Gallup Investor and Retirement Optimism index to its highest mark since December 2007. Yet 56% of workers expect only inflation-rate pay raises the rest of their career, and half believe they are destined to end up living on Social Security benefits.

“At the macro level, people are feeling pretty good,” says Karen Wimbish, director of Retail Retirement at Wells Fargo. “But at the personal level, the Great Recession left a deeper wound than a lot of us realize.” The average worker believes that wage growth, which has been stagnant for decades, won’t rebound before they retire. This feeling is especially acute among the upper middle class, those making more than $100,000 a year.

The gloom is partly attributable to the national discussion about wage inequality and some evidence that only the top 1% is getting ahead. It may also reflect a sense that the U.S. is losing ground to the faster growing developing world and experiencing an inevitable relative decline in standard of living.

The Federal Reserve has been battling anemic growth for seven years through an aggressive stimulus program that includes rock-bottom short-term interest rates. This week, the two Fed governors most outspoken and critical of this policy confirmed that they would retire next year, essentially putting the Fed all-in on a growth and jobs agenda with diminishing concern over inflation and underscoring the sense of stagnation so many feel.

Most investors polled (58%) said they are doing about as well or worse than five years ago. Similarly, 63% said they are saving about the same or less than five years ago. These figures are essentially unchanged from two years ago, suggesting that investors have not made much financial headway in the recovery. Roughly half said they are still feeling the effects of the recession.

“Is it real?” Wimbish says. “Or is it emotional?” If our prospects are really so dire, how do you explain record high stock prices, strong quarterly growth, a pickup in consumer borrowing, and an improving jobs picture?

Whatever is causing the gloom, one result is that nearly a third of investors continue to shun the stock market. Those with less than $100,000 in assets avoid stocks at twice the rate as those with more than that level of savings. Arguably, those with fewer assets are precisely the ones who need to be in stocks to take advantage of their superior long-run gains and build a nest egg.

They may be worried that they have missed the rally and that it is too late to get in. But the overriding concern—expressed by 60%—is that stocks are just too risky. So as the average stock has more than doubled from the bottom and recovered all its losses, and as those who remained true to their 401(k) contribution plan through thick and thin have become flush with gains, the truly risk averse have lost valuable time. Seeing this now may be part of what makes them so glum.

MONEY early retirement

It’s Time to Rename Retirement

Senior doing yoga on beach
Image Source—Alamy

People change their minds — a lot — when it's time to stop working. Let's acknowledge how flexible retirement can be.

Some clients dream of retiring early. Others would like to work forever if they could. And a third set of clients…well, they’re on the fence.

Let me tell you about one of my clients who falls in that third category, and what my experience with him says about retirement.

When John and his wife (I’ll call them John and Jane) became clients of my firm two years ago, they were both in their early 50s. John, who had been retired for eight months, wanted us to evaluate whether he would be able to stay retired comfortably. Jane, who was still working, planned to stay at her job for another five years.

After crunching the numbers and running through several scenarios, we found that John — and Jane, too, if she wanted to — could retire immediately and most likely not have to work again.

The joy in the room was palpable as John described all the things he wanted to do with his time: Spend more time with his aging parents and his college-age daughter, spend more time fishing, and manage his real estate investment properties.

Fast-forward six months later. John called to let us know that he was going back to work for the same company from which he had retired. “One myth I’ve found out: You think you’re going to catch up on all those projects you’ve put off,” he told us. “You don’t.”

So we revisited John and Jane’s financial plan. Of course, more income made their situation look even better. John felt satisfied and happy to have his old routine back.

Ten months later, we got another phone call from John. He had changed his mind. Once again, he decided he was ready to retire. So we revisited the plan another time. Again, it was all systems go.

“Man, you just made my day,” said John. “No, I take that back. You just made my year!”

Sometimes, like John, we don’t know what we truly want. We grow up thinking we will work as hard as we can, so we can reach our golden years and retire to a life of vacationing, fishing, biking or fill-in-the-blank. And then, like John, we realize we’re not so sure.

For many retirees this is becoming more common. Having time to truly dissect your desires often helps to further clarify your true passions and what fulfills you on a deeper level. Walking through options can help provide peace of mind through these transitions. In today’s world we are seeing more and more of this type of trial-and-error decision-making about retirement. Retire for a while, only to go back to work, and then retire again so you can have control of your time and do things you truly enjoy.

Retiring these days is really just gaining the freedom to do what you want, when you want. It could be part-time work, volunteering, starting a business, or, in John’s case, going back to your old employer for a while.

Going forward, maybe retirement should be renamed “flexibility,” since that seems to be a more appropriate description for the way retirees are actually treating it. So right now, I think I will go spend some time planning my own “flexibility.”

——————–

Smith is a certified financial planner, partner, and adviser with Financial Symmetry, a fee-only financial planning and invesment management firm in Raleigh, N.C. He enjoys helping people do more things they enjoy. His biggest priority is that of a husband and a dad to the three lovely ladies in his life. He is an active member of NAPFA, FPA and a proud graduate of North Carolina State University.

MONEY 401(k)s

Why Americans Keep Treating Their 401(k)s Like Piggy Banks

Smashed piggy bank
Dan Saelinger—Getty Images

Borrowing from your 401(k) plan has advantages. But it should not be your first option.

Consumer borrowing is on the rise again, jumping nearly 10% in July—the biggest gain in three years. The largest loan sources were related to auto financings and credit cards. But since the recession, 401(k) plan loans have been rising as well.

One in four American workers with a 401(k) or other defined contribution plan taps their retirement account for current expenses, according to a report from financial website HelloWallet. Much of this money never gets repaid.

Such borrowing has significant consequences. Loans that go unpaid are subject to penalties and taxes. Penalized 401(k) distributions increased from $36 billion to almost $60 billion from 2004 to 2010. The penalties aren’t even the worst part. Money pulled from a 401(k) plan may result in years of lost growth, leaving you far short of your savings goals.

Roughly a quarter of those who borrow from their plan need the money to pay monthly bills. But a lot of this money is going other places. The most common uses of money from a 401(k) plan, other than monthly expenses, according to a Schwab survey:

  • Down payment on a house (23%)
  • Home improvement (19%)
  • Medical expenses (13%)
  • Discretionary purchase (9%)
  • Vacation (4%)
  • Pay down student loans (2%)

Plan loans are not all bad. They are quick, and you need not win credit approval from a bank or other lender. You must pay yourself back, plus interest. So over a loan period when stocks have fallen you might end up with more savings, not less. And the often-repeated issue of double taxation on money used to repay the loan is overstated. You pay the loan back with after-tax dollars, which are taxed again in retirement. But you’d pay off any type of non-mortgage loan with after-tax money. That’s hardly a deal breaker.

The real problem with these loans, and the reason they should not be your first option, has to do with the penalties and lost growth. If you switch employers you may have to repay the loan in full in as little as a month. If you can’t, the loan converts to a distribution subject to a 10% penalty and regular income tax. Meanwhile, many people stop contributing to their 401(k) plan during the repayment period, losing out on years of contributions and growth, notes Catherine Golladay, vice president of 401(k) Participant Services at Schwab.

New York Life found that the average contribution rate for a worker who takes out a loan from their 401(k) is 5.63%, compared with 7.23% for workers without loans, and that two-thirds of workers with a loan who leave their employer take a cash distribution from their plan rather than pay back the loan.

For these reasons, retirement experts have been pushing for 401(k) loan reform, among other things giving those who lose their job more time and incentive to repay the loan. But for now the risks remain and, certainly, borrowing from a plan to pay for a vacation or other discretionary item is probably a poor decision.

Get answers to you 401(k) questions in MONEY’s Ultimate Retirement Guide:
What If I Need My 401(k) Money Before I Retire?
What Happens to My 401(k) If I Leave My Job?
When Do I Have to Take the Money Out of My 401(k)?

 

 

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