MONEY Millennials

The Conventional Money Wisdom That Millennials Should Ignore

millennials looking at map on road
John Burcham—Getty Images/National Geographic

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.

TIME Retirement

Millennials Actually Have an Edge on Retirement

The surprising advantage of the younger generation

Every generation likes to think it’s nothing like the one that came before it. As for retirement, millennials might actually be right. Twenty- and 30-year-olds make up the first postwar generation with almost no shot at getting a traditional pension from a private company. Today fewer than 7% of Fortune 500 companies offer such plans to new hires, according to the consulting firm Towers Watson. In 1998, when members of Generation X entered the workforce, 50% of Fortune 500 companies offered such plans.

It’s not all long odds. Here are some things to remember as you prepare for your sunset years.

Relax, you’ve got time. According to the Center for Retirement Research at Boston College, if you can start setting aside money at age 25, you’ll need to save only about 10% of your annual income to retire at 65. Start at age 35 and your target is a manageable 15%. But wait until age 45 and you’ll be stuck socking away 27% of your annual income.

You can also spend money to improve your chances of a happy retirement. In your 20s it can make sense to forgo some saving to invest in your future earnings potential, says financial planner Michael Kitces of Pinnacle Advisory Group in Columbia, Md. Think education–not only degree programs but also short courses that teach marketable skills. You should also pay off high-interest credit-card debt and build a cash reserve. That can cover emergencies, Kitces says. It can also provide greater flexibility, like the ability to finance a move to another city for a better job.

Even so, if you have a 401(k) plan, try to save enough (typically 6%) to get your maximum employer match. That’s like free money, says Anthony Webb, an economist at the Center for Retirement Research. If you save 6% and your company matches 50¢ on the dollar, you’ll save 9% of your income, nearly what a millennial should be doing.

You have the best tools ever. One advantage today’s savers have over previous generations is that investing can now be simple and cheap. An index fund that holds a representative slice of the U.S. stock market–like the giant Vanguard 500 or newer cut-rate competitors like Schwab Total Stock Market Index–charges investors 0.17% of assets or less per year. Compare that with the 1% or so charged by typical fund managers, who tend to perform worse than index funds after fees. Index funds are now common in 401(k)s. Why stress about a measly 1% charge? William Sharpe, the Nobel Prize–winning economist, recently projected the returns of indexers vs. expensive funds over a lifetime and found that the low-cost funds could deliver over 20% more wealth in retirement.

You can handle some risk. At your age, a big market loss represents a tolerable drop in your true lifetime wealth, says investment adviser William Bernstein. Consider investing much of your 401(k) in a stock fund, which should earn a higher return than bonds or cash over time, though with greater risk.

But be ready for large swings. “A 30-year-old who sees a $19,000 portfolio cut in half is going to feel devastated,” Bernstein says. If you don’t know how much risk you can handle, consider a 60-40 split. Sixty percent can be divided between a U.S. stock-market index fund and, for diversification, a similar fund holding foreign stocks, such as Fidelity Spartan International or Vanguard Total International Stock. The rest can go into a bond fund, like Vanguard Total Bond Market. If your 401(k) doesn’t offer index funds in all three areas, look for options with low costs and a broad mix of assets.

After you set up a simple portfolio, try to leave it alone. You are unlikely to correctly time the twists and turns of the market. And at your age, you have better things to think about.

TIME Retirement

5 Things Every Millennial Should Know About Retirement

Save, get lucky or wait for the robots

In this week’s TIME, I, an employed barely 24-year-old with little to no reason for confidence about my future, stare down my sunset years, exploring the world of retirement today and envisioning what it might look like 40 years from now. But I’m told millennials dig lists. So here’s what I learned.

Read the full story in this week’s magazine.

1. Every little bit of savings counts. It helps to build a nest egg. A 2010 study from the Center for Retirement Research says 53 percent of American households are at risk of losing their standard of living upon retirement; in 1989 only 30 percent of households faced such a predicament. Alexa von Tobel, the CEO of Learnvest, a firm which offers financial-planning services to the masses says you should get insurance and keep your debt down. Max out your 401(k) match, if your employer offers one, in your youth. Start an IRA. Cut out that extra coffee. It’s harder to save for retirement when you’re playing catch-up, and you never know what sort of harm could one day befoul you. She says, “Most of us work with our brains now. But how do you know you’re not going to have a brain injury, or something else happen? We just don’t know…We see all kinds of really great people that just didn’t know that something could happen.”

2. Choose your career wisely, then get lucky. And have an exit strategy. John Arnold, the energy trader turned philanthropist, managed to leave his job at 38, and with a spot on the Forbes 400 to boot. (He earned $1.5 billion at Centaurus Advisors in 2008; FORTUNE called him then “The Wunderkind Gas Trader.”) He does realize that not everyone could reasonably expect to follow his path. In his career he nonetheless found generally applicable lessons. “I fell into this job out of college, and my plan was to go to business school,” he says. But then he found that natural-gas trading was the perfect career for him. His math and problem-solving skills pushed him to the top of a cutthroat field. And then there was the money. “The one thing that money does—it allows you to follow your heart rather than do a particular job,” he says.

3. We should expect to be healthy long past the age of 65. Social Security sets the full retirement age for our generation at 67 (those born between 1938 and 1959 reach full retirement age somewhere in between 65 and 67). According to Centers for Disease Control data from 2010, though, the average 65 year-old American has 19.1 more years to live. (That’s up more than five years from 1950.) And we can expect 13.9 of those years to be healthy ones. Ursula Staudinger, the director of Columbia’s Butler Aging Center, says that the proportion of healthy years is expected to continue increasing, as the gospel of good health spreads and prescription drugs improve. All of this is to say that many of us will not need to drop out of the work force at 65 or 67 or even in our 70s, unless we want to. Living over the long-term without the structure and engagement of employment has even been shown possibly to diminish cognitive and physical health, Staudinger says. With that in mind, why don’t businesses try sabbaticals that would increase in frequency with age? What about formal hours-tapering programs? What about a government program that would engage us in civic activity when we’re elderly? I fear otherwise we’ll spend all our time on the PlayStation 37.

4. Retirement is a modern invention. The supposedly sacrosanct institution originated in Germany in the 1880s, when Kaiser Wilhelm I posited that the state ought to care for citizens who couldn’t work due to old age or disability. Germany soon established a social insurance system, and 50 years later, the United States had its own. But the conditions facing seniors during the Great Depression—the best statistics available show that about half of seniors lived in poverty, and generally in rural settings—and the conditions facing German workers in the first several decades of industrialization have next to nothing to do with the conditions in which most aspiring retirees toil today. There’s no reason we need to apportion our leisure time this way, except for that it’s tradition.

5. All of our retirement theorizing might be rendered moot by the advent of brain emulations. Robin Hanson, a futurist and economics professor at George Mason University, forecasts that at some point in the next century human-level robots will appear. Researchers, he predicts, will make cell-by-cell copies of the brains of the 100 most productive humans and implant them in robots. Then the emulations could do much of the work once assigned to humans. I can’t wait.

TIME Retirement

The Millennial Retirement Plan

Holly Andres—© 2013 Holly Andres

Staring down his sunset years, a 24-year-old goes in search of a happier, healthier ending for us all

Despite the blessings of youth–I’m 24 years old, with limber joints and without mortgage payments–I am aware that we have something of a retirement crisis on our hands.

You can’t miss it if you watch sports on TV, where financial-services firms pitch themselves to worried middle-aged men. I can’t miss it either when I call home. My parents are in fine shape, thank goodness, but like any other self-respecting late-50-something professionals, they are gaming out survival plans for so many improbable scenarios. And it didn’t take a lot of days on the job for me to notice that my employer was lowering its match on employees’ 401(k)s, leading to grumbling among some of my older co-workers, who saw their defined-benefit pension plans end in 2010.

The boomers, we’re told, might be going bust. But what–if I may be so millennial–about me? Sixty percent of American millennials, the approximately 85 million of us born from 1980 to 1999, expect to retire at age 65 or earlier, according to a recent survey from the Transamerica Center for Retirement Studies. Yet we came of age in an economic climate worse than any since the Great Depression, impossibly far from the postwar prosperity that greased our grandparents into the workforce. That alone seems to limit the chances of retirement’s having a future at all like its present.

More than that, we fancy ourselves a new breed. We think freely. We never unplug. We invented Pinterest. So even if we did have the financial wherewithal to retire in 40 years, should we want to? Are decades spent away from the office good for our bodies and brains? Does it make us happier to officially transition to a new phase so late in life? Perhaps retirement, this august institution that came of age in the era of World War II, has reached its own retirement date. I decided to find out.

Preparing for Retirement

My first call goes to Alexa Von Tobel, the CEO of LearnVest, a firm that bills itself as a financial planner for average Americans. LearnVest aims to make wealth care, as von Tobel puts it, as accessible as health care, with financial-planning packages priced in the mid-hundreds. Though the business won’t disclose its client numbers, LearnVest has raised more than $70 million in venture funding. Von Tobel has been on the cover of Forbes and on the cover of her own book, Financially Fearless. The one caveat about her retirement expertise? She’s 31. But considering she was twice admitted to Harvard (she earned her B.A. in 2006 and left business school in 2008 to start LearnVest), while I was twice rejected from Harvard, I thought myself in no position to judge.

Von Tobel invited me this summer to LearnVest’s New York City offices, on two sunny floors a few blocks from Union Square. Even sunnier than the space is von Tobel herself, energetic and quick to launch into a speech confirming the nation’s collective retirement peril. “In my book, Financially Fearless,” she says, “I almost wrote a whole chapter on the history of why I believe we have a huge financial crisis looming.” She fears that the mixture of widespread access to credit and widespread financial illiteracy will doom the nation.

The numbers do cast a distinct pall. A 2010 study from the Center for Retirement Research says 53% of U.S. households are at risk of losing their standard of living when their earners retire; in 1989 only 30% of households faced such a predicament. And that number concerns only people over the age of 30. The long-term financial prospects for millennials are even gloomier: according to the Project on Student Debt, 7 in 10 college graduates from the class of 2012 carried debt, with an average per-debtor load of $29,400. They graduated into an economy seemingly hostile to young workers, with an unemployment rate for job seekers ages 20 to 24 that averaged 12.8% for the year 2013. The unemployment rate for those ages 25 to 54 was less than half that, at 6.3%. And young workers with jobs should not consider themselves especially lucky; studies show that recession-era graduates often deal with depressed wages for the first decade of their careers.

Though millennial workers began saving for retirement earlier–the Transamerica study says 22 is the median age at which my generation’s workers started saving, compared with 27 for Gen X and 35 for baby boomers–they’ve also been under more pressure. According to a recent Wells Fargo study, 47% of millennials spend more than half their monthly income paying off debt; 4 in 10 call themselves “overwhelmed” by debt. They’re saving to dispel future gloom, but they’re already in the thick of it.

Von Tobel says a change in perspective helps. To our sit-down, she brought along Stephany Kirkpatrick, the firm’s resident retirement expert. Kirkpatrick considers saving a matter of behavioral psychology. No one wants to save for retirement, she says, when it looks like a mountain in need of scaling. But when clients see the merits of incremental savings modeled over 30 years, they perk up. Kirkpatrick and von Tobel tell me I ought to sock away a little bit more in a Roth IRA. It could do so much for me, and the numbers do look good.

But, I protest, I’m young and employed. I’m supposed to spend money on frivolous things! Besides, I say, what little employability I have comes from my brain. I’m not going to break down in my mid-60s. Why would I ever need to retire?

Von Tobel looks at me, and her tone turns serious again. “How do you know you’re not going to have a brain injury or something else happen? We just don’t know. We’re in this line of business, so we see all kinds of really great people that just didn’t know that something could happen.” Nice brain ya got there, I silently translate. It would be a real shame if something happened to it.

So I guess I have no choice but to save: Save by investing in the stock market, save by abstaining from indulgence, save by any means necessary. In preparing for retirement, there is no magic, only savings and more savings. I leave my LearnVest consultation planning to act on von Tobel’s simplest tips. I sign up for a high-yield online savings account and a Roth IRA (down a cool 1.85% at press time) and vow to limit my credit-card debt, buy more insurance and plan my monthly budgets. But I also get to asking myself many questions about the savings gospel. The biggest one: What’s in it for us?

The Early Retiree

One muggy Friday morning in houston, I meet a very happy retiree a little more than two years removed from the working world. His name is John Arnold. The father of three is all of 40 years old, and with his boyish, sheepish grin, he looks younger. Per Forbes, he possesses a modest nest egg of $2.9 billion, putting him among the 200 richest Americans.

In May 2012, Arnold did what so many workers dream of one day doing. He had gotten tired of running his hedge fund and he had made enough money at it, so he quit. But in place of a gold watch and a dinner at the Elks Lodge, he earned headlines in the New York Times and Houston Chronicle. In 17 years, Arnold had reached the top of his cutthroat profession, reportedly returning more than 300% on investments in 2006, closing his fund with billions under management after opening it with $8 million and with 60 employees after starting with three.

The first 14 years of work he loved. Arnold, an economics and math major at Vanderbilt, started at Enron in 1995, just a few days after graduation. He says the job–a junior-trader gig that paid $35,000 a year plus a 15K bonus–suited his skills perfectly. His boffo returns in the go-go late ’90s at Enron facilitated a steady rise, and even the company’s bankruptcy and criminal downfall (in which Arnold was not implicated) barely stalled him. Then came the big returns and the big days for Centaurus Advisors, the fund he launched in 2002. The job consumed him, but he liked it. He was working straight from 6:30 a.m. to 5:30 p.m., waking many mornings having dreamed about what he traded–natural gas.

By 2009 he began to question his passion as natural gas prices slumped. In 2011 he knew he wanted out. He figured his moneymaking opportunities were gone, his best days behind him. So he closed the fund just shy of its 10th anniversary. He took a summer vacation in Colorado and then got into philanthropy, which is what he spends the bulk of his time on now.

For a self-made man with such a spectacular mike drop to his credit, Arnold has little to share in the way of business maxims. His advice is simple enough: Find a career that suits you well, and try to make a lot of money at it. Then have an exit strategy concerning a passion of yours. His was public policy. “The one thing that money does–it allows you to follow your heart rather than do a particular job,” he says.

And in his retirement, one of Arnold’s primary causes is the reform of defined-benefit public-employee pensions. He wants rules mandating timelier funding for them and thinks it might be wisest for the defined-benefit plan to disappear altogether. (This change has long since been under way in the private sector, where defined-benefit pensions covered 35% of the workforce in 1990 but only 18% of it by 2011.) Since the 2008 financial crisis, six states have introduced plans with a mandatory defined-contribution component.

The story that pension politics and the expected exhaustion of Social Security’s trust fund in 2033 tells is the same one von Tobel told me: we millennials will be on our own in retirement.

Ready-Made Suburbia

Retirement, as an institution, traces its founding to 1889, when Otto von Bismarck, the Iron Chancellor, promised Germans over 70 that the state would provide them with income. It wasn’t until the 1935 signing of the Social Security Act, which endeavored to lift the elderly from poverty, that America’s retirement culture began to take shape. But it took postwar prosperity and the attendant improvement in seniors’ quality of life to vault retirement up to what it is now for the fortunate many, a round-the-clock actualization of a Jimmy Buffett song.

Retirement is, after all, sold to us from both sides: it’s not only the financial-services firms’ looming horror but also the real estate developers’ well-deserved, leisure-filled reward–the shimmering twilight years spent frivolously but guiltlessly before dotage arrives. Retirees defect, free of puritan compunction, from the Northern and Midwestern metropolises that gave them grueling if remunerative careers and head to warm climes with little industry to speak of other than condominium construction and physical therapy.

Maybe this lifestyle ought to come to an end. In search of answers, I give the Pulte Group a call. Pulte, one of America’s largest homebuilders, offers homes for prosperous active adults ages 55 and over, known as the Del Webb line. This is a name with some history. TIME put construction tycoon Del E. Webb on its cover in August 1962, heralding the rise of The retirement city: A new way of life for the old. Three years earlier, Webb had started selling houses at his Sun City development in Arizona, where in 1954 the first age-restricted residential community had cropped up. (Punning developers named it Youngtown.)

Today, even though Webb himself is 40 years deceased, about 50 still-selling 55-and-older communities bear his name. Securing my piece of these developments, or whatever their 2055 equivalent may be, is just what my new friends at LearnVest have me saving for. I had to explore. That’s how I find myself sitting shotgun in a double-length golf cart, touring Sun City Carolina Lakes, a newish development 30 minutes south of Charlotte, N.C. (Base prices start at more than $200,000, out of the range of many seniors and most assuredly out of mine.) Pam, a resident who gives tours, is behind the wheel, with Shannon, a sales VP, in back.

As we roll over the roads, statistics keep coming: 11 lakes on the property (two stocked for fishing–catch and release), eight softball teams (the primary source of business for local orthopedists, one resident jokes), four seasons (more than Florida has!), $50,000 (the state’s discount on the fair market value, for tax purposes, of homes with residents over 65). All of it, especially the last part, seems well suited for convincing stickler-y seniors.

But the social climate, more than the grounds, is what draws seniors to Sun City. In conversations with so many residents, the phrase like-minded people pops up. In exchange for surrendering lifelong friendships, the kind forged by happy accident in heterogeneous communities, seniors often seek out places where the residents act the same as them and do the same things they do. (Imagine picking a college, if college had no classes and lasted 20 years.) So the people here are mostly retired professionals, mostly friendly, mostly from the East Coast, mostly active, mostly with pensions and grandkids, mostly conservative, nearly all white.

At an afternoon cocktail hour at the home of Melissa and Rich, who came here from Columbus, Ohio, the talk is of richer lives and newfound passions. It’s important, Melissa tells me, to feel like you’re doing something meaningful after you’ve moved on from your old job and community and into a place full of people your own age. She used to be a teacher; now she works as a life coach and pursues creative arts. Barb and Joe, another couple, moved there from Erie, Pa. Joe left his government job early; Barb was reluctant to leave hers. But a friend gave her a copy of Rhonda Byrne’s The Secret, and she soon realized she had to leave town to grow. Joe says they know more people here than they did in Erie, where they lived for 60 years. Barb misses her friends. They keep in touch through Facebook.

The Sun City residents tell me that they cannot picture my generation wanting to retire there; apparently we don’t care for outdoor recreation. True enough. (Investment idea: Find a fixer-upper sanatorium next to an Apple Store.)

But it’s not just their immersion in screens that may scare millennials away from retirement communities. We’re also averse, I figure, to the homogeneous, ready-made suburbias the master builders have long sold. Instead, despite the prices, my generation has headed for cramped housing in diverse, historic cities. And we have done so largely in search of culture, which is hard to find at Sun City, even with Charlotte just a 30-minute drive away. Other communities have sprung up to corner the culture market–some universities have offered alumni the chance to retire on campus-adjacent developments–but that goes only so far. I can hardly fathom enjoying a life in which I interact only with people my own age, people largely just like me, with all the same cultural points of reference. Besides, I can get that free on Twitter.

Time to Save

I wanted, though, to square my assumptions with at least one senior. So I went to see the U.S.’s ranking consumer-advocate curmudgeon. “A healthy society,” Ralph Nader says, “provides opportunities across the board that send a message to the elderly: ‘We need you, we want you.’ ” Residential communities “put seniors out to pasture.”

Don’t even think about asking him about his own potential retirement date. Nader, 80, is no longer a frequent presidential candidate–his last campaign was in 2008, when he captured more than 700,000 votes–but he says he’s working harder than ever. He reads, writes, talks, advises, demonstrates, cajoles. Whatever it takes. He’s made just a few concessions to time, he says, cutting pastries out of his diet and surrendering his hopes for an uninterrupted night of sleep. Otherwise he’s the same Nader he was when he appeared on Time’s cover in 1969; he is still brimming with the blend of scorn and optimism that made him a civic leader. He still forgoes a computer in favor of his Underwood typewriter.

Nader laments the generational gap brought on by technology and, indeed, the whole retirement industry. “Take China. There’s no retirement. But older people, they’re revered for their wisdom and experience and willingness to help the young. Well, here, if you don’t know how to use an iPad,” he tells me, “you don’t have anything left for people your age.” Seniors feel lonely, burdensome, terrified of even the slightest hint of Alzheimer’s. And marketers, Nader says, prey on that anxiety. Seniors lose, and so does everyone else.

After my afternoon with Nader, I kick some of these matters to academic experts. Andrew Cherlin, a sociologist at Johns Hopkins, predicts that the weakened American family structure will take a particular toll on retirees in the next few decades. Adult children usually serve as seniors’ most important caregivers, but fathers who are absent during their children’s formative years will struggle to enlist them later. (More than 8 million of the 33.2 million U.S. households with children under 18 are headed by unmarried women.) Yet there is some small reason for hope, from an unlikely source. According to Cherlin, the Great Recession has brought some families together, with adult children living with their parents out of necessity. Perhaps this closeness will persist into boom times.

Ursula Staudinger, the director of the Butler Aging Center at Columbia University, says the healthiest seniors are the ones who keep working. While short-term breaks from the structure and demands of a job can improve the mind, medium- and long-term absences often lead to downturns in mental and physical health, research suggests.

The average 65-year-old, ready to collect his first Social Security check, has 20 years to live, most of them rather healthy. And scientists expect the proportion of healthy years to increase. Retirement as we have long known it wastes the healthy minds of good people. A solution, Staudinger says, might be for large American employers to allow their middle-aged workers to take sabbaticals and gradually reduce their hours as they age, as some European firms have done. But we need an attitude change first.

Retirement, I’ve learned, isn’t so much an essential social institution as it is a fun-house mirror for the old generation. In middle age, we’re all more or less the same. Everybody works, and everybody’s unhappy. But when age 65 rolls around, our differences get magnified.

In retirement, those who had good jobs can play tennis all day and work part-time: consulting, advising, expert-witnessing. But those who did manual labor without the protection of a pension plan will have sore backs and need full schedules, hoping for scraps of service labor to be thrown their way.

Trends be damned, millennials should expect fairer and better–not a blessing to drop out of society and ignore its problems. Maybe it would serve us well to give up on our mythologized retirements.

Sure, I’ll save a little more cash just in case, and I’ll tell my friends to do the same. But I’m dreaming of starting a movement. My brain feels better than ever. I can keep it that way into my 80s or 90s, I bet, if I play the right games on my iPhone. With fresh eyes and a sharp mind and a renewed sense of purpose, I look forward to spending 60-some more years as I spent this one, writing for weekly magazines.

MONEY Ask the Expert

How Can I Save More?

Financial planning experts share easy ways to trick yourself into setting more money aside for your future.

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.

To be notified of future “Readers to the Rescue” questions and answers, find MONEY on Facebook or follow MONEY on Twitter.

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 1.8088% ) or Priceline THE PRICELINE GROUP INC. PCLN 0.6651% 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 1.3428% and Wells Fargo WELLS FARGO & CO. WFC 0.6134% — 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.

 

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser