Ah, January: New year. Fresh start. Clean slate: Eat better, move more, be kinder. All great!
But there’s only one thing I want to know: Where’s your retirement plan?
I’m serious. Where is it? How much is in it? Who’s managing it? What funds did you buy? Did you rebalance? What’re you paying for it? You don’t know?
[Cue Michael Jackson: You are not alone…]
Most of us spend more time thinking about what’s on TV than we do about what we’re going to live on when we’re too old to work anymore. The retirement crisis (it’s not really a crisis, more like a chronic condition) is upon us.
We’d love to tell you that most of us max out their 401ks/IRAs after carefully considering our options, but we’d be lying. Most of us don’t do enough; some of us do nothing; few of us do all we can.
Many of us would like to do more, but wind up two minutes before noon on the last day to sign up for 401k benefits, frantically fill out whatever form HR sent us months ago, and ticking off the first box we see. God only know what we signed up for. Come on, even people who work in the industry do this.
So what do we need to prepare for our own retirement?
After all these years in the business, we can tell you what we don’t need. We don’t need another retirement calculator that’s going to spit out some number that we will never, ever hit. Ever. Because that just makes us opt out: “Forget it, we’ll never make that number; might as well spend $25 on a breakfast sandwich.”
And we don’t need a retirement calculator that gives us a little smiling sun, offering what feels like an false sense of security.
But we can tell you, from oceans of research, at least three things that we hear all the time:
1. Before the retirement calculator, a household budgeting tool.
Most Americans say the main reason they can’t save for retirement is that they don’t have any “extra money leftover” after paying the monthly bills to save for retirement.
People say this no matter how much money they make, which means that at least part of the problems is a lack of basic budgeting skills, like how to differentiate between fixed, variable, and discretionary spending. It’s true that no one teaches this.
The first step toward retirement planning isn’t choosing the fund provider; it’s figuring out how much we have to invest in our own future – something that needs to be taught. Why not by investment companies?
(Also, this week’s free money wisdom: There is no such thing as “extra money.” There is only money you pay yourself, and money you pay others. Pay yourself first.)
2. Before the financial advisor, a financial counselor.
After we figure out how much money we have to work with, but before we choose funds (with or without a financial advisor), most of us need still have more questions: What’s the fee? What happens if the market crashes? Should I pay off my credit card or put money in my IRA?
We need a financial counselor – someone who doesn’t get commission, isn’t incented to move people off the phone quickly, and is trained in both financial literacy as well as financial communication.
This kind of education – different from fiduciary, FINRA-ruled advice – step sets up the foundation of the kind of long-term investing that most of us need. The financial education precedes the financial advice. In the current set up, they are different functions from different professionals.
The single greatest predictor of retirement preparedness is early childhood financial education, irrespective of income. It doesn’t have to do with being born with money: like nutrition and language, the earlier habits are set, the easier they come. It is definitely possible to learn as an adult, but it requires much more focus and energy.
3. Normalize saving for retirement.
From the provider’s side, retirement planning is an incredibly complex proposition. But two everyday staples of modern life – the smartphone and the credit card – are also incredibly complex propositions which have been made incredibly easy – indeed, indispensable – in modern life.
Here’s where the real innovation comes in. We’re not saying that we should use smartphones or credit cards to save for retirement (although we probably will); we’re saying that it’s possible to take an unbelievably complicated manufacturing process and make it easy for consumers to use – actually, really hard to live without.
But this has proven very difficult to do. The only thing we’ve seen in the last ten years that moves the needle even incrementally is the “opt-out” clause: This means that when you get a new job, you are automatically opted-in to a qualified retirement plan, and you have actually opt-out. But there isn’t enough of this going around to stave off the retirement crisis; and full-time jobs with retirement benefits are disappearing like polar ice.
What do you need to feel good about your retirement planning? We’re looking for fresh viewpoints. Write us back at firstname.lastname@example.org. Until next week.