Retirement Planning for Rookies
Here's a good reminder from a report earlier this year; I especially find it relevant since my work at C.F.P. will be focused on emphasizing the importance of fiduciaries among financial advisors.
I’m a huge fan of Last Week Tonight w/ John Oliver (on HBO) and his staff’s latest investigative report was on the current state of saving for retirement. Naturally, young people will zone out after a few minutes but fortunately John Oliver is a comedian so it makes the piece tolerable. In case you are wondering, here’s the segment I am referring to:
If you watch the full 20 minutes of John Oliver’s piece, you will understand exactly what I have been preaching since the founding of GradMoney: financial advisors are crooks and investing for yourself is the best thing you can do.
Now, if you are thinking that I’m lumping myself into this basket, please don’t think that. Understand that I’m not getting paid for my stock-picking advice. In fact, I can only act in the best interest of those who ask me stock questions, and the horrible incompetence of many Wall Street professionals is what caused me to branch out on my own in the first place. I never sugar-coat advice; if I think you’re wrong, I will tell you that you’re wrong. If you start getting cocky with your investing strategy, I’ll tell you that you’re getting cocky with your investing strategy. I’d be willing to bet that a good 90% of financial advisors will not tell you these things. Fees are the biggest deterrent for realizing actually retirement savings and over the course of your life, you could pay a ridiculous 2/3 of the money you set aside in fees if you use the wrong broker/financial advisor/employee 401(k).
Oliver makes a lot of great points in this segment, and at the end highlights what your strategy for retirement savings really should look like if you want to avoid the sliminess of these financial advisors. I will address a few key points in his video (in case you don’t have an opportunity to watch):
1. The Term “Fiduciary” is EXTREMELY Important – By its legal definition, it is a term that is used to describe any relationship where one party is legally required to act only in the best interest of another party. To break a fiduciary relationship of any kind is extremely serious and this is really the best gauge you have for determining the trustworthiness of a financial advisor. Anyone without this title will be a huge gamble for you and your retirement no matter how many famous people trust them (*ahem* Bernie Madoff) or how many people watch them on TV giving stock advice (*ahem* no comment). If you use a financial advisor, ask if they are a fiduciary. If not, take your money and run.
2. Start Saving TODAY – Yes, build a time machine and go back ten years and then start saving for retirement. It is never too early but there are instances where it certainly can be too late. Stop putting it off and DO IT.
3. Everyday People Should Invest in Low-Cost Index Funds – If you are not comfortable picking your own stocks after separating from your broker, or if you are new to retirement savings and just opened an account, then the best thing to do would be to google “low-cost index funds.” Put your money into a few different funds (index funds are easy because they try and match the stock market) and then leave it alone. Do not even look to see how they’re performing; set it and forget it. Actually, you should check on them every now and then. I love their suggestion (and am mad I didn’t think of it) you should check them as often as you google the phrase “Is Gene Hackman Still Alive?” (about once per year) – Fun fact: he IS!
4. Over Time, Slowly Switch from Stocks to Bonds – By the time you retire, the majority of your portfolio should be in bonds. Bonds do not possess robust growth, but are a way of ensuring that your money cannot lose value. What if all your money was in Microsoft and the stock completely crashed the day before you decide to retire? All your money would be gone overnight. With bonds, this cannot happen. The video gives the best advice for how to know when to start shifting from stocks to bonds: every time a new James Bond is cast (so whenever we move past Daniel Craig) move some more of your money away from stocks and into bonds. Easy, right?
5. Keep Your Fees Below 1% Annually – This is hard to find, especially in an employer-sponsored 401(k). If you’re lucky enough to have an employer who will match your 401(k) contributions – do it! It’s free money that ultimately takes the brunt of much of the fees that will be paid out over time. I do this, and fortunately I have an employer that allows me to create the structure of my own retirement portfolio which cuts down on management fees significantly. There is still no substitute for just doing it yourself though. A little independent research can mean the difference between being able to have enough money to sustain you for 20 extra years.