Suze Orman TwitterSuze Orman FacebookSuze Orman YouTubeSuze Orman LinkedIn
View Blog & News List

Let’s Not Sell Young Retirement Savers Short

November 03, 2014 at 1:00 AM

Let’s Not Sell Young Retirement Savers Short

A recent paper from the influential Research Affiliates investment management firm (more than $140 billion in assets managed) takes the provocative stance that young adults saving for retirement should not start out with a large portion of their money invested in stocks.

I respectfully disagree.

One key point of the paper is that young adults have a tendency to cash out their 401(k)s when they are laid off. Given that layoffs are most prevalent during a recession-when stock values are falling-the last thing a young person wants is a portfolio that has sharply declined in value right when they need it.

But that just seems to concede that cashing out a 401(k) is a fact of life, and is somehow okay. It is not okay. I don’t think we need to change the portfolio mix for young retirement savers. We need to change the mindset of young workers that their 401(k) is not something to be raided. And that’s a two-step process.

First: We need to show every young adult who wants to take a withdrawal, the opportunity cost of pulling that money out. If we are really being honest that we care about the future of our young adults, and if employers are really serious about wanting to help employees build retirement security, that requires a bit more than lip service.

Educating young adults about the damage of early withdrawals is really low hanging fruit. Why can’t every request for an early withdrawal immediately trigger a message that shows an estimate of what the participant will pocket after paying tax and the 10% early withdrawal penalty and also show an estimate of what the existing balance could grow to by the time that person turns 70, assuming a conservative rate of return of say 4%? And let’s require the participant acknowledge they received this information, and then ask them again if they still want to make the withdrawal. It’s just a nudge. They are still in control. But it forces them to make an informed decision based on facts, not emotion.

Let’s Not Sell Young Retirement Savers Short

Second: We need to do better at encouraging young adults to build an emergency savings account. When you have money set aside for layoffs, or whatever, you will be less inclined to raid your retirement money. The Research Affiliates piece also advocates for this. Where we disagree is that Research Affiliates suggests that the retirement account first start as a safety account: that it be invested conservatively until the balance is equal to six months income.

I think it’s best to keep the two distinct goals in two distinct accounts, and invest each accordingly.

A 401(k) is a horrible rainy day fund: you must pay income tax on 100% of the withdrawn amount and a 10% early withdrawal penalty. I don’t think it’s asking too much of twentysomethings to have them start building an emergency fund by making automatic deposits from their paycheck or checking account into a savings account. I know plenty of twenty somethings doing just that. And if and when they need to tap it, there’s no 10% penalty and the only tax is on interest earned, which these days is nil.

If we really think young adults can’t save for both at once-a point I am not suggesting is true-then at the very least let’s provide good advice: Always save in a 401(k) that offers you a matching contribution, but limit your contribution to what you need to max out on the match. And plan on never touching that 401(k) until retirement. (I also want all 401(k) savers to understand that even if they were to file for bankruptcy, their 401(k) savings will not be touched; all money in a 401(k) is protected in bankruptcy.) With that long-term horizon, let’s do a better job making a case for the long-term benefits of having a heavy allocation to stocks in your younger years.

Then all additional retirement saving should be done in a Roth IRA. All contributions one makes to a Roth IRA can be withdrawn at any time without any tax or penalty; just earnings are subject to both. That’s a better back up emergency fund.

Tag Cloud

small changes would you decline a bonuscredit union10 year repayment plan Stock Investmentsteach your child good money habitsreplace permanent life insurance with termprovider of financial supportretirement accountsidentity fraudlousy investmentRevocable Living TrustRetirement Savingsdon't charge a pennypay more than minimumCredit scorePay Off Debt Before Retirementrequire chore in exchange for allowancemarriage inequalityPrime Rate Rise 2015lower ratecredit utilization rateinsurance mistakecredit cardNewtownhigh down paymentborrow each year, capitalization is going to pile up women outlive menlower mortgage interestLegal Guardianat worst still pay 75% benefitWall Streetstudent loan debthome loan credit score below 740 Suze is my biggest mentorlife insuranceopen enrollment review death benefit needs for familycompare provider pricingspecial saving accountcharges on credit cardlow down paymentschedule vacationbuy home you can affordCD'spay off debtdeath benefit 20 to 25 times annual incomeCiti Simplicity Card mortgage interest tax deductionStaffords this year have a fixed 6.8% interest rate15 year mortgageBankwomen long term carefile taxes quicklyfiduciaryadvice for college graduatesdo you need life insuranceInflation Benefitsidelinedshort term goal point cost offset by savingschildren under 18HDHP's are not badrent vs buyoverspend on giftsMoney MarketAARP Social security calculatorswitch to spouse coveragecredit reportlower interest rateETF'shealthy gumsMoneyincrease retirement savingsresponsible with moneyget health insuranceis it true? 8 month emergency fundFederal Funds Ratecar buying mistakes2017 TaxesGay Rightshome budget after tax costcut monthly cable bill8 month safety netfour steps to retirement savings engaged in financesraise deductiblessuccessinterest capitalizationcommunity collegeadult childrenfinancial aidNew american Dream earn more on savingsraise your deductiblebad retirement planning!00% tuition paidquick closinglowest cost fund optioncreate new truthNew York Lifeclosing disclosureloan is giftsocial security not going brokeTeachescrowLovereal estate marketenjoy saving University of Illinoislow mileage discountlearn good financial choices30 year mortgage allowanceFinancial Solutions For YouheartacheAlarm ClockLong Term Care shoppingultimate compounding giftbuy down comparison shoppingLong Term Care Insurance pay down student loan debtearn allowancenot enough life insurancezero rate transfer dealsBaby Boomersstretch out haircut appointmentshigh premiumsprescription tiermonthly dental insurance premiumFICO at least 720mobile appmental healthtake actionwaive home inspection bidMost Influential Celebrities Listdoctors in networkpaid in fullsummer job match income depreciating asset only refinance if it paysFederal PLUS loanCredit Card Rate Increasebest interest of investoradd teenworkaholicloan big picture marriage financial responsibilityeliminate credit card debtunder 18 financial gifthealthy aging no waiting periodpreexisting condition not coveredget over life insurance phobiaoverspend on nights outMarlo Thomassecure creditkeep a scheduleholiday spendingForeclosureSuze changed my lifeHDHP'sallowance taskcredit managementmoney-aware childbetter loan ratesinsurance yearly reviewprotect dependent dental savings planCory BookerUrbana-Champaignstay positiveConventional loan PMIritual scheduleGraceFundsraising mortgage rates Amy Lacyetdon't blow tax refundbad decisionsbig results financing car tax refund fraudvalentines dayalternative FICO scoreFHA loan feesdon't ignore open enrollmentbreakdown projected monthly housing costdon't do five year car loanhigher insurance deductibleleave a legacyretirment savingsSandy Hook Promiseno negativityrising home pricesrefundTelepicturesdon't buy wantspurely financial standpointalways use all paid time offmake saving a pleasureno tax on withdrawlsInfluential Celebrityiffy incomeFICO credit score credit card mortgageFederal Stafford loanlow credit scoreraise insurance deductibleconfident of solutionlong term carecostly insurance mistakepay 100% cashno retirement funds for down paymentprotect your familyHoliday Seasoncontribution Richautomatic paymentsavingshome buying mistakesgift grandchild IRA contributionForbes Top 1050 over 50high deductible health care planconsider roth 401(k)Americans don't use all paid vacation timesecured cardrefinance20 year level term costly legal One Wallet At A TimeGiftsFinancial Power of Attorneytax ID theftIRA contribution gifted moneySwap Older Annuities or Life Insurance no sneaking in feespercentage men widowed 75-84standard deduction savings pleasurewives should be involved in retirementFinancial Advicedon't use allowance as bribe3 savings buckets reduce withholdingget the most out of social security let them have 50% controlWarner Bros Television Groupprofessional advisorlong-term care LTC shoppinghealthy retirement blood pressureMust Have Documentsraising interest ratesAuto Savings Mortgage Credit Availability Indexsetup automatic savings withdrawavoid burn outlife insurance name trust as beneficiaryFICO Scoremortgage disclosuregift up to 14,000calculate dependents annual income needspay credit debt ASAPbill paying prioritieslower overall drug costFinancial EducatorteensFree Debt Eliminatorcar loanonly offered while employed focus on new truth save become member financial fearssave moneydon't spend social securityhighest possible benefitEasy Life Insurance live below your meanshome ownershipLTCloan no longer than 36monthsis it kind?Financial Awareness Video Festivalgrandparent IRA contribution Long Term Care premiumsSpendingfraudulent returncollege studentdon't cover cosmetic dentistrygrandchild summer job IRA contributionhousing marketspeak new goalplanshop online guaranteed level term policycar leasinggay marriage ban end Florida family save at least $100 monthlyARM CautionRevocable Trustitemized deductionknow before you oweemergency fund savingsaccelerate dental workloved ones dependent on incomespring summer Influentialspay high rate off firstverify retirement plan with HR or plan sponsorYoung Adult not gender specific healthy retirement weightis it necessary?maintain standard of livinginitial tax break Holiday Shoppingpermanent life insuranceteach importance of helping othersignore 6 month grace period worst financial mistake20% down payment avoid fees3 bucket approachtaxesdoctor no longer in networkcnbc alarm clock19 years cash flow problem10% donate to charityno life insurance financially irresponsiblefinancial goal phraseterm insurance40% toward financial goalbest interest rateshealthy teethmax benefit coveredInvest for savings growthdear suzesocial workdental discount plangraduationmortgage brokerloan necessitylong-term care premiumsrolloverbuying car 2016insurancemeet monthly real estate mistakesbe good exampleCommencementhigher monthly paymentdon't derail retirement savingsHDHP's are good for youEmployer Matched Contribution740 credit scoreno splurge derailed planpush yourself to save more for retirementHolidayborrowing plan negotiate points with bank or sellerHDHP/HSALifestyleWillEmergency SavingsPhyllis Shelton expert long-term careStudent Debthigh FICO scorebetter termsVeterinary Schoolno interestThe Suze Orman ShowStudent LoanRetirement Income3 step financial road mapdebtterm life insuranceinterest on student loanstelevision hostVital Documentsbuy homecouple financesmoney vowsone annual feesame-sex marriage2016 adjust estimated taxidentity theftdental insurance premiummax employer matched 401(k) contributionannual cost of living adjustmentfinancial argumentsMass MutualSatisfyingvalue moneyincrease retirement contribution rateroth irakids schedule paymentsback-to-school budgetSuze OrmanStudent Debt Crisisreduce interest rateLTCi ASAPapproved medical 100% tax-freecommitSuze Orman's Money Wars2015 record year car salesreduce monthly paymentsuitableBeautybest loan deal mortgageCommunication Skills social security never insolventletter to suzeDurable Power of Attorney for Health Carecompare monthly expenseshigh credit score discountteens and moneyclosing feesaffordable premiumfederal student loan deferment responsibleAccuQuote.comclosing costs 2% of loanfocus on needshome insuranceeight month living expense Financial SystemJose RodriguezExhibitionForbesfull retirement ageAdequate Auto and Home InsuranceFinancial AwarenessOverspendingpublic service loan forgiveness programno private loanemployer funding HSAdebit cardlower premiumPersonal Finance401(k) Contributionsno apologyCNBClong term goalget credit cardnew carproperty taxretirement2015 financial roadmapcommunity banknon conventional routeHigh FICO Score = Better RateCOLA3% debt transferred powerfulrepay student loanscut monthly cellular billMoney-Savingtitle insuranceSelfishCivil Rightsstandard ratebalance transfer home buying budgetAARPSchool of Social WorkFinancialRoth 401(k)unsubsidized Stafford loanFRAHSA tax savingspercentage of women widowed 75-84healthy youprotect loved ones 6 month waiting periodFixed Rate Mortgagefinancial independencecommissionsMotheraffordabilityno late fee home buying seasonretain separate credit cardsjanuary billscan you afford itHigh Credit ScorePBS Specialcost of capitalization calculatorthree year car loanjuggle multiple financial goalsdangerous money seasonUS Tax Codefinancial concerntoo expensive schoolorigination feesGoodbyeback door Roth IRA401Kretirement planhome related tax break bonus Post-DivorceInterestAshley SpringerFinal GoodbyePrime Rate Increaseincentives for health care wellness screeningswitch to roth 401(k)budgetHow To Build Creditpeace of mindemotional stakesstudentdangerous retirement plandon't defer interest paymentsSuze approvedpaid vacationCredit Card Interest Ratestaycationbetter loan dealssame sex marriage band end Floridawrite new goalBankruptcyBill and Pennychildren's book20% down paymentFiscal Responsibilityunexpected expensepositivephysical healthbe true to yourselfstudent loan repayment estimatorlow-cost index mutual fundpaying for collegeCollege of Veterinary MedicineGiftincrease emergency savingsstudent loan repayment planUniversity of Floridarequired disclosureMinor Children burn outdo not pay allowance for good behavioremployer offered life insurancedebt freekid borrow firstSelectQuote.com4 Must Have Documents multiple lendersautomate student loan paymentsoverspend on dining outSuze Orman spouse Kathy Travisstrained relationshipage appropriate chore15-year refinance dealHeartone credit cardGay Couplesemergency fund face your financial fearARMno fee transferco-sign Combo Insurance Productsincreased auto insurance premiumstore credit cardscollege graduateSuze Orman Scholarshipschool 8 Rulesdon't extend mortgage Eric Dodge public service career student loan repayment HDHP contribute household expenses dream schoolage appropriate goalsconfidentmanage student loansprotect and provide for minor child max employee matchmonthly benefit pay interest while in school20 to 25 times annual income2016 adjust withholdingSandy Hook Elementary SchoolFederal Reservepay down car loanpresident Obamareferrals CPI-WWashingtonFinancial Cliffyours, mine & oursovercome financial fearsanticipated salary20% equityChanging LivesSave Us Moneywomen longer life spanstudent loan repaymentfile asapFinancial Gift Cliffbuying a carverify wellness screening and programstraditional vs roth 401(k)no private loansDeath Benefitis it necessarynear historic lowsgift not loanshorter payback perioduniversal college accessexercise reguarlywomen live longerbe kind to yourselfautomatic withdraw to savings adjust allocations

View Blog & News List
People First. Then Money. Then Things.
Connect with me on Facebook Connect with me on YouTube Connect with me on Twitter
© 2017 Suze Orman Media Inc. All rights reserved.
 |  Search  |  Sitemap  |  Privacy  |  Terms
Sign Up For E-mail Offers
Open Panel
Close Panel