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

paying for collegefocus on new truth Easy Life Insurance social security never insolventback-to-school budgetbecome member Auto Savings mortgage brokerSuze Ormanmax employer matched 401(k) contributionGay RightsSuze changed my liferetirement accountsMotherfinancial independenceChanging Liveshome related tax break bonus manage student loansUniversity of Illinois50 over 50advice for college graduatesmaintain standard of livingroth iradear suzeEmployer Matched Contributionpaid in fullbetter termsrefundfinancial argumentsdon't extend mortgage retirement planno interestStudent Loandream schoollow credit scoreunsubsidized Stafford loanbalance transfer don't buy wantscredit unionSuze is my biggest mentormobile apploan big picture AccuQuote.comhome budget after tax costdon't defer interest paymentsno fee transferstay positivewomen outlive menpremiumexercise reguarlyincentives for health care wellness screeningmax benefit coveredsummer job match income doctors in networkenjoy saving compare monthly expensesrolloverCPI-Wbuy homeCory BookerRoth 401(k)HSA tax savings20% equityMarlo ThomasHolidaylousy investmentloan necessitydoctor no longer in networkMass Mutualprotect and provide for minor child Banklower premiumidentity theftthree year car loan3 step financial road mapescrowSuze approvedOne Wallet At A TimeCredit Card Rate Increasemake saving a pleasureclosing costs 2% of loanconsider roth 401(k)debit cardSchool of Social Worknegotiate points with bank or sellerhome loan credit score below 740 Financial Awareness Video Festivalcost of capitalization calculatorhighest possible benefitfile taxes quicklycontribution increase emergency savingsPrime Rate Increaseiffy incomeVeterinary Schoolannual cost of living adjustmentterm insurancehome buying budgetsavingsbetter loan ratesFinancial Solutions For You4 Must Have Documents charges on credit cardnot gender specific tax refund fraudpay high rate off firsthome buying mistakesstore credit cardsbad retirement planningrising home pricesFRACivil Rightsinsurance mistakeFHA loan feesloan is giftWarner Bros Television Groupreal estate mistakesdo not pay allowance for good behaviorgift not loanETF'sspeak new goalreferrals family save at least $100 monthlypoint cost offset by savingsHoliday SeasonHDHP powerfulHoliday Shoppingtraditional vs roth 401(k)kid borrow firstdebtEmergency Savingsphysical healthhealthy aging IRA contribution gifted moneypurely financial standpointAshley Springer40% toward financial goalPost-Divorceunder 18 financial giftSuze Orman Scholarshipborrow each year, capitalization is going to pile up Lifestylesetup automatic savings withdrawbe kind to yourselfnear historic lowssmall changes Personal Financebe good examplegrandparent IRA contribution same-sex marriageverify wellness screening and programslive below your meansBeautystudent loan repayment estimatordeath benefit needs for familyearn allowanceSandy Hook PromiseSpendingfour steps to retirement savings don't blow tax refundExhibitionultimate compounding giftclosing disclosurelower rateGay Couplesis it true? no sneaking in feespay interest while in schoolstudent loan repaymentinsurance yearly review8 month safety netstudent loan repayment planno splurge studentderailed planfocus on needsget health insurancereduce monthly paymentcredit managementwrite new goalspecial saving accountget the most out of social security 401Kcredit cardcollege graduateitemized deductionno waiting periodprotect your familyyours, mine & oursPay Off Debt Before Retirementcollege studentpercentage of women widowed 75-84financing car 20% down payment avoid feesreduce withholdinginterest capitalizationpay off debtHow To Build Creditvalentines daykids schedule paymentsautomatic withdraw to savings COLAwaive home inspection bidprescription tierpublic service career student loan repayment is it kind?mental healthTeachpermanent life insurancecalculate dependents annual income needscouple financesAARP Social security calculatorCommencementRichorigination feesUrbana-Champaignloved ones dependent on incomeEric Dodge Americans don't use all paid vacation timetitle insuranceLong Term Care Insurance identity fraudcut monthly cable billstudent loan debtHDHP/HSAFinancial Power of Attorneyuniversal college accesspay more than minimumWashingtoninterest on student loanszero rate transfer dealsrequire chore in exchange for allowanceemployer funding HSAprotect loved ones New american Dream overspend on dining outanticipated salaryFinal Goodbyelong term carebest interest ratesdon't derail retirement savingsalternative FICO scoreUS Tax Codemonthly dental insurance premiumreal estate marketAdequate Auto and Home InsuranceLTCi ASAPinsurancecomparison shoppingget over life insurance phobiaoverspend on nights outbill paying prioritiescommunity collegeCiti Simplicity Card high deductible health care planHDHP's are good for youhome ownershipcut monthly cellular bill2015 financial roadmappercentage men widowed 75-84Newtownraise deductiblesJose Rodriguezsocial security20 year level term adjust allocations emotional stakesCredit scoremoney-aware childlong term goalstretch out haircut appointmentsretirment savingsteens and moneywomen longer life spanincrease retirement savingstelevision hostjuggle multiple financial goals15-year refinance dealTelepicturesdon't ignore open enrollmentwould you decline a bonusretirementno retirement funds for down paymentfinancial goal phraseLong Term Care premiumsis it necessaryhealthy retirement blood pressurehigh FICO scoresave Financial Gift Cliffdo you need life insuranceat worst still pay 75% benefitlearn good financial choicesfile asapStaffords this year have a fixed 6.8% interest ratebe true to yourselflife insurance name trust as beneficiarygift grandchild IRA contributionbuy home you can affordcar loankeep a schedulerequired disclosurePrime Rate Rise 2015secure creditStudent Debtwives should be involved in retirementswitch to roth 401(k)overspend on giftsLTC!00% tuition paidautomate student loan paymentsritual scheduleprotect dependent life insurancegay marriage ban end Florida no life insurance financially irresponsiblemax employee matchpublic service loan forgiveness programsavings pleasureunexpected expenseMoney-Savinglowest cost fund optionCNBCFree Debt EliminatorGiftbig results loan no longer than 36monthsplanreduce interest rateGraceFundslong-term care low down paymentadd teenFederal Funds RateFinancial EducatorBaby Boomersdeath benefit 20 to 25 times annual incomecommunity bankconfidentchildren's bookCommunication Skills push yourself to save more for retirementteach your child good money habitsno tax on withdrawlssecured cardcommitdon't cover cosmetic dentistryFinancial Advicedepreciating asset not enough life insurance10 year repayment plan costly insurance mistakefull retirement agereplace permanent life insurance with termage appropriate choreFinancial Cliffhigh premiumslow-cost index mutual fundcreate new truthCredit Card Interest Ratemoney vowsmortgage interest tax deductioncnbc alarm clockone credit card6 month waiting periodis it necessary?taxesMoneygift up to 14,000Influential Celebritystandard deduction repay student loansAlarm ClockPhyllis Shelton expert long-term carenew carInfluentialsCollege of Veterinary MedicineFICO at least 720pay down car loanWall Streetvalue moneyget credit cardallowanceonly refinance if it paysgrandchild summer job IRA contributionquick closingavoid burn outSuze Orman's Money Wars8 Rulesmarriage inequalityemployer offered life insurancebest loan deal better loan dealsGiftsignore 6 month grace period buy down 3 bucket approachback door Roth IRASave Us Moneyclosing feesLong Term Care shoppingadult childrensave moneyRetirement IncomeLoveSatisfyingjanuary billsLTC shoppingprovider of financial supportsocial security not going brokefinancial fearsbuying car 2016Conventional loan PMIFiscal Responsibilityfinancial concerndon't use allowance as bribepositive2015 record year car salesForbesbuying a caremergency fund savingstax ID theftalways use all paid time offdental savings plandental discount planpay down student loan debtterm life insurancesocial workBill and Pennyheartache2017 Taxes401(k) ContributionsFinancialFICO Scoreproperty tax3% debt transferred only offered while employed leave a legacyretain separate credit cardsno negativityFinancial Systemraise insurance deductible20% down paymentdental insurance fraudulent returnpay 100% cashdon't charge a penny3 savings buckets Suze Orman spouse Kathy Travisdangerous retirement planswitch to spouse coverageletter to suzeface your financial fearpreexisting condition not coveredMoney MarketNew York LifeAmy Lacyetcredit reportverify retirement plan with HR or plan sponsor10% donate to charitydon't do five year car loanMost Influential Celebrities ListOverspendinglower overall drug costThe Suze Orman Showmonthly benefit refinanceGoodbyebreakdown projected monthly housing costmarriage financial responsibilitystandard rateworst financial mistaketeach importance of helping othersschool paid vacationdon't spend no late fee 2016 adjust withholdinghome insurancerent vs buybudgethousing market2016 adjust estimated tax8 month emergency fundStock Investmentsincrease retirement contribution rategraduationsuccessDurable Power of Attorney for Health Careborrowing plan confident of solutioncontribute household expenses PBS Speciallower mortgage interestautomatic paymentcan you afford itInvest for savings growthhigher insurance deductibleForbes Top 10women long term carewomen live longerlong-term care premiumsRevocable Living Trustinitial tax break Retirement Savingsshop online guaranteed level term policymortgage disclosurebad decisionsHDHP's are not badStudent Debt Crisisone annual feedebt freeemergency fund dangerous money seasonFICO credit score credit card mortgageage appropriate goalsMortgage Credit Availability Indexshort term goal let them have 50% controlovercome financial fearscar buying mistakeshealthy retirement weightco-sign responsibletake actionFinancial Awarenessmultiple lendersresponsible with moneysidelinedSelectQuote.com19 years cash flow problemForeclosureSandy Hook Elementary Schoolallowance taskno private loanHeartpay credit debt ASAPapproved medical 100% tax-freeHDHP'sAARPholiday spendingYoung Adult know before you oweInterestBankruptcymortgagemeet monthly University of Floridasame sex marriage band end Floridaopen enrollment review federal student loan deferment president Obamateenscar leasingchildren under 18

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