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

emergency fund real estate marketcostly legal 20% down payment avoid feesAdequate Auto and Home InsuranceHDHP 19 years cash flow problemclosing feesinsurance yearly reviewnear historic lowsmortgage interest tax deductioncommissionsworkaholicgay marriage ban end Florida BankMoneydebt freeAuto Savings january billsknow before you oweno splurge same-sex marriageTeachpremiumbe kind to yourselfaccelerate dental workpay high rate off firsttax refund fraudburn out8 month emergency fundteensHigh Credit ScoreAshley Springerpeace of mind15 year mortgage4 Must Have Documents Invest for savings growthMost Influential Celebrities Listoverspend on nights outcharges on credit cardFICO credit score credit card mortgagekid borrow firstshort term goal increase retirement contribution ratecontribution emergency fund savingscreate new truthloan is giftreduce withholdingwrite new goalback-to-school budgetdon't cover cosmetic dentistrybe good examplePrime Rate Rise 2015manage student loansCombo Insurance ProductsFinancial Power of Attorneystandard deduction meet monthly Americans don't use all paid vacation timeCD'sconfident of solutionverify retirement plan with HR or plan sponsorhome ownershipcollege studentLong Term Care shoppingescrowbetter loan dealsiffy incomeAARPFederal Reserveunder 18 financial giftallowancemax employer matched 401(k) contribution3 savings buckets plancut monthly cable billpoint cost offset by savingshousing marketbudgetreferrals raising mortgage rates ignore 6 month grace period is it necessaryUrbana-Champaignreal estate mistakesVeterinary SchoolEmergency Savingsno fee transferlife insurance name trust as beneficiaryraising interest rates50 over 50holiday spendingavoid burn outsocial securitylow mileage discountadvice for college graduatesloan no longer than 36monthshealthy aging dental insurance long term goalsetup automatic savings withdrawfinancial goal phraseloan necessitylow-cost index mutual fundhigh premiumschildren under 18employer funding HSAdon't use allowance as bribeearn more on savingsdon't spend social security never insolventfamily save at least $100 monthlyNew York Lifefinancial aidheartachewomen live longerback door Roth IRARevocable Trustget over life insurance phobiataxesOne Wallet At A Time401(k) Contributionssave insurance mistakeannual cost of living adjustmentautomate student loan paymentsletter to suzefocus on new truth consider roth 401(k)Forbesyours, mine & ours20% down paymentpurely financial standpointreduce monthly paymentis it necessary?Holiday Shoppingphysical healthbill paying prioritiesearn allowancerolloverteens and moneyFixed Rate Mortgageidentity theftsocial workgift grandchild IRA contributionlong-term care open enrollment review engaged in financescar loanEric Dodge Money Market8 month safety netfocus on needsdon't charge a pennyFederal Stafford loansmall changes push yourself to save more for retirementpay credit debt ASAPmaintain standard of livingbest interest of investorlong term carecollege graduatenew carLovestaycationRichSandy Hook Promiserefundcredit utilization rateHSA tax savingsdon't buy wantsSatisfyingincrease retirement savingsdon't derail retirement savingshealthy retirement blood pressurebe true to yourselfallowance taskno negativityStaffords this year have a fixed 6.8% interest ratetake actionHow To Build Creditage appropriate choreteach your child good money habitsgraduationspring summer no waiting periodorigination feesSuze OrmanHoliday SeasonAARP Social security calculatorbuying a carcar leasingoverspend on dining outdeath benefit 20 to 25 times annual incomeJose RodriguezFICO ScoreBill and Pennyrising home pricesteach importance of helping othershealthy teethbig results mortgageget the most out of social security mobile appstretch out haircut appointmentsrequired disclosure20 to 25 times annual incomewives should be involved in retirementpercentage of women widowed 75-84Pay Off Debt Before Retirement30 year mortgage automatic paymentInterestkeep a schedulePost-Divorcecredit unionSuze changed my lifetitle insuranceface your financial fearprotect your familyno late fee pay more than minimumbuy home you can affordpercentage men widowed 75-84no private loansretirement planwould you decline a bonusCommencementclosing costs 2% of loandoctors in networkFRAhealthy gumsSwap Older Annuities or Life Insurance Influentials20 year level term loved ones dependent on income6 month waiting periodFederal Funds Rate2015 record year car salesitemized deductionlousy investmentchildren's bookCOLAGraceSandy Hook Elementary Schoolincrease emergency savingsPrime Rate IncreaseForeclosureunsubsidized Stafford loanHeartno interestMass MutualMoney-Savingterm insuranceexercise reguarlytraditional vs roth 401(k)Beautypermanent life insurancepay off debtSchool of Social Workenjoy saving live below your means10% donate to charityFinancial CliffDurable Power of Attorney for Health Carehigh deductible health care planExhibitioncouple financesfinancial independenceGiftdebtco-sign shop online guaranteed level term policystandard ratepaid vacationbad retirement planningdon't blow tax refundhigh credit score discountFHA loan feeszero rate transfer dealsgrandparent IRA contribution eliminate credit card debtsecured cardhome buying seasonverify wellness screening and programsjuggle multiple financial goalsTelepicturesdream schoolfiduciaryritual schedule40% toward financial goalrepay student loansreplace permanent life insurance with termcontribute household expenses is it kind?summer job match income lowest cost fund optionWashingtonUniversity of Illinoismortgage disclosureautomatic withdraw to savings don't defer interest paymentsrefinancepay down car loanno life insurance financially irresponsibleraise your deductible8 RulesInfluential Celebrityleave a legacyworst financial mistakeaffordabilitySuze Orman spouse Kathy Travis15-year refinance dealLTCi ASAPinterest capitalizationPBS Specialat worst still pay 75% benefithigh FICO scoredo not pay allowance for good behaviormental healthmortgage brokerpaid in fullcan you afford itMinor Children HDHP's are good for youCredit Card Interest RateEasy Life Insurance cut monthly cellular billMarlo ThomasHolidaydon't ignore open enrollmenthome buying mistakesemployer offered life insurancemax benefit coveredBaby Boomersdental savings planCPI-Wcompare provider pricingSelfishNewtownSuze Orman's Money Warsconfidentspecial saving accountFree Debt Eliminatordo you need life insurancestudent loan repayment estimatorpaying for collegevalentines daycredit cardfinancing car same sex marriage band end Floridacompare monthly expensesbest interest ratesGiftsLifestyleadd teenmoney-aware childETF'sFinal GoodbyeSave Us Moneyno private loanswitch to roth 401(k)school incentives for health care wellness screeningprotect loved ones file taxes quicklyborrow each year, capitalization is going to pile up home insuranceroth iraARMraise insurance deductibleclosing disclosureproperty taxlong-term care premiumsadult children3% debt transferred eight month living expense derailed planARM CautionSuze Orman Scholarshipdoctor no longer in networkprotect and provide for minor child Suze is my biggest mentorstore credit cardsprescription tierresponsible with moneybuy down cnbc alarm clockHigh FICO Score = Better Ratenegotiate points with bank or sellercost of capitalization calculatorretirement accountsRevocable Living Trustsidelinedmarriage financial responsibilityfinancial concerndeath benefit needs for familyemotional stakesSpendingBankruptcystay positivedear suzemonthly benefit Financial Awareness Video Festivalcredit managementone annual feeprovider of financial supportStudent Debt Crisisdepreciating asset too expensive schoolinitial tax break Gay Rightsfinancial argumentsMortgage Credit Availability Indexpreexisting condition not coveredgrandchild summer job IRA contributionhome buying budgetFICO at least 720loan big picture higher monthly paymentincreased auto insurance premiumCredit scoremultiple lendersbetter loan ratesraise deductiblescomparison shoppingpay 100% cashEmployer Matched Contributioncommunity bankStudent Debtwomen outlive menget credit cardultimate compounding gifthigh down paymentdangerous money seasonlower premiumno sneaking in feesuniversal college accessstudent loan debtfraudulent returnAmy Lacyetwaive home inspection bidConventional loan PMIhealthy youdebit cardsocial security not going brokeonly refinance if it paysCredit Card Rate IncreaseCiti Simplicity Card bad decisionstax ID theftbetter termsFinancial Awarenessage appropriate goalsadjust allocations LTCpublic service loan forgiveness programlife insurance401Kgift not loanFinancial Gift Clifffull retirement agebest loan deal retirment savingsstrained relationship10 year repayment plan overspend on giftsWarner Bros Television Grouphome related tax break bonus don't do five year car loanFinancial Advicelow down payment2016 adjust withholdingget health insuranceswitch to spouse coveragehome budget after tax costquick closingmax employee matchAccuQuote.combreakdown projected monthly housing costnot gender specific CNBCNew american Dream television hostWillwomen longer life spanMust Have Documents2017 Taxesterm life insurancemarriage inequalitylow credit scorefinancial fearsMotherOverspendingcalculate dependents annual income needsFinancial Solutions For Youcostly insurance mistakealternative FICO scorefour steps to retirement savings protect dependent file asaplower rate2016 adjust estimated taxsavingsGay CouplesUniversity of FloridaPersonal Financeovercome financial fearsLong Term Care premiumswomen long term carepowerfulsuitablepublic service career student loan repayment president ObamaCollege of Veterinary MedicineLTC shoppingmake saving a pleasurekids schedule paymentsStudent Loanshorter payback periodWall StreetFundsidentity fraud2015 financial roadmapstudenthealthy retirement weightbuying car 2016highest possible benefitsecure creditresponsiblelower mortgage interestLegal Guardianmoney vowscommunity collegerent vs buyYoung Adult HDHP's are not badreduce interest rateprofessional advisorcar buying mistakes!00% tuition paiddon't extend mortgage 740 credit scorecredit reportgift up to 14,000unexpected expenseCory Bookerno retirement funds for down paymentdental discount planrequire chore in exchange for allowanceretirementnon conventional routelower overall drug costhigher insurance deductibleinsuranceRoth 401(k)positivestudent loan repaymentpay interest while in school3 step financial road mapthree year car loanStock Investmentsalways use all paid time offRetirement Incomeno apologybuy homeFinancialUS Tax Codeapproved medical 100% tax-freemonthly dental insurance premiumdangerous retirement planDeath BenefitGoodbyeSelectQuote.comhome loan credit score below 740 Communication Skills HDHP/HSAinterest on student loansHDHP'scommit3 bucket approach20% equityRetirement Savingsnot enough life insurancefederal student loan deferment affordable premiumFinancial SystemInflation BenefitVital Documentsretain separate credit cardsspeak new goalIRA contribution gifted moneySuze approvedborrowing plan Forbes Top 10value moneyis it true? no tax on withdrawlsChanging Livesone credit cardAlarm ClockPhyllis Shelton expert long-term careschedule vacationlet them have 50% controlpay down student loan debtFinancial Educatorbecome member Civil Rightsstudent loan repayment planonly offered while employed The Suze Orman ShowLong Term Care Insurance balance transfer learn good financial choicesanticipated salarysuccesssave moneylower interest rateFiscal ResponsibilityFederal PLUS loansavings pleasure


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