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

Financial Cliff2015 financial roadmapHeartPrime Rate IncreasecommitTelepictureswould you decline a bonusignore 6 month grace period Free Debt Eliminatorspeak new goalidentity fraudUS Tax Codepay more than minimumdental savings planhome loan credit score below 740 low-cost index mutual fundETF'sstandard rateescrowpoint cost offset by savingsgift not loanonly refinance if it paysbest interest rates40% toward financial goalgraduationHDHP worst financial mistakeInterestzero rate transfer dealsSuze Ormansame sex marriage band end FloridaWarner Bros Television Groupdon't spend file asapvalue moneydon't do five year car loanmax employee matchMoneyautomatic paymentrefinancehighest possible benefitcharges on credit carddon't derail retirement savingsFinancial Power of Attorneyultimate compounding giftNewtownget health insurancepay down car loandebit cardfederal student loan deferment no negativityopen enrollment review Suze is my biggest mentorpay off debtno life insurance financially irresponsibleno private loanpay high rate off firstdon't cover cosmetic dentistry50 over 50write new goalcar buying mistakesLTC shoppingmake saving a pleasureLTCLong Term Care Insurance no sneaking in feespaying for collegestudent loan repayment estimatorcut monthly cable billLong Term Care shopping3 bucket approachmax employer matched 401(k) contributionAccuQuote.combuying car 2016breakdown projected monthly housing costcompare monthly expensestaxespublic service career student loan repayment traditional vs roth 401(k)SelectQuote.comcut monthly cellular billdental insurance no waiting perioddream schoolunder 18 financial gifthealthy youfile taxes quicklystrained relationshipcollege studentForbes Top 10credit managementlife insurance name trust as beneficiaryearn allowancemonthly dental insurance premiumlow down paymentcar leasingGracevalentines daycost of capitalization calculatortitle insuranceallowancepowerfulrequire chore in exchange for allowancereduce interest rateForbesAmericans don't use all paid vacation time20% down paymentbe good examplecompare provider pricingpreexisting condition not coveredroth iraspecial saving accountprotect dependent paid vacationavoid burn outhealthy retirement blood pressuregrandchild summer job IRA contributionbetter loan rateswomen longer life spanallowance tasknear historic lowscredit reportcontribution affordable premiumget credit cardpresident Obamaadvice for college graduatesmobile appHDHP's are not badresponsible with moneynot gender specific home buying seasonCollege of Veterinary Medicinemanage student loanskeep a scheduleCNBCInfluential CelebrityHoliday ShoppingStock Investmentsadd teenstudentOverspendingBill and Pennysocial securitycar loanFICO at least 720yours, mine & ourspay credit debt ASAPbalance transfer letter to suzeStaffords this year have a fixed 6.8% interest rateCredit Card Interest RateAmy Lacyetbecome member home ownershipLovecomparison shoppinggift grandchild IRA contributionhigh deductible health care planannual cost of living adjustmentinsurance mistakeprotect loved ones Personal FinanceStudent LoanNew american Dream 20 year level term overcome financial fearsPrime Rate Rise 2015Financial Awarenessrepay student loans15-year refinance dealCPI-WFinal Goodbyesocial security not going broke19 years cash flow problemtax refund fraud4 Must Have Documents mental health3% debt transferred Lifestylethree year car loandeath benefit needs for familymax benefit coveredgay marriage ban end Florida be kind to yourselfemployer offered life insuranceschedule vacationpercentage of women widowed 75-8410% donate to charitySuze Orman Scholarshipprotect and provide for minor child save no late fee How To Build Creditdon't blow tax refunddangerous retirement planback door Roth IRAAARPAuto Savings 740 credit scoreUniversity of Floridadebt freeStudent Debt Crisissocial security never insolventbad decisionsDurable Power of Attorney for Health Careinitial tax break buy home you can afford2017 TaxesCOLASave Us Moneyverify wellness screening and programsCory Bookerreal estate mistakesEmployer Matched Contributionpush yourself to save more for retirementchildren under 18school bad retirement planningSuze changed my lifeautomatic withdraw to savings sidelinedMarlo Thomasdon't charge a pennyfinancial fearsincrease emergency savingsreferrals enjoy saving kids schedule paymentsmortgage brokerOne Wallet At A Timemoney-aware childnegotiate points with bank or selleremotional stakesForeclosurelowest cost fund optioninterest capitalizationEric Dodge loan necessityat worst still pay 75% benefithealthy retirement weightdoctors in networkFiscal ResponsibilityFHA loan feesburn outshop online guaranteed level term policyrequired disclosureStudent Debtreduce withholdingbetter termsdental discount planterm life insuranceface your financial fearbig results retirement accountspublic service loan forgiveness programfinancial independenceclosing feesmultiple lendersdebtget the most out of social security mortgage disclosureanticipated salaryhome related tax break bonus get over life insurance phobiahealthy aging Bankruptcy401(k) Contributionsno retirement funds for down paymentage appropriate goalsleave a legacyjuggle multiple financial goalsloan big picture Changing Livescredit unionone credit cardGay CouplesEasy Life Insurance not enough life insurancedoctor no longer in networkdon't defer interest paymentsdeath benefit 20 to 25 times annual incomeretirementis it necessary2016 adjust withholdingonly offered while employed lower rateautomate student loan paymentsAshley Springerreduce monthly paymentbest loan deal pay interest while in school2015 record year car salescreate new truthinterest on student loansFinancial Advicepaid in fullBaby Boomersage appropriate choresuccessprescription tierspring summer Federal Funds Ratelower overall drug cost6 month waiting periodexercise reguarlystudent loan repayment planretain separate credit cardspermanent life insurancefull retirement ageraise deductiblesloved ones dependent on incomehousing marketdo you need life insuranceMass Mutualno splurge community bankoverspend on nights outholiday spendingWashingtonkid borrow firstHSA tax savingscollege graduateborrowing plan is it true? quick closingfinancial goal phraselong term carelong-term care high credit score discountrolloverMother10 year repayment plan itemized deductionMoney-Saving3 savings buckets raise insurance deductibleresponsibleiffy incomestandard deduction no interesthome buying budgetcredit utilization rateYoung Adult let them have 50% controlstore credit cardshigh down paymentknow before you oweRichconsider roth 401(k)no fee transferpay 100% cashretirment savingsno apologyHolidaydepreciating asset student loan repaymentInfluentialsCiti Simplicity Card new carNew York Lifelearn good financial choicesloan is giftphysical healthfocus on new truth switch to spouse coverage401Kmarriage financial responsibilityhome budget after tax costworkaholicpay down student loan debtcontribute household expenses 20% equityalways use all paid time offmeet monthly high premiumsPhyllis Shelton expert long-term careHDHP's are good for yousame-sex marriagebuy homepurely financial standpointCivil RightsIRA contribution gifted moneyfamily save at least $100 monthlyPBS Specialheartacheborrow each year, capitalization is going to pile up Credit Card Rate IncreaseSchool of Social Workloan no longer than 36monthsuniversal college accessHDHP's8 month safety netSuze Orman's Money WarsHDHP/HSAhigh FICO scoreincentives for health care wellness screeninghigher insurance deductibleunsubsidized Stafford loanrefundInvest for savings growthSandy Hook Elementary Schoollong-term care premiumsbill paying prioritiesConventional loan PMISatisfyingwives should be involved in retirementMoney MarketJose Rodriguezadult childrensetup automatic savings withdrawRevocable Living Trustclosing disclosurelife insuranceone annual feeFRABeautyhome insurancederailed planrent vs buydon't extend mortgage Gay RightsAARP Social security calculatorwaive home inspection bidincrease retirement contribution rate!00% tuition paidemergency fund adjust allocations dangerous money seasoncostly insurance mistakeinsurance yearly reviewFinancialis it kind?Suze approvedRetirement Incomelong term goalstudent loan debtstretch out haircut appointmentsdon't use allowance as bribeFinancial Systemfinancing car premiumalternative FICO scoreVeterinary SchoolWall Streetincreased auto insurance premiumproperty taxsocial worksecure credit2016 adjust estimated taxrising home pricesreplace permanent life insurance with termunexpected expensedon't buy wantscouple financesBankFinancial Awareness Video Festivalraise your deductibleemployer funding HSAteach your child good money habitsbe true to yourselfCredit scorehome buying mistakesdear suzeapproved medical 100% tax-freeconfident of solutionstaycationmoney vowscan you afford itFICO ScoreGiftSuze Orman spouse Kathy TravisFICO credit score credit card mortgage8 month emergency fundritual schedulechildren's bookfinancial argumentswomen long term careis it necessary?fraudulent returnincrease retirement savingsback-to-school budgetGiftsExhibitionUniversity of IllinoisSpending3 step financial road mapprovider of financial supportAdequate Auto and Home InsuranceThe Suze Orman Showbuy down 8 RulesTeachbudgetfinancial concernverify retirement plan with HR or plan sponsorRetirement Savingsteens and moneytax ID theftlive below your meanspeace of mindmortgagecredit cardterm insurancefocus on needsbetter loan dealsprotect your family20 to 25 times annual incomeUrbana-Champaignmortgage interest tax deductionfour steps to retirement savings monthly benefit overspend on dining outsave moneyteach importance of helping otherssavingsswitch to roth 401(k)television hostLTCi ASAPFinancial Gift Cliffdo not pay allowance for good behaviorMortgage Credit Availability IndexFundsno tax on withdrawlsplanLong Term Care premiumsoverspend on giftscommunity collegeidentity theftEmergency Savingsreal estate marketinsuranceSandy Hook Promisemarriage inequalityretirement planemergency fund savingssmall changes savings pleasureshort term goal Most Influential Celebrities Listwomen outlive menwomen live longercnbc alarm clocksummer job match income take actionCommunication Skills lower mortgage interestlower premiumlousy investmentAlarm Clockgrandparent IRA contribution percentage men widowed 75-84teenspositive20% down payment avoid feessecured cardlow credit scoreFinancial Solutions For Youclosing costs 2% of loanconfidentHoliday Seasongift up to 14,000Financial EducatorPay Off Debt Before Retirementjanuary billsdon't ignore open enrollmentCommencementcalculate dependents annual income needsstay positiveco-sign Post-Divorceorigination feeslow mileage discountGoodbyeRoth 401(k)buying a carmaintain standard of living

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