Some advice for the 401(k) generation

We've all gotten the message to save more for retirement.

Problem is, our national conversation about planning for retirement is on the wrong track. It reflects too much Wall Street and not enough Main Street.

With the rise of the 401(k), Wall Street has convinced us that we need to be savvy investors to reach a comfortable retirement.

We've been told that stocks offer the highest potential return. And that the central question of retirement planning is figuring out how much stock risk we can bear.

That might be true for someone worth millions. But the typical worker nearing retirement has less than $100,000 in a 401(k). As Alicia Munnell, head of the Center for Retirement Research points out, most of us don't have enough money in the retirement till for high returns to count much.

What does boost retirement income? Let's turn to Main Street for guidance. Your grandparents were spot on when they said "spend less." You may have rolled your eyes when they passed on that time-honored chestnut, but they were right. The reason we don't hear this from Wall Street is because they don't make commissions pushing frugality. Main Street has also come to realize that most of us are going to need to work longer.

I find these numbers convincing. If the typical worker starts socking away for retirement at age 25, she cuts her required savings rate for a decent retirement by about two-thirds. But don't worry if you're 45: delaying retirement from age 62 to age 70 also cuts the required savings rate by two-thirds.

Look, as part of the 401(k) generation, we all need a well-diversified portfolio. But we should pay much more attention to our spending habits and our careers and much less time on our mix of financial assets.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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Using the 2008 crash as an excuse for not reasonably investing is short sighted. Chris Farrell gives good advice: live below your means. But that saved money needs to go into more than just CDs and that does mean stocks and bonds. "Investing" in horse racing says a lot about how the writer below will be living when he or she reaches their later years.

For the record, horse racing is a seasonal (Triple Crown Series, Breeders' Cup) past time for me. I have never been so foolish as to pin my financial security/future on it.

My relating the horse racing incident was to prove two points: A.) Most working middle-income “investors” are far too undercapitalized, uninformed, misinformed…and busy…to become “savvy investors” so successful as to retire off of their investing.

B.) There can be nothing father removed from “taking charge of your financial future”…as handing it over to SOMEONE ELSE to “manage” for you.

This is some really good and much needed advice. A retirement plan, like much of life, should be implemented from a probabilistic standpoint. That is, no outcome is deterministic. A retirement plan should be a quiver with many arrows in it. Some of those arrows will be duds (broken tips, cracked shafts, bad “feathering”) and some will fly true and straight into the heart of the retirement beast when it comes time to harvest it.

I remember the condescending looks I’d get from my coworkers when they learned that I didn’t participate in our company’s 401(k) plan. Then the financial crisis happened. That ended that.

I did attend one of the enrollment meetings at the urging of a person I knew in HR. The plan representative was going on with the usual pitch about thinking long-term (this was before the collapse). I, in turn, asked him if he would show a bit of good faith, and wave his fees, now, in return for a significantly larger percentage of the riches we were all sure to have later…in the “long-term.” He declined.

I ended by informing him that I, and everyone else in the room, would be dead “long-term” and I wanted my money now.

And as for the average American being a “savvy investor”. I was once overheard discussing my Kentucky Derby pick with a coworker. This compelled a listener near us to remark that that was gambling (who knew?!) and that betting on horses was for “suckers.”

I then informed her of the detailed history, merits and liabilities of the [live]stock I was investing in. What the mathematical probabilities (odds) of my “investment” finishing first, second, or in the money were (as handicapped by yours truly); What the fair money odds were based on those probabilities; How long it would take me to realize my gain or loss on said investment (about 2 minutes) and when I would know if my investment was a good one or bad one. (*6:45 EST on that Saturday…the first Saturday in May.)

I then asked her to give me the same details on the stocks in the 401(k) plan that she was pumping her hard-earned into every week. She couldn’t. “Now THAT’s gambling”, I retorted.

And that was the end of that.

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