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Like most people, I’ll get to feeling overwhelmed. Too many choices, too much complexity, just too much. Once the overwhelm kicks in, there are two ways forward; take a big deep breath and calmly work through the issue, or simply put the whole thing aside. I would like to think that I do more of the former, but as a human being, sometimes it’s the latter.
And it worries me that when financial advice is broadcast to a wide audience, the vast majority will feel their heads spinning. Like most people here as part of the Humble Dollar community, I would like to think that I’ve got a good grasp of the basics. But when the discussion turns to tax efficiency, sequence of return risk, inflation hedges and myriad other topics, I can be left feeling a little dazed. So I can just imagine how Joe or Janet Average might feel trying to get their head around these issues. Once Janet or Joe is feeling thoroughly confused, I suspect that it all gets too hard and they take no action to improve their financial situation. In fact, they may even do the opposite and gravitate to a seemingly simple scheme that is “too good to be true”, and destroys their financial health.
Specifically for retirement preparation, I tend to think that society as a whole would be well served with a very simple approach. Something like:
– Put 12% of your wage, or as close as you can possibly get, into a target date fund.
– Keep doing this until retirement age.
– Once in retirement, always have 3-7 years worth of spending into a high yield savings account. Avoid topping this up on years when your index funds are down.
– Keep the remainder in a suitable mix of fixed interest and globally diversified index funds.
Now, please feel free to argue with me about my particular plan. I’m no financial oracle (obviously) and won’t claim to have the final answer on this. And this plan will not optimise the outcomes for an individual. But I would argue that if the plan is going to be reasonably good for the vast majority of the population, and is sufficiently simple so that people can grasp it and feel comfortable actually implementing it, that it would provide vastly better outcomes for a huge proportion of society.
Could a plan outlined in just a handful of dot points be perfect? No. But could it have a massive positive impact on retirement outcomes? I think …. yes.
I think your plan is an excellent launch pad for most people.
As I look back, I have benefited from making 401k contributions every two weeks since 1994. Not through some great financial wisdom, it just seemed like a good idea to get the company match (free money) when I started. I set it and mostly forgot it. With the exception of over time increasing contributions with pay raises until I was able to max out the contribution limit. For many years the quarterly paper statement received in the mail was my only window into progress being made and I didn’t pay attention to the stock market. Simple.
Back then I did not understand the complexities of investing and the potential pitfalls. It is only over the last 5-6 years that I have sought to better educate myself. In retrospect I am sure that I would have been much better off today if low-cost index funds had been available as a choice in my 401K, fortunately I wasn’t paying outrageous fees either.
Over the past 2-3 years, I have been trying to give some financial advice to my now 30-year-old daughter. At first some suggested reading and websites, to no avail, and some gentle prompts to let me look under the hood of her finances. Eventually, when the time was right for her, she did allow me to take a look under the hood. Unfortunately, I found credit card debt (for which she was making minimum payments) and while she did have a 401k retirement plan, its balance was meagre and she was not saving enough to take full advantage of the company match.
Today she has a simple plan:
I consider this a major achievement!
When I saw the title of your article for some reason it made me think of an interview with Bono from U2 discussing the bands success and longevity. He said, in reference to selecting songs for an album, “good is the enemy of great”. That might be the case for a rock band but not necessarily for personal investing / retirement planning.
Thanks Grant. I love the simplicity of your daughter’s plan. The reality is that most people have little or no interest in the details of personal finance. I wholeheartedly believe that a very simple but imperfect plan is more likely to succeed than a complex, but technically superior plan.
No argument about keeping it simple, choice is not always a good thing. One of the worst places for choice beyond investing is health care coverage. Just think of all the words used to describe the choices enrolling in Medicare- totally unnecessary and unfair.
In your post you mentioned retaining 3-7 years of spending in savings. The reality is not many retirees have that much anywhere at anytime. The HD perspective is showing. The average retiree has about $200,000 in total savings and average is quite misleading.
Thanks Dick. Certainly happy to accept the criticism. My main aim is simplicity, and I’m sure someone smarter than me could improve my very basic thoughts, whilst still keeping it very basic.