When it comes to the Top 3 New Year's resolutions for 2014, they are 1) Lose weight, 2) Getting organized, and 3) Spend less, save more, according to University of Scranton, Journal of Clinical Psychology. From the same source, you might not be surprised that only 8% of people that make resolutions are successful in achieving their resolution. So rather than talk about resolutions, let's talk about setting goals. After all, you can always get back on that horse. This subject is dedicated to all employer sponsored retirement plans, including 403b accounts, TSAs, and 401(k) accounts. If you would prefer a YouTube version, please watch:
Author Tom Corley submits that 67% of wealthy people write down their goals vs. 17% of poor. Another study found that people who call themselves happy often spend 5 hours a year on their finances. Most Americans probably spend more time planning their vacations than they do their financial future. Spend at least the same amount of time looking at your finances as you do planning your vacations. The wealthy don’t just focus on paying off debt, they establish clear goals for achieving financial independence. So if we understand that you make your habits, then your habits make you, it makes sense to begin the habit of setting aside money with your very next paycheck. Let’s look at some other interesting statistics:
Only 17% of employees indicate they are on track to replace 80% of their
current income (or their own goal)
Source: AON Hewitt, The Real Deal 2012: Retirement Income Adequacy at Large Companies
The average person should plan for a 20 year retirement
Source: US News & World Report, The New Ideal Retirement Age 67
The average employee receives a total contribution from employee and employer of 12.1% to their employer-sponsored retirement plan. Source: AON Hewitt, The Real Deal 2012: Retirement Income Adequacy at Large Companies
To achieve better than average results requires us to do things differently. To reach your goal for financial independence you may find it is necessary to set aside 15% to 20% of your earnings. Use time to your advantage and set the spending limit at 80% of what you earn and set aside 20% in the next 30 days. It's a beautiful thing to see funds set aside for those rainy days and retirement days that you know are in your future.
Now let's look at the habits too many investors keep that can dismantle funding their future:
- GREED The desire for wealth quickly and recklessly often causes people to invest heavily in the hot dot of the day.
- PANIC Reacting to short term market movements without planning or in a thoughtful way can result in the experience of loss of principal and depression.
- CONFORMITY Rather than investing in a herd mentality or like you hear everyone else you know may be investing, keep upmost in your mind your specific goals and tolerance for market volatility.
- IGNORANCE Instead of buying an investment and looking at in your rear-view mirror, the first question that deserves to be answered is What do you want your money to do? When will you need how much?
- APATHY Lack of interest or indifference cause people to avoid educational opportunities and may even disengage them from saving at all.
- ARROGANCE People tend to rarely change their allocations even after there has been a change in their circumstances or expectations. Be willing to learn and review your assumptions.
- PASSIVITY People tend to rarely change their allocations even though the markets or their goals may have changed.
Active vs Passive Management
If you are young or you don't need the money, it really doesn't matter what the market does. If on the other hand you are nearing retirement or in retirement, as we have shown here, that old buy and hold strategy may be your undoing after you take withdrawals compounded by suffering from negative market returns. Your human resources department and your mutual fund options aren't generally able to show you how you can apply active management strategies, so ask your financial advisor for help here. Since you are too busy to move money out of risky positions in bad markets and back into risk assets in good markets, you might want to hire help. Negative volatility on contributions may be helpful, but when it comes to larger lump sums the same losses may put you in position where the odds are not favorable for getting back to even as you need to start income distributions.
Start by getting a structural analysis. Begin your disciplined process by identifying the range of portfolios within your 401(k) options and match your risk and return characteristics to your options. Identify portfolio strategies that are suitable for investors, from conservative to aggressive. Then focus on what can be done to attempt to reduce short-term volatility and chance of loss while giving the investor the opportunity to outpace fees and inflation. Identify the risks you are willing to take as well as the risks you want to avoid. Monitor your portfolio at least annually as an ongoing process. Regularly evaluate whether the portfolio stays in line with its stated objectives; whether the investment options are exceeding benchmarks and whether market conditions are influencing the portfolio's behavior beyond expectations. Yes, the job is difficult, but is not impossible.