The Writers Coin

There are some standard rules and recommendations when it comes to preparing for retirement. Things like:

• Start saving as much as you can as early as you can
• Contribute to your company’s 401(k), at least to the match (it’s free money!)
• Open a Roth IRA for added withdrawal flexibility when you retire
• Calculate the nest egg you’ll need to accumulate for the standard of living you want
• Take out 4% of said nest egg every year and live only off of that

It’s all good advice when the market is doing what the market has historically done. But if you’re near retirement right when something apocalyptic happens (like the mortgage crisis in 2008) and you followed these rules, then you’re probably going to be a little pissed off.

Because there are thousands of people out there that followed the rules and aren’t going to be able to retire the way they’d planned.

This has some financial experts thinking that it might be time to retire the old-school retirement mindset and move on to a new retirement paradigm—one that doesn’t involve saving up a whole bunch of money, investing it, and then living off the proceeds when you’re 65 and no longer want to work.

This Reuters article lays out the case for a focus on “other forms of capital.”

The goal is to focus on other assets that can help bridge the gap during retirement if money is in short supply—assets that aren’t being risked in the market.

“If they don’t have the money, they have human capital like skills and education, and social capital in terms of friends, neighbors or a church. All these things help,” says Larry Cohen, director of Consumer Financial Decisions.

Even if you don’t have the money, investing in things that aren’t stocks and bonds can pay off. If you learn a skill that can save you money, like gardening, then that can help a little bit during retirement.

And being a part of a community can also help with reducing costs—you can buy in bulk or use someone else’s car.

Then there are skills that can actually generate money, like blogging, consulting, or freelance writing. I mean, you have to spend your retirement doing something, right? Another thing you could do is teach. After 60+ years, there have to be a few things you’re really good at or know a lot about. If you had a career in the automotive industry, you could teach a class on how to repair cars or something like that.

I like this idea. It actually does two useful things:

1. It helps make retirement a bit easier financially and
2. It helps answer the eternal question of “what the hell am I going to do when I retire?”

Traveling and playing golf are good answers, but that still leaves you with a ton of time. I like the idea of a 65-year-old Carlos writing an occasional magazine article here and there, teaching a computer class to other grandpas, and then going on a long walk to stay healthy (and keep health-care costs at a minimum).

In theory, that means I don’t have to stress out so much about accumulating a million-dollar-plus nest egg to be able to “do nothing” after I retire.

If retirement experts can somehow factor these types of activities into the classic retirement calculations, couldn’t I put away less money right now as a 30 year old? Which means I could go on skiing trips or fly to Australia to go scuba diving. If I need less money when I’m older, I should (theoretically) be able to cut down on some of my contributions and use the money right now, while I’m still a strapping young man.

Is this a totally irresponsible and knee-jerk reaction to a stock-market plunge or do you think there’s something to this “new retirement?”

Image by Dawvon

It’s the end of the year and that means a lot of you will be getting bonuses. If you’re ultra responsible and personal-finance savvy, you will no doubt take a nice chunk of that bonus and drop it into a retirement account like a Roth IRA or a 401(k) (see the difference between the two here).

Which is a great idea: it’s never too soon to start thinking about retirement.

I’m here to tell you that, while worrying about retirement is definitely the responsible thing to do, it can also ruin your life.

Skydiving and Retirement

I’ve always wanted to go skydiving. I still haven’t done it, and the main reason is because it’s so expensive. Over $150 for a few minutes of death-defying action hardly seems like a good deal.

As someone who constantly analyzes the return on investment of the money I spend, this looks like a terrible deal.

So instead of blowing $150 on skydiving, I save it and do the responsible thing like putting it into a Roth IRA.

That means that when I’m 65 I’ll be flush with cash (knock on wood) so I can enjoy the rest of my life without worrying about how to make ends meet.

But I can guarantee one thing: I won’t go skydiving at 65 if I haven’t already.

There are some things in life you need money for and some things you need youth for. Skydiving most is one of those latter things.

If you have a little bit of money while you’re young, that’s the time to pull the trigger on stuff like this. It doesn’t matter how much money you have when you’re old, you can’t buy youth.

It’s not an easy idea to get into your head at age 28 because:

• I’m young and will always be young!
• I want to do the responsible thing
• I’m paranoid and don’t want to be broke as an old man

Don’t let planning for retirement keep you from doing the things you want to do in your life, especially if you have the money. You’ll make more money as you get older, but you won’t get any younger.

What other kinds of things can you think of that we should do while we’re young that are near impossible as we get older?

Image by Dawvon

Robert Kiyosaki is at it again. In his latest article, he calls the 401(k) the biggest scam ever. I’ve written about 401(k)s, so I know a thing or two about them and I have to say that RK is talking out of his ass again.

Kiyosaki thinks the world is about to end, and it’s got nothing to do with war or global warming. It’s all due to the evil 401(k):

…the flaws of this retirement plan will grow into personal tragedies as the first of approximately 75 million baby boomers retire, leading to the biggest stock market crash in history.

Then he conveniently picks a time frame in which the stock market did terrible (1998–2008) to show that a sample 401(k) would’ve gone from $47k to $45k. But 10 years is way too short of a time period, especially when you’re talking about retirement. I mean, long-term investing might fall into the 10-year spectrum, but not retirement investing. And he conveniently fails to point out that employer matching kept that number higher than it should be.

He says that retirees will be taking their money out of these plans, causing the values of those funds to plummet. But he doesn’t take into account that the rules for 401(k)s have changed: employees are automatically being enrolled in these plans, which means the amount of money going into them will increase. Will they offset themselves? I don’t know, but he never mentions that.

Vintage Kiyosaki

I don’t know what happened to Kiyosaki or why he says what he says, but he says outlandish things for the sake of being outlandish. He has tons of people talking about him right now (some good, some bad), including myself. So he’s doing something right if his goal is to promote himself, which is something he’s really good at.

It’s like he’s trying to remind people that the guy that wrote a best seller a LONG time ago is still alive and kicking—which is kind of sad.

I do have to say one good thing about him: I have to give him credit for starting me on the path of financial responsibility. If it wasn’t for him and his book, Rich Dad, Poor Dad, I wouldn’t have found The Simple Dollar and would never have started this site.

But after his book became a worldwide phenomenon, he’s taken to these wild assertions that are meant to do one thing: shine the spotlight on himself.

What are Your Alternatives, Robert?

Back to his latest article on the 401(k) issue.

He tears 401(k)s a new one, but he doesn’t propose an alternative. Let’s say he’s right and the 401(k) is the biggest scam in the world. Great, we’re all on the same page.

Now what? How are you supposed to build enough wealth to retire? What other way is there to realistically save money and have it compound over time?

He never gives one, and that’s why he pisses me off so much. It’s really easy to point out things that don’t work (I’m a master at it!), but proposing an alternative that will actually work is much harder.

And that is why Kiyosaki is nothing more than a rabble rouse: he stirs the pot and sits back to watch the havoc he’s caused. And the only reason why anyone gives a damn is because he once wrote a book that became a worldwide phenomenon.  Apparently, that’s an automatic pass to say and do whatever you want without being held accountable.

I better get writing.

Trent had a reader ask him a question that got me thinking quite a bit the other day. Basically, Wayward wants to know if it’s OK to stop contributing to his 401(k) and if he should put the money he was previously putting into it into a different account.

The problem? His company, as are many others during these difficult times, is no longer offering their employees any matching. That means you’re not getting the biggest perk of all of a 401(k): free money.

Matching? We Don’t Need No Stinkin’ Matching!

Umm, yes you do. As frequent readers know, I’m not a big fan of 401(k) providers—I think most of them suck. Why? Let me count the ways:

• Limited Options: Their menu is very limited and if you want to lobby for change, it will take a long time to get it done—if it happens at all. Think of as being in jail and complaining about the food—what are you gonna do but eat what they serve you?
• High Expenses: Why wouldn’t they charge you more? They’re the only game in town, so they can charge whatever they want because they know you want to get your hands on that “free money.” It’s kind of like the ridiculous prices of candy and soda at the movies. There’s no competition so they can charge whatever they want.

Something about that whole attitude of “hey, we’ve got you where we want you so we’re gonna fleece you” just doesn’t sit well with me. So if I were in Wayward’s shoes, here’s what I would do:

• Open a Roth IRA: Trent also recommended going this route, and I think it’s a no-brainer. Having a Roth IRA and a 401(k) gives you added flexibility (as this “oh so early” post of mine illustrates—I’ve come a long way) when it comes time to retire. I have mine in several places, but the best place to start is Vanguard: cheap index funds baby.
• Stop contributing as much: Wayward was originally contributing 20% of his paycheck to his 401(k), to which I say “Whoa!” That’s great that you can afford to set aside that much of your paycheck, but with the matching gone, I would seriously cut this back. How much? How about trying to fully fund the Roth you just opened. That’s $5,000 a year. If you can fully fund it and leave the rest in your 401(k), you are home free.
• Check your allocation: Now that you have a Roth, look at the funds you want to own in your entire retirement portfolio and see where they are cheapest. If you you can get the same fund in your Roth and your 401(k), odds are it’ll be cheaper over at Vanguard than with your 401(k) provider, so pick the one that is ripping you off “the least” and buy that one with in your 401(k). What you’re trying to do here is minimize your fees.

Am I missing any other tips for people in this situation? I know that the drumbeat out there is to contribute as much as you can to your 401(k), but under certain circumstances it’s worth considering the other options that are out there.

Oh and if you still get matching I would still push for opening the Roth—flexibility is a beautiful thing.