According to Charles Schwab more than half of 401(k) investors struggle with their investment options and see 401(k) selections more confusing than health care choices. Retirement planning decisions even caused stress for one-third of those surveyed. Marketwatch.com’s Andrea Coombes read the review and posted “401(k) Savers Are Confused and Stressed.”
Immediately, the financial blogosphere and Twitter buzzed with Led Zeppelin “Dazed and Confused” references. Let the Walton Sun break the news — Jake Holmes, not Zeppelin guitarist Jimmy Page, wrote “Dazed and Confused.”
Let’s clear up something.
Group health insurance options pose few problems unless you get sick and corporate accountants decide to play God and count pills. America is the only place in the industrialized world where health costs can cause bankruptcy. Astonishingly, over three-fourths of medical bankruptcy filers had health insurance prior to their illness. Don’t be naïve: The doctor’s office likely has no idea what your insurance company will cover when they send you the bill.
To alleviate investment anxiety, Coombes recommends buying a target date fund to coincide with your expected retirement. Target date funds (TDF) aim to match your retirement date with their portfolio by owning fewer stocks, hence becoming less aggressive, as retirement looms.
This strategy has several problems. First the stock allocation varies with each mutual fund company. Vanguard, Fidelity, and T. Rowe Price 2025’s TDFs own 70 percent, 60 percent and 75 percent stocks respectively. How funds will change their portfolios over time varies, too. More importantly the TDF for your expected retirement date may be more aggressive than your risk tolerance.
We recommend clients use TDFs, if available, but to make sure the target date matches their risk tolerance. Investments inside a TDF will change so regular reviews are critical. One frequent mistake we see is a target date fund mixed with other investments — usually the one that did better last year. Chasing returns does not work, rather have a strategy and stick with it. Target date funds get a lot of grief but they have one good point — simplicity. If a saver chooses an appropriate target date fund some 401(k) confusion vanishes.
Coombes closed her column with a link to an Economic Policy Institute report, “Social Security Is the Only Reason Most Americans Can Afford to Retire.” In 2010, the middle 20 percent of Americans had total retirement savings (IRAs, 401(k), etc.) averaging less than $35,000. To contrast, the top fifth of incomes had average retirement savings slightly more than $300,000. Social Security, on the other hand, provides retirement income more equitably. The Social Security income stream for a typical family in the top income decile is around $600,000 while a family in the middle tenth can expect, on average, around $300,000 from Social Security.
Many erroneously claim, like Page did with “Dazed and Confused,” they can beat Social Security. Since self-employed folk like us pay both sides of Social Security maybe we have that right. But when making portfolio withdrawals, the sequence of returns (market fluctuations) is critical. Social Security avoids market gyrations; only the dazed and confused ignore portfolio volatility.
For decades Social Security has minimized retirement income woes but it has evolved and changed over the years, too. When the weather gets cool, Social Security ripples through the South Walton economy.
Buz Livingston, CFP, has the only investment management and financial planning firm in the entire world headquartered in Blue Mountain Beach. He helps clients along Florida’s Emerald Coast and around the country with financial decisions. Contact him at 850-267-1068 or www.livingstonfinancial.net. He’s a tweeting fool @BuzLivingston.