Recently we met with the child of one of our “fifty something” clients. She is in her late 20’s. She was aware enough in 2008 to hear about the devastation that friends of her parents suffered during that time in their 401k’s and their home values. Her parents were not immune either. Sara is a saver and had begun saving in her company’s 401k plan. Her parents felt she needed some advice as she seemed to be avoiding the stock market at all costs.
When we met with Sara, her account was definitely void of risk, and, in fact over the past 5 years, she had earned an average annual return of about 2.75% in her retirement account. Considering that the average historical rate of inflation is 2.9%, her money may have actually been losing value instead of gaining. Add to that the fact that the money is for her retirement which, as we calculated, is 40 years away. Sara was really missing out on allowing her money to work for her. Once we educated Sara on the compounding of interest and the historical stock market averages, even with the “Great Recession” included, she realized she needed to adjust her thinking and invest so that she might have the opportunity to allow her money to work for her.
Research bears out how important it can be for parents and grandparents to share their experiences with their family.While some choose to keep their money matters to themselves, we’ve seen with our own eyes that families who educate and share are among the most successful, helping the younger to better navigate the common mistakes that perhaps even they made themselves.
Here are some of the most common mistakes we see by age:
20s: Not taking on enough investment risk
30s: Complexity and choice make it difficult to decide what’s best
40s: Underestimating the cost of home and kids
50s: Trying to catch-up on savings and investment, entrepreneurship, too much risk
60s & Beyond: Not delegating or getting advice… The older we get, the more complicated our balance sheets
So, if you’re in your 20’s, here are some key things to think about…If you’re employed and your employer offers a 401k savings and investment plan, make certain that a percentage of your paycheck is going into the plan.
Why? According to Albert Einstein, the compounding of money is “man’s greatest invention.” The sooner you start investing, the more money you can accumulate. Consider a bit more risk in this decade of your life, and you may find you have to save less later for retirement later on.
In your 30s, so much choice… “Do I save in a 401k? Roth 401k? IRA? Roth IRA? What about buying a house? Kids?” The 30s is most often when the big commitments like getting married and having children occur. The standard of living you had with your parents is how you want to live, often racking up credit-card debt, spending instead of saving and missing out on that compound interest that Mr. Einstein raves about. Additionally, when people in their 30s do start to save, they often have difficulty choosing what type of account is best, especially when it comes to retirement accounts.
Along come the 40s. Homes and kids are often swallowing a bigger chunk of your dough than you thought they would. A more aggressive stance on paying down mortgage debt would serve many well during this decade– before the kids head to college.
The 50s—If you haven’t saved enough for the estimated 30 to 40 years in retirement, risks like entrepreneurship to “hopefully” offset the deficit and provide a smoother transition are often appealing. However, a 2016 paper by Annamarie Lusardi, a professor at George Washington University School of Business says, “You’re putting all of your eggs in your human capital, and often your savings, too. Sometimes human capital—the skills we have developed throughout our careers—may not be as valuable in the market as we think.” Most research shows that people near retirement should take a more conservative approach.
And the 60s provide an altogether different set of issues. When people need the most “outside” or “expert” advice, they often don’t get it. Just when their financial lives are most complex, they often make the mistake of going it alone.
Does any of this sound familiar? Well now that your eyes are open to the pitfalls, you are able to avoid falling into them! Get inquisitive. There are many good options to explore.
Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.
Sources: The Wall Street Journal entitled “The Biggest Money Mistakes We Make—Decade by Decade” by Charlie Wells