Sure, but it’s always a good idea to review your choices at least annually and make sure that your risk tolerance, planned retirement date, etc… are still the same.
And really, the only thing that’s automatic about a 401k is the payroll deduction. Which isn’t that special when you come right down to it; you can set up Direct Deposit to do much the same thing into a savings account, or most banks let you do a standing periodic transfer to savings, if you receive a paper check.
Saving isn’t that hard, if you’re willing to do it. There are ways to make the perceived impact easier, and the primary one from my perspective would be to have the savings money directly deposit into the savings account and never even show on your checking account balance. That way, if you have enough discipline to not dip into savings willy-nilly without good reason, that account will steadily grow, and you’ll live out of your checking account.
I think defined benefit pension plans are more perfect for most, despite the various potential pitfalls. Just by the mere fact of not being dependent on voluntary investment which is where a great many people fall short, either through shortsightedness or by circumstance.
DB pensions with required early vesting, complete inter-employer portability, robust government oversight of management actions, and deep-pocketed insurance provisions would indeed be ideal.
Here in the USA we can’t have nice things. So the answers to those 4 desiderata are roughly: No, Yes but only for some few state & local government workers, No, and Yes but not nearly well-funded enough.
Is it possible that I have the details of our ESPP wrong 30 years later? Sure it is.
But I think my basic point stands.
If the point you’re hinting at is that a holding period could marginally reduced the number of employees who could truly afford to tie up stock purchase money – even at a discount – than I will gladly concede that point.
If there is a holding period, it’s no longer an automatic 15%. It’s 15% plus/minus whatever changes occur to the stock price over the holding period. If you work for Coca-Cola, bully for you - pay your transaction fees and it’s almost free money. If you work for a tech company these days, good luck.
It becomes less about the ability to tie up money for a while or financial discipline and more about playing the market.
But what sometimes happens with the investment-shy crowd is that they don’t do automatic savings transfers at all. Or they eventually set them up but then turn them off when they have a short-term financial need and then don’t turn them back on. But with the 401k contributions, once they turn them on, they tend to leave them alone. I think this is because they tend to think of 401k contributions as special retirement savings, but think of savings accounts and IRAs as just another place that their cash is parked. They seem to be more motivated to get a 401k setup than to setup an IRA or savings account transfer.
My sister is an example of this. She thinks a 401k is like a generic savings account for retirement. You just put money into the “401k” and you get back monthly income in retirement. She doesn’t understand that the 401k is just giving you access to different investment plans and you have to pick which one to invest in. Expecting someone like her to review the dozen plan choices on an annual basis and rebalance her contributions is not realistic. Not only is she not qualified to pick which funds to invest in, that stuff will just make her flustered and she won’t do anything at all. I eventually got her to pick the S&P500 fund for her 401k investments rather than the money market fund that was the default choice when she signed up. That should have been a simple, 5-minute discussion, but the reality is that I had to bring up the topic slowly over several months so she wouldn’t get anxious. Now if she never makes another decision about her 401k, at least she will get the gains of the S&P rather than the meager money market interest. These are the types of people that need a “set it once and forget it” kind of investment plan.
This is Basic Financial Literacy, but I did my taxes today (I know, I know). I logged on to my UBS account, because I couldn’t find my 1099R. I don’t look at my money, because my money guy is really good at contacting me if there are any issues.
And I noticed that my current account balance is nearly exactly what it was when I first retired 10 years ago. You need money to make money.
Unless you’re willing to live on a cold-oatmeal budget in your retirement, you will need to invest a large portion of your savings in stocks (or mutual funds composed primarily of stocks). If you put most of your savings in bonds, it will accumulate, but it won’t really grow. (I’m guessing this was your main point?)
Don’t try to time the market. People who pull their money out when they think the market is crashing (and then try to put it back in when they think the market is recovering) almost always do worse then people who just leave their money invested.
In a nutshell, yes, that was my point. My list wasn’t meant to be all-inclusive, just the barest of barebones outline. Each of those 4 points could be expanded into a chapter of a book. And there’s probably 2 or 3 more top level items we could come up with.
To me, the barebones basics of knowing how to deploy your savings includes things like:
Understanding the difference between emergency / rainy day savings, saving for a big purchase savings, and retirement savings.
Understanding that for retirement savings, 401k is better than IRA is better than non-qualified. [arguable in reality, but at a high level for a total noob this is the safest way to view it IMO.]
Finally, as you say, it entails understanding the idea of the power of compound returns, the difference between real vs nominal rates, and the general rule that over the long term stocks >> bonds >> interest bearing accounts (CDs, passbook, money market).
I kind of think it’s the combination of carrot (tax benefits), and stick (penalties for early withdrawal) that cause people to let them ride. And the not insubstantial level of PITA involved with actually getting money out is a factor as well, I’m sure. I’m sure that’s all by design to keep money in there.
But it’s just a different facet of the same thing I’m describing- people never miss that money because in day-to-day life, it feels like they never had it, since it wasn’t ever in their account to begin with. The only place they ever see it is on their check stub if they bother to look at that, or maybe on their W-2. Automatic savings accounts are a bit more visible, but the same concept applies- if it’s never in your checking account, it’s not there to spend, assuming there’s a little discipline involved in not dipping into savings for frivolous stuff.
There’s a bank that actually tries to do that with kids at my children’s school- basically they bring in their money, and they “invest” it, and then they get paid back with interest at the end of some term. They get a little piggy bank with the bank’s name on it, and something like 5% back.
Problem is, most kids tend to show up with like $3.17, two bottle caps, and a lint-covered jolly rancher, and in a couple of months or whatever, they get back $3.33. I know my kids tend to be more excited about the bank and the other swag and candies they get than the sixteen extra cents, so I’m not sure it really educates as much as people think.
I almost think that they’d get better understanding if they paid their interest in candy- for every dollar you save, you get it back AND a Jolly Rancher at the end of the term.
Agreed. It’s best, educationally, to meet them where they are, speaking to them in a language they’re likely to understand.
AIUI, attempts to replicate the Marshmallow Experiment (delayed gratification) have essentially failed, but ISTM that what they got right was the use of incentives that resonated with the kids: marshmallows, M&M’s, etc.
The bank is certainly teaching an accurate lesson. Just not the one they’d hope to teach. That lesson? IMO:
Banks are places to store money, not make a return. Their real interest rates are always desultory. They are OK for accumulating principal, but useless for making growth / income. Therefore store an appropriately-sized smidgen of money there for emergency liquidity and invest your actual excess money almost anywhere else.
Like I said: probably not the lesson they hope to impart. But a valuable one nonetheless. If the kids take it onboard. Some of whom might get some glimmer of this, depending on their age & precociousness.
My high school Government teacher brought in two guys from the Pacific Stock Exchange who had developed a game to teach very basic economic principles to teens. In order to make the game more “real world,” they gave a random student an advantage. That student was me.
I used my advantage to wipe out the class. I ended up owning everything, and everyone else owed me. Yeah, it taught me a lesson. But probably not the one they had in mind.
This reminded me. In 8th grade, I think, we had a project to invest an imaginary $1,000 in stocks, and we had to explain why we bought the ones we did, and track them (using newspaper stock pages of course) for a period of a few months.
I think the idea that they’re trying to teach is that saving is good, not so much return on investment. But I think that gets muddled by the fact that none of the kids put enough in to actually get anything meaningful back, and the stuff like the candies, pencils, etc… are worth more to the kids than the interest anyway. That, and the fact that saving their $3.17 may have meant that they incurred opportunity costs when they went somewhere they could have got a good deal on chips or something like that.
There are two schools of thought: “Because I saved that money I missed the chance for a BOGO on potato chips at 7-11” vs. “Because I didn’t buy any chips at all I saved even more money.”
Pretty obvious which mindset wins for kids or for folks of any age who think like kids.
One of my brothers is the poster child for the second POV. As in “he carries it to wacko extremes.” His motto:
Not spending is the best investment. It pays 100% guaranteed and does so instantly.
He quite literally looks at 100% of his take-home pay as savings. Then he begrudgingly doles out dimes here and there for the absolute minimum of necessities. Every dime of which pains him because it’s a reduction in savings. Not my schtick even a little bit.
