How Can Bright People Be So Stupid

RETIREMENT PLANNING…HOW CAN BRIGHT PEOPLE BE SO STUPID?

I surprised myself by choosing this as a topic to put out there so early in my blogo-history (Is that even a word?).  But, as I thought about it, it made perfect sense.  If you want to save enough money for retirement, you’ve got to start early.  In fact, as I read what the financial pundits say about how to build your wealth, invariably, they say start to save earlier.  That doesn’t do someone in their 70s or 80s much good.  And, the 20 something generation doesn’t think about retirement because, as a professor, they are making such a paltry amount, they are having trouble just scraping by.  Through the process of compounded interest, though, you would be surprised by how much wealth you can accrue over the years…say 30 – 50 years.  You should easily be able to earn three or four times what you, personally, contribute to your retirement.

Here’s how you do it.  Every time you get a salary raise, let’s say, 3%, take half of that amount, 1.5%, and have it directly deposited into your retirement account…Fidelity, TIAA-CREF, or whatever company you’ve chosen.  By doing so, you accomplish two things.  First, you reduce your net taxable income.  Secondly, you start to build that retirement nest egg in a painless way.  Trust me, you’re not going to notice half of any raise you might receive.  We aren’t talking Wall Street bonuses, here.

Once you’ve made the commitment to contribute early to your retirement account, you’ll need to decide how you want to allocate your contribution.  Some of my friends have gone the route of a no-risk straight insurance payout of about 3-4% per year.  I haven’t met anyone who has gone to the opposite extreme and put everything into the stock market.  I would guess that many young professors do a 50-50% allocation between the two extremes.  I did this for a while.  As I became savvier, though, I started to move my distribution allocations around.  Every year on or about my birthday, I take a look at my portfolio and decide where I want to move things.  After a lifetime of reading, I can report that all of the experts will ask you how much of a risk-taker you want to be.  Basically, the younger you are and the more years you plan on working, the more risks you can afford.  The older you are and the closer to retirement you happen to be, the more conservative you need to become.  It simply amazes me how many of my coworkers have never modified or altered their allocations over the course of their careers.  How can bright people (like college professors) be so stupid?  Why would you choose to be earning .05% per year when you could be earning, say, 8.5 %?  Duh!  Having said that, don’t chase the stock market.  There are a lot of dudes with more money and brains than you have who have inside information about how to make a killing.  Let “slow and steady” by your mantra.  Remember, there are three types of people that play the market…bulls, bears, and pigs.  Slow and steady wins the day for most of us.

At one point in my career, I used to track my TIAA/CREF net worth on a daily basis.  It was fun to do when the stock market was making double-digit gains each year.  It would have been depressing to do that over the last three years, however!  Instead, I suggest you check out your account every week or two and not get too excited about what you see.  Use that birthday anniversary to make changes based on what you’ve observed over that year.  In the TIAA/CREF world, I’ve been fortunate enough to take home some nice gains in the Real Estate and Inflation-Linked Bonds categories.  Your agent can help steer you through your decision-making. 

There have been times in my life when I’ve taken out loans against my TIAA/CREF policy.  It was a way for me to get into a nice sailboat that I had been eyeing for some time.  Make your money work for you.

You can also start withdrawing your money after the age of 59.5 under current law.  I’m not suggesting you do that but at least the money is there.  You need to be aware that once you withdraw some money, however, it will be taxed at your current tax rate…probably 25-35% unlike Mitt Romney who gets his money at less than 15%! 

So, don’t wait.  Make yourself a promise.  Or better yet, make a promise to your partner or kids.  Having a little extra cash at your retirement may enable you to help them come up with a down payment for a home.  Or, if they don’t need it, I’m sure you’ll find a way to give yourself to a well-deserved treat.

January 23, 2012