Money Myths and Misperceptions

Last month (Financial Literacy Month), I attended a virtual conference for financial educators sponsored by Next Gen Personal Finance. One of the sessions was about money myths and misperceptions. Below are 12 statements and a brief explanation of why they are false:

“The most common scam contact method is e-mail”  FALSE

The #1 scam contact in 2025 was internet platforms (e.g., social media and What’s App messaging).

 

“Carrying a credit card balance can improve your credit score” FALSE

What’s needed to improve credit is to use a credit card regularly and pay at least the minimum due by the due date.

 

“Buy Now, Pay Later (BNPL) is not a form of debt like credit cards are” FALSE

When you use BNPL, you are borrowing money to make a purchase and agreeing to repay it later.

 

“There is no reason to save for retirement before age 40” FALSE

This myth ignores one of the most powerful forces in personal finance: compound interest growth.

 

“Buying a home is always better than renting” FALSE

Buying isn’t universally better. It depends on your finances, timeline, and local housing market.

 

“You only have one credit score” FALSE

Different credit scoring models exist and there are also multiple versions of each (e.g., different FICO scores).

 

“You can be too old to invest in stocks” FALSE

There is no age limit on investing in stocks, which historically help protect against inflation.

 

“At age 40 (or 50), it’s too late to start saving for retirement” FALSE

You still have time for growth because time + compound interest can grow meaningful savings.

 

“Making minimum payments on a credit card is fine” FALSE

Making only minimum payments can keep you in debt for years and cost you a lot in interest.

 

“If an item is more expensive, it’s better” FALSE

Being expensive doesn’t guarantee it’s better. It may just be priced higher (e.g., brand names).

 

“Stocks are too risky” FALSE

Risk depends on how you invest, not just what you invest in. Also risk varies widely within stocks.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Investment Basics

I recently taught a basic investing class for an audience of older adults. Below are some of the key take-aways related to investment principles, investment characteristics, and later life investing:

Common Investment Concerns- In later life, investment concerns include income generation from investments, decumulation (spending down assets), sequence of return risk (negative returns early in retirement), inheriting unfamiliar investments from others, market volatility, tax implications such as required minimum distributions, possible cognitive decline, and passing securities on to heirs.

 

Saving and Investing- Savings is money held in cash assets such as online bank accounts, money market funds, and CDs. It is generally used for short-term goals and emergencies and also useful for older adults as a “buffer account” for older adults to hedge sequence of returns risk. Investments are used to increase net worth over time and achieve long-term financial goals (generally 5+ years away).

 

Investment Risk- Risk in investing is uncertainty about future investment returns and whether you will lose investment principal or see it grow over time. There are many sources of investment risk including business failure, inflation rates, jobs reports, politics, interest rate changes, currency value changes (international investments), and a “herd mentality” in response to market trends.

 

Risk Reduction Strategies- Investment risk cannot be eliminated but it can be reduced. Three common strategies are diversification (holding a mix of different types of investments), buy and hold (not panicking and selling investments during market downturns), and dollar-cost averaging (investing regular amounts of money or making withdrawals at regular time intervals (e.g., $500 monthly).

 

Asset Allocation- This is the ratio of stocks, bonds, cash, and other asset types in your portfolio and is a primary determinant of investment success according to numerous research studies. Factors that affect asset allocation include investment goals, time horizon, investment risk tolerance, time and skill to manage investments, taxes, and, for older adults, availability of guaranteed income sources.

 

Investment Categories- There are two types of investments: ownership (where you own a piece of something) and loanership (where you lend money to a government entity or corporation). Ownership assets include stock, stock mutual funds and exchange-traded funds (ETFs), real estate, and collectibles. Loanership assets include bonds and bond mutual funds and ETFs.

 

Hybrid Investment- ETFs are a cross between stock (where you are part owner of a company through your shares that trade on a stock exchange) and index mutual funds (mutual funds that track a market index like the S&P 500). ETFs are similar in composition to index-tracking mutual funds but trade like stock on a stock exchange.

 

Older Investors’ Mutual Fund Dilemma- Mutual funds are required by law to pass their earnings on to investors. This can cause a big tax problem for older adults with accounts that have grown for decades. If they sell shares, they face capital gains tax and if they stand pat, they face increasingly larger taxable distributions. There is one escape hatch: donate appreciated securities to charity.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Navigating Fintech and Financial Fraud

I recently attended a webinar about investment fraud sponsored by OneOp. The speakers were from the U.S. Securities and Exchange Commission (SEC). Below are six key take-aways:

FinTech Platforms-Financial technology (FinTech) is increasingly being used for banking, lending, bill payments, and wealth management. Investment advisory platforms typically include an initial assessment through an online questionnaire (e.g., goals, age), automated portfolio recommendations, and automated management. Fees/commissions vary widely among providers. SEC-registered platforms are subject to examinations and enforcement and have SIPC insurance against insolvency.

 

Online Gambling- Research suggests money spent on online sports betting overwhelmingly comes from money that was previously spent on more stable, long-term investments like retirement savings accounts. One study found that bettors spent, on average, $1,100 per year on online bets. For every dollar spent on betting, bettors put $2 fewer into investments. The study author (Scott Baker, Northwestern University) concluded “Bettors are looking for the big win at the expense of savings.”

 

Modern Twists on Old Scams- Fraudulent individuals or public companies may use the promise of artificial intelligence (AI) and emerging technologies to lure investors. Bad actors love to use the latest trends or events to promote outright frauds. Watch out for heavily promoted microcap stocks that may be the focal point of a “pump and dump” scam. Also beware of messages claiming to come from companies and government agencies. AI makes it easy to clone voices and make fake videos.

 

Advantages of Diversification- Diversification can lower the risk of investing. If a single company or sector loses value, exposure to other investments may limit their losses. Broadly diversified, low fee index mutual funds or exchange-traded funds and target date funds are easy ways to achieve diversification. For example, the Standard & Poor’s 500 index tracks the 500 largest U.S. publicly traded companies and total stock market funds offer even broader diversification.

 

Market Timing- Market timing (i.e., moving money in and out of the stock market to try to track high and low prices) is difficult and expensive. A Library of Congress study found that active traders are more likely to underperform the market. In addition, frequent traders typically pay higher taxes than investors with long term “buy and hold” investments. The best and worst days in the stock market tend to happen close together.

 

Account Protection- The SEC offered the following advice to protect online accounts from fraud: pick strong passwords and keep them secure, use multi-factor authentication (e.g., texted or e-mailed codes) or biometric safeguards (e.g., facial characteristics, fingerprints, retinas, and voices), and turn on account alerts. Also, avoid using public wifi for online access, be careful clicking on links, and beware of relationship scams and affinity fraud scams that target specific groups.

 

For additional information about investing and investment fraud, visit www.investor.gov.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Middle-Income Earners Can Be Millionaires

Many people think you need to earn a high salary (e.g., $100,000+) to become a millionaire. In reality, many people of ordinary means (i.e., middle-income earners like teachers and police) become wealthy over time and achieve a net worth (assets minus debts) of $1million or more.

A key factor in their success is financial capability, which includes financial knowledge, decision-making skills, and habits. Below are nine things to know about "middle-income millionaires":

Planning is Key- Research has found that saving with a plan makes people two times more likely to reach their goals. Having a motivation to save also matters. One study found that emergency fund and retirement saving motives significantly increase the likelihood of saving regularly.

Slow Starts Are OK- A negative net worth (debts-like student loans-greater than assets) is not uncommon when young adults are in college. What matters is that proactive action is taken afterward to increase savings and reduce debt so that a positive net worth steadily grows.

Decisions Matter- Wealth and net worth are determined largely by decisions that people make about money (e.g., saving 10% of pay in a 401(k) plan). Two people with the same income, or two siblings raised by the same parents, can have very different financial paths and net worths.

Education Matters- One study found that 88% of millionaires graduated from college and 52% have a master’s, doctoral, or professional degree. One reason is that average salaries rise with higher levels of education. In addition, people tend to marry spouses with similar characteristics.

Automation is Key- One of the best “one and done” financial decisions that someone can make to build wealth over time is to set aside money automatically from each paycheck (or net income from self-employment) for retirement or other financial goals. Payroll deductions for defined contribution plans, like 401(k)s, make adhering to advice to “pay your first” automatic.

Wealth-Building Needs Protection- It is important not to overlook the role of insurance as a wealth-building tool. A growing nest egg can quickly be depleted if a family breadwinner dies or is disabled or a major illness or property damage or a large liability judgment occurs.

Backstops Can Mitigate Risk-Taking- Some investors feel that they can take on more investment risk when they have a guaranteed source of income (think tenured educators or retirees with a pension and/or annuities). Similarly, if one spouse in a couple has a stable income, the other spouse may decide to take a chance with entrepreneurship or by earning a degree.

Investment Expenses Are a Drag- Successful wealth accumulators avoid high expense ratios and front- and back-end loads (commissions) on mutual funds and costly annuities with high surrender and mortality & expense charges. Expenses are a drag on the performance of an investment. The second most important factor affecting investment portfolio returns, after asset allocation, is fees.

Knowledge is Power- Wealth-building is enhanced with financial knowledge (e.g., investment risks and characteristics) and skills (e.g., budgeting). A good rule to follow to build financial knowledge is to learn one new thing every day about personal finance (e.g., blogs, podcasts, newspapers, etc.).

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Useful Information from Recent Webinars- Part 1

 

Every so often, I review my personal “learning journal” and summarize notes taken from various webinars.

Below are six information nuggets that caught my eye:

 

Impact Investing- This is a big growth area in the investment world and is expected to grow. The stated intention is to have investments create change and generate a positive impact on the world- as well as a high return. Acronyms associated with impact investing include SRI (socially responsible investments) and ESG (environmental, social, and governance). Investors need to be careful about “greenwashing” (unsubstantiated claims about a company’s positive impact).

 

Widowhood Challenges- Part of many older adults’ later life will be spent living as a single person, but few couples proactively plan for this. “One size does not fit all” when it comes to a surviving spouse’s financial needs. Common challenges that affect many widows/widowers are aloneness, a lower income, increased taxes/higher tax rate filing as an individual vs. a couple, loss of services that a deceased spouse used to perform, and no longer spending time with couples.

 

Financial Infidelity- This is the term used to describe financial cheating on a partner. It includes lying about finances and debt and hiding purchases. “Red flags” to spot it include a change of status (a spouse is no longer on a joint credit card), changed passwords to online accounts, new credit card statements, a spouse no longer willing to discuss financial issues, and unexplained documents to sign. Effects include a loss of trust and broken relationships.

 

The Rise of Neobanks- Sometimes called “challenger banks,” these are fintech companies that offer banking services (checking and savings accounts) in a non-traditional (i.e., digital) way. They typically provide checking and savings accounts via a website or app. The #1 neobank is Chime, with over 13 million customers. Other neobank names are Aspiration, Current, and Varo. Most neobanks partner with chartered banks, which provides access to FDIC insurance.

 

Taxes in Retirement- Tools for tax control in later life (read: to avoid being clobbered by taxes on RMDs- required minimum distributions) include charitable giving, Roth conversions, and tax diversification (i.e., placing savings in taxable, tax-free, and tax-deferred accounts). Placing every dollar of retirement savings in tax-deferred plans can be expensive in later life as RMDs get added to other ordinary income sources such as W-2 income from a job, a pension, Social Security, interest and dividends, mutual fund capital gains distributions, and more.

 

Roth Conversions- Between now and the end of 2025 is a good time to do Roth conversions (e.g., convert a traditional IRA to a Roth IRA) because the Tax Cuts and Jobs Act was “time-boxed.” As a result, tax rates (applied to converted IRA dollar amounts) are scheduled to increase in 2026. Market downturns are also a good time to make Roth conversions. When market values bounce back later, subsequent growth in value will take place in a tax-free investment.

 

Financial knowledge is power. I hope that you found this information useful.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

The Curious Case of I-Bonds: Too Good to Be True?

I can’t think of any other investment, off the top of my head, where the rate of return earned two decades ago continues to directly influence what I receive today…with the exception of Series I-bonds issued by the U.S. Treasury. Of course, early compound interest earned also impacts later investment growth, but I’m talking about investment features per se.

Personal Connection

Earlier this week, as part of an annual net worth (assets minus debts) review, I checked to see the value and current interest rate being paid on my twelve I-bonds purchased between 2001 and 2006: three were paying 12.76%, three, 11.30%, and six, 7.51%...at least for a six month period. The current rate paid on I-bonds issued through April 30, 2023 is 6.89% and the current fixed rate component is 0.40%. From May 2020 through October 2022, the fixed rate was 0.0% (zero).

 

Fixed Rate Advantage

How can I be earning more than the current interest rate paid on newly issued I-bonds? Thanks to the high embedded fixed rates of a bygone era when I-bonds could be purchased in person at financial institutions instead of through a clunky website. Since I-bonds were first issued in September, 1998, the fixed rate has ranged from 0% to 3.6% and is adjusted semi-annually. The earliest I-bond adopters (late 1990s) earned as much as 13.39% from May to October of 2022.

I-Bond History

But I’m getting ahead of myself. First, some savings bond history. U.S. savings bonds (Series EE) began in 1935 and inflation-indexed I-bonds, as noted above, began in 1998. In 2008, bond purchases became available electronically and in 2012 paper U.S. savings bonds were no longer issued by financial institutions. Instead, investors were directed to the Treasury Direct website.

Interest Rate Calculation

I-bonds, like any other government bond, are a loan to a government entity, in this case, the federal government. They are currently a high-yielding, low-risk investment paying almost twice the interest rate on a 30-year Treasury bond and about 30x the average savings account rate (0.23% on January 25). Interest is earned monthly and compounded semi-annually. Thus, every six months, interest is applied to a new principal value (i.e., old value + interest earned).

Semi-Annual Interest Rate Changes

The interest (earnings) rate for I-bonds consists of a fixed rate component that remains the same over the life of the bond plus an inflation factor, which is based on the last six months’ Consumer Price Index (CPI). I-bond interest rates are updated every six months on May 1 and November 1 and interest on I-bonds is payable for up to 30 years from their purchase date.

Purchasing Methods

Unfortunately, there is no advertising to tell people about I-bonds. Up to $10,000 of I-bonds can be purchased electronically down to the penny (e.g., $178.36) through Treasury Direct and up to $5,000 (in different increments) of “old school paper I-bonds” (like I have) via a tax refund. I have seen online chatter recently by some people who significantly over-withhold income tax to buy paper bonds to avoid online hassles. When purchasing I-bonds online, investors must provide their Social Security number or other taxpayer ID and bank routing/account number.

The Real Deal

In summary, we have experienced a historically high inflationary time period these past two years which makes I-bonds a very attractive place for cash assets. The rate of return on I-bonds will eventually decrease when inflation decreases, but it will never fall below zero so investors can’t lose money. I-bonds are not “too good to be true” if you understand how they work and their limitations (e.g., annual purchase limits and inability to cash out within a year of purchase).

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

2022 Personal Finance Year in Review

Last month, I presented my eighth annual (2022) Personal Finance Year in Review webinar for OneOp. Below are dozens of important events and trends from the past year:

High Inflation- The consumer price index (CPI) started out the year at a 12-month percentage change of 7.5% in January 2022, reached a year-to-year high of 9.1% in June 2022, and stood at 7.1% in November. There was a four-decade high in core inflation that excludes food and energy and inflation eclipsed strong wage gains for many workers.

Inflation Impacts- Higher prices affected the following household expenses: food, restaurant meals, apartment rents, air fares, child-rearing expenses, and utility bills. A majority of Americans (i.e., many Gen Xers and younger ages) experienced high, sustained inflation for the first time in their adult lives.

Interest Rates- The Federal Reserve raised interest rates seven times in 2022 through December, including four rate hikes of 0.75%. It is trying to raise interest rates to cool inflation without causing a recession. Impacts were felt in mortgage interest rates, variable rate credit, and bank savings accounts.

Savings Rates- The U.S. savings rate, which rose to a record 33.8% in April 2020, started the year at 4.7% in January 2022 and declined to 2.4% in November 2022. The average interest rate paid on savings accounts was 0.18% in November, but some online bank money market accounts paid 3% to 3.25%.

Housing- Mortgage interest rates soared past 7% for the first time in more than two decades in October 2022 vs. 3.05% a year earlier. Many home buyers backed out of deals or coped with lock-in fees and higher down payments. Rents increased sharply in the first half of 2022 before gradually subsiding.

Taxes- The average income tax refund in 2022 was $3,039, but some families with advanced child tax credits faced tax payments. Some states held sales tax holidays in response to high inflation. The IRS also issued new guidance for some inherited IRAs.

Credit- 2022 saw the post-pandemic return of unsecured personal loans, rising variable rate interest, and a $30 maximum first-time late fee on credit cards. Medical debt in collections that was subsequently repaid was removed from credit reports and Equifax reported a three-week credit scoring glitch.

Student Loans- Many Public Service Loan Forgiveness (PSLF) qualifying payment rules were suspended through October 31 and the final extension of the pause in student loan payments is sometime in 2023, depending on the timing of the resolution of the court-challenged student loan forgiveness plan that is undecided as of January 2023.

Cars- Monthly car payments crossed a record $700 and the average cost of a new vehicle in November 2022 was $48,281. New cars were in short supply and used car prices exceeded their original value on some models before starting to ease. The average age of vehicles rose to a record 12.2 years in 2022.

Shopping- Buy Now, Pay Later (BNPL) increased in use, both for travel and shopping. 2022 also saw car and electronics supply (and prices) affected by a continued shortage of computer chips, a baby formula shortage, and many consumers returning to pre-pandemic shopping, travel, and entertainment habits.

Insurance- Auto insurance premiums increased due to increased cost of repairs (labor), replacement parts, and car rentals and life insurance sales increased amid COVID fears. Homeowners insurance premiums increased by 12.1% on average and renters insurance premiums averaged $18 per month.

Investing- The stock market faced extreme volatility throughout 2022 and entered bear market territory in September. A bright spot for investors was the 9.62% return on inflation adjusted I bonds from 5/1/22 to 10/31/22, then decreasing to 6.89%. Other popular cash asset havens at year-end were fixed-rate annuities, brokered CDs, and Treasury bills.

For more information about 2022 personal finance events, review this reference list.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Investment Insights for Uncertain Times

The year 2022 has been a time of great uncertainty for investors with periods of extreme volatility (i.e., sharp price movements of securities, both up and down). Times like these are a good time to revisit what we know to be tried and true about investing from decades of investment performance data. This knowledge can help calm frayed nerves and keep investors focused on their long-term goals.

Below are eight investment insights to consider during these uncertain times:

 

Volatility is “The Price of Admission”- Successful investing requires having an “investor’s mindset.” This means being able to accept market volatility and not expecting investments to provide a guaranteed returns (like a certificate of deposit) and no loss of principal. An analogy is that volatility is a “fee” charged to investors, who must be willing to “pay” it (i.e., remain invested) to gain access to potentially superior long-term returns.

 

Consistency Counts- Long-term investing is a good antidote for high inflation because it has potential to provide returns that exceed what inflation and taxes take away, thereby maintaining purchasing power and preserving wealth. The key is to hang tough when there is bad economic news. While it is emotionally difficult to “stay the course,” market downturns actually provide a great buying opportunity similar to deep discounts on products sold online or at department stores. A recent book by financial blogger Nick Maggiulli advises readers to Just Keep Buying (i.e., making investing a habit).

 

Goal-Setting Matters- Research by the Consumer Federation of America found that people with a plan saved more successfully than those without a plan. A plan was defined as “a savings plan with specific goals.” Another study found that retirement provided a powerful motive for regular saving/investing. This speaks to the importance of setting goals and saving/investing for multiple goals (e.g., retirement, college, a car) concurrently with different “buckets” of money.

 

Some Investments are Already Diversified- Diversification is the process of investing in different securities to hedge the risk of loss affecting any one of them. Researching, purchasing, and monitoring multiple individual securities requires time and investment expertise. A much simpler, as well as less expensive, way to achieve diversification is to select a stock index mutual fund or exchange-traded fund that provides broad stock exposure. Examples include total stock market index funds that track U.S. stock indexes and total world index funds that provide exposure to stocks issued worldwide.

 

Compound Interest is Not Retroactive- People cannot earn interest on money that is not invested, which often happens when people get a late start investing and/or “sit out” stocks during market downturns (i.e., in an attempt to practice market timing). The latter helps explain results of a Dalbar study of the difference in performance, as well as the growth of, $100,000 between the average equity investor and the Standard & Poor’s (S&P) 500 index between 1/1/92 and 12/31/21.The S&P index returned 10.65% resulting in $2,082,296 after 30 years. Average investors earned 7.13% and accumulated $789,465. Bottom line: investors under-perform market indexes when they are out of the market too often.

 

The First Million is the Hardest- Like the game show Who Wants to Be a Millionaire?, initial rounds of the investment “game” do not double large sums of money. However, you must get through them for compound interest to double larger amounts later. Most people do not become millionaires until their 50s or 60s after they have been investing for 30 or 40 years. Late starts and “sitting out” down markets only delay investment growth. Once you accumulate $1 million, the next million might only take a decade or so (Rule of 72: money earning an 8% average return would double in about 9 years).

 

Financial Capital Can Replace Human Capital- Economists refer to the knowledge, skills, productivity, and other personal attributes that people bring to a job as “human capital.” Human capital helps people earn a living, but it wanes over time as people age. Investing can help people turn their human capital into financial capital. For example, withdrawing 4% of an $500,000 investment portfolio in later life is equivalent to earning $20,000 ($500,000 x .04).

 

Financial Independence is the Ultimate Goal- Financial independence (FI) is the state where people can pay their bills and have the quality of life that they desire without having to work for others. Many people try to achieve FI before they retire, whether this occurs in their 50s and 60s or 30s and 40s (FIRE proponents). FI occurs when monthly investment income (supplemented with guaranteed income sources, if any) exceeds monthly living expenses. The classic book Your Money or Your Life refers to the time when income from investments surpasses expenses as the “Crossover Point.”

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Ten Things to Know About Target-Date Funds

Target-date funds (TDFs), which are frequently described as a “set it and forget it” approach to investing for retirement, have grown in popularity during the past two decades. Below are ten “need to knows” about investing in TDFs:

 

How They Work- Target-date funds hold a mix of stocks, bonds, and/or cash equivalent assets and gradually become more conservative (read: a smaller percentage of stock in the fund portfolio) and income-oriented as the “target date” (e.g., 2050) approaches and, once it is reached, going forward. The mix of securities within a TDF changes over time.

 

Where They Are Used- Target-date funds are a frequent “menu” option for workers to select in tax-deferred employer retirement savings plans. For example, federal government workers have “L Funds” in the Thrift Savings Plan. TDFs are also a popular “default option” for retirement plans where workers are enrolled automatically unless they “opt out.”

 

TDF Logistics- TDFs are built on the long-standing assumption that investors should have less stock and more fixed-income securities in their portfolio as they get closer to retirement age. Asset allocation changes are made automatically for them. The target dates in TDFs are generally provided in five- or ten-year intervals (e.g., 2030, 2035, 2040, etc.).

 

TDF Glide Paths- “Glide path” is the planned changes in asset class (e.g., stock and bond and cash equivalent assets like money market fund) weightings over time as a TDF approaches its target date and beyond. Glide paths and, hence, stock and bond allocations vary among TDF providers and should be compared side-by-side for TDFs with the same target date.

More About Glide Paths- Three key elements of a TDF glidepath to compare are the initial equity allocation, the slope of the glidepath (how much and how frequently asset allocation changes), and the equity landing point. This is the date when the equity (stock)-to-fixed income ratio remains unchanged throughout the remainder of an investor’s life.

TDF Fees- Many target-date funds are “funds of funds” that create their portfolios by investing in other mutual funds. With these funds, investors pay two sets of expenses for the fund itself and its underlying funds. The lower the expense ratio (expenses as a percentage of fund assets), the lower the cost to investors so they keep more of what they earn.

TDF Advantages- TDFs provide diversification across asset classes and time intervals to meet a variety of planning needs. Investors can buy TDFs in taxable or taxable or tax-deferred accounts. Many have low required minimum deposits and fund managers make all asset allocation decisions. TDFs offer a low-maintenance starting point for new investors.

 

TDF Disadvantages- As with any investment, TDFs can lose money. They also do not guarantee anyone a sufficient retirement income. TDF characteristics vary among investment companies, which can make “apples to apples” comparisons difficult. In addition, certain glide paths may leave investors exposed to more risk than they want.

 

Investor Flexibility- Investors planning to retire in between two TDF target dates can choose the nearest date (up or down). For example, if planning to retire in 2042, they might select a 2040 TDF or a 2045. If someone is a conservative investor, they might decide to “go shorter” (2040), while a more aggressive investor might “go longer” (2045 or beyond).

TDF Selection Criteria- Like any mutual fund, there are three key factors to consider when selecting a TDF: 1. the fund’s composition and investment style, 2. historical performance, and 3. fees and expense ratio. Small differences in fees can translate into large differences in returns over time.

For additional information, check out this webpage from the U.S. Securities and Exchange Commission.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

More Miscellaneous Insights From Recent Webinars

 

As I mentioned in three previous posts, I love learning new things and often attend webinars and podcasts to gain knowledge and/or continuing education credits for my CFP® and AFC® as well as to connect virtually with others. 

Below, in no particular order and on a variety of topics, are nine financial “nuggets” that I heard recently.

 

¨     The Key to Building Wealth- There is no “secret” formula for wealth accumulation. Rather, the way that most people accumulate assets and become millionaires is to save as much as they can as soon as they can. Wealth is built by investing over time and compound interest over four or five decades of regular deposits is the key to success. That said, it is important to acknowledge that many people get a late start. That is reality and late savers need hope, encouragement and options. Saving later in life is still much better than not saving anything at all.

 

¨     The Power of Empowerment- People often have more power than they think they have, can do with a lot less shame and blame about past mistakes, and need to feel that they are in charge of their life. Financial well-being begins with a strong foundation of positive cash flow. An analogy used in a webinar is that, just like you don’t put on perfume without first taking a shower, you shouldn’t buy investments without having a budget with positive cash flow. Budgeting is the cornerstone for financial well-being.

 

¨     Key Financial “Need to Knows”- A panel of personal finance teachers on a CNBC webinar for Teacher Appreciation Week described the following concepts that all students need to know: start investing today, invest with low-cost investments, check for licensed sellers and registered investments, develop and follow a budget, understand your retirement savings plans, and consider a target date fund as a retirement plan investment.

 

¨     COVID-19 Impacts- A speaker at the three-day Wall Street Journal Future of Everything Festival noted that a big post-pandemic issue will be the large amounts of money put into the economy and the inflationary stimulation this is causing. A second issue is the grief experienced by many people, which has focused their priorities and clarified what matters. Many more employees today are vocal about work load concerns and work-life balance. They have also realized that they can be pickier about ways that they “lean in” at work and don’t need to be at every event. They can pick and choose.

 

¨     COVID-19 Comebacks- We should all expect that the process of re-emerging from the pandemic will be awkward. CDC guidelines will continue to evolve over time and people have different levels of “cautiousness” as they have had throughout the pandemic. Companies in many industries (e.g., restaurants, ball parks, and airlines) are trying to anticipate how their employees and customers are thinking and to make them feel comfortable. Not every company will get it right.

 

¨     Retirement Plan Withdrawal Caution- A webinar, The Impact of COVID-19 on Retirement Savings, by Consumer Action, noted that the CARES Act made it easier for people to take withdrawals from their retirement savings plans to pay bills. That said, participants were advised not to do this unless they absolutely have to. Alternatives to generate cash include savings that is not in a retirement plan (if any), employer assistance (e.g., giving circles), family and friends (even if it is embarrassing to ask them), and tapping a home equity line of credit.

 

¨     Womens’ Finances- Women, the majority of U.S. nurses and teachers, have been “beaten down” by COVID-19. As a result, many have stated “I’m out at 62,” so they can collect reduced early Social Security benefits. There is concern, however, as to whether they will be able to live comfortably throughout the remainder of their lives. Using the Rule of 72 with 3% inflation, prices will double in 24 years (e.g., from age 62 to 86). A recent study found that 47% of women cannot afford a $400 emergency expense and 21% use a credit card for emergencies. Another Consumer Action webinar speaker ominously predicted “we will see caravans of homeless women in this country” (a la the movie Nomadland).

 

¨     Working Past Age 70- People should not plan on doing this when they are calculating how much they need to save for retirement. Ambitious plans can go awry. Ageism is a very real thing and those who plan extended careers must absolutely keep their skills and professional contacts up to date so they can provide value to an employer or clients (if self-employed). Two risk factors, besides ageism, are health and ability to work. Benefits of working longer are delayed withdrawals from savings, more time to save money, and increased formula-based pension and Social Security benefits.

 

¨     Getting Started is Hard- Many people don’t invest (or take other actions to improve their personal finances) because they don’t know where and how to start. Financial educators need to remember this and break financial actions down into a series of process steps and offer encouragement along the way. Another financial education tip is to make financial planning activities seem urgent and important. For example, investing is important because it is a proven way to build wealth over time. The #1 pre-requisite for making a change is a sense of urgency.