Bobby Monks: You’re focused on improving financial literacy and encouraging parents to teach their children about it at an early age. What’s your approach to building a foundation for a child to understand and appreciate financial matters?
Dan Kadlec: Financial education should begin at about age 5 with coin counting and a piggy bank, and progress in baby steps each year through allowance and light discussions of what things cost and building an understanding of wants versus needs. By high school, kids should be making real choices with how to spend their money, including saving and charity. Ideally, this is all reinforced through a program in school, but all too often that is not available.
BM: In your experience, what are people’s biggest misconceptions about 401(k)s? What are some ways that employees can make sure they’re getting a good deal out of their employer-sponsored retirement plans?
DK: Increasingly, we see 401(k)s being treated as a piggy bank. People take loans and early distributions without concern for the penalties and lasting damage to their retirement security. This is not a liquid savings account and should go untouched until retirement. The best way to get max value out of a 401(k) is to make certain you are contributing enough to get the full employer match. Then sign up for a 1% or 2% auto escalation of contributions every year until you are saving 15% of pay.
BM: What’s your advice for Americans saving and investing for retirement? What should they watch out for?
DK: Make the most of tax-advantaged accounts – 401(k)s, Roth IRAs, 529 Plans, etc. Put your savings plan on auto pilot. Have contributions taken directly from your pay. And watch out for fees always. If you stick with index funds and target date funds, you will be most likely to get the lowest fees out there. Also, stay with your plan no matter what the market does. You want to be a buyer, not a seller, after the market dips 10% or 20%.
BM: Have you seen any significant changes in behavior since the 2008 recession? Do you think the average individual is paying more or less attention to financial matters?
DK: Most people are paying closer attention. Millennials in particular seem hellbent on saving for their future but in many cases, they just don’t know how or where to do it. Some post-recession values are sticking, like a focus on relationships and experiences over material items.
BM: I recently published a book about the hazards of outsourcing the investing process to money managers. We warn folks about the dangers of high fees and financial advisors who don’t put their interests first. How can we encourage investors to take back control of their own investing?
DK: Most people would do quite well without paying for advice, at least as it relates to saving for retirement. It’s pretty simple, really. Index funds give you low fees and broad diversification within the stock universe. Target date funds usually have low fees and actively reallocated assets based on your age. Millions of people have all their long term savings in a single target date fund, and that is OK. Managing your savings does not have to be difficult! You don’t have to make decisions about hedge funds, commodities and individual stocks unless you enjoy it. The hard part is just getting started, and that’s why target date funds have become so important.