Anyone who grew up in the 1960s remembers how driving a car used to be. Rough roads, no power steering, shifting with a stick. It could be fun, but you had to be on the ball. And you actually had to know how to drive.
It was exhausting, too. Getting around town would wear you out. Long drives were an endless rumble of tarmac and wind noise. No romance there, just effort and stress.
Consider driving now: Cars are sleek, efficient and quiet. You don’t hear a thing outside of your tightly sealed, comfort-controlled bubble. Roads are generally smooth and curves are banked. In cities, lights are better timed and pavement is marked for safety. The cars we drive today are, essentially, luxury golf carts.
Even a terrible driver today can have a pretty good experience on the road most of the time. In fact, it’s a little boring. So we distract ourselves with business calls and radio talk shows, some of us with video screens. On long drives, we wind up lulled into a state of drowsy unawareness while cruising at 70 mph or more.
In a way, that’s what has become of our approach to saving and retirement. Yes, huge numbers of us don’t save enough in the first place. But for those that do, the problem turns into one of highway hypnosis. We barely pay attention.
See if you recognize these poorly understood “road to retirement” dangers:
1. Allocation, what allocation? Your 401(k) is all set up at work. Great, that’s a huge step. A pamphlet from the plan manager suggests that you diversify. So you buy a collection of mutual funds that match an age range. Then 15 years go by. Have you looked at it since? Probably not.
Here’s the fix: Adjusting your allocation as you get closer to retirement is important stuff. Generally, you want to dial down risk as the years pass but not turn to cash or fixed income too soon. It’s not good to obsess about this, of course, but reviewing every five years or so is a good policy.
2. Who put all this cash in my account? Retirement savers sometimes don’t realize that dividends paid on stocks they own and bond interest payments show up in their retirement accounts as cash. Too often, it just sits there earning nothing. Likewise, some asset classes zoom up in value, only to deflate later.
Here’s the fix: Companies are moving to push their employees into target-date funds by default. Like pension funds of the past, these vehicles rebalance your money automatically. Some target-date vehicles are unusually expensive, however. Look for the ones that use index funds and charge very low management fees, or rebalance your investments yourself when necessary, including reinvested cash.
3. I’m on track…I think… The scariest part of investing is the urge to try to go faster to reach your goal. It’s like racing to get to a wedding on time by speeding through traffic and taking chances. You’ll get there, sure. Or get run off the road and into a tree.
Here’s the fix: Save enough, early enough to make a difference. Six percent is great and 10% is much, much better. If you’re halfway down the road to retirement, however, now is no time to stomp on the gas by taking wild bets in the markets. Increase your savings rate, cut expenses and find a balance of safety and growth that will ensure that you arrive alive.