As soon as I learned of the city of Detroit’s filing for Chapter 9 bankruptcy protection, I posted the following across my social media platforms:
Today, I want to add a few more reasons why this historic event should really – and, I mean REALLY – matter to you and serve as a wake-up call for how to best manager your money.
The city’s bankruptcy has at least five (5) clues and cues for you. In no particular order, here’s why I believe you shouldn’t dismiss this as a “that’s their problem” scenario:
To elaborate on what I said on the interwebs last week, if you participate (and I hope you do) in your company’s 401(k) plan and the company’s stock is one of the investment options, be sure to minimize your exposure to said stock. As so many people (re)learned on September 15, 2008, your company’s value can evaporate – go poof! – in a single business day. You’ll need to work with your financial advisor to determine the specific percentage as it is situation dependent, but as a conservative general rule of thumb, I’d aim for 5-10%.
Here’s why this is relevant to you: You don’t want your retirement savings tied to a single security, especially if your earnings are tied to the company of that security. Make sense?
- Municipal bonds
You shouldn’t have municipal bonds in your 401(k) plan anyway (there’s no added value), but just in case you do…check your investment allocation to municipal bonds. You should do the same for your taxable brokerage accounts, too. Make sure you know how financially healthy the municipality whose bond you hold is. And, you’ll want to do this for you and your parents! (One of the sad side-effects of Detroit’s bankruptcy is the number of retirees whose retirement lifestyle (and dreams) will be financially interrupted.)
Here’s why this is relevant to you: Typically in a bankruptcy proceeding, creditors are the first in line to get paid. But it looks like Detroit is taking another route. So, as of this writing the city’s municipal bondholders will likely have to wait their turn.
- Have savings beyond retirement-related accounts
To some extent, my industry is to blame for the emphasis on ‘save for retirement’ – whether on your own via a defined-contribution plan (like a 401(k)) or a defined-benefit plan (like a pension). Yes, you should save for retirement, but not just for retirement as a life-style, but because of the associated tax advantages from tax-deferred instruments.
But far too many people save for retirement almost at the exclusion of saving OUTSIDE these options. They may have an emergency fund and retirement savings, but nothing in between. This is a costly mistake I see people making all the time; I call them lop-sided savers because all their savings are tied up in retirement-related accounts. Are you making a similar mistake?
Here’s why this is relevant to you: The employees and retirees are likely to be in for a rude awakening, and will now have to scramble to figure out how to address a financial shortfall they didn’t anticipate and therefore didn’t prepare for. Balance out your savings strategy!
- Heed the warning signs…early
You don’t have to be a Detroit resident to know the city has been financially challenged for a very long time. Besides, $19 billion in debt didn’t just pop up overnight! It took 60 years; a population decline of about 800,000 people; and a combination of financial imprudence and ignorance.
I don’t know what measures were (or were not) taken to avert the bankruptcy, but the signs were clearly there for a loooong time.
Here’s why this is relevant to you: Since things simmer before they reach a boiling point, what is simmering in your life right now? What is quietly tapping you on your shoulder begging for your attention? Start to address whatever just popped to mind – even if it is nothing more than writing it down on paper and getting it out of your head.
- Make the tough choices sooner rather than later (it’s less painful!)
Sometimes, reality sucks. Sometimes, you have to choose between hard and harder. This is particularly evident when it comes to dealing with overwhelming debt and/or having to renegotiate a promise.
Sounds like this is the position in which the city of Detroit’s fiduciaries found themselves. The city’s debt escalated far beyond its means to meet its obligation, and the ripple effect will likely impact their ability to meet pension commitments. (Newsflash: there are a number of cities and states dealing with a significant deficit and under-funded pensions and could easily find themselves in a similar situation as Detroit.)
From what I can gather, it also sounds like the city officials were trying to satisfy everyone 100% and wound up not satisfying anyone in the process!
Truth is, there are times when in order to give everyone some of what they want everyone needs to leave something on the table…
You can’t always get everything you want, when you want it, and how you want. Yes, I know, this is no surprise to you. But I think this truth often gets lost when the stakes being negotiated are high and people feel taken advantage of during the negotiation proceedings.
Here’s why this is relevant to you: When you have to make a tough choice, make it, make it as soon as you feel you’re about to enter a danger zone, and map out a plan to include several scenarios! And, remember to negotiate and operate from a space of abundance. People may not like the outcome, but if they respect the experience of the process, they are more likely to work with you…rather than against you.
Even if Detroit’s bankruptcy wasn’t too much of a surprise to the residents of the city, I’m sure it’s still a rude awakening to its citizens, especially its affected employees and retirees. It is a potent reminder that at all times YOU ARE RESPONSIBLE for your financial health and well-being. That should never be abdicated. ‘Can’t think of a better case for financial intimacy as a concept to embrace and a practice to follow!
p.s. want my virtual help with making sure you’re managing your 401(k) well? Check out the training, “What the Hell Should I Do with My 401(k)?” (Content is relevant for 403(b) plans, as well.)
If I were to wager a guess, I bet the only time you think about your 401(k) is now (during benefits season) and when you get your quarterly statement.
Yet, 401(k)s play a critical role in your finances. Or, at least they can. They have morphed into THE retirement option offered by most employers. But as you know from conversations with your parents and grandparents, this wasn’t always the case.
401(k)s are relatively “young;” did you know that? They were introduced in the early 80s as a vehicle to supplement traditional defined-benefit plans – aka pensions. But pension plans are all but gone for most employees. Thus, the shift from defined-benefit to defined-contribution puts you in the drivers seat. As such, you get to decide:
- whether to participate;
- how much to contribute;
- in what to invest;
- how to allocate your investments;
- when to withdraw;
- and more.
And as the driver, you shoulder ALL of the responsibility for managing the various elements of your 401(k) – often with little to no guidance. As a result, you just might be making mistakes – some of which are obvious, others less so. But…
The most costly mistakes are the ones you’re making, unwittingly.
So here’s a list of common mistakes and what you can do instead:
Mistake #1 – Not enrolling in your employer-sponsored 401(k) or its non-profit cousin (403(b)
Truly, none of the other mistakes can be made if you make this one! And this one is costly in both the short- and long-term. Therefore, as soon as you are eligible enroll in this employer-sponsored benefit!
Mistake #2 – Putting too much money in your 401(k)
Yep, believe it or not, you can, in fact, put too much money in your account. How? By contributing more than your employer matches. A good rule of thumb is to contribute to the match and invest the rest in an external traditional IRA or ROTH-IRA.
Mistake #3 – Not taking advantage of your employer’s contribution.
This is also known as putting too little into your 401(k). When you contribute less than your employer will match it means you are leaving money on the table…don’t do that! For example, if your employer match is 6% – aim to contribute 6% of your salary.
Mistake #4 – Selecting investment options (usually mutual funds) based purely on performance
Whether it’s your retirement account or taxable brokerage account, it is never EVER a good idea to just select your investment choices using the filter of performance numbers only. Choice by performance only is quick, easy and quite seductive but very, very harmful to the health of your account.
Mistake #5 – Having too much exposure to your employer’s stock (if applicable)
All I need to say here is ENRON. If you don’t know the history, click here.
Mistake #6 – You stop contributing (or cash out) when the market crashes (or corrects)
You know the investment rule: buy low, sell high. But when the market crashes or corrects (think 2008), emotions set in and the idea of following prudent investment rules go out the window. But here’s the thing: when the market crashes or corrects, that is usually the best time to exercise “buy low!” The other lesson here is a reminder of why it is important to tie the structure of your portfolio to your goals.
Mistake #7 – You never re-balance
When you set up your 401(k), you have to select how much exposure you will have to the broad asset classes – stocks, bonds, cash. You also have the opportunity to diversify within those broad asset classes. It is natural for your allocation to shift throughout the year as the market naturally moves up and down. When this happens, you need to bring your *new* allocation – as a result of the market’s movement – back to your *original* allocation.
Mistake #8 – You don’t pay attention to what’s inside your mutual fund holdings
One of the things I always mention when I teach a class on mutual funds is that you must know what’s under the hood. It’s the only way to minimize overlap – or the possibility of having too much of one thing and not enough of another. Thereby undermining the value of diversification.
Mistake #9 – You diversify your account, but not your portfolio
One of the biggest mistakes I see people making is to focus on how to diversify their current 401(k) without considering how their other investment accounts are invested – including how your spouse is investing his/her retirement assets, if applicable. Look at the whole…not just a slice!
Unfortunately, it is far too easy to unknowingly make some or all of the above 401(k) mistakes. If you’re making any (or all) of them and you want help…you want to go a bit deeper than the suggestions provided, I have something for you! It takes place on Wednesday, November 14th at 8pm EST. Click here to learn more about – What the Hell Should I Do With My 401(k)?
p.s. it’s benefits season for most U.S.-based companies…perfect time to enroll or reevaluate your 401(k). There’s nothing wrong with not knowing which mutual fund to select or how to put them together. But not taking advantage of an opportunity to close the knowledge gap…well, that isn’t too wise. So, join me for the live, online training class (What the Hell Should I Do With My 401(k)?) and let me help you learn what you need to know about mutual funds and your 401(k). I would love the opportunity to work with you!
In the November issue of Essence Magazine, Charlotte Stallings, Stacey Tisdale, and I debunk nine (9) prevailing money myths, such as: “It takes thousands to start investing.” (Myth #1); “My kids will provide for me in retirement.” (Myth #4); “Using a bank debit card is the same as cash.” (Myth #7)
If you are not a subscriber, the issue is on newsstands now! Our advice begins on page 103 and provides truths to live by for investing, home-ownership, managing your 401(k), managing the sandwich generation, credit and debt management, insurance, and cash management.
And a bonus for me: “Financial Intimacy” (see page 109) is listed as one of five (5) must-read money books! Exciting!!