The Retirement Equation

Three different personal finance/retirement articles to look at today.

First, Barron's looked at taking mini-retirements every so often starting at a youngish age. The immediately conceded that the correct word is sabbatical. They did a fair pro and con of the idea. 

The cons related to not having the flexibility at work to do this, the drawback of having to quit and then reenter the workforce and not just the interruption of savings contributions but also potentially pulling from savings to make the economics of the sabbatical work. There is the potential have a real retirement planning setback from having pull from savings for some number of months. 

One negative not discussed and you know what, negative might not be the right word, but late 20's into our 30's up to some age we pay our dues. This is when things should be tougher and I don't think bailing out at 29 because the position immediately after the first entry level job was difficult is a great idea. It does nothing to help someone develop resilience. Moving up the ladder at that age is a different thing and not what I am talking about. Do the difficult thing with one reward being fewer jobs listed on the resume. Six employers in nine years raises questions. If you're 30 years old, reading that last sentence and thinking he doesn't know what he's talking about, fair enough but I'm closer in age to the person likely to make the hiring decision at your next employer, and if they don't understand, that is a problem for you not them. 

While taking a sabbatical at a relatively young age might draw mixed reactions, I would not shy away from the occasional, calculated risk. I took a couple of fairly big risks in my early and mid 30's. I built up a little bit of a war chest to get through but this was in part buying a call option on myself and betting the risk would pay off. Getting back into the workforce at 35 might be difficult but it would be easier than trying to get back in at 55. 

The Wall Street Journal wrote about the extent to which people are using their 401ks as emergency funds citing data from Vanguard putting the number at 4.8% of participants taking money out early one way or another. Vanguard also reported that about 1/3 of people who change jobs take all the money out, this must be a younger cohort but the article didn't specify. 

A common reason for taking money out is to pay off debt with a couple shared anecdotes in the article where people did just that and are glad they did. The thing to watch out for of course is paying off the debt and then going right back into debt. Never having credit card debt again is of course commendable but using retirement money to pay off debt only to go right back into debt is bad spot to be in. If their behavior isn't (self) corrected then nothing really gets solved. 

Taking money out can of course be expensive. There are a couple of hardship exemptions that might relieve some of that expense but under age 59 1/2 and these withdrawals are both taxable and subject to a 10% penalty. Certain hardships waive the penalty. 

The comments on the Journal article were mostly opposed to the idea but there one comment with an interesting theory. Basically, if you get the employer match and then at some point you take money out for something, the employer match is subsidizing the tax and the penalty. He didn't say this but the vesting plan could get in the way of this but either way, it's an interesting idea. 

I won't say that taking money out early is universally bad but there are negative tradeoffs and there is potential for serious mistakes. 

The final article came from Yahoo and was provocatively titled Working Longer Won't Save Your Retirement and featured ideas and opinions from Teresa Ghilarducci. Ghilarducci gets interviewed frequently and I always find her comments interesting because I find myself disagreeing with the majority of what she says. Her commentaries always read as being quite far to the left. On some things I am liberal and other things I am pretty conservative and on this subject I guess I am conservative. 

She doesn't appear to be saying working longer doesn't work, more like it is an unfair burden to place on many workers for quite a few different reasons. The article actually talks a lot about white people having better outcomes and I didn't really know what to make of that. Was it racist or not racist, honest to God I am not sure?

I don't think I will ever be able to get on board with any solution that doesn't involve people trying to solve their own problem. Yes, not every one will be able to do so but plenty have that ability. Ghilarducci talked about people being unable to work to older ages for various reasons including that the stress induced from certain jobs can adversely impact health outcomes. Ok, that is an interesting idea. 

Are you on track retirement savings-wise with not much margin for error or maybe a little behind? What do you do for work? Do you dislike it? Are you aware of how much stress it might be causing? How old are you? Following that line of questions like a flow path, if you need some sort of income beyond (reduced) Social Security and portfolio income to make it work and staying in your current job is not feasible for any reason, what can you do starting now to solve that problem?

Ghilarducci wants the government to step up with some sort of new plan as a supplement to Social Security where people contribute 1% of their income and the government matches 3%. Ok, how do we pay for that? The article didn't get around to how to pay for this new program. 

I probably come off as harsh in these posts but letting my fate rest in the hands of the government to fix it is unacceptable. Yes, something might happen to Social Security that is beyond our control but how we solve other parts of the retirement equation doesn't have to be. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.