| Sargent & Lundy Savings Investment Plan |
| RETIREMENT DEMONS |
| The following excerpts are from an article in the May
2000 issue of "Mutual Funds" magazine. The opinions expressed
by the author, Lynn O'Shaughnessy, may or may not reflect those of the
SIP Committee.
Answer this: What's the biggest obstacle to saving enough for retirement? If you said "the high cost of living," "taxes," "inflation," or "the crazy financial markets," you're in good company - but you're wrong. Because, as difficult as these obstacles are, the one thing that can keep you - or anyone - from saving enough for retirement is the challenge of mastering one's own mind, we well as one's own emotions. Your emotions can trip you up. Feeling fearful? You might not invest aggressively enough, even though you know better. Overly optimistic? You'll take on too much risk, or overspend, and come up short one day. Impatient? You'll take an immediate tax break, even though it might hurt you in the long run. To act wisely, you'll need to recognize, and face, your mental demons. Let's meet a few of those demons, along with some people who have challenged them and prevailed. DON'T THE KIDS COME FIRST? (GUILT) Pam and Jerry Kaiser were grappling with how to apportion monthly savings between their retirement accounts and college tuition funds for their two sons, ages five and seven. Pam, a former clinical drug researcher, had quit her job to stay at home in South Orange, N.J., with the boys. Like many parents, she and Jerry, an information systems director, worried about whether their retirement savings might shortchange their children financially, but they didn't know how to meet both needs. They consulted a planner. He listened to their concerns, looked at their numbers, and told them this: People can borrow money for all sorts of uses - car, house, new business, college tuition. But lenders always balk at one request, no matter how urgent the need: Nobody's going to lend you money to fund your retirement. Based on the planner's cold splash of reality, Pam and Jerry concluded that saving aggressively for retirement was a higher priority than giving their kids all-expense-paid trips through college. Guilt? Trumped by logic. Using some existing savings, they did open two accounts with Massachusetts' college savings program, which is managed by Fidelity Investments. But for now, they aren't adding to those accounts; instead, Jerry contributes to his 401(k) retirement plan at work and the couple puts $4,000 a year into his-and-hers IRAs. "Funding retirement comes first. A child can always find a way to go through school," says Christopher Brown, the Gaithersburg, Md., planner who helped the Kaisers. Parents must also be realistic about what they can accomplish once they start a college fund, Brown adds. Most people, for example, should forget about giving their kids a private college education without student loans, scholarships, or other outside help. It's just too expensive, and too emotionally taxing to try. Here's an alternative: Start saving for a public school instead, when your kids are very young, and you'll need to put away just two or three hundred dollars per month, an amount that many parents can swing without crippling their retirement saving plan. Then, if your kids are smart enough to get into Harvard, you - or they - will find the difference somehow. I DON'T WANT TO KNOW! (FEAR) How much money to you really need to save for retirement? It's a question that haunts many of us. But it often goes unanswered, even unexplored, because people are scared to learn the truth. It doesn't help when the financial services industry (and the press) come up with scenarios showing that millions will be needed. Many people "just assume that they can't save enough," says Faye Doria, a financial planner in Portsmouth, N.H., so they don't try very hard. Negativity, spawned by fear, psychs them out of devising a savings road map. Making matters worse, it's difficult for most people to understand, on a real, gut level, the awesome power of years of compounding in an investment account. Compounding - making gains on your gains, then on those gains - is the magic dust that turns modest monthly savings into immodest nest eggs. Planners often show their clients detailed examples of compounding, demonstrating how dogged saving combined with smart investing can yield all the money they'll need. Clients nod in earnest appreciation, shake their planners' hands, and then, driving home, fixate only on the unbelievable, seemingly unattainable final goal. Two million bucks? Yeah, right. If you're thinking about ignoring the issue, know this: A 1999 study by the nonprofit Employee Benefit Research Institute shows that people who try to determine their retirement needs, no matter how they do it, put away considerably more - nearly five times more, on average - than those who choose to remain clueless. Why the difference? People who are disciplined enough to do their retirement homework might also be more disciplined as savers. But the study's authors also concluded that many respondents likely escalated their savings because they let themselves face the monster - the retirement needs calculator - and were shocked into action, rather than inaction, by the results. Ignorance, in this case, is not bliss. I WANT IT N-O-W. (IMPATIENCE) Meaningful asset allocation - the kind that results in a diversified portfolio with acceptable volatility - has been a tough sell lately. Retirement investors are demanding home runs, not singles or doubles. "My clients tell anecdotes about people striking it rich virtually overnight. It's hard for them to fight the desire to try to do the same," says Robert Moody, a financial planner in Atlanta. When does good, aggressive investing cross the line into foolishness? There's no simple answer: what's prudent for a 30-year-old lawyer might by folly for a 50-year-old schoolteacher. Most people should be aggressive with at least a portion of their money. But if you're prone to chasing the day's hottest investments with big chunks of your retirement kitty, at least recognize the potential for damage - not just to your accounts, but to your psyche as an investor. Jim D'Aoust learned firsthand. At heart, this research-grant administrator at the University of California at San Diego is an aggressive but mainstream, rock-steady investor. He and his schoolteacher wife, Becky, have to provide for their own retirement and for their three school-age daughters. But about two years ago, after breathless recommendations from a friend who had invested in a tiny biotech firm called Trega Biosciences, D'Aoust impulsively took $35,000 and sank it into the firm. He paid about $4.40 per share. The stock soon tanked; before long, D'Aoust's stake was worth $8,000. He hung on gamely, but finally sold out last December when Trega rebounded a bit - to $2 per share. Adding insult to injury, Trega then kept climbing, recently trading at $13 per share. The lesson here is not just in the story of a loss - you've got to take some risk, after all, to make good money - but in the numbers: 35 grand proved more than this particular investor was comfortable to have riding on a speculative stock. Many retirement investors who sell a big chunk of stock at a loss torment themselves for months or years afterward. As a result, they may become less willing to take advantage of other opportunities, even good ones. Treat yourself kindly. Diversify to insure against extreme volatility and unacceptable losses. Then, on the fringe of your portfolio, you can go for the big score without risking too much. TAKE THAT! AND THAT! (ANIMUS) Have you ever known someone who treats investing as a weapon - not just a way to make money, but to stick it to other parties as well? You find such creatures not only on Wall Street, but all over Main Street, too. And they might hurt themselves more than they hurt others. Need proof? Nobody likes paying taxes. And if there's a way to keep money our of Uncle Sam's pocket, most of us will go for it. But will we take a tax break even if it could hurt our retirement plans? Just look at all the people still flocking to traditional IRAs, which provide an immediate, up-front tax break, even in cases when using a Roth IRA (with only the delayed gratification of a back-end tax break) would create more spendable money for retirement. As the April 17 tax filing deadline approached, the pace of traditional IRA contributions at Fidelity Investments, for example, greatly exceeded those of the Roth IRA. Fidelity customers overwhelmingly preferred the traditional IRA to the Roth last year, as well. The story is similar at American Century, the Kansas City mutual fund family. The traditional IRA has claimed 60% of contributions this year. "By and large, people want the tax deduction today," says George Paquin, a financial planner in Chelmsford, Mass. It takes more than a presentation of the facts, he adds, to convince many clients to buy into the Roth. It takes "cajoling" - in other words, people's feelings have to be changed. How logical is that? Remember Jim D'Aoust? He took unpaid vacations one year just to qualify to convert a pension rollover into a Roth account. (Otherwise, an income ceiling would have prevented the rollover.) Yes, there are cases when a traditional IRA is best. But try to do what's good for you, not what's bad for the IRS or anyone else. MONEY FOR ITS OWN SAKE (GREED) Robert Barry's retirement daydreams used to focus mostly on a huge pile of cash, obtained, he would imagine, from investing and from selling his Hackettstown, N.J., money management firm to a big outfit for big bucks. He thought about the firm day and night, seven days a week, keeping an exact, running tally of new clients swirling in his brain. The obsession evaporated one day in September 1998, when the then-45-year-old financial planner keeled over at his desk from a near-fatal heart attack. In an emergency room, Barry's heart stopped beating for nearly five minutes. In the months since, Barry has made a good recovery - in more ways than one. While he still works hard, he has reevaluated what he wants from his professional life and from retirement. Instead of making official retirement the grand prize of his life, he's trying to "retire a piece of each day, every day," as he puts it. He reminds himself to exist "in the moment" when not working - to fully experience and appreciate things like playing with his young daughter. And suddenly, retiring doesn't seem so hugely, overwhelmingly important. Barry has decided not to sell his business, but to keep it, and keep a hand in it, because he does love the work. he certainly hopes to scale back one day, but he no longer feels "a pressing need to create the next Morgan Stanley" or to be the next J. P. Morgan. One thing about money: You've gotta have it - lots of it - to eventually live in comfort and security without working. But there's another thing about money, too: By itself, it makes a lousy goal. |
This page updated on 3/24/2000