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Anne Lester on Personal Finance

Anne Lester on Personal Finance

This week I am joined by special guest Anne Lester to discuss the importance of educating young individuals about finances. In particular, we discuss Anne’s latest book titled Your Best Financial Life: Save Smart Now for the Future You Want and its focus on individual financial responsibility. We also talk about the shift towards personal financial management, overcoming behavioral biases in saving and investing, the benefits of automated savings, and the significance of educating young individuals about finances.

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Retirement Savings – You’re on your own

Anne and I begin our chat by acknowledging a historical shift in retirement savings. Back in the day (our parents’ generation and even ours, to some extent), companies would take care of their employees with pensions and retirement packages. It was normal for an individual to spend years, decades even, at the same job, or at least employer. The same cannot be said for today’s economy in which most people spend a maximum of five years in any one given position. 
Why does this matter? If your job isn’t actively preparing you for retirement, that responsibility now falls on your shoulders. There is a lack of education and an abundance of complication when it comes to personally managing long-term savings. Let’s break those key issues down to their impact on you:
 

Educating kids and young adults on personal finance

Math in elementary school covers the basics. In high school, it gets more complicated with advanced computations but most public schools do not spend much, if any time on personal finance. It is up to us parents to teach our kids about credit (cards, lending, etc), real estate (purchase, lending), and arguably most important: long-term savings. These concepts are not intuitive and they accompany two significant behavioral biases: loss aversion and present mindset.
 

Loss Aversion and Investing

We’ve talked about loss aversion in the past on this podcast, in particular in the episode Be More Aggressive. Anne revisits this behavioral bias that is well defined by the Decision Lab as a “cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing.”
Winning $10 is cool I guess, but losing $10 is a CRUEL WORLD!
How does this impact investing? It explains why so many people are afraid of the stock market. Even if they know that historically speaking, they will always gain money from investing in stocks, watching the tickers and tuning into the day-to-day market volatility wreaks havoc on the psyche and impacts one’s decision making. Putting money in a savings account feels safer than investing, even if we know that it is a financially detrimental decision. We just talked about this last week!
Anne breaks it down further by running some numbers. Investing $5k in the market today will likely grow to $100k in 40 years. So how do we overcome, or teach our kids to defeat that behavioral bias? Well, first we have to acknowledge that living in the moment isn’t always a good thing.
 

Present Self vs. Future Self 


Have you ever tried telling your young child that if they eat those chocolate-dipped, deep-fried oreos from the fair they probably won’t feel well in an hour or so? You probably then held their hair or rubbed their back as they made a sacrifice to the porcelain throne.
Trying to explain to a young person the concept of regret in the face of instant gratification is a lot like banging your head against a wall, repeatedly. We all remember the feeling, and likely still indulge (binge-watched any shows into the wee hours of the morning lately? You know you have!). Ane talks about the challenge we all face when it comes to present self vs. future self. Luckily, she also has some tips for overcoming the tendency to prioritize the now over the later.
 

Tips for teaching/embracing long-term financial planning

What’s the easiest way to help your kids achieve success in retirement planning? Automate. Show them how to take the decision and the tendency toward instant gratification out of their hands. You can’t spend money you don’t have, right? So start by saving off the top. Use those employer benefits to contribute to any and all savings vehicles offered to you including (but not limited to): 401k’s, Health Savings Accounts (HSA’s), 403(b), TSP, etc.
Next, automate transfers to those savings vehicles that don’t come directly from your paycheck. Set up an auto-transfer for the day after you get paid to 529’s, IRAs, Brokerage account and more. Sure, your newly minted adult child might not be able to manage a huge contribution if they want to make rent and eat, but they can plan to set-aside a percentage of their yearly raise to savings goals. You can’t miss what you never had, right? The less they have to think about it, the easier it is to let their money grow overtime. Future selves for the win!
 

Your Best Financial Life

Book: Your Best Financial LifeAnne Lester was a truly delightful guest to have on the Financial Planning podcast. Our conversation shed light on the evolving landscape of personal finance, particularly in terms of retirement savings and the imperative for financial education among young individuals. As we navigate a world where traditional employer-provided pensions are increasingly rare, the responsibility for long-term financial security falls squarely on individuals’ shoulders. Anne’s insights underscore the importance of equipping the younger generation with the knowledge and tools necessary to navigate complex financial decisions, combatting behavioral biases such as loss aversion and present bias. By emphasizing the benefits of automated savings and instilling the value of long-term financial planning early on, we can empower our kids to take control of their financial futures and strive towards their best financial lives. Anne Lester’s expertise serves as a valuable guide in this journey towards financial literacy and security.

Transcript

Transcript
Michael:00:00:00

Welcome to financial life planning. I’m your host, Mike Morton. And you notice my usual co host is not here today. I’m doing the introduction, which is probably sounding bizarre to you. And the reason Matt’s not here today is because I have a special guest, which I’m super excited about today. Today on the show, we’ve got Anne Lester. Let me give a brief introduction to Anne. She is a retirement expert, author, top rated speaker, former head of retirement solutions at JPMorgan Asset Management, where she worked almost 30 years. And I’m definitely interested in a few things there that she’s written about. She’s been featured on Bloomberg TV, CNBC, Forbes, Business Insider, Wall Street Journal, the New York Times, and Barron’s. And today we’re talking about her new book, your best financial life, save smart now for the future you want helps young savers find longterm saving success by overcoming their behavioral biases. So and welcome to the show.

Anne:00:01:02

Well, thanks so much for having me, Mike.

Michael:00:01:04

I, like I said, I love this book, so I got, a copy of this book. And it was amazing. I read a lot of financial books. What I loved about this is very aimed. I would say it’s aimed at the, people getting started maybe in their twenties, maybe learning about finances for the first time, trying to figure this thing out, which is fantastic because we definitely need that. And it’s so, and the other thing I love the best, so it’s very aimed at that. So it’s written very clearly. And the other thing I loved is that it was really written in a very easy to understand way. It was written like, in a very like, ah, I could just, you know, crush through it. it was so fun to read, easily understandable, and very approachable, all the, the language and everything in it. So, congratulations on an amazing, amazing book.

Anne:00:01:47

Oh, I’m so glad you liked it. And I was trying to make it approachable. And I mean, I’m really thinking about what book would I have wanted to read read in my twenties when I was doing everything wrong which I share excruciating details about in the book. But, but also I just know from talking to so many people that they’re just feeling stuck, right. And having someone lecture you. Or use big words and imply that you should already understand them, which is totally bogus is not helping

Michael:00:02:13

Yeah, it isn’t it crazy like how I say this all the time how it’s so much put on the individual now, right? Like 50 years ago. It’s like you work for one company get that pension. They would take care of you, you know And now it’s you know over the last 40 50 years because of the law changes and other changes It’s put on the individual to understand their own finances and take control of it. And when did you ever get that learning?

Anne:00:02:37

I sure didn’t get any of it. And I guess that transition happened maybe when I was in middle school, like in the seventies is really when some of the laws changed. And, I don’t know that we can just blame the law or like companies who don’t want to offer pensions because, you know, American workers change jobs a lot now and it’s pretty rare to have somebody like me who spent 30 years or almost 30 years at one employer. Most people. Stick at the same job for five years or less. So that DB system, the way it was set up, wouldn’t have worked anyway in today’s economy. So this is, I think, got some strengths to it, but boy, if you don’t know what you’re doing or don’t take advantage of it, or your employer doesn’t offer a 401k plan, you are in a lot more trouble than you would

Michael:00:03:15

Yeah, yeah, not to blame the laws of the companies. I totally agree with you, but also we didn’t replace it with education

Anne:00:03:21

correct. Or, or a system that was easy to use or easy to transfer from employer to employer. I do spend a little bit of time like trying to. Do policy work and stuff and advocate on that side. And we can talk about that. If people find that interesting, most people don’t. But it’s like, there are a lot of ways to keep improving the system

Michael:00:03:37

Yeah, yeah now I want to say this at the top because we’re not gonna get you know to each chapter of the book and all and all The different things in the book so for listeners just know that this is a great book from start to end in terms of getting people started. So if you’re a young person kind of tuning in, that’s just getting started, or if you know a young person in your life, that’s just, or someone that’s just getting started with trying to learn finance, navigate that first job. This is a fantastic book, a fantastic resource to put in their hands. Very easy to read. So just want to say that at the top here, because we might go into some different topics, go a little bit deeper in some topics. And so you might not get the sense of what the whole book is about. So a question for you to get started, because I noticed this while I was writing up some of the notes here. It says helps young savers find long term savings success by overcoming their behavioral biases. So why do we need to overcome our behavioral biases?

Anne:00:04:30

I think all of us are, this is science, right? We are all wired. To respond different ways to different kinds of situations, right? And there’ve been a whole bunch of books, Nobel prizes, right? There’s blink and thinking fast and slow and fundamentally the big idea, I think behind a lot of this is that it’s easy for. And I think people in financial services, professionals are super prone to this, like come up with a rational, optimal financial answer that will give you the most money at the end of the day, let’s say, but when we’re asked to risk our own money, you know, the fear of losing hurts. More than the fear of the the gain of winning feels good and some people have estimated that that losing hurts twice as much as Winning feels good. So out of the gate You’re not going to make Rational decisions because like you were rolling dice and nobody cared about what happened and it was like some science experiment like you just don’t People don’t behave like that So that’s one big behavioral bias. Another really big one that really gets in the way of saving. And I talk a lot about this in the book is we care more about what is happening to us right now than we care about what is going to happen to us in the future. And sometimes the future is like tomorrow morning. So just you’ve ever. Stayed up and watched three more episodes of your favorite show than you’d plan to like raise your hands, right? Like we’ve all done that. I you know, I read i’ve like looked at my watch and gone. Oh, it’s one o’clock What happened right? Well, I had to finish the book, right? So so we all do stuff like that and when you do that with money Your present self right wants that shiny thing Whatever it is. It’s like shoes for me. It might be you know, whatever for you, but It’s hard to put brakes on that decision maker because it just kind of grabs control and runs. And so that present self, right, the today guy, I call him really does a number on what tomorrow guy would want. Right. So, you know, when you wake up in the morning, having stayed up till two o’clock in the morning, binge watching something, you don’t, you’re like, why did I do that? Right. So. I think for a lot of people who struggle with this temptation, which is, oh, by the way, hardwired into our brains is not your fault, right? It’s just the way you are. Understanding how you’re wired can let you a stop fighting it. And, and then ideally start setting up a few ways to put some breaks, some guardrails. I only go bowling if it’s at a children’s birthday party. Cause that’s the only way my ball stays out of the gutter. Like, like whatever you do. Understanding how you are wired and how you react to things that are attractive, right? That make you want to say yes, can start helping you figure out what the right ways are to put some of those brakes, some of those barriers, some of those guardrails in place so that you can stay on the path that you want to stay on.

Michael:00:07:19

Yeah. I love that about staying up late at night, of course, it all resonate with that. Like, Oh my gosh, why am I so tired? I got a lot of things to do today, you know? And so we know that today guys messing with tomorrow guy. What can we do or what are some top things that you recommend when it comes to finance? Then you know, a couple of easy things that you would recommend to get started, like, Hey, putting the brakes on that or setting up some guardrails so that we don’t get hijacked.

Anne:00:07:44

Yeah. So a big one, and this is again, something that if you’re lucky enough to have a job that has a 401k plan or the equivalent 403b, and there’s a whole bunch of, you know. Number and letter salads that describe these plans But if you’re lucky enough to have one it gets taken out of your paycheck automatically before you see the money and automating Savings is like the number one Best thing you can do because it doesn’t let you know Today’s self in your tomorrow self like start fighting over what to do with the money like the second you’re like Oh, I could save this money or I could go to a bachelorette party in Las Vegas Let me think about what I want to do. Like, okay, you’re already like probably gonna have a tough time with that decision You’re gonna feel bad right if the money’s not there to spend you’re a lot less likely Especially if you don’t have a big line of credit on your credit cards, we’ll talk about that too. But if you don’t have the money to spend, you’re a lot less likely to spend it, right? So just automating savings is a huge one. Another really important one, especially if you’re just starting out and you don’t have a lot of spare money, which let’s be honest, most people in their twenties and their first job don’t, aren’t living the life that they hope, hopefully aspire to, right? Like It’s hard to save the sort of recommended amounts, which are like double digit percentages of your income. I don’t want to scare anybody, but like you eventually want to get to a savings rate of like 15 to 20 percent of your income. And that’s like almost impossible in your first job. You’re living in an expensive city. Maybe you’ve got student loans to pay. You’re already, you know, sharing a group house or an apartment with like three people that like don’t wash their dishes. Like there’s nothing good about this. So trying to save that much money is tough. The most important thing, the most important hack is to commit before you get a raise to saving half of it.

Michael:00:09:35

Yeah. I

Anne:00:09:35

Right. And that that doesn’t hurt because you’re not like sacrificing money. Don’t have like it’s just all right. I’ll do that tomorrow. Okay. Well, okay So then the trick is you have to do it some 401k plans will let you do that automatically some don’t but it’s if you make Yourself that commitment and that promise that intention Share it with somebody share it with a friend share it with the sibling share it with your partner I don’t know how I feel about this. Maybe share it with your parent. Maybe if they’re judge you don’t do that, but That is one great way to increase your savings rate without feeling like you’re sacrificing too much.

Michael:00:10:10

Oh, man I love both of those and it’s just hilarious because I was talking with a young person yesterday going over finances and stuff and that was exactly it. It’s like how much can we automate first of all just 401ks first then like okay, you got some extra savings, but today they’re already identified So it’s like great. Let’s Automate sweeping that out. You’d ever see it. Cause otherwise it burns a hole in your pocket and you’re kind of like, Ooh, I could do this, could do that, maybe I’ll save it, but what am I saving it for? I’m not sure. You know, that kind of thing.

Anne:00:10:40

yep, no, it totally burns a hole in my pocket. Like I get any money. I’m like, Oh goody, what can I spend it on? I still do that. Right.

Michael:00:10:45

And I love the automatic increase. So same as you just said, 15 to 20%. I, I target like 15 percent of gross income. If you stay with that, you can do a math equation for your financial lifetime and it sort of works out. So 15 percent of your. Gross income if you can, automatically save that for the longterm and if you can’t start there just like you said Yeah, can you increase it either two ways one when you get a bonus say 50 of it Or like you said a lot of 401ks or you can just put a reminder yearly your yearly calendar, I can start at 3%, you know, to get that match. But the next year goes to 4%. The next year goes to 5%. Like just keep increasing it by 1%, until you get there. So again, you won’t really miss it. Right. It’s just like, Oh, 1%, it’s not that big a deal, you know? So you just commit to kind of doing that.

Anne:00:11:31

and getting to 15 percent like seems impossible if you’re saving three, but if you do one or 2 percent a year, let’s say you get a 5 percent raise. And now that inflation is coming down, like it’s, that’s all a little better. If you get a 5 percent raise, you save 2 percent of that a year, you know, you’ll be there in 10 years. Like that’s

Michael:00:11:47

That’s okay.

Anne:00:11:48

that’s okay. Cause this is a long game you’re

Michael:00:11:51

that’s right. you had a, a stat in the book I wanted to highlight too, that if you invested 5, 000 one time at age 21, that would have turned. So 5, 000 at age 21, that would turn into 100, 000 at age 65 when you retire. So that’s pretty awesome. Like your 5, 000 turns into 100, 000. Like that’s great, but it’s the consistency. So if you could say 5, 000 every year, Okay. Okay, 21 every year and invest that then instead of 100, 000 you end with 1. 5 million dollars So it’s that consistency as that time in the market, that matters, putting it away. So even if you are at 3 percent now or 4%, if you can get to that 15 percent over, if it takes you 10 years, like it’s the consistency of kind of doing it year in and year out, that really makes the big difference.

Anne:00:12:41

I think it’s hard, again, just talking about the way our brains are wired, like when you are starting out in your 20s, your brain is already not, fully developed, like you’re still, your brain is still growing. And so that impulse control, that prefrontal cortex part of your brain that develops last is actually the one that’s in charge of, this stuff, so it’s really hard. And then the concept of compounding and the math behind it, right? Like if you earn a 7 percent return every year, which we can argue about whether that’s a little conservative or not. I like being a little conservative on these estimates. So you don’t get these crazy ideas in your head. 7 percent will double every 10 years. And after, you know, you do the math on that one and that’s how you turn, 5, 000. it’s just math. And when you’re young, you haven’t seen it happen. And it takes a while to start, like, 5 to 10, okay, fine, it doubled, whatever. Okay, 10 to 20, 20 to 40, 40 to 80, 80 to 160, like now we’re talking. Right. But that takes a long time. So part of it is just trusting the math and I think that’s one of the obstacles to get over is you just kind of have to trust the math and look that it’s worked over a hundred plus years

Michael:00:13:54

It’s, it’s impossible for our brains to comprehend that I still can’t comprehend it. None of my clients can comprehend it. I show them graphs like, Hey, in 20 years, you’ll have like 5 million and they’re like, whatever, you know,

Anne:00:14:05

Yeah. Like that’s funny money, Right.

Michael:00:14:07

just doesn’t make sense. My, one of my favorite stats is the Warren Buffett. You know, his greatest attribute is that he started investing at 14 years old and is still investing like, you know, 95 years old. So 80 years of compounding and

Anne:00:14:22

does add up a little bit. Yes.

Michael:00:14:24

95 percent of his net worth came after 65. So most people are retiring at 65. He would have had, you know, I think it was like 50 million or something. Great. That’s fantastic. Retire. Right. But he kept going and doubled and doubled and doubled and then you’re a billionaire, and so it’s, it’s this crazy, you know, time in the market, that really makes a big difference or investing for the long run.

Anne:00:14:43

Absolutely.

Michael:00:14:44

So speaking of investing for the long run, I did want to ask you about this. So skipping ahead. Now we’re investing, we’re getting it into the, you talk about the different account types to use and, and okay, so we’re using the right account types. One of the things that struck me was, using the target date funds. It’s great. It’s one of these things that’s auto investing or auto investing into the 401k. You get auto put into like a target date fund now. So it’s not just sitting there in cash. So that’s fantastic. And I think my audience, you know, knows about the target date funds, the allocations and stuff like that. So one of the things that struck me was you had a story about the target date funds doing better than people kind of doing it on their own in the 401k. Can you talk about that story and like how that works.

Anne:00:15:26

Yeah. So. Again, this goes back to how our brains are wired, right? That I talked briefly about how losing hurts more than winning feels good. And I hear this, people say this kind of stuff all the time. I remember somebody saying to me in 2008, right? Well, I wish I’d just put the new kitchen in instead of throwing my money away in my 401k. ’cause the market’s down so much. And I’m like, oh, oh, you’re buying stuff on sale? No, no, no. Add more like now, buy, buy, buy. Right? You wanna buy when things are low. IE when it’s scary and all you see are terrible headlines, we can think of a few moments in the last 20 years or 30 years that that has been true in Right? And then. When things are really good is not the time to start throwing all your extra cash in the market because guess what like Maybe things are a little toppy like I don’t advocate Timing the market at all. I used to do this with my team professionally. We were lucky if we got 60 percent of the decisions we were making right, and the way you make money doing this over the really long term, if you’re going to try to do this as a professional, which I was, is you make lots and lots and lots of little tiny decisions like, Ooh, I think France is going to do a little better than Germany, you know, this week. And you make little tiny decisions and you make a lot of them and you get 60 percent of them right, if you’re lucky, and then that adds up. But that’s, Like a team of 15 people who did nothing all day, but run models and look at data and think big thoughts about this. Like this is not something you want to try by yourself. And even we as professionals. Sometimes like really, Ooh, I don’t know. Is this feeling a little scary? No, let’s sell. No, no, no, no, no. Like we’d, we’d fall prey to these emotions. Right? So there’s been a lot of work done. Morningstar did some studies on this and we saw it when we looked at the data ourselves, that people who are trying to manage their own money tend to buy stuff that does well and sell stuff that does. badly, which is actually the opposite of what you’re supposed to do. So you want to buy low and sell high. When you sell low and buy high, you’re dissolving your return, you’re losing money. And so people who try to do this by themselves either don’t invest at all and they stay in cash and they’re scared and then the market goes up a lot and they go, Oh, I guess it’s okay. I should put some money to work. Or they do the opposite. So it’s, it’s, it’s a rare person who has the discipline to actually methodically buy when things are down.

Michael:00:17:57

Yeah. Well, it’s funny. It goes back to that bias. I was thinking about it just feels good things that are going up It feels good, right? And we of course we’re humans. We look want to feel good. It reminds me of Marketing, you know, what are the hot selling items? It’s what everybody’s wearing what everybody’s doing and that feels good So same in the stock market you read the news or it’s going up or people are chatting about it You’re like, oh that feels good. I’m gonna buy that. Well, you’re buying something that’s popular It’s going up in value versus the other way. So totally agree with you. And the other, the other point there is when you get to active management, right? You can get, you know, index funds or actively managed funds. And you read the reports from SPIVA or other places. It’s like, yeah, so many of them cannot keep up over. You know, five, 10, 20 years with the index, just sitting there riding up and down because making those active decisions year in and year out is, nearly impossible for anybody.

Anne:00:18:52

And I’m just going to say in defense of like what I used to do for a living that it’s possible that the asset class right that the kind of investment that it’s Statistically almost impossible to do well, and there are a few who can, but statistically extremely difficult to do well as in U. S. large cap stock, right? If you’ve heard of the S& P, right? That’s the 500 largest companies. That is almost impossible for people to beat. And Finding a manager who’s going to beat them consistently is also a highly skilled and difficult task, right? So the people who do that for a living, you know, maybe Mike, you do this, right? It’s a lot of time and attention and research and like thinking and meeting the people and talking to them. And so this is not, I don’t want to sound like it, it can’t work. It’s just unlikely to work for someone who’s not a professional and even professionals make plenty of mistakes. So if you’re trying to do this by yourself. What I like to think about is how much time and energy literally do you have to spend on this? How much do you want to have to get something that’s going to be pretty darn good without risking that you’ll get it really wrong? And that’s how you end up at, at, at thinking index funds make a lot of sense because you give yourself fewer decisions to make. And that way you have a much lower chance of a getting something wrong, but also be like just getting stuck and thinking, oh, it’s too scary. I don’t want to do this. Right? So the simpler you can make it and the more you can leave room for spending your time and energy where it’s really going to matter, which is like. Figuring out how to save more and using your willpower for that. Like that is a home run

Michael:00:20:26

Yeah, absolutely. So I want to ask this question of you because you, you spent a long time in this and the target date funds and the allocation. So target date funds, even if you’re in your twenties, the most aggressive target date funds for the longest return still have 10 percent bonds in them, right? Or most of them. Yeah. Ish. Okay. And then I read in the book too, and I agree with you. You say, for the very long time horizon, I would put all my money in stocks. And let’s agree very long time horizons like 40 years, I mean like long, you know long All right. So for very long time horizons, we’re going to put all in stocks So i’ve always had this question like why do target date funds have 10 bonds even if you’re in your 20s? Hmm.

Anne:00:21:07

Okay. There are a couple of different reasons. And I actually, when my team and I at JP Morgan built these, we started with actually 20 percent in fixed income, so some of it. is math. So if you have 100 percent stocks, it’s going to go up and down a lot, like every year, right? You can see it’s not unusual to see the market down 20 or 30 percent inside of one year, maybe not every year over year. And then it to see it go up that much to bonds, notwithstanding what happened last year, right? Or 2022, I guess, Can rarely see swings like that. Like they’re usually kind of boring and every once in a while you see a big swing like you did, last year, two years ago and in either direction. Right. But that’s really unusual. Stocks and bonds also tend to move in opposite directions, right? Bonds tend to do better in poor economies because. Interest rates are going down and there’s this whole like bond math thing, right? When interest rates go up, prices go down and vice versa. when anybody is building a portfolio, they tend to like diversifying and having different things that will behave differently in different environments. And again, this is just math and you can look backwards through history and see this paying off over time. An investment that’s diversified, that has a little bit of. dampener, let’s say 10 or 20 percent of fixed income over time is going to give you similar returns as that 100 percent stock portfolio, maybe a little lower, but with a lot less volatility, a lot less bumping around over time. And so then when you’re building a target date fund for someone, right, you are basically playing. To some extent, you’re playing God and saying, I know what the right answer is for this person. Like even this, you’ve never met this person. So you’re making a whole bunch of assumptions. You also know if you’re a target date manager, like I was, if you look at the data that most people don’t state their employer for a long time, like they’re there for three or four or five years. So even though you as an individual may not be retiring for 45 years, It’s very likely that your money is not going to be in my fund for 45 years. And in fact, you may well leave this job after six months or a year or two years or three years. And guess what? When people have little balances, it’s a crying shame. And I talk a lot about this in the book, like a lot of people take the check and cash out or they roll it over. But either way, that money’s not staying invested for a little bit of time. And so The other thing that target date managers think about is like, what happens to that person when their money is transitioning between employers, even if you don’t cash it out, it’s going to be sold. You’re going to get a check where the money’s going to get wired to the new target date manager. And. It can happen that that happens at a really bad time in the market. And so you don’t want to have one of those crazy pandemic trading days where the market goes down 10 percent or whatever, you know, there was a really short period of time where the market dropped a lot and you don’t want to be the poor person whose portfolio just got sold at the bottom. And then by the time you buy back, everything’s better, right? So some of that fixed income is in there just to kind of balance that out a little bit. That was a very long answer. I apologize.

Michael:00:24:11

sense. And, and of course it makes sense. And the biggest thing that resonated with me in there is like, you’re trying to design target date funds for a bazillion people that you’ve never met. So we have to have, we can’t be like overly aggressive. I mean, it’s still going to be aggressive, but like you gotta have some rationale and you want them to stay in it. So you don’t want it to like the market tanks and they’re like, geez, my, my thing tanked. You like, you gotta have a little bit in there. So I totally understand that. So let me ask you this question as a followup. If you had a 22 year old in your life that was saying, Hey, I’ve got, my 401k, or I’ve got an IRA, you know, individual retirement account. That’s going to be invested for 40 years. Hey, and I’ve got 5, 000 bucks in it. And what should I do with my 5, 000 bucks? Would you recommend the target date fund? Or would you recommend like, Hey, I know this person I’ll be able to help him like just go a hundred percent S and P 500 and just let that ride for 40 years.

Anne:00:25:02

So, I don’t think either of them is wrong. I’ll tell you what, I told my kids who are 24 and 26, which is just throw them in the Target Date Fund and don’t worry about it,

Michael:00:25:10

cool.

Anne:00:25:11

because if you’ve signed up to keep giving that person advice, and if you’ve signed up to make sure they actually go and look at it, and if you’ve made sure that you are staying on top of their holistic financial situation as they move through all the stages of their life, or you’re that person and it’s gonna do it. Or, I have some colleagues who used to put all their money in the S& P because they had partners who had pensions. Like there may be a hundred reasons why that’s, that’s a great thing to do, but it means signing up for a higher level of sticking on top of it. So like that may be fabulous, but if you put every dollar, like that 1, 000, 5, 000 investment that you know your novel touched, like fine, let, let it go. How about every single pay contribution they’re going to make? Every two weeks or every month for the next 40 years, like, I don’t know if

Michael:00:25:56

yeah, it’s a really great point. I love that again getting back to what you said the set it and forget it Target date funds are there to help you. They glide over time at the glide pad. They have all kinds of things that you can do one investment, every month, pick one thing, make one decision. And for the next three years, you’re at this job. And then the following five years you’re at the next job. You can just keep doing that one decision and you’re going to be pretty good. Like, let’s be honest. You’re going to be like really good.

Anne:00:26:22

And again, I think something with this stuff that I think investment professionals and actuaries tend to get stuck in is like, we want to have the best answer. And a target date fund is definitely like one size fits most, and it’s not going to be the best thing you possibly could have done with hindsight. But it’s gonna be pretty good and it’s gonna keep you out of a lot of trouble, right? So again, it’s just it’s I think some of this long term saving stuff is scary because there’s so much uncertainty You don’t know how much you’re gonna be making you don’t know what the markets are gonna do You don’t know how long you’re gonna work and even when you’re you know older You don’t have a lot of insight over how long you’re gonna need that money for until you don’t need it anymore so Because this is kind of, on some level, an unknowable problem, it’s really easy to get trapped in a, I need to find the perfect answer, and then, I don’t know the perfect answer. Well, the reason you don’t know the perfect answer is because there isn’t one. So just, you gotta let some of that go, and accept that, The actual answer is a little bit unknown, but the overall shape of the answer, the direction you’re traveling, if you do save that 15 to 20%, 15%, let’s say, and you invest it,

Michael:00:27:32

You’ll be fine.

Anne:00:27:34

But you got to take a little bit of that on faith. And that’s why it’s

Michael:00:27:36

Yeah, yeah. I love that. You can solve the optimal, but if people aren’t going to do it, stick with it for decades, then what’s the point? I mean, one slip, could really make a big difference. One market drop and you don’t stay in, you panic. That’s going to overwhelm any sort of, little bit more optimal solution.

Anne:00:27:53

I talked to so many investors right after 2008, 2009, 2010. I was talking to a lot of investors who’d invested in some other funds that my team and I ran. And they got scared and sold and they’re like, Oh, who knows how bad it’s going to be? And everybody sells at the bottom. Like that’s exactly, that’s the capitulation moment, right? You sell at the darkest before dawn moment. And then you watch it go up and go there. And as I’m going to sucker me. And, and, you know, the market recovered in two years, Some balance funds recovered in one year. So that’s what I’m saying. Like, and you said, right, if you sell at the worst time, you got to get back in. And that’s where value is destroyed.

Michael:00:28:29

Yeah, a hundred percent. I wanted to switch gears a little bit cause something else stood out to me. I thought would be good for this audience, which is talking to your kids about money. And you had a story in here that you ran a bunch of focus groups. You’re doing some research for the book research and just everything else, your life that you’re working on. And you had a story of the, of a woman that had about a million dollars. In her retirement account and several rental properties at well as well. And what stood out to you was that her grandfather had taught her about money. And that was something you said in the focus groups you’re working with that stood out as a commonality with people that were successful, had a mentor, a parent, someone that spoke to them about money. So can you tell us a little bit about that? Cause we’ve got a lot of people listening that have kids, how to. You know, make sure we’re speaking to them, mentoring them, so that they can end up in that successful group.

Anne:00:29:20

Yeah. And I’ll just say that my parents who were born in the thirties, right. Depression era kids never talked about money. Except, we had enough for whatever my parents decided we needed and I never felt like we didn’t have enough except when I wanted something, you know, like I needed a new outfit for the dance and my mother’s like, no, that’s not important. You’re not getting that, I think a couple of points, one, helping your children understand that there is never enough money in the world for everything that we all want early is a really good idea. How do you make choices? About a finite amount of money because that’s the reality that we’ll be living with and that’s a lesson I really tried to help my kids with and we gave them fixed allowances and like as they got older and older They had to take care of more and more of their spending. So Not clothes. I’ve heard this recommendation for girls for clothes I have two boys and they’d be like good like I’m good I don’t need any new clothes and like your shoes have holes. You need a new pair of shoes. No No, I’d rather buy a video game. No, that’s so I actually took the clothing away from them because I knew I needed to buy it because they just wouldn’t buy it. And I was, I had standards. But I think, so that’s like just the budgeting side of thing is one half of the equation, right? And that’s, that’s foundational. And then the other half is like that whole compounding investing. How can you help your children understand that this stuff isn’t? Scary. And there, I think, you know, depending on the parent and what they’re comfortable with, right? I think either being that financial mentor or maybe finding one for yourself and your child, because maybe you don’t feel comfortable doing that role. But that’s great. And there are online resources. There are people in your community. If you’re working with financial advisor, right, there are all kinds of people who can start having that conversation. And I guess as a parent, of young men in their twenties, there’s a lot of advice that your kids will hear a lot better from someone else other than you. So, finding that mentor that may not be, you may be valuable anyway, like job hunting, like all this stuff. I can’t tell you how many times like our kid goes, Oh, I talked to so and so and they said, I told you that, but you know.

Michael:00:31:18

Right.

Anne:00:31:18

Somebody else is smarter than you with the same advice. So that’s fine. Like that’s part of the deal. but I think every family can have a conversation about budgeting and how you make choices around money and how you decide when it’s when to say no. And then how you helping children, especially as they’re younger, live with the discomfort of wanting something and not getting it. Like that’s, that’s a huge parenting thing too, right? Like how do you, you got to model that behavior too for your kids, right? If they see you just getting everything you want, then you’re not helping them learn that skill either.

Michael:00:31:46

Yeah, so true man. As you were talking about the the budgeting side was laughing inside because I had this story of when my kids were very young That we would go to the market one of these big markets where there’d be a ton of stalls and and They were like four to six years old or something and they’re like, oh, can we have this? Can we have this? You know, you’re walking through there. Can we have this? Can we have this? Can we have this? And I got so tired of it. I was like, okay the next time we went I gave them each 10 and I was like, you have 10. So look around, buy whatever you want with your 10 and that’s it. Right. So now we’re into the trade offs of like, Oh, it’s my money now. And the, the mind shift of like, even at that age, Oh, this is my money. Versus just, can I just spend, infinite money was unbelievable.

Anne:00:32:34

huge. We did something by accident with our kids that I’m I’m still proud of to this day and I think it actually probably was the thing that helped them and they still talk about it and they were like Three and five or something little tiny kids in our the nursery school our older son was going to so there must have been two And four was like, we’re gonna collect some money. We’re gonna donate it We want your kids to do chores around the house to earn the money and we’re like, all right You can recycle the newspapers or whatever And then after they stopped, they did that and then we were like, well, this is kind of cool actually teaching him about money. And back then there was actually money that we could give them and your market, right? To same thing, right? It’s money. And there were real toy stores. so we go to the toy store and you know, our son has a dollar, right? And what can you buy in 19, you know, maybe this is 2001, right? With a dollar. Some really not very nice little plasticky thing that broke like instantly. And then the next week we said, you know, if you don’t spend your dollar next week, you’ll have 2. And then we’ll give you another dollar or two because you waited and he was like, Oh, then I can buy the smallest Lego set. And we’re like, mhm. Bingo. Done. Like that’s compounding. That’s delayed gratification. That’s waiting. That’s having a goal. And we did that throughout their whole childhood and it seems to have stuck. It’s

Michael:00:33:40

That’s that’s awesome. I love that. Yeah trying to teach that idea of compounding Because like we were saying before it’s so slow even for myself. It’s like really, you know, it’s like going nowhere,

Anne:00:33:50

It’s painful. It’s

Michael:00:33:52

you know, so if you can try to, speed it up in their timeline and do some things while they’re while they’re still young

Anne:00:33:58

My, my parents said they wanted to deposit their money in our bank and we’re like, yeah, no, just the kids.

Michael:00:34:03

I know i’ll join that bank That sounds great Well, we’ve talked about a lot of things but we haven’t even scratched the surface on the number of topics that are in the book. Like I said, we went a little bit deeper on some stuff I was interested in exploring with you, but the book is very broad and the other thing that you mentioned when we were talking about. Kids that I found really great in this book is that it’s very approachable. You define the jargon in the financial industry, right? The other, all the different words and stuff, because you have to start to get to know them, you know, you’re going to have to but you approach them from a way of Introducing the concept, then, saying, here’s the language, that you’re going to come across. And, and so it’s just a really great book to give a broad set of knowledge and how to actually get started. Okay. You’ve got some savings. Here’s what you actually should do next. And that’s what I find when I’m talking with 20 year olds or people just getting started on the financial journey. It’s like. But what do I actually click? Like what do I you know, what do I actually open and this book? It just does a great job of walking someone through how to get up set yourself up for success.

Anne:00:35:10

Well, thank you so much. I mean, I’m, I’m glad that’s what you thought, because that’s exactly what I was hoping to do, so

Michael:00:35:15

Yeah Well, my pleasure. Is there anything else that you wanted to communicate and I definitely want to ask, you know Where do people find you besides getting the book, to highly recommend where else should people connect or follow you?

Anne:00:35:26

Yeah, maybe before we go there, I’d just say one thing, which is no matter where you are, and no matter how bad you feel about where you are, you can totally make it better. From that perspective, it’s just never too late to make it better. And I hope that people listening to this and people who read the book understand that you don’t have to feel ashamed about this stuff. if you’ve been struggling, there’s one of my favorite chapter titles is you suck at savings and it’s not your fault. Like some of it is just like the way we’re wired in the society we live in, just make it hard. So accept it. Figure out what you’re going to do about it and then make it better. So I’m, I know everybody can do that. So that’s the big message. If people want to learn more about me or the book, they can go to my website, which is annelester. com. It’s A N N E L E S T E R dot com. And I’m on all the social media. My handle on everything I think is save smart W Anne because Instagram wouldn’t let me put with in there. It was too long. So save smart W Anne and you can find me on all the platforms.

Michael:00:36:21

Thanks, Anne. Thanks for the book. Thank you for everything today. It’s been a pleasure and looking forward to catching up again soon.

Anne:00:36:28

Oh, thank you so much. Me too.

undefined:00:36:29

Thanks for joining us on financial life planning. If you like, what you heard, please subscribe to and rate the podcast on apple, iTunes, or Spotify or wherever you get your podcasts. It makes a massive difference. If you have a comment or question, please email me until next time. Thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. I can not guarantee the accuracy or completeness of the data presented here.

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Anne Lester on Personal Finance

Episode 134 •

13th February 2024