By: Paul Morrone
I’m not sure if it is a generational thing, an aversion to financial markets, a lack of education or the fact that young career-driven households simply have no free time, but even for high earners it seems that financial planning takes a back seat to virtually everything else in life. It’s easy to see how it happens, though. Take the millennials for example. They are old enough to witness their parents lose their shirts in the dot-com bubble and great financial crisis. They graduated college with record debt and watched jobs dry up in 2009 and 2010. They witnessed the collapse of a housing bubble in 2008 and are now seeing generationally high interest rates, housing prices and inventory shortages. Now they are paying astronomical prices for daycare for their growing families and watching their parents age at a time when healthcare prices can be crippling. Talk about the wrong place at the wrong time.
It’s a common situation – a couple earning several hundred thousand dollars a year, a couple of kids, living in a nice house that they own (with a mortgage of course). They have modest retirement savings because they’ve been saving 8-10% of their salary each year, maybe some company stock, and large six-figure balances in the bank. And those bank balances are parked in cash. Not in investments, ROTH IRAs, or even CDs. In cash. Earning zero. Why? The answer is usually the same – I didn’t know what to do or where to start; I haven’t had time to deal with it, or I’m uncomfortable taking too much risk.
While there are many glaring issues here (starting with our egregious lack of financial education here in America, but I digress…) the obvious issue is opportunity cost – or lost opportunity – of what that money could have done. As Benjamin Franklin once said, “Money makes money. And the money that money makes, makes money.” It’s a time-tested concept that leaves little to the imagination. And with inflation running at a multi-decade high, the value of those dollars in the bank is actually less today than it was 5 or 7 years ago. Factor in the multi-year bull run we’ve experienced in equities (and significant buy-the-dip opportunities we’ve had during 2018, COVID or 2022) and the magnitude of the lost appreciation is hard to quantify.
Yet taking the leap is often hard to do, too. The retirement plan stuff is easy – you’re almost forced to do it in today’s world. Your employer auto-enrolls you and you’re off. Some are savvy enough to modify their deferral rate and type (pretax vs ROTH), or even review the plans investment options. But most stop there – which is a mistake. The cash that hits their bank account continues to accumulate to a staggering number.
Now this is just one of the many issues typically present when a couple has this fact-pattern. In addition, taxes are typically addressed in a ‘it is what it is’ fashion. Accounts tend to be scattered across various institutions, creating administrative headaches. An investment philosophy is nonexistent. If there is any consistency with what I’m assuming here, there is also little risk management planning – how is your mortgage going to get paid if you get hit by the bus? Who have you appointed guardians of your minor children if you and your spouse’s plane goes down? If you have a long-term disability, are you going to be able to replace your income? Relying on employer benefits, alone, is typically a fool’s errand. They help, but generally don’t provide enough protection for those that are accustomed to a certain lifestyle.
Behavioral finance and theory, aside, there is a cost to not addressing the opportunities for those that have the means to seize them. Some may be hesitating to take the next step because they simply don’t know what to do. How to set up accounts properly, how to ‘invest’ in general (and we’re not talking about meme stocks here). How taxes work. They are confused by the misinformation they see online. All the above may be legitimate stumbling blocks.
Those who can see the greatest long-term benefit from qualified advice are those that have the most to lose. Being stuck or not dealing with finance is not a plan, and the cost of inaction can be huge. A good planning firm will help you organize the chaos, educate you, help you set your priorities and get you on track. Beyond the peace of mind, an accountability partner and someone who can help you get things done can be your best friend when you look back 30 years from now. And while there is an inherent cost to that – as with any professional service – it is likely a lot less than the cost of lost opportunity over the long-term.
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