Jack Bogle and passive investing, fighting 401(k) fees, and the looming retirement crisis

1. NPR shares a recent interview with Jack Bogle, “the George Washington of investing“:

“We live in this mythical world where we kind of believe the American way is if you try harder, you will do better — that if you pay a professional to do something, it will pay off,” Bogle says. “And these things are true — except in investing!”
That was Bogle’s insight: When you invest, you should own a mix of bonds and stocks. But paying investment managers to pick stocks just doesn’t work, he says. That’s because picking winners is very hard, and paying the guys in the suits is so expensive that it hobbles your ability to make money.

2. Also from NPR, a reminder to find out how much you’re paying for the mutual funds in your 401(k).

“Sixty percent of people don’t know they’re paying any fees at all in their 401(k) plan,” says Laurie Rowley, president of the nonprofit National Association of Retirement Plan Participants. NPR asked her and other experts to explain how people can get their retirement portfolios in good shape.
Rowley says people need to be aware that they are paying fees, and they need to find out how big those fees are. “Fees make a huge, dramatic impact on your total savings nest egg,” Rowley says.
A 2 percent annual fee might sound small, but it eats up half of your earnings over 35 years. Review your plan and pick just a few of the lowest cost funds, Rowley says.

In the same vein, we recently shared our data on mutual fund fees with CNBC.

3. On the rise of automated/robo financial advisors, Meb Faber writes that traditional advisors should not feel threatened but seize the opportunities they provide.

Many advisors have been wringing their hands over the fee compression – how can we compete in a world where asset allocation is a commodity?
The answer is – because asset allocation has always been a commodity.

Since almost every custodian and brokerage will have no cost robo technology for their advisors in the next year or two, advisors should spend as little time as possible on the asset allocation solution, and more and more on their value ads. But that is a beautiful thing! Clients would appreciate more attention, estate planning, insurance, tax management, microbrew tasting events etc etc. Not to mention it would free up advisors to spend more time on prospecting if they so choose.

4. The Economist summarizes sobering research on Americans saving for retirement. The brief version: not enough, and for many, not even close.

Unsurprisingly, the biggest problems face those with no private pension at all: 68% of these Americans are expected to fall short. Those lucky enough to be covered by defined-benefit plans—in which pensions are linked to a worker’s salary—have the least difficulty: only 20% are deemed at risk. Of those in defined-contribution (DC) plans—in which workers receive whatever pension pot they have accumulated by retirement—53% probably will not reach the replacement rate.
The problem is that many people simply do not save enough in a DC pension. The combined contributions of employers and employees average just 11.3% of salary. This will not generate the same level of pension as a typical defined-benefit plan. The CRR found that the average retirement assets of those aged 50-59 were just $110,000 in 2013, slightly lower than in 2010. This balance will improve over time, since DC plans are relatively new, but there is a long way to go. If pensioners take an (inflation-adjusted) 4% a year from their pot, they will need $250,000 just to generate an income of $10,000.

Dilbert, via Barry Ritholtz, has a relevant response.

Links to external sites will open in a new tab or window.
SigFig Insights
Understand risk, maximize returns, minimize fees.
SigFig will show you how.

4 year-end tax strategies that work

Towards the end of the year, a flurry of activity begins—and not just in the nation’s kitchens. With just a few months left in 2015, people are starting to think about 2016—and the tax bill that will be due in April.

You probably know that it is a good idea to do some year-end tax planning to try to reduce your 2015 tax bill. However what actually works, and what exactly should you do? Donate to charity? Sell some losing stocks? Pay January’s mortgage bill now?

The answer, of course, depends on your individual circumstances. While a certified financial planner or other professional can help you make a customized plan, here are some rules of thumb for when to try some common tax-reducing strategies—and when to skip them:


1) If your income fluctuates a lot from year to year, take a look at whether you can accelerate or defer some of that income. This strategy often works best for people who are self-employed, like small business owners, freelancers, and some doctors and dentists, or those who work on commission, like real estate brokers or other salespeople. If you are having a particularly good year, you could hold off on sending out a couple of end-of-year bills to push some of that income to next year. If it is a bad year—if you have just started a business or spent a lot on business expenses and your profits are low—see if you can pull some January income into December, in the hopes that your tax bracket will be lower this year than next.

For most people with traditional full-time jobs, accelerating or deferring income will not make a big difference. “When you have changes in income, that is a place where a lot of opportunities come in,” says John Scherer, a certified financial planner with Trinity Financial Planning.


2) If you are in a low tax bracket, you should consider tax-gain harvesting, Scherer says. This strategy works well for retirees who do not have a lot of income coming in, or for people with fluctuating income who are in a lean year, for example.

Most people know about tax loss harvesting, and for many investors, that is worth doing most years. “It is sort of like free money,” Scherer notes. But “tax gain harvesting, people do not talk a lot about,” Scherer says. Anyone who is in the 15% tax bracket (singles earning up to $37,450, or married couples filing jointly earning up to $74,900) will not have to pay capital gains tax, Scherer says. So any year you are going to end up in that lower tax bracket, you can lower your future tax bills by taking gains now, he says.

Here is how this works: You will sell some investments that have appreciated, and you will not pay any capital gains tax on them. You then immediately buy them again at today’s higher price—so you keep your investment portfolio the same, but later, when you need to sell those investments for income, your cost basis will be higher, and your tax bill will be lower.


3) If your deductions are close to the standard deduction amount, consider bunching your deductions. Generally, you should itemize if your itemized deductions will be greater than the amount of the standard deduction, which this year is $6,300 for single people. But if your itemized deductions are not adding up to much more than that standard deduction, you can bunch your deductions into on and off years and reduce your total tax bill, Scherer says.

Basically, you would pull as many deductions into this year as possible—pre-pay your January mortgage, property tax, or tuition bills, make 2016’s charitable contributions in December, and so on. You would itemize your deductions this year and take as many deductions as you can. Then, next year, you would have fewer deductions and take the standard deduction. You could save yourself a few thousand dollars over the course of two years through this method, Scherer says.


4) If you are subject to the alternative minimum tax, most deductions will not help you—except for deductions for charitable donations, Scherer says. So if you are subject to AMT, make sure you get receipts for all your donations, including donations of goods. Most people do not keep track of the value of, say, old clothes they are donating to Goodwill, but those donations can add up, Scherer says.

Of course, donating to charity only saves you money if you were going to donate anyway, Scherer notes. If you donate $1,000 and it saves you $250, you are still out $750; so do not donate just for the tax deduction. “It is like buying something at the store that is on sale—you are still out the money,” Scherer says.

Make sure all your tricks and tips are really worth it to your personal bottom line. Look for strategies that make sense for your personal situation, and do not spend money just to save money.


SigFig Wealth Management is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor. SigFig Wealth Management does not provide tax or legal advice. This material is not intended to replace the advice of a qualified tax advisor, attorney, accountant, or insurance advisor. Consultation with the appropriate professional should be done before any investment decisions are made. The material contained herein is for informational purposes only and does not constitute tax advice. Investors should consult with their own tax advisor or attorney with regard to their personal tax situation.
Sarah Morgan
Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

The smartest thing millennials are doing with their money: Making cheap investments

It is hard to save for retirement when you are just starting out. Maybe you have student loans you are struggling to pay off. Maybe you are saving up for a wedding or a house, or supporting a young family. Maybe you are not making very much money to begin with.

All these individual reasons for saving less add up to a lot of young investors who could be saving more. Our data shows that the majority of investors in their 20s and 30s are not saving as much as they could in their 401(k) accounts. More than half of investors in their 50s or older are on track to make the maximum possible contribution to their 401(k) accounts this year, but only 1 in 5 investors in their 20s are set to do the same.

If these young investors save more in their 20s and 30s, they will reap huge rewards. Every dollar saved when you’re young has more time to compound and grow—making it far more valuable than a dollar saved down the road.

Even if they are struggling to save a lot, these young investors do have one advantage over their elders; they are paying less in fees. Investors under 30 pay a median 0.07% in fees, while investors in their 30s pay 0.10%, investors in their 40s pay 0.15%, and investors over 50 pay a median 0.17%. Just as early savings pay off big down the line, over the course of working life, even small differences in the fees you pay on your investments can add up to hundreds of thousands of dollars in lost savings.


If you cannot afford to save much, then you certainly cannot afford to overpay for your investment options. Our data shows that more expensive investment options do not outperform cheaper options over the long term. In fact, the research shows that the cheapest investments will give you a greater total return in the long term.

The millennial investors who are choosing cheap funds for their 401(k)s are making the smartest possible choice with the limited amount of money they have available—something older investors could learn from.

Still, no matter how smart you are about investing, there is no substitute for starting your saving early and taking a moment to reevaluate how much you can actually afford to save. Consider putting an anticipated bonus or raise straight into your retirement account, or adjusting your tax withholding so that you’re taking less money out of your paycheck to pay the government, and more to pay your future self. A small change now could be worth a lot of money later.

Sarah Morgan
Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.
The Editors
Aleks Todorova

Aleks Todorova

Editorial Director

Aleks runs content at SigFig. Before joining the company, she ran the editorial teams at Visually and Mint.com. Her work has appeared on SmartMoney.com and the Wall Street Journal, among others. At lunchtime and on weekends, you'll find her swimming, biking or running -- or all three, in that order.
Benny Wijatno

Benny Wijatno

Data Science and Analytics

Benny does all things data and science at SigFig. He was Director of Product Analytics at TinyCo and a Principal at Applied Predictive Technologies, where he helped companies run smarter experiments. He studied Economics at Harvard, is an avid cook, and loves running.