[MattGrommes]

One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.

[Terr_]

Tangentially: I think a lot of people forget/underestimate the degree to which the industries behind their job are ones that they need to diversify away-from.

In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, a coal-miner should invest a bit more away from energy and mining, etc.

If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment by liquidating some, but if both hit trouble simultaneously then that's much much worse.

[mancerayder]

That makes sense, and it probably should be said more. It's probably just because we invest in what we know. If you're a real estate broker, you have an interest in properties, you think about it all the time, so you'll buy your own properties, or invest perhaps in builder stocks. If you're in tech, well, I don't need to say it because that's most of us. If you work in the energy sector, I imagine you know a thing or two about transport and esoterica of speculative miners or drillers, etc.

[Terr_]

> It's probably just because we invest in what we know.

I'm mostly thinking of folks that will passively invest in a big broad index fund, and then assume they've reached the end in terms of balancing industry/sector risk.

[parpfish]

it's also why you shouldn't hold equity in your own company any longer than necessary (e.g., an apple employee shouldn't tie up the majority of their networth in apple stock).

[Terr_]

My go-to example is always Enron, and the impact on employees whose retirement funds were in their own too-awesome-to-fail employer.

Oh, sure, it's way worse because of the fraud-angle, but even if it had just been a more honest kind of mania, the arrangement was reckless and bad.

[parpfish]

stock options/rsus are a great example of some sort of cognitive bias (maybe it's the endowment effect?).

give somebody $1000 worth of shares in their company, and a lot of folks will hang on to them. but if you gave them $1000 cash to invest, they almost certainly would not choose to dump all of that money into their own company.

[Terr_]

Tax-law also makes is sticky: StockX -> Money -> StockY means a portion of is lost as capital-gains tax on the money step. StockY might be better... but is it something that will perform better-enough to be worth the switching costs? (At this point logarithms and spreadsheets start getting involved.)

In contrast, starting with Money and then choosing between StockX or StockY is an easier choice.

[rwmj]

Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).

[duzer65657]

most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.

[LargeWu]

Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".

Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.

[HDBaseT]

It is either that, or they have tons of debt. (Sometimes both!)

The average person is struggling in modern America.

[alex43578]

Because the average person also makes a litany of poor financial decisions. $100K student loan balances for an state school arts degree, forgoing health insurance but expecting to receive $200K in care for free, or buying that $80K F150 on a 12.5% loan and rolling in negative equity.

The US is second in the world for median equivalised household disposable income, second only to Luxembourg and 10%+ above Norway. For daily median per person income after taxes and transfers, we're only behind Norway, Switzerland, Luxembourg, Qatar, and the UAE. Outside of petrostates, microstates, and Switzerland, no country has richer "average" people.

The US certainly doesn't have the safety net of some of these other states, but these aren't holes you're being thrown into by society: they're pits you've deliberately jumped into in 99% of cases.

[mancerayder]

Your error here, or the missing piece if we're generous, is what people are spending money on. Health care is astronomically more expensive here. Schooling isn't free after high school. Day care isn't free. Hell, even property taxes are simply 'not a thing' in France or the UK, where the taxes and Council Tax, respectively, are a tiny fraction of what Americans pay in property taxes ---- which, of course, pay for the 'free public schools.'

Now, let's talk about insurance, that's also much higher. In states like California and Florida, home insurance is through the roof, in some states like NJ and NY, car insurance is through the roof. Both going up way above inflation (like the items in my first paragraph).

You might counter with energy costs are much higher in these European countries (and similar ones like Germany, Benelux, etc), and the purchasing power might be higher, but the wages are so so much lower.

That said, this trope of people misspending their money needs to consider this outrageous costs of things that many people around the world never need to think about. The shitty wages in France are overshadowed by so many essentials being available without a high cost or any cost in some cases.

[inigyou]

Victim blaming. It always works, whether on HN or Reddit. And why, pray tell, is the system set up so that all the things you obviously should do are bad decisions?

[MattGrommes]

When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.

[light_hue_1]

And lose the tax advantages? That's crazy

[Grombobulous]

The comment parent to you said it poorly. The 401k is the container, you don’t move stuff out of it you change the investments inside of it.

[smallmancontrov]

The tax advantages of being forced to pay ordinary income rates on your distributions as compared to long term capital gains (which are low, capped, can be exercised before a tax hike, and avoided entirely if you just need collateral)?

[Retric]

401k reduces your taxable income when depositing money, this is more tax efficient than paying normal income taxes and then also paying capital gains.

401k lets you rebalance a portfolio with zero tax implications.

The downsides are generally high fees and a 10% penalty for early withdrawal which makes them surprisingly bad for young people. They tend to start in lower tax brackets, have fewer reserves when unemployed, and face fewer risks from an unbalanced portfolio.

Pay down debt then Roth IRA when young 401k after 40 is often better than defaulting to a 401k, but saving anything tends to be more important than such optimizations.

[kmbfjr]

Keep in mind post tax income sources are king when retiring before age 65 and looking for ACA subsidies.

[rwmj]

Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).

[bell-cot]

Look back at the grandparent comment. If someone doesn't have 3-5 years in total savings, then they had better not try to retire.

[hdgvhicv]

People return with less than 4 years expenses in retirement funds

Surely you need about 20 years?

[budman1]

Social Security, my friend. And there are still some pensions out there.

[staticman2]

3 to 5 years of cash or a bond ladder won't help in a 1970s stagflation scenario.

[inigyou]

At the extreme end of this, realise that absolutely nothing is safe.

[Panzer04]

3-5x is way too much if you're still working.

1x is plenty IMO.

[bandrami]

Which is why lifecycle funds move you into bonds gradually as you approach retirement age