The Paradox of Choice: Retirement Investing

In a previous life I worked as a financial education consultant, traveling the US and talking to my company’s retirement plan participants about their retirement plan.  We focused on the basics.  Why they should save in their 401(k).  How the power of compounding interest can work for you.  What is diversification? What is your risk tolerance?  How do you use this information to choose how to invest your money?

I have long been a personal finance geek.  But the reality is that the vast majority of people aren’t.  And it can be downright overwhelming for the average 401(k) plan participant to figure out where to invest his or her money.

I was reminded of this fact recently.  The company I work for does its match in company stock, and the stock has done so well over the long term that a lot of people are over-weighted in it (that’s a story for another day).  A couple of months ago the stock hit a new 52-week high, and I decided it was a good time to move a little more of my match money out of company stock.  I had a coworker who wanted to do the same, but she didn’t know WHERE to put the money once she sold the stock.  The paralysis of having to make that decision almost kept her from taking any action at all.

Barry Schwartz outlined this phenomenon in his book, The Paradox of Choice.  I may get overwhelmed by the wall of 50 different types of laundry detergent at Target, but many other people are paralyzed when their retirement plan offers too many options.

So what’s the average Joe to do?  I couldn’t give advice to plan participants in my financial consultant role; I could only educate.  But at the time I was in this job, target date funds were starting to become popular additions to retirement plan investment lineups.  When our plans offered them, we would explain how they worked and how a participant could determine if it was the right choice.

So what is a target date fund?  This link to Vanguard (one of my favorite investment companies and a FIRE community favorite) gives some of the highlights.

  • You invest in one fund that does the diversification for you.  In Vanguard’s case, the target date fund is a blend of their other underlying index funds.  It is diversified to include a mix of US and international stocks and bonds.
  • The asset allocation is based on the target retirement date.  If you are far from retirement, it is more heavily weighted in stocks and as you move closer to retirement, the mix of investments gradually becomes more conservative.
  • You don’t have to rebalance your investments – the fund company automatically does it for you.

Of course there are caveats to every recommendation, and every fund company that offers target date funds has it’s own style and approach (Vanguard’s 2040 fund will not be the same as Fidelity’s or T. Rowe Price’s).  But don’t let the perfect be the enemy of the good – it’s better to have a solution that is 80% effective than to have no solution at all.  I told my coworker that in her upcoming meeting with a financial advisor that she could get advice on where to invest for the long term, but in the meantime I gently steered her towards one of the target date funds offered by our 401(k).


What is FIRE, anyway?


I sent a friend of mine a link to my new, shiny blog and she asked if FIRE is an acronym.  Why yes, yes it is!

For the uninitiated, the acronym FIRE stands for Financially Independent, Retired Early.

Kristin Wong has a new post over on Lifehacker that provides an overview of the FIRE movement.  In essence, by optimizing finances, a lot of bloggers in this community have been able to save upwards of 70+% of their income which has allowed them to retire in their 30s or 40s.  (Mr Money Mustache’s post on the math of early retirement is a mind-blowing must-read.)

Why has this movement been so appealing to me?  This quote explains it well:

“Financial independence ultimately means that you can shape your life without taking money into consideration,” said Tanja Hester, a recent FIRE graduate and founder of the website Our Next Life. “Most of us have to consider our finances in nearly every decision we make, or maybe even make decisions solely based on money. But once we reach financial independence, we get the freedom not to be bossed around by what we earn or what we have saved.”


How having a child helped us save more money

When I found out I was pregnant last year, I spent some time crunching the numbers and worrying about how we would afford it. Any time I talked to current parents about how they found money for daycare and diapers and such, their answer was typically something to the effect of “it all just works out.”

Now that we’re 10 months into this parenting gig, I have to say they were all right. We pay a crazy amount for daycare, but other than that our expenses have been manageable. In fact, this year I paid off my car (early), and my spouse and I have both increased our 401(k) contributions.

Here are some things that helped us get here:

Baby stuff. I am lucky to have a couple of close friends with kids not much older than mine. We have been the recipients of borrowed clothes, toys, baby bathtub, play mat…the list goes on. We were also very blessed by friends and family at our baby showers as we received nearly everything we needed for the first 6+ months of babyhood. In addition, we have grandparents who have gifted a few toys and clothes and send us diapers monthly from Amazon.

We didn’t go overboard decorating the baby’s room. I bought a well rated, inexpensive crib on Amazon (with my Amazon registry completion discount). My mom gave me a very sturdy old dresser to use, rather than us buying a fancy new one (and we just put a changing pad on top rather than buying a changing table). Instead of buying a glider rocker, we re-purposed an Ikea Poang chair and put a new cover on it.

Food. As a DINK (double income, no kids) household, we went out to eat quite a bit pre-baby. We are foodies. Going out to eat is a form of entertainment for us.  Now that we have a kiddo, it’s often a lot easier to eat at home. We meal plan before our weekend grocery shopping and focus on fast meals for weeknights (which my husband makes) or meals that I can prep on Sundays. I’m pretty lucky – my husband is a good cook!

Our daughter is now at an age where she is eating solid foods regularly and this has really made me look at how we eat. Most of the time she eats what we eat, and if she can’t eat what we’re eating, it’s probably not that healthy. It has made me a lot more conscious of planning meals that are well balanced and nutritional. It’s not particularly easy to find meals that meet those criteria when you go out to eat.

My spouse and I both like going out to lunch during the week too, but we’ve also cut back there. As part of our meal planning I usually target a couple of meals that will make good lunch leftovers.

Alcohol. As a new parent, I’ve found alcohol and sleep deprivation (or disrupted sleep) generally don’t go well together. While I’ll still enjoy a good beer or glass of wine sometimes after the little one goes to bed, the quantity has lessened and it typically is consumed at home rather than at a bar or restaurant where the cost is 3x as much.

Entertainment. We only have one babysitter at this stage and her name is Grandma and she lives 2 ½ hours away. So at this stage of life we don’t do much in the way of concerts, sporting events, movies, etc. We do sometimes have a date night when my mom visits but other than that, our entertainment budget consists mostly of Netflix and HBO Now.

Travel. Some people travel quite a bit with their little ones. I guess one of the advantages (or disadvantages?) of being older when having a child is that we’ve both done a lot of kid-free travel, which makes traveling with a little one sound a lot less appealing. I’m excited to travel the world with our daughter, but for the next couple years it will mostly be road trips rather than ambitious air travel.

Taxes. I contribute the max ($5,000) in a dependent care flex account through work. Even though we’ll spend more than that on daycare this year, it does help offset the tax burden. Knowing we would have a lot of out of pocket spending for medical this year since we had a baby, I also contributed the max to a flexible spending account. The flex account deductions and our 401(k) contributions all reduce our taxable income and ensure we’ll qualify for the child tax credit.

The bottom line is that we are fortunate to have a healthy household income. We had a lot of discretionary spending in our budget previously and we have now become a lot more intentional in how we spend our money.

How have kids impacted your spending and budget?

Welcome to FIREd up!

So why did I decide to set up shop in this little corner of the internet to talk finance?

I love to write.  In fact, I’ve maintained a private personal blog for over 10 years.

Finance is my thing.  Budgeting, investing, optimizing taxes…I love to break out a spreadsheet and go to town with this stuff.  It’s easy to forget that a lot of people don’t have the interest in these topics or they find it to be overwhelming.  If I can provide content that is helpful to just a few people, I will be happy.

Community.  Over the course of the past year I’ve started to immerse myself in the online FIRE community and man…some of these bloggers are just killing it.  I want to interact more with this community and continue to learn from what other bloggers have to offer.

Focus and clarity.  I’ve always paid attention to my financial situation and have generally made good decisions.  But having a child at the beginning of this year really put things into perspective.  There is only so much time we are going to have with her living at home.  I don’t want to spend the next 17+ years slaving away in a cubicle, working for someone else, doing something that doesn’t provide fulfillment, when instead I could be spending more time with my daughter and spouse.

Reading and listening to podcasts about financial independence this year has kept me motivated to be more intentional with how we spend our money.  We probably won’t reach true “financial independence” in the next 5 or 10 years.  But I do know that the less we spend, the more we can save and invest, which does provide FREEDOM and OPTIONS to make different choices about how we work in the future.


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