Liquidity Matters

So I’ve been thinking about the standard financial planning advice given to lay people.  One of the most common and often repeated pieces of advice is about where to invest for retirement.  Here’s how it usually goes:

Financial Planning Show Host:  You’re on the GENERIC FINANCIAL PLANNING SHOW!©™Patent Pending  What’s your question, caller?

Layperson Caller:  I want to start saving for retirement.  My job’s got a 401.  Should I invest money there or in an IRA or what?  It’s all very confusing.

Host:  Do not be alarmed!  I, your financial planning entertainer, will answer your question despite being entirely ignorant of any other variable that could impact your financial planning needs and render my advice moot or even harmful.  How does that sound?

Caller:  Great!

Host:  Here’s the advice I give to all people who call in with a similar question.  Allow me to recite from my 3×5 index card.  First, if your company gives you a matching contribution on your 401k,  put money in to the 401k up to the match.  Then, max out your Roth IRA.  Once you’ve maxed out your Roth, then put all the excess money into a 401k.  Hows that sound?

Caller:  I think I have both a Roth at work and normal 401k.  Is that what you’re talking about?

Host:  It sounds like you’ve got a Roth 401k at work, does that sound right?

Caller:  Yeah…

Host:  That’s great!  So here’s what you do:  First, fill up your Roth 401k to the match.

Caller:  Ok.

Host:  Second, fill up your Roth IRA, which you’ll have to open with <Insert Name of Advertiser Here>.  Then you put in money up to the maximum.

Caller:  Um, I don’t think I have that much money to save.

Host:  That’s ok!  Just save as much as you can!

Caller:  Ok.  Thanks!

Host:  And thanks to you for calling in to GENERIC FINANCIAL PLANNING SHOW!©™ If you use this mark my lawyers will “Cease and Desist” you into oblivion. Stay tuned for our continuing moneypalooza, after a word from our sponsors!

Granted, there was a little hyperbole, but you can see how I could develop some concern.  What most people take away from this is that they should put all their long-term money in tax advantaged accounts.  What are the consequences of doing this?  Most people end up keeping nearly all of their savings in their tax-advantaged accounts.  For many people, this works out.  But, if you’re one of those people who has an unfortunate series of events, such as a medical catastrophe or long-term job loss; having all of your long-term investments tied up can be a real kick to the gut when you’re already down.

So, take a moment to be mindful of the liquidity of your investments.

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