Motley Fool Answers: Author Kimberly Palmer and Mad Libs?

Sometimes a simple letter can keep the people you care about from making poor financial decisions.

Author Kimberly Palmer joins Alison Southwick and Robert Brokamp to explain how on this week's episode of Motley Fool Answers. In addition to welcoming a very special guest, the team offers advice on what to do when your company has a retirement plan without matching your contribution.

In addition, Alison and Bro play a game they call "Mad Lib the News," which is absolutely as silly fun as you would expect it to be.

A transcript follows the video.

This podcast was recorded on Sept. 27, 2016.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, and I'm joined, as always, by Robert Brokamp, personal-finance expert here at The Motley Fool and you are also the advisor on The Motley Fool's Rule Your Retirement newsletter.

Robert Brokamp: It is so true. Hello, Alison.

Southwick: Hello. So talking to your friends and family about money can be weird. Whether you want to share a love of investing, or help them avoid the same pitfalls that tripped you up, it can be awkward. So today Kimberly Palmer, personal-finance expert and author of many fine leather-bound books, joins us to talk about how a well-crafted letter can help your loved ones learn from your experiences with money. We'll also answer your question about what to do if your employer doesn't match 401(k) contributions and play a little TV pundit and Mad Libs. All that, and more, on this week's episode of Motley Fool Answers.

It's time for "Answers, Answers," and today's question comes from Justin. He writes: "I was pondering my current employer's retirement plan, being that they do not match contributions. Would I be better off taking the money and putting it to work in my Roth IRA? If I do this, would I be missing out on any benefits of having it in my company's plan? Love you guys."

Brokamp: Well, we love you, too, Justin, and I think you're on the right track. I think, yes, you should first contribute to your Roth IRA, and here's why. IRAs have advantages that 401(k)s don't, and it starts, first of all, with fees. The average 401(k) has some fees associated with it. On average, it's about 1%. That may not sound like much, but when you compound that over someone's career, it could cut about 20% off of your retirement nest egg.

Southwick: If you're investing in a mutual fund through your 401(k), is the fee on top of that?

Brokamp: That is a great question. It includes the mutual fund's but also includes administrative fees. Bookkeeping fees. Every year a plan has to be tested to make sure it's not disproportionately benefiting the higher-income folks at the company. Every year it has to be audited by an outside auditor. All that costs money.

A lot of companies, like The Motley Fool, will cover those costs, but many others will pass those costs on to the employee, so you have to pay for that. You don't have to worry about that with your IRA. You might have to pay an annual account fee of like $10, but that's it.

Southwick: But for Justin -- Roth IRA.

Brokamp: Roth IRA. And the other benefit of having an IRA over your 401(k) is your 401(k) is a selection of like 10 to 20 mutual funds that have been picked -- sometimes by people who are really good at what they do, and sometimes the funds are not so great, but you're stuck with that. Some plans do have a side brokerage account that allow you to pick other things, but most don't. Whereas if you open an IRA, you can invest in just about anything you want. Stocks, bonds, mutual funds, ETFs. You have a lot more choices with the IRA.

And with the Roth IRA, too, another advantage over a 401(k) is you can have early access to the money if you need it. And of course, as retirement money, ideally you leave it alone, but if you need the money before age 59 1/2, with the Roth IRA you can get the contributions out early, tax and penalty-free if you need it. Also with IRAs you can get money out and avoid the 10% penalty for early withdrawals in certain situations like a first-time home purchase, or qualified higher-education expenses. You have a little bit more flexibility with getting the money with an IRA.

Now, you also ask whether you're missing out on anything by participating in the company's plan, and the 401(k)s do have some advantages, No. 1 being a higher contribution limit. You can contribute in this year $18,000, and $24,000 if you're 50 or older. The contribution limit on an IRA is only $5,500 or $6,500 if you're older. So ideally you would be saving more than the $6,500 in a Roth IRA, so you could put that in the 401(k).

Also with 401(k)s, if you need the money you can borrow the money. We've talked about this before. Generally it has a lower interest rate than many other types of loans. It's not always the best thing for people to do, but it is available. You can't borrow money from an IRA.

So the Foolish bottom line on this is yes, I think your money should first go to the IRA, but chances are you're going to need to save more than that to retire. You should be aiming for 10% -- probably 15% of your income. So max out the IRA, and then any more money you want to save, go ahead and put it in the 401(k).

Southwick: Kimberly Palmer joins us today. How are you doing?

Kimberly Palmer: Hi, I'm good. How are you?

Southwick: I'm good. So you and I first met many years ago, I think it's safe to say, when you were the senior money editor at U.S. News & World Report.

Palmer: Yes.

Southwick: And a lot has changed since then. Kids. We're both at different places. And you've written a few books.

Palmer: I have.

Brokamp: You got prolific.

Southwick: You got very prolific. I didn't write a single book. So in the last, I don't know, 10 years that we've known each other, you've managed to write two, three, four ...?

Palmer: Three.

Brokamp: Three.

Southwick: ... three books, and have two kids, and I've only managed to have a kid, and ...

Brokamp: There's a book in there.

Southwick: ... binge-watch all of Breaking Bad. Like, that's literally all I've accomplished in the last 10 years.

Brokamp: There's a book in there, somewhere. I'm confident.

Southwick: Yeah, Kim's book. I wrote Kimberly's book. So your most recent book is Smart Mom, Rich Mom. Thank you for coming into the studio today.

Palmer: Thank you so much for having me.

Southwick: Why we brought you here is because we receive a lot of letters from listeners asking for advice on how to get their loved ones interested in money. Sometimes they say, "I had them listen to your show, and they thought it was all right."

Brokamp: Which always makes us feel good.

Southwick: It hurts a little, but it's a good reminder that if you aren't interested in money, it can be very hard to get interested in managing it. Your health and your money are arguably the two most important things that lead to your happiness, but so many of us avoid thinking about them. Why do you think that is?

Palmer: I mean, it can seem kind of boring to talk about, and also we're afraid of making mistakes. I already feel like I made a ton of mistakes with my own kids with money. I live with a lot of things, but also money, so it's just hard to talk about. It's so complicated, and it's hard to make it fun and exciting.

Southwick: Here we like to talk about -- speaking of fun and exciting -- writing a letter called "A Letter From Your Dead Spouse."

Brokamp: Yes. In this case, "A Letter From Your Dead Husband," but yeah.

Southwick: Well, in my case I would be writing the letter from me. Bro, talk a little bit about what it is.

Brokamp: This was actually an idea from a longtime subscriber to my Rule Your Retirement service. Basically he handles most of the money in the household. His kids are grown, but he still has his wife and actually his mother-in-law has been living with them for decades as well.

What he does is every year he updates his letter. It says if something happens to me, this is what you need to do. This is where all the accounts are. This is where the insurance policies are. Go to this person for advice. Don't go to this person for advice. So it's basically a letter that his wife is supposed to open if something were to happen to him.

Southwick: But the letter that you're here to talk about is much more inspiring. It's meant to be read over and over again. And you talk about it in your most recent book -- the importance for moms (or dads or grandparents) to write a letter to your grandkids about their own relationship with money. And you actually got this idea from your mom?

Palmer: From my mom, yes. She did this for us. I have two younger sisters. I was about 22, and she wrote us a really long letter, like three pages long, all about the mistakes she and my dad made with money. Trusting the wrong people. Losing a ton of money. Having no emergency fund. And also what she did right -- their values, and how they started saving as soon as they got their first job.

It kind of just made me think about it. I was in my early 20s, so not really doing much saving at all, yet, or even thinking about money. But it totally got me thinking about it, and I actually, within a few years, started saving more. It just got my brain thinking about it.

Now I am grown up and have to make bigger money decisions. I reread it a few years ago, and it's so helpful. And also just knowing her values, and what they went through, and the stories. It's so much more interesting to read about a story of her making a bad choice than her just telling me "don't do this."

Southwick: Well, it goes back to your original point about how people don't like to talk about money because of making mistakes. But she was very honest with you about the mistakes she made, which, I guess, made you feel pretty OK?

Palmer: Yes. I think our parents can seem so perfect, and it can seem like they can't make mistakes. It made me feel like it was OK to tell her when I made a money mistake, or get advice, or just open up that conversation. It made it OK to talk about all this stuff. It just put it on the table.

Southwick: So you actually created, for your book, a handy-dandy template for writing a letter, so if you're up for it, I thought we would go through it ...

Palmer: Yes ...

Southwick: ... point by point, and you could help people fill in the blanks. And they can get this template, also, in your book. So if we blow through this too quickly, go buy Smart Mom, Rich Mom, even if you're not a mom. I'll just do a plug for the book right now. It's a really great book for women ...

Palmer: Thank you.

Southwick: ... but anyone can get something out of it. There's tons of really great checklists in there, and I think it's got great bite-sized lessons. I enjoyed reading it.

Palmer: Thank you so much.

Southwick: So here we go. Let's get into your letter. First off, you want to explain why you're writing the letter.

Palmer: Yes. So maybe something happened, or you realize that you didn't want to forget to tell your child something, or teach them something. For my mom, it was actually a story about when my parents got in a car accident before I was born, and they literally had $50 in the bank at the time. Her message to me was, "Don't let this happen to you. You need an emergency fund, because you never know what's going to happen." That was how she started her letter, and it got my attention.

Southwick: Right. In your template you say, "Let me start by telling you about a financial challenge of my own." That was her financial challenge?

Palmer: Her challenge was getting in a car accident with no money in the bank. It was really hard to handle a situation like that when you don't have an emergency fund.

Southwick: Absolutely. The next point you want to cover is "one of the best money decisions I made, which continues to contribute to our family's financial security today, was ..."

Palmer: I'll always remember this, which my mom told me, too. As soon as she and my dad started working -- and they had relatively modest-paying jobs -- they made such an effort to save a quarter of their income, and that let them eventually buy their first house. So it got me in the mindset, when I got my first job, that even though money's tight, I should still try to save a good portion of it.

Southwick: That's a nice one -- the point of how they had to work hard for the house and it wasn't that they just had the money lying around ...

Palmer: Exactly.

Southwick: ... and thrown at them.

Brokamp: And a quarter of an income is a lot.

Palmer: It's a lot.

Brokamp: But when you know that your parents were able to do it, it does make you feel a little like "well, if they did it, I should be able to find some way to do it."

Palmer: Yeah.

Brokamp: Or if not that much, at least close to it.

Palmer: Right. It sets the bar and it just makes you think about it.

Southwick: The next point you want to tackle is "our choices have helped our family achieve 'blank' and pay for 'blank.'"

Palmer: Yeah. So for us, it was my family buying a house. Starting to save for college for us. It's also a chance to talk about your values. If you value education. It got that conversation going to "I want you to save for the future." My mom wanted us to set up a retirement account, even in our 20s. That kind of thing.

Southwick: You bring up a good point about how money decisions are decisions about your values, and you're communicating a lot about your values. Your parents communicated a lot about what they valued by what they spent money on, and we all do that.

Palmer: Yes.

Southwick: And the next step you have for the template is "I encourage you to develop these financial habits as you get older." How do you do this without sounding a little too preachy?

Palmer: I know. It's so hard. I think you're going to sound preachy. This is OK.

Southwick: And you caveat it with "and I'm going to sound a little preachy here."

Palmer: You're a mom.

Brokamp: We're the mom and the dad. The mom, the dad, and the preacher. They can get away with this.

Southwick: Yes.

Palmer: Yes. It's things like think before you make big splurge decisions. Set up an automatic savings account so you are putting money away each month. Set up your long-term investments. My mom is so big about retirement and investment saving as soon as you can, so don't delay that. Do it as soon as possible. Those are the kinds of things she was getting us to think about there. She also mentioned thinking about your insurance and your rainy-day situation, so you might want to think about life insurance. Disability insurance. All that stuff. She put that on the table, which was not on my radar in my 20s at all.

Southwick: Then we have closing the letter with some sort of kind and loving words about providing future support.

Palmer: Yes. So maybe not financially, but in some way you'll always be there for your kids, so you're there to talk about this stuff.

Southwick: How did your mom actually give you this letter? Did she present it to you on a velvet pillow and say to you, "Here, my darling. This is my best advice."

Palmer: I was so glad she didn't do that, because I probably would have lost it.

Southwick: It's like, "Mom!"

Palmer: It was like 15-something years ago, but email existed, so she wrote it in a Word document and emailed it to us, and that's the only way it stuck around. Like I still have it.

Southwick: Yeah, that's a good point. What do you think is the best age to target for writing a letter like this? Some of our listeners might be parents. They might be grandparents. What age do you think their target audience is?

Palmer: Well, more than one age, because I think it could be teenagers. Twentysomethings. Even much older. I think it's about getting you at a life transition, because that's when you're thinking about it.

Southwick: OK.

Palmer: So for me, I was about to graduate from college. Maybe it's when you're about to get married, or have a baby. These big life transitions make you more open to having these talks, so that could be a good moment to do it.

Southwick: What can our listeners, our parents and grandparents out there, do to instill their younger kids with a value for money? Like, younger than 18, because some of them are going to have younger kids.

Palmer: I think it's all about modeling, because our kids are watching us so closely and briefly copying what we're doing, even if they deny it when they're a teenager. For example, I was making a huge mistake of not carrying my wallet around when we went out to dinner as a family, or did a family activity ... I mean, my wallet is hefty. I don't want it in my pocket, so I let my husband pay for everything, and, of course, my daughter was like, "Oh, Mommy doesn't have money. Only Daddy can pay for this."

Southwick: Oh!

Brokamp: Oh, ho, ho!

Palmer: My point is that they copy and see things, even if we don't intend them to. So make sure they see you making these decisions, being empowered, and paying for things. And giving them insight into the choices you're making can help with all that.

Southwick: Wonderful! Do you have any closing questions?

Brokamp: So your kids are younger.

Palmer: Yes.

Brokamp: Have you thought about what you're going to do in terms of chores, allowance, and that type of thing?

Palmer: Definitely. We started allowance with my 6-year-old. It's a small amount. We give her a quarter every weekend, and it's just getting her to think about saving it. And now when she wants something, I say, "Well, how much money do you have?" Some of their wants are actually like $10 or less, so it can work by just getting them thinking about it.

Brokamp: Is it tied to a chore?

Palmer: No.

Brokamp: It's not.

Palmer: We do chores separately. Not tied.

Brokamp: We had Ron Lieber of The New York Times on a previous episode, and he believes that as well. That you don't tie allowance to chores. I'm not totally sold on it, yet, but I'm getting there.

Southwick: Do you do separate allowance for chores?

Palmer: Chores are separate, so they have things they're expected to do, but it's not money-related.

Brokamp: Just part of being in the family and pitching in.

Palmer: Yes.

Brokamp: Got you.

Southwick: Maybe you're going to change your mind about it. I don't know.

Brokamp: We'll see.

Southwick: See what the Brokamp kids think about that. All right, Kimberly. This has been super helpful. Thank you so much for sharing your story about the letter that your mom wrote you. It's wonderful that she wrote you this one letter and then you get to share the idea with the world!

Palmer: Yay!

Southwick: Isn't that great?

Palmer: I love it.

Southwick: Don't you feel like you're having such an impact? I would if I were you.

Palmer: It's been super fun.

Southwick: Then again, maybe it's just another day in the life of Kimberly Palmer. Going out there and doing stuff. Writing books. Making it happen. I do stuff, too. I do! I have a podcast. ...

Kimberly has agreed to stick around and help us play a game we're calling "Mad Lib the News."

Brokamp: Yay!

Southwick: I am blatantly stealing this from Barry Ritholtz. He wrote it for The Washington Post. Basically he mused that every financial news interview is the same script with just different words plugged in by the on-camera expert. You wrote a template to help people talk to their kids about money, and he wrote a template for expounding on the economy, so I'm going to ask you to give me a list of verbs and nouns and adjectives, and then we're going to plug them into the script and see what our economy looks like.

Palmer: The economy.

Southwick: No pressure. I need a verb.

Palmer: Run.

Southwick: And I need an adjective.

Palmer: Yellow.

Southwick: I need an adjective.

Palmer: Hot.

Southwick: I need a noun.

Palmer: Stone.

Southwick: I need a gerund -- that's a verb with "ing," but it's acting as a noun?

Brokamp: Yes, it is.

Southwick: What is this, Dr. Brokamp?

Brokamp: This is true, yes. That's what a gerund does.

Palmer: Skipping.

Southwick: Skipping. OK, I like that. A verb.

Palmer: Yell.

Southwick: Adverb.

Palmer: Swimmingly.

Southwick: Ooh! I think you're going to be a big optimist on the economy. An interjection.

Palmer: Oh, no!

Southwick: OK, a noun.

Palmer: Table.

Southwick: And a noun.

Palmer: Orange juice.

Southwick: A company.

Palmer: Tesla [Motors].

Southwick: And a number.

Palmer: Ten.

Southwick: All right, here we go.

Brokamp: Here we go.

Southwick: Are you ready?

Brokamp: We just clicked on CNBC. Here's the aftermarket news.

Southwick: The economic outlook, according to Kimberly Palmer, as mad libbed. Our view is that the economy in the U.S. continues to run, and we foresee yellow problems overseas. China is hot, and that has ramifications for the Pacific Rim's stone. Greece is skipping in Europe, but many sectors of the U.S. economy yell swimmingly. The valuation issue continues to be oh no! and that means table. Maybe a noun was not the right option there. Under these conditions, the sector most likely to benefit from this is orange juice. The company best positioned to take advantage of this is Tesla; thus we believe the Dow will be at 10 next year.

Brokamp: Sell! Sell!

Southwick: I don't know. It started so positive. It was like everything was great and then the Dow's going to be at 10.

Brokamp: Oh!

Palmer: Oh!

Brokamp: Wah-wah!

Southwick: Wah-wah! Of course, the lesson here is that ... I don't know. What's the lesson here, Bro? Give us a lesson.

Brokamp: The lesson is that the financial news is filled with people trying to explain why the market or the economy did something and make a prediction about what it's going to do, and most of it is just stuff you don't really know. They're making stuff up. You just change out the words. It's the same thing every day.

Southwick: It's mostly furphy.

Brokamp: Furphy, yes. Is that an adjective?

Southwick: We learned "furphy" in last week's episode.

Brokamp: Oh, that's right. That's Australian slang.

Palmer: I don't know that one.

Southwick: Yes, it means basically a story that isn't quite all accurate or true.

Palmer: Oh, I like it.

Southwick: Well, Kimberly, thank you again for joining us. We would love to have you back.

Palmer: Thank you so much.

Southwick: In a few weeks, as it turns out, in face time. Anyway, thank you for joining us.

Palmer: Thanks for having me.

Southwick: Before we go, I have a few postcard senders to thank.

Brokamp: Yay!

Southwick: It just gets me off my game when you make noises like that. OK, someone from an L.A. Galaxy game, who didn't leave their name, sent us a card. Also Joseph sent one to Chris from Italy. He says he sent one to us, too, but ... hmm. Never saw it. And James sends a ni hao from Hong Kong. So thank you to everyone who keeps sending them in. Even though I stopped asking for it, it makes me so happy.

Brokamp: It really does make her very happy.

Southwick: All right, that's the show. It's edited mad-libbingly by Rick Engdahl. You can reach us with comments or questions via email at [email protected], or you can leave us a message on the phone by calling (866) MRS-FOOL. That's (866) 677-3665. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody.