Regardless of your other financial goals, saving for
retirement is a must for everyone, and that brings up an uncomfortable truth
for those of us who care about not contributing to the climate crisis or the
human inequality crisis with our money: to retire securely, you must invest,
and investing responsibly can be a challenge.
The good news is that investing responsibly is becoming
simpler than it was only recently. But as I write about in my new book, there’s
more to funding your retirement ethically than just what stocks you invest in.
Fortunately, funding your retirement in a way that minimizes harm to the planet
and other people is straightforward if you know what to look for.
Responsible banking
Ample research shows that millennials, and Generation Z, and
younger members of Generation X prioritize investments that are socially and
environmentally responsible. And responsible investing has become an oft-used
buzzword in the personal finance sphere. But many of us are ignoring the much
more direct way our money does harm: through our bank. If you use a big bank,
there’s a near-certain chance that the money sitting in your savings account is
being used to fund new fossil fuel projects and other harmful things like
conflict mineral operations, funding new factories that employ forced labor,
and the list goes on. We’d like to think that the money we have deposited goes
to fund mortgages for first-time home buyers and loans to small-business owners
of color, but much of that money instead goes toward exactly the types of
projects that many of us try to avoid with our invested dollars.
The solution? Switch banks. It’s a bit of a process to
switch to a credit union, a community bank, or a Black-owned bank, but it’s a
one-time process and then you’re done. You can find a credit union you qualify
to join at mycreditunion.gov, or go a step farther and find a credit union
specifically focused on uplifting low-income people and communities at
inclusiv.org.
Responsible investing
The first and (often only) way most people invest is through
a workplace retirement account, and as an employee, you’re limited by the
investment options chosen by your plan administrator. Though ESG
(environmental, social and governance) funds are not perfect because there will
continue to be abuse of the term until it has an agreed-upon and enforceable
definition, in general ESG funds are still better in terms of social and
environmental responsibility than non-ESG funds. So get loud and demand that
your plan administrator include multiple ESG options in your workplace
retirement account. Encourage your co-workers to join you in pressuring your
employer for more responsible options.
If you’re investing on your own, either because you’re
self-employed and are using a vehicle like a SEP IRA or a solo 401(k), or
because you want to invest above and beyond what you can invest through your
workplace plan, you have many more options. ESG funds can be a good place to
start, but do your homework. Find out what’s actually in a given ESG fund to
ensure there are no fossil fuel companies hiding out there, or gun makers, fast
food companies or manufacturers with especially flagrant bad labor practices.
And of course look closely at fees, as you shouldn’t have to trade your future
financial security for responsibility.
A growing option that more investors consider is called
direct indexing. While not created for the purpose of responsible investing,
it’s a fantastic tool for the job because it allows you to buy a whole index,
as you would with any index fund, but then subtract the stocks you don’t wish
to include. So you could, for example, invest in the S&P 500 SPX, -0.21%,
minus fossil fuels, guns, nonelectric auto makers, big tech that don’t fight
misinformation.
Ethical rental investing
Investing in rental real estate — buying a property
specifically to rent it out — is becoming more popular, and if you believe some
of the videos on TikTok, it’s a sure thing. While there’s risk with rental real
estate as with any investment, it can be a solid way to fund your retirement if
you approach it right. Of course, approaching it with an eye toward profit does
not guarantee that you’re approaching it ethically.
Proponents of rental real-estate investing tend to use a lot
of euphemisms and insider terms that mask the fact of what you’re actually
doing: providing a home for someone. The focus is often on maximizing your
investment by finding a property in a location where rents exceed purchase
prices, and that happens most often in low-income communities where people
can’t afford to buy a home, pushing rents up and prices down. Because these
properties may exist in a different city or state from where the investor
lives, this approach often requires hiring a property manager to select
tenants, collect rent, and to intervene if anything goes wrong. Unfortunately,
a huge number of property managers of properties for low-income people have a
history of discriminatory practices such as not renting to people of color,
harassing tenants, conducting unscrupulous eviction processes, and more.
So how do you avoid all of this?
First, you can decide to purchase a property only if you can
manage it yourself.
Second, if you can’t manage it, or investing near where you
live isn’t a feasible option, do your best to avoid low-income areas that have
been hard-hit by the eviction crisis, to avoid worsening it. Before you buy
your first property, resolve not to raise the rent each year just because you
can, but instead to work hard to keep tenants as long as you can.
Finally, if you must hire a property manager, be hands-on
with the vetting process. Investigate any potential candidates for harassment
and discrimination claims. Ask to speak to some of their tenants as references.
Don’t assume they approach the work ethically just because they say so.
Ethical location selection
Though choosing where you live is not funding your
retirement, it’s common for those thinking ahead to plan to move to a new place
where cost of living is less than where you live now, which stretches your
saved and invested money, acting as a kind of funding source. And where you
choose to live comes with plenty of its own pitfalls, not least of which is the
fact that the most popular retirement locales tend to be those at highest risk
from global warming.
In addition to climate considerations, if you care about not
exploiting people who are worse off than you, remove from your list any
locations in low-income countries, such as popular expat retirement locations
in Central and South America. By moving to a low-income country, you benefit
from infrastructure that your tax dollars did not help to fund, often without
returning anything substantial to the community, particularly in places where
expat communities tend to be walled off from the locals. If you wish to retire
abroad, consider countries of comparable income level to the U.S., or simply
find a place to retire within America where you can stretch your dollars
farther without displacing anyone or benefiting from services that you didn’t
help fund.
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