Transcription:
Tips for Retirement Saving

Melanie Cole (Host):  Have you ever wondered if you can actually retire at 65 or 70 or 75? Do you have the means to retire and what does that even mean? Welcome to Bryan Health Podcast. I’m Melanie Cole and today, we’re discussing retirement planning. Joining me is Geoff Langenberg. He’s a Financial Education Consultant for Union Bank and Trust. Geoff, I’m so glad to have you with us and what an amazing topic this is. So, let’s start with paychecks to save for retirement, based on a salary of whether it's 40, 50, 60,000; what should the average person be putting away from each paycheck if they can every month?

Geoff Langenberg (Guest):  Well thanks for having me Melanie and you’re going to hear me reiterate this a lot during these questions that it’s not a one size fits all type of answer. Every single person has a specific financial situation that’s going to help dictate some of these decisions. But when we talk about just a general rule of thumb, most experts would have you try to save anywhere from 12 to 15% out of your paycheck annually. Okay. And for a lot of average investors, that can be a really hefty number, especially during difficult economic times. Some people can’t afford to save 12 to 15% right off the top of their paycheck. I think something that gets lost in the middle of all of this is that that 12 to 15%, it does include employer contributions. So, it’s not just your money that they are factoring in there. They are also factoring in any match, profit sharing or both into this calculation.

In a real general sense, if you are looking to save 12 to 15%, a typical matching contribution that we see on average with a lot of participants, I’ll just use a real vague example fifty cents on the dollar up to let’s say 6%. If you were to max out that match and put in 6% of your own compensation; you’re going to get 3% free from your employer. So, if you factor that together, you put in 6, you get 3, you are actually doing 9% towards your retirement every year. And that’s a really good head start because I feel like when you throw the number 12 to 15% out there, it sounds so unattainable that most people think that they can’t get there but if they just use their companies 401K plan to their advantage; they can make that dream more of a reality sooner than they think.

Host:  Okay, so that’s really great advice. But what if you are self-employed? What if you are a trades person or you don’t have any employer that matches anything, then what?

Geoff:  That’s great and that’s actually another question that I wanted to answer. There are other opportunities out there outside of a general retirement plan whether that’s a 401K or a 403B. you also have the option to invest in both traditional IRAs or Roth IRAs. IRAs are individual retirement accounts. And those are designed for a person that maybe like you said doesn’t have access to a company sponsored plan. Those traditional IRAs, they are both separate and a Roth IRA is another one that’s separate. But the way that they work is they are contributions that you can make on a pretax or an after tax basis. So, a pretax traditional IRA, you’re putting that into this plan pretax and then when you withdraw the money later on down the road; you’ll take that money out and Pay those taxes at that point. The Roth contribution is just the opposite. The Roth IRA is an after tax contribution to that individual retirement account where, you can put your money in up front, tax it then and then that way when you take the money out later on down the road; you’ve already paid those taxes and that’s out of the way.

There’s pros and cons to both and whether or not you open up a traditional or a Roth IRA or whether or not you use a company sponsored plan if you have access to those. The main thing I always advise people to look at, especially if they have a company sponsored plan and they are considering investing in an IRA is you don’t have to do one or the other. You can do both but really just take a look at fees. Fess is a big one for me. With a company sponsored plan; typically your fees to invest in that plan are very, very low. Everybody in the business of investing has to get paid in one way, shape or form. With fees in regards to a 401K plan, companies typically choose a plan that has a very, very low administrative expense.

They know saving for retirement is a good thing and they want to make sure that you’re taken care of financially and so that you are not paying an arm and a leg to invest with one of these investments that you have access to. IRAs typically and I say typically because it’s not true in all of them, fees tend to be a little bit higher because you’re paying a financial manager or some sort of firm to manage this account and set it up for you. Okay. With IRAs, there’s also age and income limitations. With 401Ks or 403Bs, there are none. And then the last thing is if you have access to a retirement plan through your company, I would strongly recommend using that first and then do the IRA second because you don’t have access to a match or any free money through an IRA.

Host:  That’s great information and you put it so succinctly and made it easy to understand for people that really don’t understand all of this and think that it involves a lot of math. Now people want to invest, and we hear buy low, sell high and when the market’s down, that’s a buy time. Right now, and at various times in our history, there’s volatility. How do we invest? Because we look at internet stocks, oh, isn’t that going to be great or we look at you know, how do we invest during times like this or during times of volatility?

Geoff:  Sure. And that’s for no pun intended, the million dollar question right now especially during the midst of a pandemic we have seen some extreme market volatility. And so when you’re investing during these difficult times; you really have to ask yourself two questions to kind of give you a real basic sense of where you’re at and where you want to be. The first question you need to ask yourself is your time horizon. Just how close or how far away is retirement for you? Because in a real general sense, a younger investor has the benefit of having time on their side. And having that much time on their side, means that they can still invest aggressively in well performing equity funds. And they have the ability to ride out those market lows when they come along like we’ve seen over the last couple of months.

Because really what’s happening when the market goes down, share prices are just decreasing in value. So, when share prices decrease in value, you’re just getting a good deal on the price of the product that you’re buying. When the market rallies, you guessed it; share prices increase in value. So, if you just dollar cost average which means use a retirement plan or an IRA where you are automatically contributing, you’re dollar cost averaging which means you’re buying consistently regardless of whether the market is high or low and on average, over the life of this thing; you should come out with a lower average share price.

The other question is your risk tolerance. And in real simple terms, this is just who you are as a person. Are you naturally more aggressive? Do you like to take risks? Gamble a little bit? Or are you more on the conservative side where maybe you’re not interested in seeing huge, huge gains but you just don’t really want to have to worry about losing a lot when the market goes down. Those are two questions you have to ask yourself and kind of find the middle ground between two of those answers to figure out who you are.

The second thing I always say is time in the market matters not market timing. We are going to see market fluctuations up and down all of our lives. We’ve seen two of the biggest market declines just within the last 12 years, 2008 and now. So, trying to time the market, pull money out, move it back in, it sounds easy in theory. Okay the market’s down right now, I’ll sit on the sideline, wait for it to come back and then I’ll put my money back in. Well what you don’t realize is that when you pull out of the market at a low share price, that’s exactly what you’re doing. You are selling your shares low and then when you jump back in when the market recovers; you’re buying back in when the shares are high.

Host:  And it should be the reverse, right?

Geoff:  Exactly right. Exactly right. So, being able to be patient ride out the lows, wait for those inevitable market rallies to come is going to be the biggest gain for you over the life of this thing. The market has been resilient. Over the last 30 years, every time we’ve seen an economic downturn; once it’s hit rock bottom, there has always been a market rally to follow to set a new all time market high. That’s something that hasn’t changed. That’s a fact. We can’t use past performance to indicate future returns, but we can at least use it as a guide to get us to where we want to be.

And then the last thing, target date funds. If you are not sure how to invest or if you are not 100% comfortable with hand picking your own stocks and bonds; we do have target date funds and most plans do have target date funds out there that will automatically allocate you to certain percentages of mutual funds based on your age. So, if you’re a younger investor, they’ll start you out heavily weighted on stocks or equities. And then slowly as you get older and older, they start to kick into autopilot where they will automatically reallocate you to become more and more conservative or safe the closer you get to retirement. So, your time horizon when you’re young, you’re aggressive and as your time horizon shortens, you become more and more conservative.

Host:  Well that would be me. I don’t want to lose a penny and it terrifies me. I like to have a nice safe stock, nice safe portfolio. Are we using our money to invest, that comes from our paycheck? Do we dig into our SEP IRAs or our Roth or our IRAs? How do we work investing? Do we just hope that we have some cash to invest?

Geoff:  So, the way that that works there is that with any plans, it’s all based off of payroll deduction if you use a 401K or a 403B. If you are using a traditional IRA or a Roth IRA. Most people will just have that automatically contributing right out of a checking or a savings account or something like that. With plans as well, they offer both traditional and Roth contributions to 401Ks and 403Bs. And that’s something that I also wanted to clarify is that a lot of folks when they hear the word Roth, they automatically assume Roth IRA. And that’s completely different. Again, like we talked about before. That is an individual retirement account used for money to be contributed outside of a company sponsored plan.

A lot of plans probably within the last decade have now started allowing Roth contributions to the 401K. What that means is that now you have the option to contribute pretax dollars to your 401K or Roth dollars to your 401K. So, you are kind of getting the best of both worlds where you’re not subject to any of the age or income limitations of an IRA but you’re also not subject to the lower maximum amounts that you can put into an IRA.

Right now with an IRA, if you are under 50 years old, you can max it out with $6000 per year. If you are 50 and above, you can do $7000. With 401Ks, 403Bs, and other qualified retirement plans; you can max out now at a total of $26,000 altogether if you are 50 and above. If you are below 50, you can do $19,500. So, the million dollar question for this one is which one is the right one? Which one do I do? Do I do pretax dollars? Do I do Roth dollars? What’s right, what’s wrong and why don’t they just give us one or the other if one’s better? And that’s because there’s not a one size fits all type of answer to this question.

Every person has a specific financial situation that they need to ask themselves a few questions to help dictate how they want to allocate these funds. So, I’ll give you my own example. And this is me personally. This isn’t advice my any means. This is just what works for me. I ask myself three questions. Okay. And I did a Roth when I answered these three questions and the reason for that is, I took the first consideration and said how old am I? Thirty age years old. I’ve got at least close to 30 years until I retire. So, because of that, because of my longer time horizon, I did all Roth contributions because I would rather pay the taxes now and get that out of the way. And that way, 30 years down the road from now, first of all, I don’t know what taxes are going to be 30 years from now. So, I would rather just pay them now, get it out of the way and not have to worry about it.

The second part of that, is over the life of any sort of investment vehicle, you’re going to gain a decent amount of earnings in your retirement account. Those earnings on a Roth contribution are not subject to any state or federal taxes when you pull the money out. So, that’s a big, big deal. If you do traditional contributions, you’re going to pay the taxes when you pull the money out but you’re also going to pay taxes on any of your gains. On a Roth, you do not. So, for me, in some cases, I have seen a younger investor over the life of their account have upwards of almost 50% of their account balance be comprised of purely earnings and that can be a big, big chunk of change. So, I went all Roth simply because of my age first and foremost.

The second part of that is I looked at my own personal tax situation. I have three kids at home. I have got a kindergartener, a four year old and then we have got almost a one year old. And we claim them on our taxes every year. So, we get a pretty decent tax return out of the deal, right now. If you do pretax contributions to a retirement account, you can deduct that money from your taxable income and that means less money that you have to pay in during tax time, or more that you get back. Like I said, I’m getting a pretty decent return out of the deal right now, so I’m not looking for any other deductions. So, I went all Roth for that reason.

And then the last reason and I know this will shock everybody that listens to this because I work for a bank and I work in finance; I assure you I am not a millionaire. I am in a very, very low tax bracket like most of America. And because I’m in a low tax bracket, I would rather pay those taxes now in a low bracket and then who knows maybe later on down the road, I’ll make some right choices and maybe I’ll be in a higher tax bracket at that point and I can start doing pretax contributions then.

Host:  Wow, that was such a comprehensive answer and as we wrap up, because we really could talk about this for a very long time; Geoff, so how much and I know this is another million dollar question, as you wrap up and summarize for us the best advice on retirement planning, because I am in my middle 50s, on the back nine as they say and so, for me, this is a question I ask myself almost every day. How much should we have saved? I guess it depends on our lifestyle, the things we find important, but when you are talking to people and you say is 200,000 enough, if your house is paid off? Is 400,000 enough? What is enough to live without having to worry about it?

Geoff:  Sure. And again as to what you said there Melanie, it depends on your goals. Are you looking when you retire to just hang out, get the newspaper every morning, sit in the recliner, read the newspaper, watch TV or are you looking to move to Arizona or Florida and get that retirement home or go on a vacation, travel the world, get in your RV? All of those types of decisions are going to affect how much you totally need in your retirement account. But to give you some baseline guidance there; let’s just say that most experts want you to save anywhere from 80 to 100% of your working income. And what that means in real simple terms is that if I’m making $40,000 a year preretirement, that’s paying my bills, that’s making sure I’m well fed, that’s making sure I have enough money left over for leisure activities and emergencies and what have you; ideally, I want to be able to save up enough money to afford to be able to take out $40,000 out of my retirement account annually. Okay.

So, when you are trying to calculate that number; you really need to focus on something that’s called the rule of four percent. And the rule of four percent is just a baseline guideline that says you want to be able to afford to take out no more than four percent of your retirement account balance annually. Studies have shown that no matter how you’re allocated, whether you are ultra-aggressive or very conservative in your investment during retirement; if you withdraw anywhere from six, seven, eight percent of your retirement account balance, you will not last through retirement on that money alone. You’re going to need other sources of income.

Studies have shown that if you can keep it to four or less, you have a more statistic probability of having that money last somewhere around 25 years or so. So, to give you an idea in a real dollar sense for me. Let’s say I make $40,000 a year preretirement and that’s my goal. And I want to satisfy that four percent rule of pulling out $40,000, I’m going to need a million dollars in my retirement account if I were to retire tomorrow. Because four percent of a million is $40,000 which would equal out to about 25 years.

As a final thought, when planning for retirement, just know that there’s not any right or wrong way. There’s no 100% correct answer or a 100% wrong answer. You just need to make the best financial situations for your own particular situation. And with that being said, please, reach out to local financial advisors or financial educators that work with your plan and they will be more than happy to help you with any questions that you might have.

Host:  What great information Geoff. Thank you so much for really advising us and giving us such great advice on the ways to plan for our retirement. Something that everybody really wants to do because we don’t want to be worried when that time comes. Thank you again. That concludes this episode of Bryan Health Podcast. Please visit our website at www.bryanhealth.org for more information and to get connected with one of our providers. Please remember to subscribe, rate and review this podcast and all the other Bryan Health podcasts. Also remember to share this show on your social channels with your friends and family because that way we’re all learning together how to plan for our retirement from the experts affiliated with Bryan Health. This is Melanie Cole.