Make It Last – Ep 91 – How to Stay Motivated to Achieve Your Retirement Goals
Statistics say most of us will have abandoned our New Year’s goals by mid-January. Victor is here with some motivation to keep your retirement goals. Just as you would with fitness goals, it is important to set short-term goals to give you a sense of achievement while working toward your long-term retirement goals.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Palante Wealth Advisors.
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Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure. With your host Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Hi, everybody. Welcome back to Make It Last. I’m your host Victor Medina. I’m so glad you could join us this Wednesday morning for another fun edition of Make It Last, where we get to talk all about legal and retirement planning and all the stuff that you need to do in order to get yourself up, ready, and looking forward to that last act of life.
I want to talk to you today about promoting your retirement accounts in 2019. Everybody starts the New Year with a set of goals, and people want to figure out what’s going to be their New Year’s resolution.
They’re going to sit through and they’ll say, “This time I going to exercise more, I’m going to try to eat less.” I don’t know how many of these things are always focused on health but it always seems like we take this opportunity to really examine what we have on our personal life. It’s a good time to actually take a look on your financial and legal planning life as well.
We all have started this year with different ideas on what we want to achieve. Nobody has exactly the same set of goals, and exactly the same things that they want to achieve, because they’re not starting from the same place.
No matter what you think when the ball drops and the New Year begins, you probably have a few things that you’d like to get done this year. Question is, how many of us will actually achieve those goals?
I think it’s interesting because if you look at any of the news reports that are out there, they’ll let you know that the majority of people give up on their goals before even the month of January comes to an end.
Here we are in February. I am going to be your motivational guru, at least on the legal and financial goals setting side. We are going to recommit to new goals that we’ve got for 2019. We’re going to sweep under the table, what happened in January, you may have started, but it’s OK.
We can start again and we can begin with a new recommitment to our goals. If it comes to saving for retirement, you can do that well.
We still have time to achieve that. I think that part of the biggest obstacle, is that there’s many people who are pre‑retirees today that are afraid of retiring because they don’t think they’ve got enough saved and they’re not prepared.
We’re going to aim the program today towards those individuals. I spend a lot of time already talking to people in retirement or people who are already in retirement. I don’t spend as much time coaching people who are on the pre‑retirement side.
We’re going to talk to you today. We’re going to give you some information that will help you prepare for your retirement golden years. We’re going to start 2019, essentially, helping you do exactly that.
As I was talking about, everyone starts 2019 or a new year with lots of energy and a total commitment to something like going to the gym. You know who you are. By the way, the gyms know who you are, too. They offer you a deal, you sign up, it takes it out of your credit card, and if you actually go in January, the gym is filled to capacity ‑‑ to capacity.
I have been going to the gym regularly. I spent some time with a trainer, who’s fantastic. I try to go in the middle of the afternoon when it’s quiet. I don’t like crowds that way. I’m lucky enough because I own my own business that I can step out and hit the gym at three o’clock.
When I go at three o’clock, it’s empty. In fact, I’ve been working with this trainer since August. From August through December, with a couple of exceptions, when I go in the midafternoon, it’s pretty much empty.
There’s really not a lot of people. There are a few people there but’ it’s not a lot of people there. I said there’s a couple of exceptions. One of the exceptions is the week before Thanksgiving and then the other exception is the week before Christmas.
We get this reactionary thing where people want to hit the gym just coming up on the holidays, specifically, the holiday meals. When we turn to the New Year, I’m still going to my training sessions, still going in the middle of the afternoon, but all of a sudden, the world’s changed.
The gym parking lot is full. It’s full of people in the mid‑afternoon, which never had anybody there before, because people start really, really strong, going into the New Year.
It’s going to be interesting what happens now, in February, because as I said before, a lot of people trail off. I think part of this ‑‑ I’m guilty of this as well as anybody else in lots of different areas of my life ‑‑ I think that it’s hard to stay committed to a long‑term goal.
For me, personally, I find it better to set short‑term goals. That way, I can feel a sense of accomplishment reaching them. I think that being successful on a bunch of short‑term goals will get you where you need in terms of reaching a long‑term goal. That might be a better, more beneficial approach for people.
As I was saying before, no one’s going to have the same approach to reaching their goals. You’re going to have to come out at different ways. Everybody lives a different lifestyle, has different obstacles to overcome.
Today, I want to help motivate you by helping you be proactive about your financial and legal life in preparing for retirement. Maybe you’ve slacked off for the last couple of years, or you haven’t done as much as you think you could have.
This could have been for lots of different reasons. The market, until last year, was doing so, so well, that you didn’t have to really be too smart or pay attention to what was going on. It was just working for you. You could have slacked off, not really worrying about what was going on because everything was going well.
You didn’t need much of a plan there. Now, that we have this whole market correction, and people feeling a little less certain about what’s coming up in the whole world over there, it may be time to re‑think that.
We’re going to start this New Year by setting some new goals, some new retirement goals, in both the legal and financial realm. I’m here to help you understand that. You can think it all in your head, if you want, but until you start to act on it, it’s just a dream.
I want to get you to start to think about that. If you can’t do it on your own, certainly, you can get help along the way. We’re here to help people. If you want help setting up your goals and preparing for your retirement, even after listening to this show, you’re like, “Look, I want some professional help along the way,” you can give us a call.
Our number is 609‑818‑0068. You can schedule a complimentary consultation with us. Again, the number is 609‑818‑0068. We can help you do that. Some of you out there listening may already be retired, and that’s OK.
There’s going to be some stuff that we’re going to talk about here that will help you prepare for obstacles in retirement by just doing some proper planning and setting some goals.
You can use the stuff that we’re going to be talking about for pre‑retirement people and extrapolate it out over. Maybe I’ll help you do that as we’re talking through some of those subjects.
For those of you that are thinking about retiring in the next 5 to 10 years, I need to help you start thinking ahead to prepare yourself before you decide to call it quits at work for good. The more work that you do ahead of time, the better off you’re going to be.
You’re going to start your new year off right. We’re going to take action. If that’s with us, you can give us a call. Again, 609‑818‑0068, or you can just start doing that on your own. Let’s jump into the show and start talking about it.
There are any number of reasons why people aren’t saving enough for retirement. They did a survey at a website called GOBankingRates. According to that survey, about 42 percent of people expect to retire broke, which means that they have less than $10,000 saved for retirement.
That’s really scary for those folks. They have been living paycheck‑to‑paycheck. For whatever reason, whatever life circumstances have dealt to them, they just haven’t been in a position to save anything. That’s over 42 percent of the people. That’s a lot.
The good news is that there’s over half of the people expected to retire with more than $10,000, what they’re calling “not broke.” [laughs] Take a step back and think about this though.
Think about retirement, think about how long that might be for you. If you retire at age 65, with all of the advances of medical science being what they are, there’s a good chance that you’re going to live another 20 years or so. If you think about healthcare costs in retirement, that’s going to eat into whatever you thought you needed for savings.
There’s another survey done by Fidelity Investments, and their conclusion is that healthcare costs in retirement are going to be maybe $275,000, and they’re going to continue to go up.
I’ve seen nothing in my practice rise more than the cost of healthcare and long‑term care. It’s incredible. People would take long‑term care insurance policies, and they would get an inflation rider on them.
When they took the inflation rider, it was like five percent. Academically, thinking about the cost of inflation or the rate of inflation, people thought five percent was pretty generous.
Inflation might be two, three, percent per year. If you had an inflation rider on your benefit of five percent, you’d be doing better than what the inflation would be.
What ended up happening is that the cost of healthcare went up so much that the inflation rider was useless. Useless. If you think about healthcare costs, at around $275,000, [laughs] when you start to think of numbers that are that big, you start to realize how important it is to save properly for retirement.
According to that same GOBankingRates survey, the one that said 42 percent are going to have less than $10,000, there’s 23 percent of adults aged 55 and older that have about $300,000 or more saved for retirement. Not everybody is broke. In fact, many people do a good job.
Now, let’s go back to those 42 percent that are expected to retire broke. I suggested that there are all kinds of life circumstances that might have led them to be that way. The same survey conducted another survey over the question, “What’s the main reason why you don’t have any retirement savings?”
They came up with answers like this. “I don’t make enough to save.” Those are the people that are living paycheck‑to‑paycheck. One of them, which I find really curious is that, “I won’t need retirement savings,” which I see as a lack of good education out in the world.
If you spend any time thinking about retirement, you realize you need something in savings. Security is not going to cut it. Unless, you are still a state worker, or somebody that works for public schools, or something like that, you don’t have a pension to speak about. You probably need retirement savings.
The other one is related to not making enough to save, as they’re still paying down debt. Some people, their job doesn’t offer a 401(k) plan ‑‑ a mechanism for saving. That can be a big hindrance because you can save a lot more when your employer has a plan for a 401(k), then you can, if you’re just making your contributions to an IRA.
They included other things, like they’re struggling to pay bills, that’s still just about not enough in the pie, and then they used money for retirement.
For all age ranges, the two primary reasons that people don’t have enough to save for retirement are basically, they don’t make enough to save, and they’re struggling to pay bills. If you’re on a tight budget, I get it. It’s not easy to save for retirement, but there are ways to go about making this happen.
Just as often, people make excuses on why they’re not saving. They go through their working years knowing that they need to save but they make the excuse that they don’t make enough.
Victor: I’m here to tell you that through the rules of compounding interest and “slow and steady wins the race,” especially over a long‑term horizon, just saving a little bit can go a long way.
What I’m going to do now is I’m going to take a quick break. When we get back from the break, I’m going to talk to you next about some ways to successfully save more for retirement and promote your retirement account. Stick with us. We’ll be right back on Make It Last.
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Victor: Everybody, welcome back to Make It Last. I’ve been talking today about how to promote your retirement accounts. In the first segment, we just got real straight with the reality of where people are in saving for retirement.
What I wanted to do in this segment is talk a little bit about ways that you can successfully save some more or promote your retirement account. As we enter 2019, we are all starting to understand that pensions are obsolete.
I’ve talked about that in prior shows. We cannot rely necessarily on a steady stream of income from our employers in retirement. Today, 401(k)s and the related plans, like 403(b)s and 457s, or SEPs, these are all on the forefront of retirement. It has switched the world from a defined‑benefit plan to a defined‑contribution plan.
The defined‑benefit plan is when the employer gives you a benefit when you retire, that’s the pension. The defined‑contribution plan is when you contribute to your own retirement savings and depending on the employer, they contribute on it as well.
That’s a huge shift because that has shifted the responsibility for retirement away from the employer to the employee. I want to be clear about this concept because some people are like, “Look, you should be responsible for your own retirement.” Why is it that your employer has that responsibility?
I think it’s less about whose responsibility it is, than it is about behavioral science. Because when your employer was maybe paying you a little bit less but accruing money as part of a defined‑benefit plan, in other words, they had the responsibility to make sure that there was enough to give you a flat income for the rest of your life.
From a behavioral science standpoint, we took away lots of individual people’s decisions to save for retirement, or not, which just took them away. We paid them less, and we put it aside. That way, we knew that they had that for retirement.
When we switched it over for a defined‑contribution plan, we put the onus on the individual ‑‑ each specific individual ‑‑ in order to get them to think about their own retirement. What happens is you get a certain failure rate.
You get a failure rate of people who are not saving enough or not thinking enough about savings. This autonomy about contributing to your own plan has led to a lot of people not contributing anything.
Because all of the responsibility on retirement is in the defined‑contribution plan, the importance of saving aggressively is becoming more apparent and beneficial for your retirement years. Yes, you’ve got social security to help you out, but we know that that’s not going to provide all that you need.
Some question marks are now starting to arise about when social security gets brought up. When it comes to saving for retirement, you start to think about, “Well, when do I claim social security?” That’s a steady income, but if I claim it too early, then it’s going to be a lower amount.
Some people just don’t have the flexibility of choosing what would be the best option for them, because they haven’t had enough saved to carry them through those retirement years when you are delaying on social security and waiting for more money to come about.
Anyway, there’s two essentially popular tax advantage plans that can be available to you. 401(k) and things like a 401(k), like a 403(b), or 457. Those are really more for public entities and hospitals. It’s not as prevalent as private corporations with 401(k), and then the IRA.
I wanted to briefly explain each account to you and also the contribution limits for 2019, and how you can take advantage to save more for retirement. 401(k), we throw this term around a lot and maybe we don’t know exactly what it is. A 401(k) is an employer‑sponsored retirement plan, that is funded directly from your earnings.
You siphon off some portion of what you’re getting paid to contribute into this account. There are some tax advantages to doing that, to the extent that you are contributing into a traditional 401(k). The money comes off of your taxable income, up to certain contribution limits. So, you don’t get taxed on that money up front.
Then it grows, tax deferred, in this account. There’s another kind of 401(k) that is growing in popularity, and it is a Roth 401(k). A Roth 401(k) allows the money that’s in there ‑‑ you’re going to get taxed on this ‑‑ as your wages.
When you make contributions into that, it will grow tax‑free, and all of the withdrawals will be tax‑free. That can be a benefit for people who want to take the taxes now and then contribute it to get a tax‑free income when they retire.
The employer has to sponsor that kind of a 401(k). The annual contribution limits for both of those increased a little bit. They increased by $500 to $18,500 in 2018 and it’s now up to $19,000 in 2019.
If you want to contribute money to a 401(k), and your employer has that plan, you can contribute your own money up to $19,000, regardless of your age. Sometimes, people get a little bit confused because their employer might sponsor a match.
An employer might contribute money over and beyond what you’re contributing, up to a certain limit. They might have a dollar‑for‑dollar contribution up to four percent of your salary. Again, there’s different formulations off of it.
It’s important to realize that that money does not go…the money that the employer contributes does not go against your contribution limit of $19,000. You can contribute $19,000 and your employer can contribute additional money and that’s all within the rules.
When people ask me, “What should I be doing in terms of my saving for retirement and my employer plan?” I’m like, “Look, go get the free money.” If your employer is willing to put money in the kitty for you, go do that. Because I don’t know of anybody, I’m not going to contribute money to your retirement account.
Government’s not going to contribute money to your retirement account. If your employer is willing to do that, go get it. Go do that at least to that limitation, if not more.
By the way, they don’t have to contribute dollar‑to‑dollar to $19,000. All I’m saying is that if you contribute $19,000, if the employer contributes money also, then that’s totally fine if you go above that.
If you are 50 or older, which is the biggest proportion of our audience, the people that are in or nearing retirement. If you are 50 years or older, there’s an additional catch up contribution of $6,000 that you can contribute into one of these accounts. That can bring your total contribution to $25,000 and that’s pretty healthy.
I mean if you’re doing that for a bunch of years between age 50 and when you retire, that plus some compounded growth, that’s going to be a healthy account to look at for sure. You know that you will have an opportunity to really look at that.
And by the way, I’ve spent some time talking about this on other shows and we’re not going to go off too far today. Unless I’m drawn that way. I don’t know. We’ll see. But one of the biggest indicators of success in your retirement has to do with your savings rates.
It has less to do with the total amount of money that you make. When they do these surveys, we’re not really looking at the difference between if you make 100,000 and you make $300,000 a year, let’s say as a combined family. That doesn’t lead to success or not in retirement.
What leads to success is your savings rate. What percentage of that are you saving? Because when you do that, you affect two variables in the equation of retirement. First, if you increase your savings rate, then of course you’re going to have more money that’s going to be available to you, but the other end of the spectrum is that you get used to living on less.
What you need to survive in retirement shrinks because you’re used to living on a less amount. Even if it increases a little bit in retirement, you’re used to living on less and so bigger money that you’ve saved plus a lower need on it increases your chances of success in retirement.
I’m totally encouraging you to get up to that contribution of 25,000 and a 401(k) if you can. One quick wrinkle, you might be with an employer that offers both flavors of 401(k), the Roth and the traditional.
You cannot contribute across these accounts. You can’t double dip is basically what I’m saying. Anyway, $6,000 was a contribution, a catch‑up contribution, for age 50, last year. It’s exactly the same amount for this year.
We went up a little bit on the base level, and we stayed the same on the catch‑up, which brings us to $25,000 for this year. There’s also an IRA, which stands for Individual Retirement Account. That can be opened at any financial institution or a bank. You can do it with one of these robo‑advisors. You can do it with a financial advisor, like us.
Basically, it’s just an account that you open, you contribute to. It is important that the IRA, with very few exceptions like self‑employment or something like that…It’s not an employer‑sponsored plan like a 401(k). What does that mean? It means that you are the only one that can contribute to the plan, not your employer.
It also means that you’ve got to set this account up on your own or work with an advisor to do that. It also means that the contribution limits for an IRA and a Roth IRA are different. They also increased $500, similar to what a 401(k) did, but they only moved from $5,500 last year to $6,000 this year.
If you are 50 or older, there’s contribution catch‑up of $1,000, which is the same thing as it was in 2018. This will bring those people who are age 50 and older to a total of about $7,000 of possible contributions. First recommendation is definitely take advantage of the catch‑up contributions if you are the right age.
Not a lot of great things are happening as you get older. [laughs] But if you’re age 50, celebrate the fact that you can contribute more to your retirement account than people that are youngsters, that are less than 50. And do that. If you have a 401(k), and you can afford to sock away the extra $6,000. I’m telling you, it’s going to be a good idea to do so.
Same thing for your IRA if you are over age 50. Put the extra $1,000 dollars away until you eventually retire. As I’ve said to you, you’re going to reap double benefit. You’re going to have more saved, but you’re going to also get used to living on less. That will increase your chances for success in retirement.
On the second one is, definitely take advantage of your full, employer match for the 401(k). You got to know how this works, so you can take advantage, especially in closer retirement. As I said before, most of the time the employer is going to offer a matching program based on your salary. Let’s say your company matches up to three percent.
It means that if you take three percent of your salary and put it away into your 401(k) each pay period, your employer will match that three percent each time. This is one of the biggest benefits of putting money into 401(k) because, unlike an IRA that is non‑employer sponsored, this is a way to get that free money from your employer.
Some employers are even more generous. They can offer as much as five percent or higher. When you’re younger, you may think it’s too much to pull out of your salary, but as you get closer to retirement this is a chance to take advantage of your employer match.
You could’ve spent the majority of your working years, essentially, making a life for your family, paying for college ‑‑ all that fun stuff. Maybe if those bills went away, maybe if your home is a little better refinanced, and you don’t need as much to live on, and your salary is increased. Maybe the time has come for you to dip your toes back into the water of the employer match.
Actually, I’m a little underselling it. You should jump in with both feet. This is free money. Other things you can do is you can reduce or eliminate at least one major expense. If you can’t contribute more to your accounts due to bills and other necessities, maybe it’s time to think outside the box.
You can reduce or eliminate one major expense from your budget, but ‑‑ here’s the thing ‑‑ you’ve got to turn that into a retirement savings. You can’t continue with that habit or replace that spending somewhere else. I’ve heard all of the things about like cut out one coffee and a latte a day, and you can contribute a lot. That’s totally true.
If you’re drinking a four‑dollar drink, 25 days out of the month, that’s a 100 bucks. A 100 bucks a month steadily invested and saved can make a big change down the road, 10 years from now.
I don’t care what that expense is, we don’t have to go as silly as cutting out a coffee, but I know that in your life, somewhere, there’s something that is an unnecessary expense.
I’ll just share a quick story, one of the things we do to improve our practice is, I gather with other planning professionals, like a state planning attorney and financial adviser. Kind of learn from one another. We get taught some principles about running businesses and serving clients, and how to make that better.
We engaged in education around a concept called profit first, by a guy named Michael Marcowits, Mike Michalowicz, something like that. Anyway, I can look it up. The point was that, the book was really putting together principles that existed out in the world.
The richest man in Babylon is one of those, thinking about the way your grandma used to cash her check, and then she would put money into envelopes for each of the different expenses that they were going to have. That’s how they knew how to budget.
One of the things that was interesting was that he recommended taking a look at your margins, on a regular basis, and trying to improve them a little bit at a time.
One financial quarter at a time. Could you eke those numbers up, and how would you go about doing that.
You can do the same thing, even if you’re not a business owner. You can take a look, and there’s tons of budgeting software that’s out there. Some of it free, some of it with gorgeous user interface. You can take a look at your expenses.
By the way, many of these will just suck in you bank statements and they’ll look through what you have, and categorize it for you so you can see. This could be really eye‑opening, if you do this.
You can see where you’re spending all of your money. If you only spend money from a couple of different accounts, like a main checking account and maybe some credit cards, things like that. You’ll really get to understanding where all of this money is going.
If you did that with your budgeting, and you tried to increase your saving rate just a little bit a time, you don’t have to go to $100 a month, automatically.
If you went from 0 to 100 over the course of a year, and you stayed there, and then next year you went from 100 to $200 a month, and you slowly moved to that, you can get a real snowball effect of saving for retirement. I think that there’s a lot of value in paying attention to what’s around you, as opposed to not.
Other recommendations, so let’s go through this. If you’re keeping a list at home, I write these things in lists, too. The first one was take advantage of catch‑up contributions, the second one was using your employer match, the third one was reducing or eliminating one major expense.
The fourth one can sound a little controversial, but if you got time on your hands and there’s a time crunch before your retirement, consider a side job. As much as we don’t want to think about adding more work to our play, it may be necessary depending on where you’re at.
If you’re on one of those 42 percent slots of people that’s got $10,000 or less, we got to get off our horse and you got to get on this. If you can’t cut a major expense, maybe creating more dollars somewhere else.
It could have additional benefits, the fact that you’re not outspending [laughs] might mean that your savings rate increases because you’re working during that period.
If you got a little free time and you can pick up a side job, it’d be a good opportunity to make a little extra money. Here’s the thing, this extra money that you make shouldn’t be used for your regular expenses.
You have been getting by without this job, so you don’t need to look at this job as an opportunity to spend more. You’ve got to plow this in to your savings and your retirement.
The next one after that, or really the last one before we take a quick break, is to save the bonus or extra money. I don’t know what your working situation is, but if you’re in a scenario where you’re getting a little free money on a regular basis, you might get a bonus at the end of the year, or you might get a raise.
This might be an opportunity to put away more money for retirement. Like the side job, this is money that you wouldn’t regularly be using towards your everyday expenses.
Victor: It could be a good opportunity to put that money towards retirement. You’ve got to put in some discipline, and make sure that that money goes out of your hands before you have a chance to spend it.
That was on getting through retirement, getting in more savings. I’m going to give you some suggestions when we get back from this break, about how to have what you have in retirement work better for you. Stick with us, we’ll be right back on Make It Last.
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Victor: Everybody, welcome back to Make It Last. Today we’re talking about how to get yourself in a better position to retire. Especially, if you’re in those pre‑retirement years, where you’re looking at your balances and wondering, “Do you have enough?”
We spent the first segment thinking about ways to increase the retirement pie, before you end up retiring. If you’re already retired, you were bored by the last segment.
Because it goes like, “I’m not going to get another job, I don’t have a 401(k) any longer. Medina, get to something that helps me.”
Here we are. I hope that you got your cup of coffee refreshed, nugget for about 25 seconds. Let’s go, for you in retirement, but also the people who are still pre‑retirement. Let’s think about some ideas that we can use in order to help you in retirement.
You’ll feel a little bit more confident, promote your retirement account, and do these small goals that we can put in front of us in order to achieve a larger goal of getting healthier in retirement, in 2019.
Since we’re in a new year, and since I’ve been talking about me going to the gym and using a trainer, let’s continue with this fitness analogy. I want you to think about running a marathon for this year. My guess is that, if you were planning to run a marathon, most people would like to prepare prior to running the marathon.
You’re not going to sit on the couch and then just on the day, show up and run 26.1 miles, or whatever it is. We know that it’s a big ask, and we know that we need to prepare.
What if I told you that you had to run that marathon with a 50‑pound backpack strapped to your back? How would you feel about that?
Even if you were ready to prepare, I would suppose that most people would decline my offer, to get fit that way. One of the things I want you to think about is back pad is being essentially the set of excessive fees that you could be paying over the lifetime in some of your retirement accounts, like a 401(k).
While you are working, I think that the 401(k) is a very powerful way to save money for retirement, but the nature of a 401(k) tends to work like this. Employers don’t want to pay fees directly for running their 401(k), at least not on investment management. They might pay some third‑party administration fees just to make sure that the paperwork’s done and the filing is done.
As it is, it’s already something above and beyond what the employer has to do to even offer a retirement account. They want to reduce the costs associated with that. One of the ways that they can reduce the costs is by selecting a 401(k) investment platform, where they don’t have to pay anything because the cost of the investments themselves essentially pay for the fees of that.
I want that to sink in because there are no free lunches out there. They’re out to make money for themselves. If you imagine what it takes to run everything that’s related to your 401(k), the paperwork, the meetings, if you’ve got somebody bringing in bagels once a quarter, they’re making money in order to do that.
You are not paying them directly. Your employer is not paying them directly, so how are they getting paid? They’re getting paid through the cost of the investment. You can look this stuff up.
By the way, they’re obligated to disclose this but most people don’t dive into the numbers. When people come and visit with us, one of the things we do if they’ve got a 401(k), is ask them to get the plan information.
Many times what we figure out, is that the cost of their investments could exceed one percent or more per year in the operating expenses of the investment choices that are in there.
It’s often buried inside of it and while you’re saving and you’re accumulating money, it’s really hard to see those fees being that 50‑pound backpack that you’ve got to deal with. You’re regularly contributing, so the money value is going up and performance over the long haul tends to be positive.
If you invest for 20 or more years, historically those accounts have all gone up if you have just left the investment strategy alone. Assuming that you’ve got a good diversified strategy, the account values are going to go up.
Definitely they’re watching the account values rise, but they have no real sense of the boat anchor that is tied around the ankle of their retirement account as they watch these grow. It’s significant, and without getting into the numbers, fees that compound over a 20‑ or 30‑year period can add up enormously.
Actually, let’s get into the numbers. I do this in a talk that I give about fees generally, so I’ve got these numbers memorized. If you made seven percent a year on average for 10 years and the only difference was a one percent difference in the fees ‑‑ if all you did was change the cost of the fees that were associated with your investment ‑‑ your account value has a 20‑point swing.
Let that sink in. If you had an average fee, or what they say is the average for mutual funds which is 1.44 percent, you would keep 73 percent of your money. If you were only paying 0.33 percent, still paying something but not paying the average amount or even something super high, if you saved just 1 percent, you’d keep 93 percent of your money. A 20 percent swing.
It may be a good idea, if you want to run your marathon in retirement, to drop the 50‑pound backpack that will slow you down and make it difficult for you to finish. One of the things you could think about doing is rolling over your 401(k). There are pros and cons to doing that so let’s talk that through.
When you reach age 59 and a half, or you experience what they call a triggering event like a divorce or a separation of service or you file for retirement, you are often able to roll over your 401(k) to an IRA. This is even if you are still working and contributing to your 401(k).
You might have the option to do an in‑service roll over. This allows you to move your money out of a 401(k) to an IRA with no tax consequences and without any penalties on there. It also helps you keep your 401(k) open and contribute to it if you can do an in‑service rollover. Some of the benefits to rolling your money over to an IRA include reducing fees, and that can be significant.
What happens is that when you are contributing to your own 401(k), you are locked into the investment options that are there. Those options could be good. They could be bad, I’m telling you. Many times that we review accounts for other people, we’re discovering those investment options are often expensive.
It makes sense to get out of those to open up the world of things that you can invest in without regard for the fees. You can choose things that are less expensive. There are also other benefits to moving your money to an IRA. One of them could be consolidating all other old 401(k) accounts.
More and more today, people don’t stay in the same job. They may move from job to job, and they may have been contributing to a 401(k) in an old employer. Now, they have the opportunity to roll that over, but many people don’t. They leave it dormant there. They’re not thinking about it too much. The money’s safe. They get the statements. It’s fine.
If you need to adjust your investment strategy so that you can choose less expensive investments or have a more cohesive plan across everything that you’re doing, it may make a ton of sense to open up an IRA and then consolidate these accounts together so you can apply one strategy going forward.
If you can do that, first of all, not only will you find things that are less expensive, but you will probably get more investing options in different places that you can put your money. You can choose from different investment products. You can make sure that your account is properly diversified.
You may not have the option of doing that across your old 401(k)s because they may not offer enough options for you to be properly diversified. By the way, if you need to know what that is, you probably need to speak to an advisor about that, like us, to get it done. If a little bit’s too much, we can talk about diversification.
Too many people think that by owning an S&P ETF they’re diversified. No, that’s [laughs] not the way that it works. Congratulations, you’ve got a low fee investment on it. The ETF or the S&Ps probably going to be super low in its operating expenses, but let’s not call that diversification.
The other thing about the 401(k) is it gives you more flexibility for withdrawals. There are a few reasons why you may not want to roll over your 401(k). One of them could be that you plan to retire early.
If you want to retire before 59 and a half, there’s going to be a 10 percent early withdrawal penalty if you take money out of your 401(k) or your IRA for that matter. If you’re planning to retire super early, before age 60, moving the stuff into an IRA may not be as good strategy for you.
On the other side of the spectrum, if you plan to retire late, rolling over it into a 401(k) will not be a smart strategy for you. The nice thing about a 401(k) is if you’re still working at 70 and a half, you don’t have to take the required minimum distributions from your current employer’s 401(k) plan.
If you did an in‑service rollover and then still contributed to your 401(k) for your current employer, the part that’s in the IRA when you turn 70 and a half, you would have to take that out. That might not help you. You’d have more taxable income. You may not need it in retirement because you’re still working.
For that reason, it may not be beneficial to put it into an IRA. You may have wanted to leave that all in your current employer’s 401(k) because you could’ve delayed all of that until you eventually retire. That would have been great. That would’ve been really beneficial to you to have left it alone.
You have to think about your time horizon for retirement to try to figure out, “Are you going to leave it there or are you going to roll it over?” There’s one caveat to that, and I want to be clear about it. That rule about not having to take money out of a 401(k) is only as to your current 401(k) employer’s plan.
The other dormant plans that you left alone, when turn 70 and a half, you still have to take money from there. We’re only talking about your current employer’s 401(k) in terms of retiring late, and why it wouldn’t be a good strategy.
I would say that, in my experience, majority of people would benefit from rolling their money over into an IRA.
That the net benefit of reducing the fees, diversifying both their investment strategy, the different products that they have in there, you’re thinking about their retirement and lining ducks in a row, really speaks to why it would be beneficial to rolling it over.
I would say that from the perspective of somebody that’s still working, that’s probably the only kind of person that really shouldn’t be investigating rolling over. Everyone should do that.
Wrapping up, this New Year is upon us. What better time to start taking action? The better you prepare and the more you are able to save this year, the more your older self is going to thank you down the road.
I’ve left you today with two really strong benefits to increasing your retirement savings rate. You’ll have more there. You’ll be used to living on less. If you can see retirement in the near future, think about ways that you can promote your savings these next few years to leave you off better in retirement.
Maybe we can contribute to a 401(k) plan. Maybe we can pick up a side job. Maybe we can increase a little bit of savings rate, and not all at once, small goals.
If you want to get to $100 a month by the end of the year, start with, essentially, $8 a month. Then next month, make it $16, and after that 24. Soon enough, by the end of that year, you’ll end up in saving $96 per month. Bump it up to a 100, and pat yourself on the back.
Small goals and get a snowball effect off of it. If you’re already retired and you’re worried about running out of money, consider using the strategies I mentioned today, either eliminating a major expense.
Even if you can’t contribute more to retirement, because you already retired and you don’t have any more working, maybe we can shave a little bit off.
I had an opportunity to meet with some of my favorite clients yesterday. We started to do some budgeting work because even though they are retired, and they’ve been retired, and they’ve got a healthy amount in the account, when we started running the numbers, their spending rate really placed in jeopardy their retirement.
We started to need to think about cutting out some major expenses in order to get there. Ultimately, at the end of the day, I think retirement is something that, I believe, you do not want to go at it alone. These are supposed to be relaxing years of your life. The ones that you can enjoy.
You have really been working hard to get here. You may be tired. Your body maybe more frail. You may realize that you just don’t have it in you, to go at the rate that you’ve been going.
The point is, when you enter retirement, you should be thinking about this as a way to get to a better place. In order to enjoy these years and better prepare, I wholeheartedly believe that you’re going to greatly benefit by working with a specialist. In this case, a retirement specialist.
If it’s me, great. If it’s not me, find somebody that you think is as good as we are at what we do, but definitely get yourself in a position where you are on the right track for it.
If you’re ready to start the New Year off right and boost your savings and retirement accounts for 2019, or maybe you just need some guidance and help setting up good goals for retirement, whatever it is, I encourage you to give our office a call today and schedule a complimentary consultation.
You know that it’s something that you need to get done. If this is you, it’s keeping you up late at night. You got to call. If it’s calling us, it’s 609‑818‑0068 on call, and schedule a complimentary consultation to talk about what you’re going to be doing in retirement.
In this first meeting, we’re going to help answer questions and concerns that you’ve got. If any of the thoughts or ideas that came from today’s topic, we’d be happy to go over these with you, specifically, as to your case in this complimentary consultation.
Again, that number is 609‑818‑0068. We can help you get yourself in a great position for retirement. Whether we’re talking about boosting your retirement savings or getting yourself in a better position by cutting fees or diversifying your investment strategy, you’re going to need a plan, and you’re going to need to work with a specialist to do that.
Before we close for the show, we have a very few number of spots available for Tuesday’s workshop. We got a workshop talking about how to prepare your legal documents, your legal ducks in a row as you get older.
People are super concerned about this. They want to make sure that they’ve got everything setup the right way. If something were to happen to them, like they would get sick, they want to make sure that they don’t devastate their lives by the cost of long‑term care. We’re going to go over, in this workshop, how to put yourself in that better position.
We are at capacity and sold out for tomorrow’s seminar. No spots available for February 7th at 1:00 PM. Completely booked. For February 12th at 6:00 PM, we still have a few slots available. If you’re interested in attending, you have got to call and reserve your spot because we cannot accommodate walk‑ins.
Once these spots are filled, we can’t expand it. We have space in here for just about 40 people and that’s it. We’re going to hold that seminar, as I said, Tuesday, February 12th at 6:00 PM.
It’s going to be held at our educational center at our office. That’s at 230 West Delaware Avenue in Pennington. It’s right off of Route 31, which can get to either off a 295 or come down 202. Pretty simple to get here. Ride off on Maine Road.
You do have to reserve your spot for this educational workshop. I will to tell you that if you attend, one of the things that we do is give you an opportunity to get a copy of one of my free books.
You may want to do that just to get the free book. Light refreshments are going to be served. You’ll have the opportunity for that as well, cookies and coffee, which is good.
If you want to go to the workshop, give us a call 609‑818‑0068. Reserve your spot. Only a few spots available for Tuesday, February 12th. Otherwise, you will not hear from me again about these seminars because by the time we get to next week, they’ve both would have happened. We’ll be moving on to something new, fun, and exciting.
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Other than that, we will catch you next Wednesday on the next episode of Make It Last, where we help you keep your legal ducks in a row and your financial nest eggs secured. Catch you next time. Bye‑bye.
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