401K Crash Course

Thursday, April 20th


Transcript - Not for consumer use. Robot overlords only. Will not be accurate.

Where you are in your life right now are you thinking about retirement investing where does it fall on your priority list do you agree. And with almost half a generation acts. Who say I'm preferred not to think about or concern myself with retirement investing until closer to my retirement dates. Is then and dangerous attitude to have. It's seven figures on TV latter's thank you so much for joining us weekly podcast. Where we talk money how to be Smart with our money because we all want to retire comfortably Sunday. But if you agree with almost half a generation ax those born between 1965 in 1978. Saying they're not gonna worry about retiring. And in building up enough stag until it gets closer to that date. Is that a financially dangerous attitude to have. Transamerica center for retirement studies found that the median household retirement savings for a generation ax is 69000 dollars. Almost half are not actively building up their NASDAQ so where do you fall into all of this does that sound about right if you weights. Let's say until age 45 to start saving for retirement. You probably good and Dow up. With the NASDAQ gov retirement portfolio at the age of 65 a book out 285000. Dollars but if you start around the age of thirty. And save about 550 dollars per month about 7% average return you're looking at. Seven figures we like the sound of that right so let's get you closer to that seven figure market let's talk for a one K because. If you really think about it if there's a company match. It's free money. It's Kashima they're experts Colleen jacket Matty a senior retirement strategist and vanguard investment strategy group tallying leads a global team. That's responsible for conducting research and providing thought leadership and retirement topics she specializes in retirement planning spending in wealth management strategies I'm really looking forward to this podcast thank you so much Colleen Howe for sharing your analogy with us our rapid reader so let's sextet for a minute here almost happened generation axed plans to push off saving for retirement. Is it because is like expenses gets in the way or is it just. The insecurity. In intimidation of the lack of knowledge. I think people put paid off because of stepped up that so far away right at target on think of something tangible a minute twenty or thirty years away from mount. On another thing a lot of people struggling with debt write a lot of people are coming out school these days and I have a lot of debt officially went. I'm paying off debt and use my own with savings so now wouldn't they don't have any financial expert to be successful and finances right. If you can spend less and you learn I get tickets for people. Com if you get matching contributions from a 41 camp that employer provides try to beat me up to the match. Can't think about establishing emergency fund right that there's a way that in the future there could be unexpected expenses or you actually lose her job things like that have an emergency fund. And I left and it kind of like Al without debt with savings your debt and high interest rates by credit card data and that that you may want to pick without first. Okay I'm a student loans with lower interest rates you know you might wanna get it just at a minimum one and actually see the rat. If you are fortunate enough to have a company that matches your forum on tank that is I mean it. We can view it as free money. Absolutely hit it that they can basically out of 100% and to return on your money. On and then we'll talk about it how much people should be maybe if they think that you know every dollar that your employer gets on your behalf of Obama probably up to see for yourself. So it definitely is something that if you have the opportunity people a different take advantage. Any you do take advantage of it and it. It is almost in big your rating to C at the year and it. Your website is wonderful very it's very easy to navigate to see how much total contributions. Came in from your employer. And when you look at that number no it only has I didn't even have to do a darn thing for that exactly yeah. It's well worth it so what somebody does say I don't make enough money I don't make an I don't have enough to to even contribute. Right second the first thing haven't faced her many people it. You can't take a loan to finance retirement to try to rethink about how to think about your budget about how much are making him when you're spending on. I'm not really either or decision. But the true that there earlier people start feeding. The lift they needed they did a compound and so even if that something as simple as you know going out to dinner one last time per month or cutting a cup of coffee so. It doesn't have to be that you feel overwhelmed by the an entity to aid small changes in your daily life. Can really add up to a time. A gates is dead is a good point a lot of people think well what's another dollar with the dollar gonna do with a hundred dollars in and do a month. It does a lot. Absolutely especially for younger investors who were just starting out right they have time on their side. So they have a 203040 year time horizon and what they've been thinking about retirement ill every dollar they can put away especially one that will be matched by their employer. I'm not gonna go a long way helping them down the road. Now saying that starting off early great okay but what if we're not young anymore is zero point we were it's too late to start investing. It is never too late. Thought they'd never Chile by a deal with that but that I do I would say the leader you start Dwayne reed states. I don't think it's important to note that if it when your starting out on maybe only need to see it. To what 300 a month if you delay at 51020. Years from now you may need to save a thousand or more a month at the same balance at retirement. Our solicit read these generation actors who are saying let's push it off until more closer to the retirement date say year. And I don't know forty. Middle of the road here were 4045. Inch. How much on average do you feel is a good safe number to save or it is to skim off our budget and and put aside. I can mean a lot of it really depends on what they were what have they want a little retirement so am I speaking to picket Pacific twelve to 18%. But you're waking up at forty and you have nothing they've yet you might need a bump that up to saint twentieth 25% right so they really. It really depends on how do you need your retirement as well who do you see yourself just staying home and reading books and thank him guarded him maybe spending less than you do. Yes I or if nothing around the world on mount that you need to have seen so it is kind of hard question and the fact that you have to think about. How do you you're talking retirement some people on retirement I have I could easily that I kept my salary because I I'd prefer to do things around my home I never had a chance to kill. And the people that extra comedic go to get a world yeah very different amounts those two individuals would need safe. Right so if you're starting out in an older wrote I would say. You have forty it'll take about OK you may have relative picture at 65 because what I envision myself doing which you might say OK then maybe I need. 500000 dollars in retirement and then have a pension or Social Security or anti dot. And kind of budget backcourt of a pet at twenty years to get there you know how much when he'd see each year from now until then. And you know pensions at one point it probably was more for our parents and our grandparents where. It where is something they discounted on pensions and now. We're not we're not as lucky I mean there's only a few of us and even the next generation not as lucky we have to do this on our own. And so let's say we were not counting on a pension is fierce some for some calculation it weakened. We can figure out in her mind with how much money we really do need to. Is seven figures that ultimate number that it's gonna be and say a good safe retirement number or how we calculate that. Can I guess you could take that I just makes for either use a million dollars as good as any calculation but think if someone had a million dollars paper retirement. That means they could say they could spend roughly forty to 50000 dollar per year and retirement. Okay that you cut back going to be a 500000. You know you can do this and then like half of that. So on the Buckley is speaking I would say people could could budget it. Spending Puerto 5% of what they have a retirement. Because they do that that kind of give them a good gauge okay that's how much relative to what I'm making now or how much relative to come to think I want abandoned that and they can. So would ever use save every chairman spent 45%. In newly. That's the end if you bait and toward a 5%. I'm and we would say we have a dynamic and much of a cause and a budget saying if the market without. You could spend a little bit more at the market breakdown you would cut back your your spending a little bit okay. And the following and that dynamic spending strategy. We would take four to 5% per year. Okay I'm preacher drop retirement. Obviously an annual thing so if for some reason I must start out and then market is doing extremely poorly pepper and as a retirement it would become a nation be revisiting each year. And also if the market doing great. You know people could actually be spending a little bit more isolated an annual thing but that's just a good target for people to try to come detoured to get an idea how much because we can be expected patent. We're on with our expert Colleen and Jack and Addie who is a senior retirement strategist in vanguard investment strategy group. So now let's talk about the 401K we're investing in it. You convinced this this is something that we should it take advantage of giving this the cities the details about the farm on K when you can you will. Take out from that one can you touch that money could be due prematurely nine you're gonna get penalized straight. Right to generally speaking if you withdraw money from my tax deferred accounts for once and you have to pay income taxes on the amount you are trawl. And then it can undertaking I'm gonna have to you'll have to pay an additional 10% federal tax pennies penalty. So if people aren't a decade and a half and went take money out of 401K. On they will take 10% penalty with two exceptions really come down if your employer allows loan. So if for some reason during the course of your employment he would take out alone. You couldn't drum player plan allows that taken alone and in pay yourself back or partial withdrawal you can also take out on. Money from the plan but those two things I'm mark depend on the world anti employer puts in place. Okay there are people. Who I know who desperate times call for desperate measures and they have withdrawn from their farming tag. And desperately frantically trying to put that money back in do you have a window or is that case by case with employer by employer. I can be based on the rules and play and I'll play you pay it back but China actually put you want schedule and much the way you are contributing. That your contributions will go towards paying off alone. No one think for younger investors com especially if they don't even have enough fun to think about establishing an emergency fund themselves yeah. All the contributions that they were put in a Roth IRA. Can always be taken out at any time. On free up tax or penalty though. They could speed up that as a way to save for retirement and just in case something happened in an emergency. They goalie Peter contribution without tax and penalty free. Okay let's talk a damn glad you brought up IRAs and Roth IRAs so first to clarify 401K money that's pretext money. Cracked OK you get taxed on it when you're gonna with drive when your of retirement age. Correct now let's move on over to Russ diaries should you first have both is it. It is that Smart to do both the diary and the 401K or is it either or. Prompts so really you can contribute to those. Com for attacked respect Haitian purposes so that if you were to put money into it and it came tax bracket today you will be in retirement. I'm just not as big of a difference but when you do one or the other right opposite the you don't for an existing employer in the ever lower expenses than you may have a match ten. But there is attacked first vacation purposes for having money in Iraq by area as well one thing for me to take the emergency fund out. Another thing is really don't know what tax rate you'll be in in the future Turkey had some money that would be tax deferred and some money that would be tax free upon withdrawal. It gives you more flexibility in the future when it and he does money out. Listed as a team Roth IRA. And just IRA. So. Regular IRA which helps quite a traditional IRA FM until 41 tank of contributions are made before tax. And then on the earnings are and contributions are tax be taken money out and you're wondering contact rate. And you shouldn't get into one bucket okay can you touchdown money. Before year of retirement age. Now it the same or all OK so higher rate very similar to four on cap rock sire re different beast you being. Tax on the money goes and. So Roth IRA you actually. Yes he tax money before them okay you pay tax money today. Yeah your IRA and then when you take money out there are no taxes on over draw and you get out whenever. To be taken out it it would be it'd take out your contribution that any time but it it will be on accident and lead if you take out the door. Earnings on his contributions part of and I have to. Okay see this is YE a lot of people I don't feel like. There involved in much as they should because he did kind of confusing intimidating. It can be very intimidating yet. But if you doubled up like don't always try to go to your 41 tank if you have expressed Davies booking agent in Iraq irate that can also be emergency on my test there are some rolled up on the can help people. I'm especially generators just kind of get started again and get that seat he's going and then. In May be a good opportunity when people are actually ready to think about retiring maybe even five years at a time to work with the plan are. Go to some sort of financial planner that Alabama that they how much time we really expected and I'm which account checked and found there at it was spending order which helps people can minimize contact that they teach your retirement felt. Some more extensive planning maybe to acquire within a few years of retirement. Okay now winced. When it is time to retire that evening gets even more confusing because now there's limitations as to how much money you can withdraw from social security and in is there are limitations to how much you can draw from far one can iron out. No it's not okay. But don't you said yea you might want to go to a professional. So with some financial planners are none op but with sun. It's very frustrating. Bit they're working for themselves and they're now working for the true benefit of the client because you know it's no secret that some financial planners get kickbacks. Yes I mean I think that is important to kind of do a little bit guilty or background any financial provided that you were like yeah. Like I kept thinking as an and it really ask questions as far as it'd have been looking toward they have the ranger product you're looking for a do they have media financial planning like a one time at light speed and his cape flats seats. Yet despite well if some people may be interested in actually having ongoing invite an asset management. And that's why you Lionel you know how are they charging you it did ask flat fee based on active and a management. Or is it based on every transaction that they are doing on your behalf. I'm a big part of it is. I'm malady Qaeda and the people speak very come up front thank you how are you getting paid my challenge of the a conversation that people should be more than comfortable that in our vibrant. Because you are running out right after MI don't feel insecure about asking that question you deserve to know. Absolutely and they should be transparent about it. Yes felt that way you know that you're and a good trusting and situation if you've got comfortable with the after the thickening and. Our let's bake a little bit. To sperling case because I want to make sure that everybody knows the importance of having a far on K in how that is if your company does contribute our match rather. How that is free money that you're just letting go by I mean it is sitting there on the table for you to grab. But there are people who still feel. I mean you touched on it when we first started they feel like they're so buried in life expenses. In dat that they just can't. Do it what do you tell those people honey advise your clients when it comes of that. I pajamas you know it say. Take advantage of the match almost no matter what. A 100% free money goes along lake is aiming towards retirement though. It has anyway. You could cut back on other things in your life to at least get up to the match I China and after that right after the match. Then go considering paying down debt so hot that eating a high credit card debt. I'm or other debt that have a very high interest rate interest rates that you'd think would be hired him when you can make by even those additional funds should I start paying those things now. I think it is possible to plant that's happening is that you have to almost think twice that much if you delay starting and you get up the match. With every month with that three year gas you're gonna have said play catch up. Know how activate supposed to be it in your far Lang can I do we have to check it every year and make sure they were making at least the 10%. Our follow the market I guess I should say. I mean people really it depends on their investment knowledge their interest and a pair content right so many 41 K plan we'll have a single file an option. That is based on their time until they retire at its call it a target date funds got. And that would be a broad diversified fund and it will there actuality shall actually change each year and polite towards us or become more conservative as they approach retirement. So it's somewhat comfortable having a single fund. Where your asset allocations of the united haven't stopped them bombs is determined by. The time until they retire. And that's up from an it would need to be add worry about checking every year right in the fun of all and I think that counts for them. On the other other people who like it I would like to actually pick exactly which stock funds and response on the lambasted him. And those people have to be a little more active kind of respect us they decide to endorse the deepest and stock 30% on investor. In every year addiction illegal reviewed their portfolio to check on the former KC is the portfolio within maybe a 5% that was extremely. 75 stocks to 25 bombs there. I'm 55 stocks. Right so if it is 7% target goes about 5% more or in. Is 5% left and a back up and they might wanna consider rebalancing. So kind of keeping within a normal range around there are target asset allocation to. If you don't trust fund who itself rebalancing in the media contact allocation through time. It's something that. Those little questions that's what you guys do right you could buy including myself got. Yet can't explain. The old apartment he'll explain to people who are in a plan. I'm what options are in their plan. Even though right now if you do have a 401K plan it's looking really nice to the markets been so strong but. In evidently W correction it'll go down there the possibility of a Black Swan event is always there do not panic. Absolutely do not panic and that and the good thing about kind of tied actually it did make sure you are rebalancing. That if your if your portfolio is ten or 20% over weighted equity based on the last couple of Beers. If you rebalance your portfolio you'll reduced the chance of having as big of a lost quite a lot and you're not comfortable. And it will be good this is money your appetites for a long time so. You know it it just happens the market will go down. Right it should be expected right at the Z times but it goes down and those are times where you kind of justified or maybe not a look at your statement that for us. Selling general honest. You know trust that you have a plan and what you're vested in it for a reason and that eventually. It would contributions on the market turnaround and go work out. That's the tough part is not to get emotional. When I currently have asked. And OK so now let's do the RO why you dedicated your time to this podcast and we appreciate it over to me give you your return on investment Colleen one big brawl esteem that we can take away from today. I can't just say when it comes to preparing for retirement the most important thing you do is get started. What you started to take it from their one dollar at a time. You are a wealth of knowledge. Colleen who is a senior retirement strategist. In vanguard investment strategy group thank you so much sank it was great to be here next week they shocking statistics behind the life insurance coverage to you have the right coverage if at all. We cash she would be experts in the in Rebecca from Allstate next week and seven figures on Twitter at seven figures tied.