How to Prepare for Retirement

[00:00:00] Jessica Quindlen: Welcome back to the Sound Cents Podcast. I'm Jessica Quindlen. Today we're discussing all things retirement. I have with me today Bree Shellito, our Senior Manager of Community Impact.

Hello, Bree.

Bree Shellito: Hello.

Jessica Quindlen: And Laura Straub, our Community Educator. Hi, Laura.

Laura Straub: Hey!

Jessica Quindlen: So let's just dive right in. Bree, where do we start with retirement savings? I think so many of us think it’s this overwhelming, daunting task until you start it. I know I personally started on the later side, so let's just help each other. How do we begin?

Bree Shellito: Yeah, Jessica, it's all in the question. That's, that's it. We start, right?

Jessica Quindlen: Yes!

Bree Shellito: We get started. We get started today because the reality is that the sooner you start, the more that you're going to save. Compound interest is your friend. Let me just explain that a little bit and Jessica, I'm going to roll you back.

You're going to be 25. You ready? 25 years old.

Jessica Quindlen: Great. I love this.

Bree Shellito: So if you're starting when you're 25, let's say you start with $1,000 and you actually save $100 per month. Mm-hmm. And in [00:01:00] both of these instances, let's just say it's a 5% return for both of us. I start at 35, I start with $1,000. I save that $100 a month exactly the same.

Over 35 years later, it would gain $70,900. I will have made it to $29,659.

Jessica Quindlen: Wow.

Bree Shellito: My initial, what I put away was $42,000. What you put away was $30,000. But over time, you earned $41,241 more dollars in interest alone because of compound interest. Just an additional 10 years. We both saved for that amount of time, 25 years for me, 35 years for you, but 10 years makes all the difference. Your interest alone was more than what I had.

Jessica Quindlen: Fantastic. All right, so start now. Doesn't matter your age. 22. 32, 42. Get started.

Bree Shellito: Get started today. Like just really saving as soon as you can is the best. Also, just kind of deciding what your lifestyle's going to look like. That's really key. Today, a lot of folks will think - and I think that Covid sort of helped us a little bit, the [00:02:00] pandemic, put some things in perspective about - Netflix is not as interesting as we thought. Some of those things we're not going to be able to spend all the time thinking about what we're going to do.

So what are you going to be doing? Keeping in mind what your social situation's going to be like. We get a lot of social interactions from work. So when you're no longer working, what does your lifestyle look like?

Think about that. How much money that you're going to need. So really, what is your lifestyle going to be? Many experts suggest that you're saving 70% of your pre-retirement annual income to have in retirement. So they think you'll spend about 70% of what you're spending today. Actually when they look at it with the Bureau of Labor and Statistics, it's closer to 60%.

That is not necessarily keeping up with some of the inflation that we've seen in recent years. So just really determining what that lifestyle's going to be for you. Is it going to be more lavish than how you live today? Or is it going to be scaled back a bit? Is it going to be the same type of vehicles that you're driving, the same type of house that you're living in, the same sort of hobbies?

What does that look like? Determine what that is and get started.[00:03:00]

Jessica Quindlen: Absolutely. So what are some steps that we can, you know, take to, check on how we're meeting these goals? I'll bounce this over to you, Laura. You know, I've started, I'm doing my thing. How do I check in because retirement may be far away?

What do I do?

Laura Straub: Yeah, absolutely. The very first thing that you want to do is just get organized with yourself. I know. So just checking to see what are all your retirement accounts that are out there, especially for folks who may have switched positions, have 401ks at other places, or things like that.

Just knowing where is your money, and what accounts do you have in all of that. And then, meeting with your HR folks to make sure that you're taking advantage of all of the offerings that your company does have. Whether you're contributing enough to get that match that a company might be offering, and then checking in with financial institutions, see what they have for you that may not be offered at your company because there are lots of different types of retirement accounts out there. So leveraging all of those, really taking [00:04:00] advantage of the different types of retirement accounts that are out there.

Bree Shellito: Can I add really quick, Laura? Because what you were saying about the employer is so huge and one of the things that we hear so frequently is that folks don't start in their retirement because they don't know how long they're going to be at that company.

We hear that all the time, even if there's a match from the company. The reality is you can transfer those over and you typically can transfer that over to a new employer. So if you're holding off on getting started, because you don't know how long you'll be at that employer, - averages are getting less and less on how frequently folks stay with a company for long periods of time - that's okay.

You can put those into a completely different portfolio from that employer. Sometimes you can keep them with that same portfolio. The fees may just change because your employer's no longer helping out with that. Or you typically can roll it right into your new employer sponsored plan.

Jessica Quindlen: Oh, fantastic. So I'm going to throw a bit of a softball question at you. What about folks who are self-employed, run their own business? What kind of options do they have to get started if they don't have an HR rep to go and speak with?

Laura Straub: No, that's a super great [00:05:00] question. There are different retirement accounts out there that financial institutions can help with.

So thinking of Roth IRAs or things like that, where you can do it as self-employed or even just as supplementing what your company is offering too, if you are employed by a company that offers a 401K or 401B, etc. Like I said, there's lots of them out there. But yeah, if you're self-employed, there are some retirement accounts that you can take advantage of, so reaching out to your financial institution that you bank with can be a great start to step into that. And then researching other types of institutions that do retirement accounts and looking to see how it is that you're able to get an account with them too.

Bree Shellito: Yeah. And checking in with some professionals as well.

Mm-hmm. A lot of this is involved with taxes. Mm-hmm. So, checking in with your tax professional, what makes the most sense? A lot of times folks are looking for it to be labeled retirement, but you can still use other products that are not retirement specific for your retirement savings if that's what's best for you.

So, checking in with a financial advisor is also great. Check into your options. Like [00:06:00] Laura said, there's savings. But just standard investments as well can be a good strategy for some retirement savings without some of the tax implications. So checking with a tax professional, especially if you're self-employed would be highly recommended.

Jessica Quindlen: Right. Fantastic. And then just one more question, and I'll lob this over to you, Bree. Can you just tell me the difference between 401K and a Roth? That sort of pre-tax, post-tax, just what's going on there?

Bree Shellito: Yeah, so we have traditional, and then we have Roth that thank you can be a 401K and then some other things.

So traditional on that side, what's happening is the taxes are not being pulled out of it when you put it in. Compound interest, like we talked about before, can be huge. That's great. So traditional is actually taxing you on that later.

Jessica Quindlen: Okay.

Bree Shellito: Roth, that's the taxes are coming out today. As we put the funds in, you're not going to gain compound interest on that. However, depending on what your tax bracket is now, what tax brackets will do later is going to be the difference. So a lot of times folks that are younger may consider really kind of putting more towards Roth if they think that later in life [00:07:00] they'll be at a higher earning and a higher tax bracket.

That being said, who is to predict what taxes will do around the time of individuals retiring. If you're retiring today, it's much more predictable than it will be for those of us who are looking at retiring in 20, 30 years.

So Roth is counting on the tax bracket that you're in today. That's what you're being taxed on as the money goes in. Whereas traditional, you'll be taxed on what that is later.

Jessica Quindlen: Can you contribute to both at the same time?

Bree Shellito: Absolutely. Typically, you can. Depending on your plan, you'll want to check into that.

And also something that you want to look into is just if you are getting that employer match, where is that going? A lot of times that's going directly to traditional, so if you are contributing your percentage towards Roth, you'll already be contributing to both.

Jessica Quindlen: Oh, fantastic. Good to know. Any other tips to help when it comes to setting yourself up for retirement?

Laura Straub: Yeah, just with the rule of 72. Kind of bringing that back to that compound interest that Bree was talking about before is just being able to figure out when is my money going to double? It can be really [00:08:00] helpful to know things like how much you can start saving now and what that's going to look like in five years or et cetera.

So essentially that's taking 72 like the number, and you're dividing it by the interest that you're getting in that account. So, let's say 5%, for instance, you would do 72 divided by five, and whatever that comes out to, that's going to be your number that your money's going to double in that many years. So it just is a quick little easy way to kind of check to see like, okay, with this amount of interest, I am going to double my money here in 10 years, five years, et cetera, whatever that math comes out to.

 So that way you can kind of check in with yourself too. Am I saving enough now? Do I need to start being a little bit more aggressive with my savings, et cetera? And then too, just like a totally different route here, just eliminating your high interest debt will really help you, when it comes to having money for the fun stuff when we retire, instead of it going to paying off credit cards or [00:09:00] other higher interest debts that you may have.

That way again, you can have it so you can have gifts for a family or go on that vacation that you've always wanted to in retirement without having to worry about some of your debts that you have going on now.

Jessica Quindlen: So just to clarify, this rule of 72, we take 72 divided by our interest rate, and that's how many years it'll take to double our money.

Laura Straub: Mm-hmm.

Jessica Quindlen: Correct? And then we have this 70% rule, which is according to data, most of us will live at 70% of our income. Right. Okay. I just want to clarify those too. Okay, awesome.

Bree Shellito: And like you're saying, Jessica, that's 70%, sometimes that means that those folks have eliminated that debt. So that's where those numbers get skewed. If you're still having to pay a mortgage payment, if you're still having to pay a car loan, you're still having to pay some of those things you're going to need higher.

Jessica Quindlen: No, for sure. Well, and also, you know, 70% of what I make now, hopefully will be different than 70% of what I'm making in a certain amount of years when I retire that I won't share. I guess going back to the 70%, should we constantly [00:10:00] be changing that number?

Bree Shellito: Well, that depends on your lifestyle. So in some of our other sessions, we talk about something called lifestyle creep and what that is as you make more money, it's this hamster wheel. It's this hideous hamster wheel. As we get raises, we spend more money, more money, more problems, right?

Right. So, we're on this wheel and we keep getting raises. We keep spending more of that money. If that continues throughout your life, the 70% will remain the same at your higher income because of your lifestyle. So if you want to live lavishly in retirement, which is perfectly acceptable, just know that you're going to need the funds to do so.

And then also just these life predictions. How long do you intend to live? What is that going to need to - it's just the reality, right? Right. That’s where we're at. So we want to look at averages, we want to look at your health. Keeping in mind health can actually really be a larger expense in retirement.

It's an unfortunate fact. Right? But that's where we're at.

Jessica Quindlen: All right. Anything else either of you'd like to add around retirement?

Bree Shellito: Yeah, I'd love to say that as we're getting in the habit of savings, we're [00:11:00] saving for retirement, let's also be sure that we have savings for other things such as emergencies.

Because where things get tricky is if you're doing a really great job setting aside money for the future and setting aside time for retirement. If an emergency happens, you don't want to pull from that. And so getting started with an emergency savings, having savings for the fun things that you're doing, and really trying, if you're putting money into that retirement savings, to not pull money back out, especially if it's a tax product, because those tax implications are going to get tough.

Jessica Quindlen: All right, so real quick, what is our goal for an emergency fund?

Bree Shellito: That's a great question. For an emergency fund experts will recommend three to six months of savings. That seems like a lot. Try to get at least one month. Get started with one month, save up to two months. It's really in the event of a job loss or income loss.

So making sure we can cover that and not pull from our retirement savings.

Jessica Quindlen: Right? So this is truly one to two month of our spending, of our monthly spending.

Bree Shellito: That's the best goal to get started. Absolutely.

Jessica Quindlen: Terrific. Anything else?

Bree Shellito: At any income level, just looking at where you can [00:12:00] save, looking at where you can put things aside is just fantastic and we know that you could do it.

Jessica Quindlen: Fantastic. That brings us to the end of our show. Bree, Laura, thanks so much for being here. It was great to have you.

Laura Straub: Of course.

Jessica Quindlen: Thank you for listening to Sound Cents Podcast from Ent Credit Union. Be sure to follow our podcast as well as rate and review us. I'm Jessica Quindlen. I will see you next week. Same time, same place.