Retirement Planning 101: When to Start and What to Know

Jess Quindlen: [00:00:00] Welcome back to the Sound Cents podcast. I'm Jessica Quindlen. Today we are navigating the retirement landscape. I have with us Stephanie Hayes Levi, our Community Outreach Specialist. Hello, Stephanie.

Stephanie Hayes Levi: Hello.

Jess Quindlen: And Katie Griffin, our Manager of Community Education. Hello, Katie.

Katie Griffin: Hello.

Jess Quindlen: All right, let's dive in. What does retirement mean to today and how has that changed over the years?

Katie Griffin: Retirement looks different today than it has in the past, and I'm sure it will continue to change even more as the years go by. So previously, you know, retirement was an event you reach age at 65, you retire from your job, often the same one that you worked at your entire career, and then you begin your leisure time.

But now, retirement for many of us looks more like a transition than just like an overnight change. I know a lot of folks that leave their career and then maybe work part-time somewhere else that might be less stress and less pressure, but provide some of that supplemental income.

Many [00:01:00] folks today are even delaying their retirement, not wrapping up at that typical age often due to either financial or personal reasons. I also think that maybe previously retirement was viewed as a time to stop doing things and just relax.

But nowadays, more retirees are looking at these years as a chance to learn, to travel, to explore, to grow, so it looks a little different. I think it's just going to keep changing.

Jess Quindlen: Yes. I love that. When should someone really start thinking about retirement planning? Is it ever too late or too early?

Stephanie Hayes Levi: Never too late. I always say the best time to start thinking about retirement is early as possible. Ideally, when you first get that first job, and even small contributions in your twenties can grow significantly over time, thanks to compounding interests. It's kind of like magic, I like to say. There is that saying the best time to plant a tree was 20 years ago. The second-best time is today, and that really applies here.

So, if you didn't start early, that doesn't mean it's too [00:02:00] late. Life happens. Maybe we go into debt, we start a family, other unexpected expenses pop up. But what matters is that you start when you can. So, whether you're 25, whether you're 55, being intentional, making a plan, and taking even small, consistent steps can still move you towards a more secure retirement.

Jess Quindlen: What are some of the biggest misconceptions people have about saving for retirement?

Katie Griffin: I think the biggest misconception that folks have is that they have plenty of time to save. Going off of what Steph was just talking about, I speak from experience that when I got my first job when I was younger, saving for retirement was literally the last thing on my mind. That was not in any way relevant to what I was thinking.

But the sooner that you do get started, then you can take advantage of that compound interest. As Stephanie mentioned, the sooner you can do that, you'll put your future self in an even better position when you get to [00:03:00] those retirement years.

Another misconception is that social security will be enough to live on. Social security only replaces a fraction of your pre-retirement income. So having other sources like a retirement account, other savings, other investments, for some of us it might look like that part-time job in our retirement years.

Having those other avenues of income will be necessary if you want to try to maintain the lifestyle that you want in those retirement years.

Jess Quindlen: That's very helpful. So how can someone figure out how much they actually need to retire comfortably?

Stephanie Hayes Levi: So that really starts with defining what “comfortable” means for you.

For some, it's traveling the world. For others, it's staying close to home and just not stressing about those daily, monthly, weekly bills that pop up. But a common guideline that we talk about in a lot of our classes is that 80% rule. You'll need about 70-80% of your pre-retirement [00:04:00] income to maintain your lifestyle.

But that number can shift depending on your goals. Healthcare is a big one, or whether your house is paid off or you're still working on paying that down. One of the best ways to get clarity is to estimate your expected expenses in retirement, housing, food, healthcare, travel and compare that to any income sources that you'll have, like social security that Katie mentioned, or any other retirement accounts.

And if you're not sure where to start, Ent has a great retirement calculator on our website, but you can certainly Google and see Fidelity, Vanguard, Smart Asset. They also have calculators as well. You can just play around with the numbers a bit. One thing that I really love that we teach is a retirement simulation where we get people really thinking about retirement and what they want it to look like for them.

It can be eye-opening to say, okay, if I want to live my life like this, maybe I need to start thinking about a number in generality of what [00:05:00] I want to be spending my retirement income on.

Jess Quindlen: What are the most common retirement savings vehicles like 401ks or IRAs, and how do they work and how do they differ from each other?

Katie Griffin: The most common retirement savings vehicles are 401k, a traditional IRA, and a Roth IRA. So y'all, buckle up. We're going to dive into each of 'em.

Your 401k is going to be an employer-sponsored account, while a traditional IRA and a Roth IRA are typically self-funded accounts that you go out and open on your own. So, let's go into how each of them separately work.

A traditional IRA is what we call pre-tax, meaning that the contributions are not taxed initially, but later when you go to withdrawal funds from that account. A traditional IRA is going to have what's called a required minimum distribution or an RMD where you must start [00:06:00] withdrawing from the account once you reach age 73.

The IRS has not gotten their cut just yet. And so they have that limit of okay, you get to this age and you have to start pulling money out because then that's when they're collecting the taxes.

Now with a Roth IRA, this is after tax, meaning that you pay taxes at the time that you contribute to the accounts. And then, after taxes are taken out, what's left goes into the IRA for your deposit contribution. And because the taxes are collected upfront, there's not a required minimum distribution. They got their taxes, so then the funds are in the accounts. Then, when you do withdrawal later, those are tax-free withdrawals.

Both of those, traditional IRA and Roth IRA, they do have annual contribution limits. It changes over time, but right now, the contribution limit is $7,000 if you're under age 50. And if you're over 50, it's $8,000. So it had that little extra to [00:07:00] catch up.

Now 401k as mentioned, this is going to be through your employer. Similar to a traditional IRA, with a 401k your contributions are pre-tax, meaning withdrawals in retirement will be taxed as income. The contribution limit is higher though.

For a 401k right now, the contribution limit is $23,000 if you're under 50 and it's $30,500 if you're over 50. Those limits are just what your personal contributions are, so if your employer matches, that doesn't count towards that contribution limit. Similar to traditional IRA, there is that required minimum distribution starting at age, 73.

And what's really great about the 401k is that employer match. It's not guaranteed, but the majority of employers do offer some type of a match. And what that means is, if they say, “Hey, if you contribute 6% of your [00:08:00] pay every paycheck, then we will put that same dollar amount into your 401k.” That is totally free money, so take advantage of it. And if your job changes, you can roll that 401k over into your 401k with your new employer.

Jess Quindlen: All right. So, talk to me a little bit more about employer match and how savings build over time and compound interest. Can we just dive a little bit deeper in that? Because there’s a lot of things happening there.

Stephanie Hayes Levi: Sure. I think Katie said it already, that matching contribution from your employer is essentially free money. And as we're out in the community and we're talking to young people, we're like, “take the free money.”

To make the most of it, the key is at least contributing enough to get that full match. If you don't, you're leaving money on the table, and it's one of the easiest ways to grow your retirement savings without doing anything extra. You're just showing up for work, right? So, let's break it down.

Let's say you make $50,000 a year and your employer offers a 3% [00:09:00] match, that's $1,500 a year you'd get just for contributing the amount yourself. And so over time, with compound interest, that can grow into a big chunk of your retirement nest egg.

And I know we've said what compound interest is. We've said that a few times on the podcast already, but I'll explain a little bit more because I did say it's magic. And it's not quite, it is math, but it looks like magic. So, compound interest is basically earning interest on your interest and it's one of the most powerful tools in saving for retirement.

Here's how it works. Let's say you put $1,000 into a retirement account and earn 5% interest each year. After the first year, you've earned $50, so now you have $1,050, right? The next year you earn 5%, not just on that original $1,000, but on the full $1,050, so you earn a little bit more. That doesn't seem like a lot now,[00:10:00] but year over year that compounds. And then the next thing you know, you're sitting on a really nice retirement nest egg.

Jess Quindlen: Plus, when you think about it, you said that $1,000 and then 5% you have the $1,050 and then the next year will go on the $1,050. But in theory you also probably put in another $1,000 we'll say, so you're actually $2,050.

So, it's like you are compounding it. It's compounding. It’s just a lot of compounding.

Stephanie Hayes Levi: And why I say it's magic because when you're doing the simple math of it, you're like, “Okay, cool, that doesn't seem that great.” But you put that away, you come back to it in, five, 10 years, you're like, “Wow, this is really accelerating.” And it's really exciting. And then it becomes magic.

Jess Quindlen: Yes. So how can debt impact your ability to retire and what should be prioritized first? Saving for retirement, paying off debt? What do we do?

Katie Griffin: That is a really great question. Debt can really have an impact on your ability to save for retirement, but we can try to work towards some balance between the two.

If we have a lot of debt that we're tackling during those savings years, it can reduce the amount we're able to [00:11:00] contribute to our retirement accounts. And then if that debt either bleeds into or exists during our retirement years, we may have to continue working that part-time job or something else in order to keep paying that debt down.

So, what to prioritize, right? That's a big question for a lot of folks. Do you prioritize that savings piece or the paying off debt piece? In an ideal world, we're able to balance paying debt and still have enough to contribute to our 401k to at least hit that employer match that Steph mentioned so that we're not leaving that free money on the table.

That's not always possible for everybody. If, for example, you have a lot of high-interest debt — typically credit cards — can really add up. The interest builds on itself month after month, and before you know it, the balance keeps growing. So, if we have a lot of that high interest debt, [00:12:00] it can be helpful to put more of an emphasis on paying that off because the amount of interest you're paying on credit card debt likely is more harmful than the positive interest you would be earning on the retirement account. And maybe while paying that off, if you're able to put even $50 aside each month. A little bit is going to be better than nothing.

Now, if the debt you have is lower interest debt, of course it still needs to be paid, but if it's a low interest, that then it doesn't need to be addressed with the same urgency as high interest debt.

It needs to be addressed. We don't want to ignore our debt, we want to pay it, and pay it on time, of course. But it's not quite as urgent as that high-interest rate debt. So, if it's more low interest, then we can find where that balance between paying that, making sure we're getting a head on it so that we're not letting that interest build up, [00:13:00] but then also contributing to our savings as well.

So ultimately, at the end of the day, it just depends on the type of debt that we have and those interest rates that we're paying as to what we need to put more of an emphasis on. It can be helpful to meet with one of our financial coaches that we have here at Ent.

Totally free for members and non-members, and they can assist with coming up with that debt repayment plan so that everything feels a little more manageable, a little less scary. Then you can say I want to pay off this debt, and then also be able to put some towards savings too. They can really help us look at the whole picture and come up with a plan.

Jess Quindlen: That's great. What's one thing that most people wish they'd done differently when it comes to retirement?

Stephanie Hayes Levi: One of the biggest things people say they wish they've done differently is start earlier.

I absolutely fall into that category. I always tell the story about how I worked at a coffee shop from Seattle. I'm sure you can guess it. It's across the nation. And I started [00:14:00] when I was in college and they offered this wonderful program to save for retirement. They offered a company match.

Do you think I took advantage of that as a young person? No, but looking back now, decades later, I like, man, I'd be sitting pretty for retirement. So yes, we all want to start earlier. But again, let's emphasize that even if we didn't start earlier, starting today is still going to give you a leg up on retirement.

Another common regret is not increasing contributions as your income grows. When you get that raise, right, we always talk about in our budgeting classes, pay yourself first. This is another way you can pay yourself first. Make sure you're checking those contributions — maybe it's year over year — and adding that extra percentage contribution.

Some retirement plans allow you to set it up automatically so you can take the thinking out of it if you are a money avoidant person like myself. Or you can manually make sure that you're checking up on it [00:15:00] every quarter, once a year, whatever that cadence looks like for you.

Katie Griffin: I love that automatic percent increase. You never miss it. December 31st every year, it just automatically increases 1% and I don't have to think about it.

Stephanie Hayes Levi: Set it and forget it. So finally, many people say they wish they'd just been more intentional and tracking where their money is going.

Those standard budgeting tools that we give to all of our members and everyone out there in the community and understanding your retirement plan options. If you are working somewhere right now and they offer a retirement plan, look into it. I know at Ent we have webinars for our retirement services. Maybe your company has the same, so I would check into that.

Just don't assume that social security is going to be enough. Make a plan, map out how you want your future to look and reverse engineer that.

Jess Quindlen: Great. Well, that brings us to the end of our show, Stephanie, Katie, thanks so much for being here. It was wonderful having you.

Stephanie Hayes Levi: Thank you.

Katie Griffin: Thank you.

Jess Quindlen: And now for our new segment brought to you by Dave Logan, the iconic voice of the Denver Broncos.

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Jess Quindlen: Thank you for listening to Sound Cents 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 month. Same time, same place.