EP 12: What is Retirement Planning?

Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.

This episode is an introduction to Retirement Planning. Glenn and Christina explore answers to the age old questions of how much do you need to save for retirement?, how much should you contribute to your retirement accounts?, and also what type of retirement savings accounts should you have? Next week we will deep dive into some FAQs of retirement planning.

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Intro music: 

Coffee & Lullabies R&B mix by J.Lang (c) copyright 2020 Licensed under a Creative Commons Attribution Noncommercial  (3.0) license. http://dig.ccmixter.org/files/djlang59/62099 Ft: CrazyLittleAsian aka SHA

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Transcript

Speaker 1: 0:10

Hello. Hello and welcome to everyday finance and economics with the sicklers the podcast we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money. We're your hosts, Glenn and Christina Sigler.

Speaker 2: 0:26

So Christina, what's going on in the economy this week,

Speaker 1: 0:30

Uh, to be honest at where do we begin? Um, there's a lot, there's a lot going on, uh, with vaccination rates and such and mandates and a lot of things going on, but the biggest economic story this week, and for the amount of time it takes for this bill to pass, um, is the infrastructure bill that is currently working its way through the Senate. It's a very, very ambitious$1 trillion, 2,702 page bill that is looking to essentially give America facelift as well as lift up everything beneath the surface, which is actually Bailey what it's about. Uh, we're talking not only improvements to roads and bridges, but also energy grids, water pipes, rail res broadband, anything that like helps people run things is what we're talking about. Uh, given the age of a lot of our systems, especially the water pipes. There's some that are like still led and a hundred years old, which is very concerning because water is essential. Um, this is needed very badly and although it's not looking like we're going to get the climate policy that was originally included, but as in, is also very badly needed in this particular bill Senate Democrats are working on a separate bill to supplement. This one is going to be the largest government project in the public works system since 2009. And our economic term of the week is retirement. Retirement is the withdrawal from one's position or occupation from one's active working life. A person may also send me a retire by reducing work hours or workload. Many people choose to retire when they're old or incapable of doing their job. All right, dad, I think it's time we get into this week's topic. What are we talking about today? We're

Speaker 2: 2:17

Talking about retirement, right? Retirement

Speaker 1: 2:22

And retirement planning. Right? So retirement planning. Um, what is that and why should I care about it? Okay.

Speaker 2: 2:30

First let's talk about retirement, right? You mentioned it. It's often a mythical time period where people think that they're, everything will be rosy. They'll have a vacation every day and they won't have a Karen world that that's not always true for everybody. Um, re retirement as time when, uh, as you, as you alluded to earlier, uh, people have ceased cease their working life either through their own will or oftentimes it's forced upon them, uh, because of injury infirmity or, you know, because their jobs just left them. Um, and so we plan for retirement for after our work life is over when we're, we're going to use our savings and our investments to fund the last stages of our life. And hopefully we've saved enough that that can be enjoyable. And so yes, you have a lot of time to, to, uh, plan for that a lot of time to work on that. Because for, for most people, the, the, the age that is the time that you have considered for a work-life is from the ages of 18 to 67. Now you take time out for school, if you're going to college or grad school. Yeah. But that's a 40 plus year period, almost 50 year period where people can work. And some people work beyond 67. And, and so you have time to save and invest to build a nest egg. Uh, so that the final years, whenever you decide to not work or not work full time anymore, that you can do so comfortably. Why is replant retirement planning difficult for people? It is hard to think and plan that far in advance.

Speaker 1: 4:33

It's so hard to think about the nature and take it serious

Speaker 2: 4:38

Because you always say, I got some time, right? I can do this later. I can do this later more time. But time is one of the things you want to work for you, right? The early you start with retirement planning and actually executing your retirement plan, the better off you will be, but people have a hard time thinking about, um, the things they need to do and putting away that money for, uh, for a goal that's so far off. And it, a lot of people can't think about what they're trying to do next week, let them know 40, 50 years from now. Right.

Speaker 1: 5:16

And also considering the consequences of not doing it right now. Right, right. That's hard to, it's hard to do that. It's hard

Speaker 2: 5:24

For people to think, uh, think about, um, there's, there's a lot of unknowns. That's very challenging. Uh, getting ready for retirement requires a consistent approach to say for most people, a consistent approach to savings and investing and avoiding, um, costs, you know, all along the way so that your retirement fund people call a nest date is, um, in good shape when you need it.

Speaker 1: 5:55

Yeah, man. All right. So this seems like a lot, where should we, where should we start?

Speaker 2: 6:01

So we're going to focus on three things today because learning about retirement planning can be a lifelong effort for people that specialize in that there are tons of books and other materials that talk about, you know, every aspect of it, or even just focus on one or two aspects of it because, uh, you know, mastering in one or two aspects of it can help people out, but we'll focus on three things, how much you should save, what type of accounts you should have and then what type of assets should you have.

Speaker 1: 6:42

Okay. So let's start with that first one. How much should you save?

Speaker 2: 6:46

So financial professional suggests that, you know, number one, starting as early as possible, um, you know, if you could start at 21 or start at 18 or start, you know what, whenever you could start, start, right? You should consider trying to save at least 15% of your pre-tax income, uh, toward retirement to make sure that you're able to live a comfortable lifestyle. And, and that 15% in many places is, you know, sometimes you'll have to do it by yourself, you know, 15% all by yourself. And that's hard to do, but some companies offer you a match where they say, Hey, you put down$50, we'll put down$50. And so when you have situations like that, where they'll match a certain amount of the money you put away, that makes it easier. Um, but even if you can't make 15%, but what you can start with to start with, you know, start with three, and then every time you get a raise, take a little bit of that raise and put it in with your retirement

Speaker 1: 8:02

Or like a bonus. Yeah, yeah, yeah. Cause that's essentially like free money. If you want to

Speaker 3: 8:08

Use the, if they have the match,

Speaker 2: 8:11

The matches is what I consider, you know, instant return on your investment. Right. I put down a hundred, they give me a hundred, a double my money right away. But if I, if you don't put anything down, you can't get the match. Right, right, right. Right. The longer you wait to start saving, when you finally do start saving, you may have to contribute more than 15% in order to get to a comfortable in, in order to get to pound interests. Right. So time is on your side. Um, you've got, you know, if you're in your twenties, you got a 40 year horizon, but the difference between a 40 year horizon and a 30 year horizon competing major. Yeah.

Speaker 1: 8:55

And I'll tell like the present,

Speaker 2: 8:57

But a lot of people wait until they're in a forties or fifties and that's when you've got to, you know, be actually a lot more aggressive.

Speaker 1: 9:06

Right. Okay. So what type of retirement accounts should I have and how much can I contribute to those?

Speaker 2: 9:15

Okay. And there's several types of retirement accounts. Uh, and in this year, uh, there, uh, you can re uh, contribute up to 19,500. Pre-tax in a 401k. If you're under 50, if you're over 50, you can add another 6,500 interesting. Okay. Okay. So that's one type of account. If your, if your job doesn't offer a 401k, um, you can, uh, start an IRA. Um, and, uh, there are, um, uh, Roth IRAs and traditional IRAs, but the limit for that is$6,000. Wait, really? Yup. Yep.

Speaker 1: 10:08

I tried to start a Roth IRA, dad. Um, we talked about, we talked about that. I was very upset. I can't contribute anything to it because I do not have an employer, but you can still, I should still be able to yes. But I wanted it to be, it's fine. But

Speaker 3: 10:26

Only 6,000. I was going to put it anyway. Right.

Speaker 2: 10:29

But that, look that again, that's tax advantage money at the, you know, the, the, the benefits of 401ks and IRAs, uh, the pre-tax ones are that you don't pay any money, putting a penny tax on the money that you put in. And

Speaker 3: 10:46

Then there's the Roth,

Speaker 2: 10:50

The Roth IRAs and the Roth 401ks. Yeah. You pay the taxes on the money going in, and then they grow tax-free after that. And so

Speaker 4: 11:04

For, for most,

Speaker 2: 11:05

For most people starting out, it's actually better to do the Roth versions of 401ks and IRAs because your tax burden is lower than it. Then we think it will be later on when you're making lots more money. Right. So it's better to pay a tax rate of 15% then, you know, later on, um, pay a tax rate of 35, 35, 37 0.9 or 39.6. Right.

Speaker 1: 11:37

But even if you do stay in the same tax bracket, 15% of a hundred is less than 15% of a hundred thousand.

Speaker 2: 11:44

Well, it, the percent on, on a, on a tax rate basis. So, you know, when you take out money, so you take it out. If you take out a a hundred thousand, your, your tax burden, won't be 15%. It'll be, if you take out a hundred thousand dollars in a year, I was just saying

Speaker 1: 12:03

For the, I understand. But I was saying for the example, I feel like it's better to be taxed on less money than, yeah. But

Speaker 2: 12:13

That is not, that is not true because we look at the tape. So if I'm paying 15% on a, a hundred dollars, if I take out the a hundred dollars today, next week, I can take out a hundred dollars or I'm still paying 15%. So it doesn't matter when I take it out, I'm always paying 15 cents on a doubt. That's fine. Because that's how percents works. I forgot how percents work. Okay. Yeah. Learn from me. Percents worked the same.

Speaker 5: 12:46

Yes. Met. It just works. I am. It's time for me to go back to school. It's not for me to go back to school.

Speaker 2: 12:57

You know, the, the bigger, the bigger thing for folks, um, you know, is that when you take it out, you'll probably have a lot more money and you'll need to take out a lot more money. So you, you know, if you're, if you've got a traditional IRA or 401k, you're going to pay the higher rate of tax on the money that you take out, because you've got, instead of putting in, you know, paying tax on$50,000, which is your earnings. When you put the money in, you're now taking out what we hope is several hundred thousand dollars, right. And paying tax and paying tax on that. So you rather pay the little tasks on the front end than the big tax on the back end. Right. Okay. So, uh, we talked about 401ks and IRAs. There's also solo 401ks, but those are more for specialty, but for most people, specialty, uh, situations. But, um, for most people, the IRA, the 401k are, are going to be the, the vehicles that you look at the most, and you're going to have to make a choice between the Roth and the traditional version of each one of those, another tax saving vehicle is a health savings account. Um, and that's another type of tax, a tax advantage account. Um, and, and in order to open one of those types of accounts, you need to be an HSA eligible, high deductible health plan. And so this is a way to put away money for your health care costs. And you can use the money now, or you can use the money in the future. And so if, you know, people use that to pay for their future health care costs, but again, the money is not taxed. And so you, well, when you retire, guess what, you're going to still have to go to the doctor. So this is still a good way to say simply more than you needed to before, right. Because they're, you know, there's no expiration date on that. Uh, the limits for contributing to health savings accounts, uh, for this year for individuals 3,600 for family, it's 7,200. And if you're no matter

Speaker 1: 15:09

How big the family is, wait a minute, wait a minute. So if you've got a family of like five or six, it's still 7,200, oh, they may have to rethink that one.

Speaker 2: 15:19

Say the tax code was perfect now. Yeah.

Speaker 5: 15:23

Just U S government, if you're listening,

Speaker 2: 15:26

It was perfect in the end. And, you know, there are certain points where it's, uh, the jumps in, uh, benefits and or exposure. Um, aren't optimal. And, but that's, that's why people go to tax planners and you read up on this stuff so that, you know, you know, uh, you know, with, with the changes in your life, how to plan for those things, what's going to work for you right now, again, uh, you know, as you get older, there is additional money that you can put in for your health savings account. There's like, like there's a, catch-up for RA for 401ks and IRAs. There's a, catch-up for HSHS as well. There's an additional thousand dollars that you can put in if you're over 55.

Speaker 1: 16:11

So what types of assets should I hold in my investments?

Speaker 2: 16:16

So that's becoming an increasingly more, um, interesting question,

Speaker 1: 16:22

Right? Especially because investments have become more diverse,

Speaker 2: 16:25

Uh, traditional, uh, retirement accounts or our stock and bond heavy, uh, bonds paid, paid a significant amount more, uh, than they do now. Um, and so, you know, investment advisors would say, Hey, pick a good mix of, uh, stocks or stock mutual funds from for most people and bond or bond mutual funds. But, but now the, the field's a little bit different. And so you've got just a wider range of investment options, um, that include alternative investments. Um, but you, you know, again, my instruction on that is, or guidance on that is know what you're investing in and, you know, no, no, the risk and return of, um, whatever, if you decide that you want to go put, have Bitcoin in an ETF in your, uh, in your retirement portfolio can be lucrative. Yeah. It could be lucrative, but it could also be risky, make sure you understand what, what you're doing. Um, okay. Um, but you know, again, for, for everybody, the versification is a great tool for investment, um, to, to diversify a way some of the risks that you have and participate in the longer term trends of growth in the markets that you're participating in and that's, you know, uh, equities and, and debt markets. Um, so again, what's the right mix. If you're really young, you can take a little more risk. And so you have more time to make it up. You you'll get higher, you should get higher returns. And so, you know, people are in their twenties and thirties can have, uh, portfolios that are 80%, 90%. Yeah. I know some people that are a hundred percent equities, um, or other risky or assets, um, in their portfolios. And as you, um, as you age and get other responsibilities, you want to lessen that risk. So then you will bring in some other things that don't have the volatility, um, and that's traditionally where bonds come in, but, uh, bonds or non-equity assets that just don't move as, as much, um, you know, with, with the, the vagaries of whichever market that they have. And, and so that's where you try to gradually taper away some of your, uh, your equity exposure or volatility exposure, but I'm going to say this because people are, are living longer, even people that are entering retirement should still have, you know, uh, some significant portion of their, of their portfolio in some sort of, uh, higher growth, higher potential assets like equities, because, you know, people, you know, uh, unlike the sixties where the average life expense expectancy was like 65, 66, 67. Well, now the average life expectancy for some people are 80 and 90. And so if you retire at 60, 65 or 67, you could live another 20, 30 years. Right. And so you, you need that growth from equities to help you, uh, keep your portfolio going that long. All right. That's our show. Thank you so much for listening and be sure to join us next time when we continue our topic on retirement planning.

Speaker 1: 20:14

Yes. And if you have any questions for us, you can email us@efespodcastsatgmail.com and follow us on Instagram and Facebook at S podcast. Thank you so much for listening. Take care, buddy.