How To Take Charge Of Your Retirement
When Kim Brown was growing up in Bismarck, N.D., her father told her that financial security is “not about how much you make, it’s about how much you save.”
That conservative and sage advice applies to Brown’s daily work life more than it does for most people, because she’s president of JNBA Financial Advisors based in Bloomington.
Brown and other financial professionals advise their clients from their 20s through their 60s to save and invest for retirement, particularly in the 21st century, when many companies no longer offer defined-benefit plans with set retirement payments.
With the shift to 401(k) plans in many American workplaces, employees now bear the risk in the stock market and they need to be smart about spending and investing.
Now it’s even more critical for people to get engaged in financial planning as early as possible, Brown stresses, regardless of household income.
“There is so much emotion around money that it’s unbelievable,” Brown says, noting that people sometimes seek happiness through excessive spending on material goods.
She recalls a couple that was making over $4 million a year, but they were spending more than they could afford. Brown recalls she had a “tough conversation” with the couple, made them look at their spending habits and advised them to cut up some of their credit cards.
Twin Cities Business interviewed Brown and other leaders in the financial services and wealth management fields to learn more about steps people should take in their early and midlife work years to prepare for retirement.
Building an investment habit
Early in their careers, people need to learn how to live within their means and control their debt, says Peg Webb, a senior vice president with the Wealth Enhancement Group, whose main office is in Plymouth.
“Invest in your company plan when you get your first job,” Webb advises. People in their 20s need to develop a habit of saving and investing, she says, so they can benefit from building their assets over a long period.
Salaries tend to grow as people progress through their 30s, Webb adds, but they should be cautious about taking on too much debt. She stresses the difference between “efficient debt,” such as a home mortgage in which interest is tax-deductible, and “inefficient debt,” such as credit cards. If people can reduce the amount of discretionary credit card purchases, then they can deploy a bigger chunk of their paychecks for retirement investments, she says.
In their 30s, some people struggle with deciding how much to allocate for paying off their student loans, how much to set aside for their children’s college educations and how much to contribute toward their retirements. Financial advisers recommend taking a balanced approach, but they urge parents not to focus so much on their children’s educations that they underfund their own retirements.
“You really get behind the eight ball if you don’t start saving early,” says Carol Schleif, regional chief investment officer for Abbot Downing, a Wells Fargo business in Minneapolis.
“Biologically, we are wired to care more about now than what happens next year,” says Schleif, who explains it’s important for people in their 30s to literally write down their core values and decide what they want out of life. If they complete that exercise and develop financial plans, Schleif says it will be easier for them to recognize they need to sacrifice in the short term so they can fund their retirement.
“You have to have a good sense of your values, because you are not naturally going to be compelled to care about retirement,” Schleif says. If people have a clear idea of their life’s goals and what it will take to pay for their lifestyle, it will give them greater willpower to resist buying consumer goods they don’t really need, such as those that are constantly featured in advertising.
Financial advisers recommend that people at this age invest as much as they can in 401(k) plans, contribute to traditional and Roth IRAs, and establish college funds for their children.
While some people feel their family expenses are so high that they can’t afford to contribute to a 401(k) plan, Schleif urges workers to allocate some money so they can take advantage of company matches. If workers bypass the 401(k) plans, they’re leaving “free money on the table” from employers, Schleif says.
More saving, investing and insurance
When people reach 40, Brown says they tend to reflect more on their lives and often reach out to financial advisers for help crafting strong retirement plans.
“If you can get a plan in place at age 40, you still have plenty of time [to catch up] if you’re not on track” to building a solid retirement portfolio, Brown says.
To free up enough money for investments, people need to take a harder look at “where your money is going and save more,” says Bill Benjamin, CEO of US Bancorp Investments. Beyond leveraging workplace matches for 401(k) plans in their 40s, Benjamin says that people need to make sure they have adequate life insurance and other policies to protect family members.
“What if you walk out the door and are hit by a bus? How do you want your family taken care of if that occurs? Think about those [unexpected] things that happen in life,” Benjamin says.
For this stage of life, Webb uses a general guideline of saving at least 10 percent of monthly income. She also advises clients to make sure they have wills.
And continue to beware of your reasons for spending. People often have an inclination to be “spenders” or “savers,” Schleif says. But financial advisers contend that everybody should set a budget, because it helps even natural “savers” be more disciplined about spending because they understand where their money is going.
In the United States, with the constant marketing of goods through social media, television, magazines and other platforms, people readily succumb to “retail therapy” to make themselves feel good.
“I tend to like to shop,” Schleif says. “But I make sure I do all of my saving first.” To establish a healthy view of money, she recommends people check out sharesavespend.com. The mission of the share, save and spend approach is to “help youth and adults achieve financial sanity by developing and maintaining healthy money habits that link to their values,” says founder Nathan Dungan.
Dungan and others help people see that choosing not to spend money on another sweater or expensive coffee will allow them to save toward something that means more to them, such as a family vacation or future home in a warmer climate.
Many people are in their prime earning years in their 50s, and Benjamin says it’s a good time to make catch-up contributions to IRAs and 401(k) plans.
For example, for the 2014 tax year, individuals could make $5,500 in 401(k) and $1,000 in IRA catch-up contributions.
Webb sees a lot of people in their 50s who fall into the “sandwich generation,” because they are taking care of their children and their own aging parents. It’s especially important for people in their 50s to have adequate short-term and long-term disability insurance, so they have enough resources to cover their living expenses, Webb says.
Many people in their 50s have children in college, and they are torn between their children’s financial needs today and their own retirement expenses in the coming decades. “Our society sort of presumes that we will automatically pay 100 percent of our children’s college education at a four-year institution,” Schleif says.
She advises parents to take a look at what’s “right for each individual family,” instead of feeling guilty about not being able to pay more for their children’s education.
When she was growing up, Schleif says it was common for young people to take financial responsibility for their lives at age 18. “I was adamant with my kids when they reached driving age that they have jobs,” she recalls, adding that it’s better when children and young adults don’t have every financial need met by their parents.
Brown advises her clients in their 50s to look at the benefit of buying long-term care insurance. While long-term care coverage can cost several thousand dollars a year, Webb adds that she discusses it with many of her clients to safeguard their retirement funds if they become ill.
Working and living longer
As a baby boomer himself, Benjamin says there is a substantial portion of his generation that isn’t prepared for retirement. The last of the baby boomers are turning 50 in 2014, and research Benjamin has seen shows the average 50-year-old has about $43,700 saved for retirement.
“About 35 percent of Americans rely 100 percent on Social Security for their retirement,” Benjamin says.
Those figures reveal that many Americans will be forced to keep working beyond the traditional retirement age of 65.
That’s the case for two reasons. One: Many people simply don’t have enough money invested to carry them through retirement. Two: People are living longer than their parents and grandparents did, so they need more money to fund their retirements.
In its RealSteps Retirement guide, US Bank says, “Men who now reach age 65 live on average until 82, women live until 85, and every couple has a 50 percent chance of at least one spouse living to 90.”
Consequently, financial advisers urge clients to prepare for two to three decades of retirement.
But retirement can take a number of forms. It “doesn’t have to be all or nothing,” says Schleif, adding that it would be rather repetitive to mainly play golf for 35 years.
She notes that many professionals enjoy extending the length of their careers, especially if they can do it on a part-time basis. Lots of people leave corporate America and work as consultants, and that choice allows them to pull in a good income and have flexibility in their schedules.
The number of Americans who will be 55 and older by 2030 is expected to be 112 million. A website called encore.org highlights people pursuing “encore” careers that are considered second acts for the greater good.
Encore careers are defined by the Encore organization as “jobs that combine personal meaning, continued income and social impact—in the second half of life.” One example of an encore career would be a chief financial officer retiring from a corporate job and applying her expertise to a nonprofit organization that works with disadvantaged youth or women trying to start small businesses.
Schleif is hopeful that older workers won’t face age discrimination if they want or need to stay in the workforce. “The core issue isn’t about the title or age, it’s about the skill set,” she says, stressing the importance of people staying “current and relevant” in their fields.
Balancing risk as retirement looms
Webb recommends that her clients think about dividing their retirement assets into three buckets based on when they’ll need to spend them.
Short-term money is held in bucket No. 1; it’s used in the first five years of retirement. This bucket contains primarily cash and money market accounts.
Bucket No. 2 is for mid-term money that will be used five to 15 years from retirement. “This is placed in a more balanced mix of cash, stocks and fixed income, and is perhaps weighted more toward the fixed-income side,” Webb says.
Finally, bucket No. 3 is for long-term money that won’t be used until more than 15 years from retirement. Webb and her colleagues generally recommend that this money is held in equities, which have higher risks and returns.
By taking this three-pronged approach, Webb says, clients can strike a balance between “appeasing the very real fears of running out of money in retirement and risking their principal in the markets.”
While planning and investing for retirement is complicated, financial experts say that people should start early in their lives to learn what it will take to produce a comfortable retirement.
“Money does not define people. It does not tell people who you are,” Brown says. However, she adds, “to retire well, you need to have a plan. You need to have a vision of what your retirement is going to look like, what it can look like and what it will take to get there.”