July 2024
Here are some key takeaways from their conversation:
• Over 55% of Americans feel behind in retirement planning.
• It is crucial to create a retirement plan custom to your lifestyle instead of taking generic advice from people who may have different standards than you.
• 65 is generally seen as the “right” time to retire. However, Stacey and Chris urge listeners to consider their financial readiness, health and life aspirations rather than defaulting to the traditional retirement age.
• Many people target age 65 for retirement to take advantage of Medicare, as it is cheaper than private insurance. But, the savings are around $5,000 to $6,000 annually, which may not make delaying retirement worth it for people who are financially prepared.
• Consider diversifying savings between personal savings, retirement accounts and home equity to avoid over-reliance on one source.
• In order to avoid over-sacrificing in the present, Stacey suggests thinking about other ways to fund your retirement, like selling a property, considering the inheritance you may receive from parents/guardians, etc.
Watch previous episodes here:
Ep. 95 Does Dollar Cost Averaging Work When Investing?
Ep. 94 Behind the Scenes: How Morton Manages Investment Portfolios
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Chief Operating Officer and Chief Marketing Officer Stacey McKinnon. Stacey, thank you for joining us.
Happy to be here.
We were talking a little bit about what it takes to save towards retirement. Took me back to those old ING commercials where people were walking around with that number above their head.
I remember that. Yeah.
In this world of saving towards retirement, it's so individual-based and you can't just give blanket advice, but it's one of the common pitfalls that a lot of clients and prospects run into because they talk to their friends and they say, what have you done? Okay, I'm going to do that same thing too. And you better hope you've got a friend that has a very similar lifestyle and situation that you have.
Yeah. And I just don't think it's one size fits all. I read a really interesting statistic recently that said that more than 55% of Americans feel like they're behind on retirement planning. So you have a like, 1 in 2 chance that your friend has good advice or not good advice, but there's just too many like statistics and data points out there that you can fall into, and it's not actually customized to you, personalized to you, or a reflection of your life and values.
It's extremely important to save towards retirement. There's that whole current me versus future me aspect. But if 55% of people don't feel like they're set up for retirement. I mean, what's their situation? Do they have a pension? Do they have a business? I mean, there's a lot that can go into this.
Part of the challenge is that maybe the 55% of people are actually seeking financial advice. Would they need to make a customized plan for themselves?
Yeah, I know a lot of people I see get anchored to this having to retire
at age 65 standpoint, and sometimes that works out. Maybe you're healthy enough to continue working. Maybe a life event causes you to not. But what I found more often, why they're anchored to that at age, has to do more around health care.
Because they want access to medical insurance at a, you know, a lower price. So they're waiting till Medicare to kick in to save for retirement.
But the actual math on that is that, you know, it's not going to cost you about half of what private insurance cost you at age 63 and 64. Right. So you're really only saving like maybe 5 or $6000 a year. Is that worth it to anchor to 65 as your retirement age, or do you want to try something new?
Do you want to retire from a 30-40 year career at age 60 and then work part-time? There's so many options out there, and it's worth exploring versus just taking like the generic number that we're all accustomed to.
And you have got clients that have sort of done something like this, you know, worked throughout their lives. And then, you know, to a certain point, maybe in their 50s, early 60s, they said, you know what? We want life to be a little bit different. Maybe own a piece of land, and have some Airbnbs just so that way they can get away from maybe the emails and the hectic part of working for a living, but enjoy life a little bit in a different way.
Well, I think something has changed in society in general. It used to be that you just put your head down, you worked really hard and then you wait until your retirement day to enjoy your life. But what we saw, and I think we're just more aware of this, is sometimes when you turn 60 or 70, health issues come and you worked all that time just to enjoy your life, and then maybe you can't enjoy your life.
So we're seeing this change happen. And you mentioned current me versus future me where people are saying, I don't want to sacrifice current me in hopes that I'll be healthy enough to enjoy a future me. I want actually to have a balance of both, to enjoy my life today and plan for tomorrow.
So we're seeing people take more vacations. There's more trips to Europe happening. My friends tell me that kids in even elementary school are comparing who's been to Europe and who hasn't, which just seems crazy to me. But I think that's a societal change. And so you're not having people put their head down with this, like, goal of retirement sometime in the future.
You're having a lot more life enjoyment happen today, which I think is actually going to change the way retirement looks, because there's not going to be that desperation to turn the switch off to start a new chapter. Instead, you might see people slowly move into retirement, do work that's fulfilling to them,stay intellectually stimulated. Maybe not go from like, spouses not being together at all to then all of a sudden being together, which actually is one of the most challenging parts of retirement for a lot of people, is just all of a sudden spending every day with their spouse. And while they still love each other, it's just a lot of time together. And so I think retirement, is going to look different and it's going to change dramatically, even as, different generations get to that age.
I had two clients back in the day that both retired from Disney around the same time in about three months, and they came to me and they said I had no idea we were going to have to spend this much time with each other.
That happens often. And that is a common comment.
Yeah. And so one of the challenges that we have with like, what's your number? Or how much do you need to save towards retirement in order to feel financially secure? Like that's trying to speak to the masses. But everybody's situation is so different.
So I used to work with a lot of senior level executives at Disney and even Northrop Grumman, and they had very nice pensions.
And so when they read these articles that you need to save ten times your income by the time you're retired, they always felt financially insecure, like they didn't do enough. Yeah. But when you factored in their pension and Social Security, that was going to replace the income that they had worked so long for. So retirement looked very good for them.
Yes. But it also caused them to save too much money into a retirement
account and not have tax diversification.
Yes, I think that's one of the biggest challenges that people face, is if too much of your money is tied up in your home or tied up in your retirement account, you actually don't have everything you need. When that day comes, I think it's better to have a balance between a personal savings, a retirement savings, and a home.
The downside is that if you don't max out your retirement savings, maybe you don't get some tax benefits, which are real. I think that's true. But having the freedom to have access to your money easier without having to pay taxes on every dollar you take out, there's a benefit to that. There's a psychological benefit in retirement. So we always suggest to our clients to have a balance of different account types.
Yeah, I love the tax diversification of different types of buckets that you can access that 'cause, you know, higher or lower tax, you know, ramifications. How would you recommend somebody save? Like what percentage do you think is right?
Well, the generic percentage that's online is 15%, generally speaking. But it depends on what's happening in your life. So do you own a business and does that business have equity value where that business actually could be your retirement plan? Can you maximize your 401 K? Do you have Roth options? How are you thinking about maybe investment real estate?
And are you willing to invest in a property that you'd be willing to sell with capital gains and pay taxes in retirement, and use those proceeds to fund your retirement? There's a lot of different ways that you can do this. It doesn't just have to be how much money do you take out of your paycheck every month and put it into retirement?
But even just thinking about the value system as well. People always talk about retirement planning, but sometimes they leave out maybe inheritance planning and how either as a person who's planning for retirement. Do you want to just fund retirement or do you want to fund retirement plus an inheritance to your kids? In addition, if you're planning for retirement, are you getting an inheritance?
And should that be incorporated into your retirement plan? So you have all of these factors, all of these different dynamics happening? I think the right answer is you should talk to a financial advisor that helps you put it all together, because just doing the generic 15%, it might actually restrict you from investing into that current me we talked about earlier.
Yeah. And that component too, I mean, mindset has a lot to do with this. So I filmed an episode with Priscilla recently where we talked about the mindset around money. Do you have an abundance mindset towards money or a scarcity mindset towards money? There's some people that are stuck on that scarcity mindset and they sacrifice the life experiences today, just so that way their kids and family members can inherit something down the road and that can cause some frustration as well. I've seen in certain instances where kids are kind of upset or disappointed that their parents didn't enjoy life a little bit more.
I think it's actually part of this trend that's changing, where even adult children don't want to see their parents sacrifice and not go and enjoy their life. They want to see their parents take those trips that they didn't think that they were going to take, or enjoy time spent with them and have big family vacations. So it's becoming, I think, much more common for different generations.
And I think it's important that we experience life together. There's a saying we talk about here, which is do you want to make deposits in your memory bank or your bank account? And I think it's becoming much more common for even adult children to say, I don't need a huge inheritance. I'd rather make deposits into that memory bank.
And I think that's where you brought up, you know, working with a good financial advisor, a good financial advisor is going to help you have conversations around what you want this money to do for you today and for your family or friends or charities in the future. So that way you can be a little bit more open about it.
I mean, talking about money in many families is very taboo. Yeah, we don't talk about it. And I'm not saying that people should ignore working and saving and just plan on getting inheritance, but ignoring a potential inheritance is a big pitfall between being able to enjoy life today, and being able to use those dollars for more of those memory bank experiences.
Yeah, I've even had clients who, they talked to their adult children about inheritance and basically say, this is what we think you potentially we're going to get. And so we want you to take that into consideration as you're planning for your life. I mean, there's many clients of ours who want to see their adult children, like, take those family trips.
They want to see them live a little easier. They want to make sure they have additional support for child care so that there's less stressors on the family dynamics. Sometimes, clients are scared to tell their children about an inheritance because they don't want them to stop working or become lazy or become overly dependent upon that.
So I think that's a consideration every family needs to make is like, who are your adult children? Can they handle it? Can they not? What's going to be the result of these types of conversations? But in general, I believe in more transparency versus less.
Yeah. And having those conversations around the values, I remember a client said to me once, money doesn't solve all problems, but it does help ease the struggle. And we're in a situation today because we live within our means to get there. And I think what's also difficult around this topic, around inheritance and, you know, potentially future generations getting money is access to information is so much easier.
For example, you could Zillow your home and find out what it's worth. And so a child might see that their family lives in a very nice home that's worth a lot of money. That doesn't mean that parent can just write a check and help them ease their life.
I think that's a big challenge that, a lot of families face. And part of it, there's good and bad to it. I think there's like concept of the American dream. Having a home, paying off your mortgage is like a very, very big goal to a lot of people. And I think when it happens, there's this deep breath and the sense of relief.
I think that that should be separated from what's your retirement plan, though? Because a home is not a retirement plan because you need
somewhere to live.
It's also not an investment. A lot of people look at their home and as investment, as an investment and it's really only an investment if you plan on downsizing to a smaller or more or cheaper home.
Yeah. And I think that people have to take that into consideration, even thinking about how your home will be there, there's ways to do it, but it'd be very difficult to get money out of your home for like, health care expenses. And I read an interesting statistic that said the average cost of health care is $150,000 throughout retirement.
So just thinking about health care alone is a big expense. You want to have liquidity. You want to have money that you can access to pay for those types of things.
So if you're saving towards retirement and you're just a normal W-2 employee at a business or a company, and you're working for that company saving towards retirement, and you don't plan on receiving an inheritance or running a business to sell. That's what most of these articles are designed for.
They are designed for that. And I think one other aspect of that that you should take into consideration is a lot of the articles or the things you'll read on line talk about income replacement. I think it's better to play on what's your lifestyle on retirement, because just as an example, during my working years, I need more income because I DoorDash, because I'm so busy that I need access to food in a different way.
If I was retired, I would not do that. I would go and make food myself and I would have you know, cost savings there. And so when you just do income replacement in retirement, it's not always a reflection of what you actually need or want your vision of retirement to look like. And so I think it's better to plan on what is my monthly spend.
So just like back of the envelope, if your monthly spend was $10,000 a month and that's what you needed to retirement, so 120,000 a year and you saved money mostly in retirement account. So every dollar you took out of retirement account, you had to pay taxes on, so that $120,000 a year you probably need, like what do you think 160 to 180?
Something like that. You probably need to spend. If you want 30 years of retirement, spend you probably need to save something around $2 million, right? Maybe three if you want to be safe and you want to maybe leave your children an inheritance, that's a lot of money. But I think backing into it that way, where you say, what do I want to spend?
What do I need? How will inflation affect what I need? And then getting to that ultimate savings goal, I think that's a better way to do it versus income replacement.
I think that that's a good way to think about it as well. And that takes me to sort of the last point around what's the safe withdrawal rate I've saved towards retirement. Now I want to live off my assets. There's been something that our industry is as sort of anchored to, which is this 4% rule. I can take out 4% of my retirement account balance every year.
And if invested appropriately, that should last 35 years. So for every million dollars, that's around $40,000 a year that you can take out. That rule has been challenged for the last 15 years because we were in a zero interest rate environment today. Today's a little bit different. Now that safe money earns 5%. But now all of a sudden we have inflation to factor into.
Yeah, that 4% rule doesn't really take into account inflation or down markets. I think it would be better to run projections on your portfolio based on the risk level, understand what you should expect to make and then what downside and upside scenarios would look like, and how would your monthly spend have to be impacted by that? Generally speaking, the smarter thing to do is to fluctuate your withdrawal based on what's happening with inflation.
And if you do have a recessionary period, you do have a down market pulling back a little bit from that too. But just a blanket 4% rule is probably not going to be your best financial planning strategy.
Yeah, no, I really like that, Stacey. And so just to kind of recap the conversation today, don't get so tied to the headlines that you see, understand the situation that you're in and really try to work with somebody that's going to help build out that plan, because you may realize that taking that extra vacation today to build those experiences with your family might cause you to work an extra 1 or 2 years in retirement.
Or maybe retirement's different for you. Maybe at 55 you step away from a big job and you go take on something more that you're passionate about, whether it's, you know, painting or art or having a Airbnbs or a different type of business, don't get so anchored to what the masses are doing. Really think about it from an individual perspective.
Create a customized plan for yourself. It's worth it. You'll make different decisions if you have that knowledge. If you just have Google knowledge, you might accidentally go with the masses and make the wrong decision for yourself. If you have knowledge that's personal to you, then my bet would be that our clients will enjoy their life more and feel more secure in their plan.
Disclosure: The information presented herein is for educational purposes only and isnot intended to constitute financial advice. Morton makes no representations asto the actual composition or performance of any asset class. The views andopinions expressed by the speakers are as of the date of the recording and aresubject to change. Morton makes no representation that the strategies describedare suitable or appropriate for any person and should not be assumed thatMorton will make financial recommendations in the future that are consistentwith the views expressed herein. Past performance is no guarantee of futureresults. You are encouraged to seek tax and/or financial advice from yourfinancial advisor and/or tax professional to thoroughly review all informationbefore implementing any transactions and/or strategies concerning your finances
