Retirement – When and Where to Start
| 2019 Q1 | story by Dr. Mike Anderson | photos by Steven Hertzog
Kristine Flynn, Kathy Olds, Emily Bowersock Hill, Amy Clark, and Kaylin Dillon of Morgan Stanley Wealth Management
Let’s do some word associations. I’ll give you a word or phrase, and you tell me the first word that pops into your head. Portfolio. Nest Egg. 401(k). Roth IRA. What did you come up with? Did these words scare you? Perhaps the word association you came up with was more of a groan. For me, they’re words I’ve largely avoided my entire life—that is, until recently.
At 37 years old, I’m now in the savings stages of my life. More specifically, I’m in the retirement-planning stages of my life, and I’m already late. Former University of Kansas professor and board member of the Senior Resource Center (SRC) Dennis Domer explains I’ve been programmed to avoid talking about aging, and age is considered an insult. Therefore, discussions about what finances I’ll need to live off of when I retire are particularly taboo. “The problem is most generations, not just seniors, don’t prepare financially for retirement,” Domer says. People no longer have pensions. So we have to save that much more. He refers to this lack of retirement saving as the 1,000-pound elephant in the room.
Domer often meets retirees who have no plan for retirement yet want to keep the same lifestyle they had while working. For him, it’s about not just convincing seniors they need think about their finances but convincing people in their 50s, 40s, 30s and even 20s that a mind-set for saving for retirement has to be adopted. There is now a stronger pressure to save for retirement because the pension era of this country is behind us.
MAKE A PLAN
The scary part? How does one plan for retirement? How does one save? I assumed the answer was built into some complex set of algorithms containing systems with a lot of letters and numbers, but really, there is no secret formula that you must have “x” amount of money at “y” age. Regardless of whether you’re 21 or 81, it all comes down to one thing: discipline.
“Planning for a successful retirement requires discipline,” explains Emily Hill, a financial advisor and executive director at Morgan Stanley Wealth Management. “Building a retirement fund requires a rigorous approach not only to investment strategy but also to cash flow analysis, risk reduction and tax management.”
The idea of having discipline is something talked about time and time again. Zak Bolick, financial advisor at Edmonds Duncan Registered Investment Advisors, makes it simple: When it comes to saving money for retirement, “You don’t have to be a genius. You just have to be diversified and not spend more money than you need.”
Christopher English, vice president and trust officer of The Trust Company of Kansas, says retirement planning is wealth building. And the process for building wealth means people have to be more savers and less spenders. “Knowing your budget doesn’t have to be complicated,” he explains. “It’s a matter of figuring out what amounts have to go out, and what do I have coming in. The availability of credit puts us in the wrong mind-set. People have become more consumers than savers. The hardest thing about saving is getting started and making yourself do it.”
Dennis Domer, retired, teaching his grand kids flyfishing. Photograph courtesy of Marianne Wille
SPEND LIKE YOUR COLLEGE YOU
English has an experiment: to see if one can truly live off of saving half of his or her income, especially when younger. If you’re still paying debt, then you’ll need more room to save. That will help train your mind-set.
Think about how you lived in college. That’s right, remember the dinners you had, the car you drove, the clothes you bought. You were resourceful. Then you got your first major job, which came with the taste of sweet money. You started making more, and, therefore, you wanted to spend more. Ramen turned into salmon, the 1990 Honda Accord turned into an Acura, and now you have four velvet sport coats. (Side note: I love the way they feel, and I’ve also discovered that people like to rub your arm when you wear velvet.) That is what these investment professionals are talking about. In grad school and college, you don’t require that much. No one is saying you should go back to that 1990 Honda and eating plain ramen. You should, however, get back into that saving mindset.
As English puts it, “the earlier you start investing, the better. The first thing people do when they get inheritance or more money is to buy something. Break that ‘keeping up with the Joneses’ mentality. Those who want to build wealth need a game plan, and that involves putting money away.”
Chris English, Senior Vice President & Trust Officer, The Trust Company of Kansas
WHERE TO PUT YOUR MONEY
After talking with various wealth-management experts, the plan becomes simple. If you’re at the pre-retirement age: Contribute the maximum your company allows to your 401(k) each year. If you can’t do that immediately, the idea would be to start as high as you can, then add a percent at the first of every year. Make it incremental. Edmonds Duncan’s Bolick explains to his clients that they shouldn’t impair their lifestyles to save for retirement, but it’s extremely important to participate as much as possible. Most individuals might not be at the point where they are putting away 15 to 20% of their income. Without discipline, it could take 20 years to get to that point. But the important thing is to start saving today.
By not participating in your company’s 401(k), you could be missing out on getting more money from your employer. In your 401(k), you are given different investment options. Bolick and his team recommend choosing a Target Date Fund inside retirement accounts. The date one chooses should be targeted to the day he or she intends to retire (dates are labeled in five-year increments). Generally, Bolick advises everyone to choose a year as far out as they can, at least an age you intend to retire. These funds rebalance and move risk as you grow closer to that targeted retirement date so you don’t have to.
Besides focusing on your 401(k), Bolick urges clients to focus on their debt. He tells them to make as much of a payment as possible on all debt or more on higher interest rate debts while still saving for retirement. For example, if your car payment is 7%, and your student loan is 4%, don’t be afraid to carry your student loans for a little longer while you extinguish your car loan. Then, when that car is paid off, take that payment and apply it to your student loan or savings. “Stay used to not having that money,” he says. “So many people will pay off a credit card or car loan, and add it to their cash flow and spend it.” You have to have discipline and the right mind-set, which are paramount to saving for retirement.
THE TIME IS NOW
Servicing debt is not an excuse to stop saving. Bolick says you should be doing both, and having some debt is normal. Getting a mortgage and having a car loan are reasonable. But don’t wait to make more money to save for the future. The time is now. “Time in the market will get you further along than timing the market,” he says.
Zak Bolick outside the Edmonds/Duncan Registered Investment Advisors office on Mass Street
Most individuals in their 20s, 30s, 40s or 50s should be growth-oriented. They have decades of investment on the horizon ahead of them. An individual in this situation can afford the ups and downs, and sways of the market. “The fact of the matter is nobody knows what is coming next,” Bolick says. For people in their 30s, 40s or older, these market corrections are not only completely normal, but they are really good for saving plans, he continues. That is, if they’re systematically investing in a 401(k), IRA or both.
“When the stock market is down, you’re still buying every month. It shouldn’t stress you out when it goes down,” Bolick continues. “When it goes down, you are still buying more shares as if the stock market simply went on sale. When the market goes up, you buy fewer shares but are still buying. If you’re contributing every month to your funds, it shouldn’t stress you out.”
You control the market, Bolick says, but the one thing you can control in the stock market is cost. “Make sure you are aware of what you are paying in terms of internal fees and annual fees for your retirement accounts outside of your 401(k).”
English agrees. He argues those at pre-retirement age should always start with savings then get into an investment account—in the market or mutual funds to be put in monthly. “As long as you’re putting monthly funds into it, you don’t have to worry about market swings,” he explains.
A RESILIENT PORTFOLIO
This time in the market, perspective is consistent across investment professionals. A recent New York Life Investments (NYLI) report shows how the volatility experienced in 2018 was neither exceptional or unusual. Despite massive swings in the market, patient investors who remain fully invested still saw exceptional returns with their portfolios in every decade since 1940. Volatility is actually the status quo. It will sometimes be tough to see prices swinging, even daily. However, any short-term volatility disappears with a long-term view. A resilient portfolio can easily weather volatility.
In his article, “5 Lessons About Volatility to Learn From the History of Markets,” on Visual Capitalist, a media site that creates and curates visuals on business and investing, editor-in-chief Jeff Desjardins highlights the findings of the New York Life Investments study by arguing that a resilient portfolio is obtained through diversifying between different asset classes (i.e., municipal bonds, government or corporate bonds, equities). Specifically, he says, there are three traits to look for in these assets: 1) low correlation with the market (these assets zig when others zag) 2) defensive or noncyclical (you often find this trait in bigger companies with conservative balance sheets and durable competitive advantages, i.e., stocks in health care, consumer staples, telecoms) 3) generates cash flow (found in stocks that pay dividends or bonds that pay interest).
Yes, investing in equities comes with risks, but since 1925, they have clearly offered the best return on investment over government bonds and cash. As stated in the NYLI report, “If stocks offer the best long-run gains—and volatility is an unavoidable aspect of investing in stocks—then we must learn to accept volatility for what it is. Even better, we must learn to build resilient portfolios that can weather any storm, minimizing these effects.” This means that planning for retirement might involve takings risks. But volatility reminds us that rewards wouldn’t exist without risk.
SAVE FOR LIFE
One doesn’t stop investing even when he or she retires; prudent investing strategies are necessary well into retirement and throughout the rest of his or her life. For example, social security: Should you take social security when you can or wait? Generally, the recommendation is to take it, because it takes the pressure off of your savings for that amount. This is where advisors can tell you when to lean in and out of different areas of the market.
There certainly is value working with financial professionals who live in that world every single day. If they know your goals (i.e., what you are saving for and what your retirement lifestyle is going to be), they can adjust that plan to your goals, and you can live off your retirement the way you intend. These professionals can take one more thing off your plate. As Morgan Stanley’s Hill explains, “I have known a few people who have the time and the temperament to maintain both the perspective and the necessary attention to detail over decades. Most, however, are better off partnering with an advisor who can make sure they develop a thorough plan and stay the course.” Saving, planning and investing are not some dragon we have to slay. Regardless of age, it is important to save. That doesn’t mean not having fun: just be sure to budget for fun.
Retirement age me wants money for his umbrella drinks, and I definitely don’t want to let him down.