In honor of a very happy holiday season, we’re celebrating with our HerMoney family with five special Mailbag-focused episodes! Our listeners submit THE BEST questions all year long (to email@example.com), and we wanted to get as many as possible answered before 2020 rolls around.
In this episode, Jean and Kathryn dive into your questions around saving for retirement and investing for the long-haul. Listen in as Jean advises a woman on how much she really needs to save for retirement… Is $1.7 million per person the right amount, or perhaps 25 times your annual expenses? Jean also shares her thoughts with a woman who’s debating where to put an extra $4,000 she has annually to invest for retirement.
Jean guides a mother of twins who is saving for retirement in a 401(k) and also considering investing in real estate and putting money into an HSA, in an effort to maximize her money for herself and her girls. Lastly, we tackle the question of investing worries that are rooted in a fear of losing money, and a question about selling stock in order to pay off the mortgage early.
From everyone on the HerMoney team, thank you so much for listening to us in 2019. We can’t wait to spend more quality time together in the New Year!
This podcast is proudly supported by Edelman Financial Engines. Let our modern wealth management advice raise your financial potential. Get the full story at EdelmanFinancialEngines.com. Sponsored by Edelman Financial Engines – Modern wealth planning. All advisory services offered through Financial Engines Advisors L.L.C. (FEA), a federally registered investment advisor. Results are not guaranteed. AM1969416
Jean Chatzky: (00:07)
HerMoney is brought to you by Felity Investments. You’ve worked too hard to let your money just sit in savings. Learn how to make your money work as hard as you do at fidelity.com/demandmore. Hey everybody, it’s Jean Chatzky. Welcome to HerMoney. Thanks so much for joining me and Kathryn Tuggle today for a special mailbag only episode. We are going through our inbox, we are tackling your questions and we are doing this as a holiday gift to all of our listeners. So today we are going to dive into some of the questions you’ve submitted around retirement and saving enough for your future. Kathryn, I’m sure there were a lot of those.
Kathryn Tuggle: (00:52)
A lot we get retirement questions more commonly than anything else.
Jean Chatzky: (00:55)
Well, that’s good because retirement is up there on the list of financial things that we really should be thinking about sooner rather than later. So let’s just go.
Kathryn Tuggle: (01:04)
Let’s dive on in. Our first question comes to us from our private HerMoney Facebook group.
Jean Chatzky: (01:10)
And just a reminder for people who are not in our private, HerMoney Facebook group. Just let us know that you’d like to be part of this group. Go to it on Facebook. Say that you want to join. We let you write in.
Kathryn Tuggle: (01:22)
Request to join, answer three questions, and it’s a private group, which means that members in the group can see what you write and post, but your Facebook friends cannot see what you write and post. So if you want to ask a question that is not going to be seen by your mother-in-law or your spouse or your best friend, the HerMoney Facebook group is a safe zone unless they also happen to be members.
Jean Chatzky: (01:44)
Well don’t tell them about it.
Kathryn Tuggle: (01:45)
Don’t tell them about them.
Jean Chatzky: (01:46)
Yeah, exactly. Okay.
Kathryn Tuggle: (01:48)
She writes, I just read an article that said most Americans feel $1.7 million is what you need to retire according to a Charles Schwab survey. But is that per person or per couple saving? $3.4 million for my husband and me to retire seems astronomical.
Jean Chatzky: (02:03)
So I love numbers and I hate numbers. Let me just answer the question. It is a per person statistic. It’s, Charles Schwab surveyed, their 401(k) participants, and this was the average that 401(k) participants felt like they had to have in order to retire or felt like they wanted to have. Some of them were probably thinking that it wouldn’t just be for them that it would probably be for their families, but bottom line is it’s still much, much, much more money than people have. On average. Right now, the average 401(k) participant has something closer to a number between a $100,000 and $200,000 which is nowhere near $1.7 million. The much more important question to be asking is not what does the average person need in order to retire, but what do you need in order to retire and there are different ways to get there. Fidelity has benchmarks that you’ve heard me refer to in the past that track your way to retirement. Basically saying you should have about one times your earnings put away by the time you’re 30 and three times at 40 and six times at 50, eight times at 60 and ten times by the time you retire. That’s the Fidelity benchmark map. The FIRE math says, and FIRE stands for financial independence, retire early. It’s a community of people who are working really, really hard to save immense portions of their income, 30%, 50%, 70% so that they can get to retirement faster. The FIRE math says that you need to save 25 times your yearly expenses. They are doing the math in that way because they figure once you’ve got 25 times your expenses, you can invest that pool of money, pull out about 4% a year and it’ll cover one of those 25 times each year. It depends how you’re going to live is the real answer, which is why, although benchmarks are wonderful, benchmarks on an individual level can sometimes be way out of whack, so think about how you are going to do retirement. Are you going to be one of those people who works in retirement? Are you going to be one of those people who is a little bit of a home body? Are you going to travel extensively? Are you going to start a business? Are you going to have another wage earner in the family who continues to help you? Will your mortgage be paid off? I mean, I could just sit here and I could ask questions for the next 20 minutes, but these are the things that you have to answer in order to get to your number and sitting down and just doing some math, whether or not you’re doing it with the help of a financial advisor on a legal pad, on a computer goes a really, really long way to at least starting to wrap your brain around what this might look like for you.
Kathryn Tuggle: (05:11)
I definitely hear you on making a list, but how do you factor in the unknowns, the big question marks around moving or how much you’re going to travel and all that?
Jean Chatzky: (05:20)
Or healthcare, right? Healthcare is the really big unknown because so many Americans have chronic diseases. You have one big health event and it can just really sabotage whatever it is you’re saving, and again, we can fall back on some benchmarks. Fidelity’s latest survey shows that a 65 year old couple will probably need about $280,000 just for unreimbursed healthcare expenses in retirement and that doesn’t include longterm care. That’s $5,000 to $6,000 a year per person for your Medicare premiums and your other ongoing healthcare expenses, which doesn’t sound like as much when you break it down, but as a lump sum, that’s a big amount of money. We can try to insure against some of those things. You can make sure that you have good Medigap insurance, a good supplement to Medicare. You can try to make sure that if you can afford longterm care insurance that you have purchased something along the way or that you’ve at least done the calculation to figure out that you don’t have enough in terms of resources so that you’ll spend through your money pretty quickly and qualify for Medicaid. But these are the sorts of things that again, belong on the list. We have to ask the questions. We have to deal with the unknowns. We have to prepare our adult kids. If we think our adult kids are going to need to step in and help us, or if we are the adult kids, we have to talk to our older parents about what’s coming our way so that we can prepare. It’s an ongoing exercise. I wish there was a pat answer. I don’t think $1.7 million is it, but we should all be running a lot more numbers than we do on a regular basis.
Kathryn Tuggle: (07:15)
Right. Our next question comes to us from Lauren. She writes, I contribute the max to my employer 401(k) every year, but due to plan rules, I’m forced to take back approximately $6,000 of it every year because not enough low wage earners contribute to the plan. I use some of this to finish maxing out my HSA, but that usually leaves me with $4,000 I’d like to invest for retirement. I make too much to qualify for a Roth IRA or deductible IRA contribution. How should I invest the leftover $4,000 for my retirement each year?
Jean Chatzky: (07:47)
So let me just take a step back for anybody who was confused by this question. There are fairness rules around how retirement plans, work-based retirement plans are set up and they are established so that people who make a lot of money in the company are not allowed to contribute a disproportionately large percentage of their salary to the 401(k) when lower paid workers are not doing the same, they’re called safe harbor provisions and you need actuaries to figure them out. It’s complicated, but what she’s saying happens. In particular it often happens in small companies where there’s a discrepancy between what the owners and senior people earn and what the people who are just starting with the company earn. The answer to your question though, Lauren, is put it in a nondeductible IRA. Just put it away. When we have the ability to save more for retirement, we should do it because there may be years when life comes along and you don’t have the ability to stash away more money and I am absolutely with you. We want to maximize every opportunity we have to save on taxes. And we do that by maxing out our 401(k) contributions, our HSA contributions, our deductible IRA contributions. If you live in a state where you get a state tax deduction for putting money into a 529 college savings account for your kids, that should potentially go on the list ahead of a traditional nondeductible IRA. But lacking that, putting the money in a traditional non-deductible IRA still allows the money to grow tax deferred and that is still a big benefit. So I would say just go ahead do it. And if you get to the point where you’ve already made all of your IRA contributions and you still have money to invest, put it in a brokerage account, invest it and pay your taxes. Before we go onto another question, Kathryn, let’s just remind everybody that HerMoney is proudly sponsored by Fidelity Investments. We’re here to remind you that you work too hard to let your money just sit in savings. Whether you are new to the workforce or approaching retirement, Fidelity can help advise you throughout your career and beyond. So that your money is working just as hard as you do. It all starts with a yearly financial checkup and an understanding of what you own and what you owe. From there, the folks that Fidelity can work with you to evaluate your investment options, determine ways to grow your savings and keep you on track to reach your life’s goals. Start demanding more from your money today at fidelity.com/demandmore. Kathryn Tuggle and I are back with your mailbag special. We are tackling your questions around saving and planning for retirement, a topic that many of us find confusing to say the least. Kathryn, what’s up next?
Kathryn Tuggle: (10:57)
Our next question comes to us from Mellie. She writes, Dear Jean, you have been my girl crush since way back on Oprah.
Jean Chatzky: (11:03)
Oh my goodness. Well that is nice. Thank you Mellie.
Kathryn Tuggle: (11:06)
I absolutely love the podcast and especially the mailbag because I’m super nosy. I listen every week. I’m a 45 year old divorced, single mom of two twin girls located in Virginia. I feel like I mostly have my act together, but I’m only recently making what I consider to be really good money. I’m trying to save as much as possible for future goals such as retirement, big kid expenses, and possibly dabbling into some real estate investment in the next few years. Where I’m getting confused is my retirement options. I have a 401(k) that I will max out for the first time ever this year. I have only ever had this 401(k). It’s value is currently about three times my salary and it’s in low cost index ETFs. I believe as a single person, I am over the deduction limits for a traditional IRA and also not eligible for a Roth, since I make more than $135,000. This upcoming year, I will be eligible for an HSA and also a deferred compensation account. If I max my 401(k) at $19,000 and put the max into my HSA of $3,500, what’s my next best option? I just want to maximize whatever I can for the future for me and my girls while I can.
Jean Chatzky: (12:14)
So first of all, it sounds like you are doing great. Congratulations on that. I’m so glad that you are part of our community and that you like the show, we are always happy to hear that. Deferred comp is actually going to be your next best move as long as you believe that your company is totally stable and sound. And the reason that it comes ahead of the traditional non-deductible IRA that I was talking about before is that income that you receive in deferred comp is treated like a 401(k) contribution and that you’re not taxed on that money. The main problem with this compensation is that if something happens to your company and the company were to, for example, go bankrupt, the assets in the deferred comp pool can be subject to the claims of creditors who are out there. So as long as this company has been around for a very long time and you believe that there is no risk of this, and I would talk to HR and make sure that the other senior executives at the company are taking advantage of this plan. And while you are putting so much money into your health savings account, I do want to make sure that you are putting as much as you can. It sounds like you’ve got an individual health savings account because you said you’re putting the max of $3,500 in, but then you mentioned your girls, which might make you eligible for a family HSA and potentially double the amount that you can put in. Maybe your kids are on your ex-spouse’s health insurance, but if they’re not and you can qualify for a family plan, that may be another option open to you. And remember, the money in an HSA can also be invested so it can, if you’re not using it for day to day, or even year to year expenditures, be grown into a supplemental retirement account.
Kathryn Tuggle: (14:33)
Fantastic. Our last question comes to us from an anonymous listener in Austin, Texas who is 29 years old. She writes, I was live streaming the Texas women’s conference today and heard Jean’s talk. It really resonated with me, particularly around being afraid to invest my savings out of fear of losing it. It feels more secure to me to keep my money in my bank account, even though the interest rate on savings accounts is terrible. My husband and I have two toddlers. We both work full time with a household income of around $280,000 and we have a nanny that we pay about $40,000. Every year. I max out the matching offered by my employer, so I have for about $150,000 in my 401(k). I also have about $120,000 invested in restricted stock units of my company. We recently purchased our first home for $590,000. We got a great interest rate of 2.875% and we put 20% down. Right now we have $110,000 remaining in our savings account. I’d love advice on what we should do with our remaining savings. How much of that would you recommend investing in some sort of fund? Would you recommend putting any more of that towards our home? We have also been wondering if we should sell my restricted stock units that have vested and put them down towards paying off our house more quickly. Thanks so much for your advice.
Jean Chatzky: (15:50)
So I am so envious of your mortgage rate. I can’t even breathe. I mean 2.875%. Kathryn and I both are relatively new mortgage holders. That’s amazing.
Kathryn Tuggle: (16:01)
It’s amazing. What is your rate?
Jean Chatzky: (16:02)
Mine is not that, but I think it’s because, no mine is closer to 4 because of being in an apartment building. Yours, too?
Kathryn Tuggle: (16:08)
Ours is right under four.
Jean Chatzky: (16:11)
Yeah. Yeah. That’s all right. It’s the co-op condo math. Anyway, it’s a great interest rate. Don’t you dare use that money to pay down your home. And here’s why. At that interest rate, this money is incredibly cheap money. And by investing the money instead for your future in a diversified portfolio, you should do so much better than you would by prepaying that mortgage. If you have a date in your head and you’re thinking, oh, I really want out of that mortgage. I really want to pay off that house before my kids go to school or before my husband and I turn X number of years old. That’s okay. Maybe make one additional mortgage payment a year in order to get yourself there a little bit faster, but putting the additional money in your 401(k), doing more than just maxing out the matching offered by your employer is likely going to be your much better longterm move. I say this to you with every confidence that sometime in the next year or two or three, the market’s going to go down and the market is going to go down substantially. The market has just been going up and up and up and up, and even if it doesn’t go down substantially, it’s just going to level off and it’s going to stop going up as quickly as it’s been going up. But I still believe what I’m telling to you and it’s why I continue to put money into the markets every single year, no matter what it’s doing in a diversified portfolio that I add to single time I get paid. So, I would not use those RSUs to pay down the mortgage. I think you’re much better off. You want to invest that money. You want to use it for something specific? Maybe consider using it for college, maybe consider putting some of that money into a 529 for those two toddlers where they can grow. Because I think when we look at the trajectory and the cost of college, that’s going to be another big challenge in the life of every parent out there. And the other thing that I would say about this is get a little bit of help with this. Sit down with a financial advisor, somebody who speaks to you, who you understand, who you feel confident asking questions of and who you feel is really, really listening to you. You have a substantial sum of money here. You’ve got two great incomes. You probably have other goals on your list that you want to achieve. Let somebody help you create a roadmap so that you can make sure that you actually get there.
Kathryn Tuggle: (18:56)
Jean Chatzky: (18:57)
All right. Thank you so much, Kathryn.
Kathryn Tuggle: (18:59)
Jean Chatzky: (19:00)
Thanks to everybody for joining us today on HerMoney as we dig through our mailbag, we hope we’ve helped answer some of your questions and we want to thank you so much for writing. If you like what you hear, please subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We of course want to thank our sponsor, Fidelity. Our music is provided by Track Tribe and our show comes to you through PRX. Thanks so much for listening. We’ll talk to you soon.