Maximizing your retirement nest egg
Tune in to hear Dr. David Kelly and Michael Conrath, Chief Retirement Strategist, discuss key strategies when planning for retirement.
Dr. David Kelly:
Regardless of where you are in life, you need to plan for the future, and for most Americans that involves planning for retirement. The task can feel overwhelming at times, and easily pushed aside for later.
But a well-constructed plan for the future not only helps ensure a secure retirement can also be a powerful engine for savings, and wealth generation.
For today's episode, I've invited my colleague, Mike Conrath, US Head of Retirement Insights at J.P. Morgan Asset Management, to help guide us through the toolkit for retirement planning, and the key strategies that individuals can leverage. And let's get started.
Michael, welcome to Insights Now.
Michael Conrath:
Thanks. I'm thrilled to be here, David.
Dr. David Kelly:
So can you tell me, for starters, a little bit about your team at Retirement Insights, and why are we interested in educating people about retirement?
Michael Conrath:
Sure. Well, I'll tell you a little bit about what we do, and why we do it. So I'll start with, did you know?
Dr. David Kelly:
Yes.
Michael Conrath:
So did you know that the typical person spends more time planning a vacation than they do planning for retirement?
Dr. David Kelly:
I can believe it.
Michael Conrath:
Pretty wild, right? You can believe it. The planner in me doesn't really get it, but the person, the human does. Retirement planning, it feels overwhelming, it could feel daunting, it involves a lot of decisions, there's sometimes math involved, there's also a lot of emotions, so that's why we do what we do.
So we're trying to help advisors, and the families they serve, stay grounded in the key principles that can lead to retirement readiness.
So to do that, we do two things. We do research around some of those big planning ideas, and two, we deliver them in a way that we think simplifies the complex, and that's where our guide to retirement comes in.
And again, the goal at the end of the day is to help investors make more informed decisions about their retirement.
Dr. David Kelly:
And so, obviously, it is a lot more than just planning your 401(k). What conversations should investors, and advisors be having here?
Michael Conrath:
Yeah, well, it's a great question, because I think that's where the conversation often starts, and stops for most individuals, is with the 401(k). And that's certainly a very powerful vehicle, that if you have it available to you, you have to be looking at that, or IRAs, traditional Roth flavors of those things.
That's important, but retirement planning is a lot bigger than that, and it's more broad, and I tend to look at it through the lens of managing risks. And there's a number of risks you face as you're planning, or approaching retirement.
Certainly, there's the markets, and we could talk about what a sound investment strategy might look like there, but it's also the difference between being a saver, and an investor. And I think those are two different things. The terms get used interchangeably, but I think they're different.
And cash looks really attractive right now, but over the medium, and long term, will it be that attractive? Probably not, so it's important to get invested, and stay invested. So that's one area of risk.
The other lens I look at in terms of risks, is longevity risk. So the good news is we are living longer as a society, so we've come a long way over the past few decades, but with that, the retirement calculus changes a bit, because now, if you're living longer, that means you generally need to plan for an income stream over a long period of time, and it becomes just that much more complicated here. So you need to factor that in.
And as you live longer, the other risk is healthcare. So you're living longer, but you're more likely to experience some type of catastrophic healthcare issue. And I think of this as the known unknown. You know you're going to have some type of healthcare issue at some point in the future. You just don't know when it's coming, what it is, and to what extent it will impact you.
So my guidance is you need to look at all these things holistically, not just at the vehicles, but all these things, in terms of risks, but also, opportunities.
Dr. David Kelly:
So first of all, I couldn't agree with you more on the whole issue of savings, and investing, because I think people don't realize the difference. We were just actually, this week, we're putting out our new long-term capital market assumptions, and in the long run, we think that cash might give you 2.9%, I think is our long-term forecast. And we think a balanced portfolio might give you 7%.
And you say, "Well, 7%, 2.9%, what difference does that make?" But in the long run, it'll make all the difference in the world, because you compound it.
Michael Conrath:
That's right.
Dr. David Kelly:
I think, one of the things you, and I know for many, many years in financial markets is just the power of compounding, so it really does make a difference. There is a huge difference in the outcome between somebody who's just a saver, and somebody who's an investor.
Michael Conrath:
That's right.
Dr. David Kelly:
And then, the other problem, as you say, if you're so lucky is to live so long, and you don't get your money to grow, you may not get your money to last, particularly if you have, and everybody's going to have something in their health, eventually, unfortunately. That's life.
Michael Conrath:
Not to be daunting, but I'm an optimist, but you have to plan for these things.
Dr. David Kelly:
Well, yeah. So what gets in the way of people saving enough for retirement? When you talk about a retirement plan, what do people have to do in order to actually achieve what they're supposed to achieve here?
Michael Conrath:
Sure. I think, well, outside of the typical things, like limited bandwidth, or inertia, all those things, and that's where an advisor could certainly help individuals stay grounded, and focus, but it is having a plan, for starters. Having a plan that includes all those risks we were just talking about a few minutes ago, David.
And also, I think it's important to recognize, for younger individuals, the calculus also changes a little bit. Generally speaking, younger workers don't have the safety net, or a backstop like a pension, or DB plan, like older individuals might be more likely to have as part of their overall retirement planning strategy, or income stream, and I think of this.
So at the risk of using a sports analogy, and alienating a big part of our audience, perhaps, I think of the NFL, since we're in football season, we came off football Sunday.
And in 2015, there was a big rule change, and I won't put you on the spot, ask you what it is, but basically they moved the line of scrimmage for the extra point back 13 yards. And at the time, it didn't seem like that big a deal, because after a touchdown, Special Teams comes in to kick the extra point. That's the point. You get up off the chair, or the couch, you grab a beverage, or a snack, it's a guarantee.
Dr. David Kelly:
Yeah.
Michael Conrath:
The kicker's going to make it. Well, it's a bit different, now. On any given Sunday, it's not uncommon to see that kicker miss, right?
Dr. David Kelly:
Yeah.
Michael Conrath:
The ball goes left, or right, or skew of the goalpost.
And that's how I think of a lot of the younger workers today, the likelihood of success, it's somewhat similar. It's still a good chance of being successful, and reaching the goal, or getting through the goalpost, but the younger worker has to kick the ball in additional 13 yards to achieve the same outcome.
Dr. David Kelly:
Yeah.
Michael Conrath:
So what can they do? And I think that's where saving early, and saving often. So that's an old adage in our industry, but it has held true over the years.
So for example, where we see this actually setting into the minds, and the actions of workers, is if they make a contribution to their 401(k) plan, make sure they're not leaving the match on the table. So if the company is offering a match that is...
Dr. David Kelly:
Free money.
Michael Conrath:
... Free money. And as much as we can say guaranteed, that is almost a guarantee. At least, on that day, I know I'm going to get a return on that investment, whatever that company's offering, so don't leave money on the table there.
The other thing is, even if you start with modest amounts, so in our guide to retirement, we talk about a worker putting away 3% of their income starting at age 25. Let's assume they make $50,000 a year. Well, by the time they reach age 65, so 40 years, hypothetical, 6% straight line annual rate return, that investment that they're putting away, that 3%, actually, adds up to about $880,000. Pretty significant. Again, modest contributions adding up to large dollars.
Now, let's say that individual said, "Okay, I'm going to start with the three, but I'm getting raises every year, and I'm going to make contributions that are commensurate with my raises." And let's just say it's a modest 1% increase in my 401(k). So they start with 3%. They increase their contributions 1% a year, up until they reach a cap of 10%. Instead of hitting that 880,000, they hit about $2 million.
So again, small contributions, or modest contributions, can have really meaningful results over the long term, back to that concept of compounding we're talking about.
Dr. David Kelly:
And one of the things that you and I were talking about earlier, which is perhaps overlooked, is it's not just a matter about having a retirement plan. You've actually got to have a financial plan in general, because one of the biggest problems you run into is you don't have any backstop if you run into trouble, so the first thing you do is you raid your 401(k), and then, you've got a problem.
Michael Conrath:
Sure, yeah. And your 401(k) should not be viewed as a piggy bank, hand off. Unless you need to make that decision, based on whatever personal circumstances you have. But we're seeing some interesting data come out of the Chase households that we look at.
So our team has access to data. It's completely anonymized, by the way, completely anonymized, so it's all reported in aggregate, but we see spending starting to tick up.
And I know you talk about never underestimate the power of the consumer. And I think of one consumer, actually, who's very close to me. She's 12 years old, and she happens to live in my house, and she's my daughter. And I know that if I give her $20 to go to the mall, she will find a way to spend 25.
So smart girl, but I think that's somewhat telling. So what we see in the Chase household data is that nine out of 10 households are spending to such a level, or we see what we call spending spikes.
Dr. David Kelly:
Yeah.
Michael Conrath:
Meaning that nine out of 10 of them cannot cover their spending on a monthly basis from their income, and about two thirds of them can't cover their spending out of their income, or their cash reserves.
So back to what you're saying about rating your 401(k), so what happens next? They tend to turn, pan the camera to their 401(k), in terms of loans, that we see them looking at credit cards, or they actually decrease their contribution rates.
So spending is an important thing to consider, and back to your point about, it's not just about retirement, it's about overall financial wellness, and health.
Dr. David Kelly:
Yeah, I think that's particularly important, now, where one of the things that we're seeing after the pandemic, is that a lot of people had actually achieved a certain standard of living during the pandemic, because of various government aid, and so forth, and perhaps the thing that they were doing was highly compensated.
And now, they're in a tougher environment after the pandemic, and they're not getting that money, but they're trying to maintain that standard of living. And I think you talk about it as spending, I perhaps I look at it a slightly more optimistic way, and say, "Look, your spending is too high given your income. So you can either cut your spending, or you increase your income, but you've got to look at it honestly."
So find some way of doing one of those two things, because what you don't want to do is, look at your retirement plan as the first place you raid, because you'll never put the money back.
Michael Conrath:
Exactly.
Dr. David Kelly:
And then, you've got a real problem.
Would you say, obviously, there's a big income divide here, upper income individuals presumably find it easier to save for retirement, but do you think that it's practical for the average person to put together a robust retirement plan these days?
Michael Conrath:
I think it is. And again, I think starting, or answering that with where we started, David, just in terms of it feeling daunting, overwhelming, you don't have to solve for all of these things at once. Again, that's where focusing first on what is offered in the workplace, back to the concept, the taking full advantage of a match, if I have that available to me, starting small, giving myself an increase in contributions over time.
Focus on those things.
And it comes down to really control, control the things you can control. We can't control what markets do, we can't control what happens in the political landscape, geopolitics, what's happening in the world, why we have to be mindful of some of those things. We can't control them.
Dr. David Kelly:
Yeah.
Michael Conrath:
We can control our savings, and I include the investing, in this sentence in that, but we also control our spending as well. So focus on what you can control, and then, expand from there.
Dr. David Kelly:
Yep, exactly. So it's making sure you're doing saving, but also, investing the money that you saved, and don't spend too much, or if you find your counter cutback, you're spending figure out a way to get your income to rise, but either way, have a plan.
Michael Conrath:
Yes.
Dr. David Kelly:
Because I think that's true in many aspects of life, that you may not be perfect in achieving your plan, but you've got to look at that plan, and hold yourself accountable to it.
Have there been any changes recently either in what employers are doing, or various government programs, or rules which are changing the retirement landscape?
Michael Conrath:
Oh, absolutely. I'd say for this year, probably, one of the biggest things, if not the biggest thing in terms of legislative, or regulatory activity, is the passage of Secure 2.0. So this was passed December 29th to 2022.
So 92 provisions in that. Do we have time for Rule 92?
Dr. David Kelly:
No.
Michael Conrath:
No. Probably not.
Dr. David Kelly:
But give us the highlights.
Michael Conrath:
I think the quick highlights, I would say a few things.
One is that, for small businesses, their incentives to start workplace retirement plans. And when I think of small businesses, I think of my parents, and primarily my dad. He was a small business owner, and he was tough as nails. He was focused on revenue coming in through the front door, trying to manage expenses, leaving through the back door.
And if we were to sit here, or he were to listen to a podcast today, and say, you need to be starting a workplace plan for your employees, the first thing he would say when he leans back in the chair, and looks at it sternly...
Dr. David Kelly:
"How much does going to cost me?"
Michael Conrath:
Yeah, exactly. Have you met him?
Dr. David Kelly:
No.
Michael Conrath:
He's Irish.
Dr. David Kelly:
But I can picture him. Okay.
Michael Conrath:
Okay. So, "What's it going to cost me?" And that would be a legitimate question to ask.
So, enter Secure 2.0, that question essentially, or that hurdle, or barrier to entry goes away, because in short, there is a tax credit, which can cover startup costs up to $5,000 for small businesses.
So up to 50% of startup costs if you have 100, or fewer employees, or if you even smaller business, like my dad had 50, or fewer employees, a 100% tax credit against your startup costs up to 5K a year, for up to three years. So that hurdle to getting started goes away.
Just some other quick things in Secure 2.0. RMDs, so required minimum distributions. For years, that age was 70 and a half, in our industry, then secure 1.0 went up to 72.
This year, and to Secure 2.0, it's 73. However, for younger individuals extends out as far as age 75. So that creates some planning opportunities. If you're not forced to take distributions until a later age, therein, you're not forced to pay taxes on those distributions.
There's an opportunity to think about that, looking at it through the tax lens as well. And we see some advisors talking to their clients, now, about doing Roth conversions, or thinking about doing a partial conversion, so they convert that pre-tax, and soon to be taxable income to tax-free income, because if they're not forced to take RMDs, and increase their taxable income, there might be a window of time now, or into the future, to do the conversion prior to taking RMDs.
So there's some planning opportunities there. And the last thing in Secure 2.0 relates to portability of 529 plan accounts. So there's a provision that will allow 529s to be transferred into a Roth IRA on behalf of the beneficiary on that account, which I think is really cool. And that goes into effect in 2024.
And now, there's a few caveats to that. It's not the entire account, necessarily. There is a $35,000 lifetime limit on that account.
And there's also a few question marks that are still out there. What happens if you had changed the beneficiary on the account? Does that reset the clock? And we're still waiting for further guidance on that, but it just creates more flexibility, and I think all in all, it points to the importance of retirement on the overall legislative.
Dr. David Kelly:
Yeah. Well, and it does sound like the government's trying to do something to make employer sponsored retirement plans more attractive to the employer, and the employee.
Michael Conrath:
Sure.
Dr. David Kelly:
And I think that in a world where, honestly, the labor market is very tight, and it's very hard to get good employees, and hold onto good employees, having that tax incentive to provide that benefit, is very significant.
Michael Conrath:
Absolutely. It's certainly attractive to the worker.
Dr. David Kelly:
So finally, and this is being fascinating, but what would you say are the biggest myths, and misconceptions about retirement planning?
Michael Conrath:
Sure. I would say the first thing, is that you need a large pool of money to actually get started with your planning, and I think we've debunked that already.
I think one of the other big areas of mystique, or mystery, is around social security. And I think this is an opportunity for advisors to add value in their client conversations, because there are benefits, and trade-offs to claiming your benefit at certain ages. So in short, there's three ages to keep in mind, 62, 67, and 70.
So think of those, 62, being the earliest you can claim social security. Think of 67 for most younger individuals, being your full retirement age at which you're eligible for a 100% of your monthly benefit, or 70, extending it out.
Now, there's benefits, and trade-offs, as I mentioned. If you claim social security early, there's about a 30% haircut in your monthly benefit, as opposed to waiting, push it out to age 70, there's about a 24% premium in your monthly benefit.
Now, this doesn't mean, David, that everyone should wait until age 70. Again, I think this is where you have to take a step back, and look holistically at longevity, as we talked about, family history, but also, other sources of income. If I can wait, and I do expect to live a long life, maybe it's in my benefit to wait till age 70.
Dr. David Kelly:
And that's why I think it's so important actually to start into retirement planning earlier. I hate to think that at 70, I'm going to be struggling through the paperwork to try and figure out which of these I want to do. I admit really much rather, do it now.
Michael Conrath:
Sure.
Dr. David Kelly:
And figure out, have an understanding, and working with, and also, work with a financial advisor can help me...
Michael Conrath:
Absolutely.
Dr. David Kelly:
... With making these decisions.
So Mike, this has been fascinating. I think it really underscores the importance of retirement planning, and I've got lots of running analogies, whereby people, you don't have to run marathons to start just plan for a little 5K is good, but the main thing is hold yourself accountable, have a plan.
Michael Conrath:
Absolutely.
Dr. David Kelly:
Figure out how you're going to do it, so I think it is great advice.
Michael Conrath:
Sure, and individualize that plan.
Dr. David Kelly:
Well, absolutely, and just like every individual potential runner is different, absolutely, everybody's got their own retirement needs, their own health issues, their own longevity risk, and we hope you've got lots of longevity risks.
But it absolutely is very much an individual thing, but you just need to start with a plan.
Michael Conrath:
Absolutely.
Dr. David Kelly:
Thank you so much for your insights.
Michael Conrath:
Yeah, Thank you. Appreciate it.
Dr. David Kelly:
On our next episode of Insights Now, I'll be joined by Beth Nardi to discuss the ways model portfolios are revolutionizing the ways financial professionals manage investments.
To all our viewers, and listeners, thank you for tuning in today, and speak with you soon.
Disclosures:
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