Following up on Part 1, I recently listened to Mark Miller’s Retirement Revised podcast, titled: “Answering my kids’ questions about retirement.”[i] Mark offered great responses. I had some added thoughts.
I certainly agree with Mark that there is no greater advantage than getting an early start on saving. However, most Americans live paycheck to paycheck[ii] and most have consumer debt—now at an all-time high of $16.5 Trillion.[iii]
US Household Debt, March 2019 – September 2022
So, most young workers have other financial needs and priorities, and few can earmark a significant amount of take-home pay for retirement preparation. However, instead of “saving for retirement,” younger workers should “save along the way to retirement.” That is, maximize tax-preferred savings in a 401(k) that offers tax-favored liquidity. Don’t deny yourself things you want or need. Don’t defer all your dreams until retirement.[iv]
The questions, Mark’s responses (paraphrased/summarized) and my thoughts:
• How should I balance my saving in retirement accounts and other savings that can be accessed for emergencies or other spending needs?
- Mark: Important to have 3 to 6 months of living expenses saved if only to avoid more expensive debt, like a credit card. It is a matter of striking a balance. Always put in enough to get the full match from your 401(k) plan. Put additional retirement savings in a low-cost IRA.
- Jack: Encourage your plan sponsor to adopt 21st Century plan loan functionality (electronic banking, line of credit structure, etc.) so your 401(k) offers liquidity capable of double duty … to meet needs along the way—so repaying the loan rebuilds the account for retirement. Not only will that functionality allow for continued loan payments, but also for loan initiation after separation.
• How can I save for retirement if my new employer doesn’t offer a 401(k) plan?
- Mark: Save in an IRA. Every time you change employers, consolidate accounts and aggregate assets via rollovers. Roth is a good option for younger workers in lower tax brackets—and for generating tax-free distributions at retirement.
- Jack: Ensure you can continue to leverage your 401(k) after separation—encourage your plan sponsor to adopt a Deemed Roth IRA and to facilitate rollovers from Traditional IRAs. Remember, the 401(k) is a separate legal contract—except for those with a very small balance, participation need not end at separation.
• How can I save for retirement while also making socially responsible investments?
- Mark: Recommend low-cost passive index investments with very low fees—safest, simplest, diversification, most efficient way to invest. Mark had some words of caution, including a comment about greenwashing.
- Jack: Nothing to add.
• Should I worry about the future of Social Security?
- Mark: Social Security is America’s most important retirement benefit. Bankruptcy is not relevant. There are funding issues. Unless there is increased funding, once trust assets are exhausted, maybe by 2035, there will be a 20% across-the-board cut in benefits. Mark believes benefits should be increased and mentioned the “benefit you’ve earned” at Full Retirement Age (see Fig. 1 below).
- Jack: Social Security statutes don’t specify what will happen if trust assets are exhausted. No one earns a Social Security benefit—the program isn’t contractual, but an entitlement. It can be changed at any time, for good, bad or no reason whatsoever.
• How will my Social Security benefit be calculated?
- Mark: Detailed discussion of AIME (highest 35 years of inflation adjusted earnings), PIA formula, “bend points” all create a progressive result. 100% of PIA if commence at Full Retirement Age, reduced if claimed between age 62 and FRA, increased by delayed retirement credits if defer after FRA to age 70.
- Jack: Formula has changed significantly since I started paying FICA in 1968 (55 years ago). The 1983 changes won’t be the last.
• When does it make sense to accelerate mortgage payments (30-year fixed mortgage @ 2.75%)?
- Mark: Good case not to carry mortgage debt into retirement. Before paying off the mortgage, first focus on debt with higher interest rates. Build emergency, liquid savings, maximize 401(k) savings. Fewer itemize so mortgage interest may not be tax deductible (and more expensive to carry).
- Jack: Agree. The best option to improve retirement preparation is one that reduces high-cost debt. Use home equity or a 401(k) loan where interest rates are less than those on commercial debt and greater than the return on 401(k) fixed income investments. That’s been the situation for 15 years—replacing high-cost debt with plan loans has improved both retirement preparation and household wealth.
• Looking back, what do you wish you had known about retirement when you were in your twenties or thirties?
- Mark: I wish I had known anything at all about retirement. He recounted an episode of “Friends” where one individual gets her first paycheck and exclaims: “What’s FICA”? It was the early days of IRAs and 401(k)s. I didn’t have a grasp of the impact of fees. The good thing was that I was saving. In the early years, it’s all about socking away what you can afford to do. Save, Save, Save.
- Jack: Yes, save, save, save—but in your 401(k) … use it as a Lifetime Financial Wellness Instrument.[i]
SEE ALSO:
• Most Young People Should Not Save For Retirement in Their 401(k)
[i] Mark Miller, 12/28/22, Accessed 12/28/22 at: https://retirementrevised.substack.com/p/answering-my-kids-questions-about?utm_source=podcast#details
[ii] American Payroll Association, Getting Paid in America survey, 2022. 72.14% of survey responses indicated that they would have some or significant difficulty in meeting their current financial obligations if their next paycheck was delayed for a week? Author’s Note: Not missed, but delayed, and delayed only one week! Accessed 12/28/22 at: https://info.americanpayroll.org/pdfs/npw/2022_Getting_Paid_In_America_survey_results.pdf
[iii] Federal Reserve Bank of New York, Total Household Debt Reaches $16.51 trillion in Q3 2022. 11/15/22. “Balances now stand $2.36 trillion higher than at the end of 2019, before the pandemic recession.” Accessed 12/28/22 at: https://www.newyorkfed.org/newsevents/news/research/2022/20221115#
[iv] J. Towarnicky, Life is Not a Dress Rehearsal for Retirement: Start doing some of those things you are dreaming about today! 9/18/18, Accessed 12/28/22 at: https://www.psca.org/news/blog/life-not-dress-rehearsal-retirement-start-doing-some-those-things-you-are-dreaming-about
[v] J. Towarnicky, My Financial Wellness Solution: The 401(k) as a Lifetime Financial Instrument, Society of Actuaries, 2017, Accessed 12/28/22 at: https://www.soa.org/globalassets/assets/files/resources/essays-monographs/financial-wellness/2017-financial-wellness-essay-towarnicky.pdf
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.