Retirement: How millennials and Gen Z can catch up on savings

[Music] how much should you have saved for retirement well that's the question we're going to answer on today's episode of decoding retirement hi I'm Bob Powell and today we'll be talking with Ann Lester who is author of your best financial life Ann welcome thanks for having me oh it's a pleasure so one of the things that we aim to do on decoding retirement is to go behind the headlines and I want to share with you some headlines that came out recently it was a study by Fidelity Investments and Fidelity in essence reported that gen Z plan participants 401k plan participants had saved 11,300 in their 401k plan Millennials had saved $59,800 and one of the interesting things about this survey to me is Fidelity and others JP Morgan tro price others have said there are certain savings targets that people should aim for one times your salary by age 30 three times by age 40 8 times by age 60 and 10 times by age 67 and what I look at the average salaries for Gen Z and Millennials what strikes me is that those asset amounts are way below targets and I'm curious one your reaction to the survey and also what's the actionable advice for people who may be behind the aall yeah so I I always want to approach these numbers with a tiny grain of salt so one is averages hide a lot right so some people are saving nothing some people just started saving last week some people have been saving 10 or 15% of their salary since the day they started working and they get the gold star um but let's just say that $111,000 number if you are 30 years old that means you should have saved $110,000 uh no I'm doing that math wrong if you say if you earning $56,000 a year and you're 30 years old you should have earned saved up $56,000 right so uh that is a big gap from 11,000 to 56,000 so number one Jen the oldest Jen zers are 27 so they got a little more time uh number two there is a lot of job hopping happening with younger workers and so you know to what extent have those people worked for the same company for the entire time or rolled their money over into the new plan so it's possible that those numbers may be slightly understating the amount people have actually saved but I think the headline is will be right like people should be saving more money right so I think about that um I have a daughter uh she's changed jobs twice now and left her 401K at her former employer and did not roll it over to her new employer or into a IRA so in that case um we're looking at perhaps this possibility that she does have one times her salary saved or so just not all in one place right so I'm thinking if someone is in that case it's far better for them to roll over their old 401K to their new employer if they can that's always I think the right strategy right and if not keep it at the old employer or move it to an IRA it depends right and I know we'll talk about this a little bit I I wrote a book uh recently and I dive into a lot of these questions and and one of the things you need to think about is you know the the mental tax on like dealing with it which is non-trivial like it's actually not super easy I know there's a whole bunch of initiatives to make this easier but we're not quite there yet um number two you know if your old plan is uh the fees are High um you may want to roll it out into an IRA if the fees are very low if you work for a very large company it's very likely that you were paying very very low fees and it's probably better to leave it alone um but you got to do a little research to make that decision the bottom line though is if you're leaving it in your own Planet safe you just don't want to forget about it right so the important thing is if you have multiple accounts or one account to use these benchmarks one times uh your income at age 30 ABS absolutely I think that's a really good rule of thumb it's you know when you get closer to retirement if you're in your 50s or 60s you might want to start like digging in a lot more to these general rules of thumb but certainly in your 20s 30s and 40s I think those are very practical sort of ways to gauge whether or not you're kind of roughly on track yeah and and what about if someone's behind the eight wall uh so they're they have 11,000 saved they need to have 56 increase their contribution rate uh spend less all all of the above so so most people are not SA saving quite enough right and geners are actually out of all the generations when you look at the data um doing a better job of being closer to what we think people should have because more gen zers are getting automatically enrolled in plans and this is a fairly recent Trend but more employers are starting to automatically escalate their contributions or increase them if you've been automatically enrolled into a plan at 3% of your salary that's a great place to start but it's a terrible place to stop you really need to be Target getting 10 to 15% of your salary over time the trick is you don't need to try to get there all at once so if let's say you're 25 you're earning $50,000 a year and I'm telling you yeah you should try to save5 to $7,000 of your salary you're going to tell me to jump in the lake right so how do you get there from here well you don't try to get there all in one go what you do is borrow a a trick from the Nobel Prize winners who uh came up with save more tomorrow and that means you make a very strict commitment to yourself today that the next time you get a raise which will hopefully be in 3 or 4 months at year end you will take half of that raise and direct it towards your long-term savings all right so the common advice though is for people to take advantage of the full employer match and often times that means contributing 6% in order to get 3% extra which puts you at nine I think that is 100% directionally where you need to be the question is if you are starting out and you're in your early 20s and you're living in a city that is expensive that's that's just really hard to get there and I guess the the thing I want people to take away is you need to have that as your goal to get there you don't have to start there if you're still trying to figure out how to balance your checkbook like like don't set this incredibly High bar fail and then say this is never going to work I give up right make it make it a plan how am I going to get from where I am today to where I need to be in a year all right and then you step into that gradually so we can throw up the ramen noodle diet for now well if that's what you need to do to stay at debt you need to be eating RAM and noodles but the next time you get a raise you can take a little bit of that money and like upgrade from the RAM and noodles and also save more yeah so when I think about debt I think a lot of these younger workers not are are only they're two things one is they're trying to save for retirement which seems implausible when you're in your 20s but also pay down student loan debt and and that's a hard thing to do you've got these two huge expenses well and rent let's not forget rent I mean it's it's it's it's it's a lot right so so you're looking at I think a lot of people starting out are are you know you pay you get your net paycheck right you've paid your payroll taxes you've paid your income tax you've paid for your health insurance and you know what's left is already 60 to 70% of what you thought you were going to get right so that's already a little math then you pay for your rent and then you pay for your student loans then with what you've got left you need to create an emergency savings fund and save for retirement so again starting out first job out of college I think it's very unrealistic to expect people to be able to save 10 to 15% so all I'm saying is start slow start immediately in the course of 3 or 4 years you should be planning on building up that percentage that you're saving until you get to that 10 to 15% and I think that is very doable for many people most people even so if someone does have student debt I'm thinking and especially because of secure 2.0 some employers not all will match the amount that you're paying toward student loan debt right and and that is you know starting early for for saving for retirement is the biggest gift you can give yourself right the power of compound returns is one of the biggest things most people don't get so the dollar you save in your 20s is going to be worth you know triple or quadruple that amount in your 50s and 60s so so it's really important to start early if your employer matches you should absolutely be taking advantage of that because that is free money right and and if that's the case would you suggest that they put all of their extra money toward paying down student debt or split it I think it's very important to have an emergency savings fund I think that is absolutely critical so I think if you have the opportunity to pay down your student loan debt and you have zero in emergency savings you should be trying to do both of those once you have an emergency savings fund built up then I think it's really important to take that money that you were saving for emergencies and throw it into your long-term savings whether that's paying down debt and getting all of the match um or whether that's just starting to contribute money into the 401K plan as as well I think the the question right about how much fun money do you give yourself is a really personal one um I am a walking uh example of someone who has uh been much more of a a grasshopper uh than an ant um and I have never met something fun that I don't want to spend my money on that's pretty true um so I struggle a little with that rule that says you should be you know maximizing your saving from the get-go um I think if you feel poor and like you're missing out on things it's it's a tough thing to feel at the same time you need to figure out how to pull your lifestyle down to a place where you're not increasing your debt burden right you don't want to be putting anything on credit cards you don't want to be running up that debt but I think again and I'm speaking especially when you're just starting out and you're at those very low salaries you can expect fairly significant pay increases for the first sort of decade or two of your working career and it is okay to let your lifestyle increase a little bit along with those increases in pay you the trick though is to not let your lifestyle completely eat up all of those raises that's when you really want to boost your savings so like I said I think you can start saving Less in your early 20s and be targeting that 10 to 15% by the time you hit 30 all right so uh for young workers this is extremely complicated um Let me throw a rule of thumb for budgeting where some people suggest 50 30 20 as the rule of thumb 50% for sort of essential expenses 20% for savings and debt and the rest for um fun I think that's a great rule I guess I just you know having talked to my own kids and a lot of young people who are starting out that 30% is like not there because their rent so high right I mean so it's like really what what's the bucket of money you have left after you pay off your housing after you pay for a minimum amount of food and after after you pay for all your debt servicing whether it's student loans or other debt you might have run up and then that to me you should be saving half of it and spending the other half on fund right so we've talked about saving for retirement paying down debt there are other expenses that they need to think about disability insurance maybe life insurance so that they can guarantee insurability U health insurance etc etc etc I think one of the biggest risks people run is the risk of catastrophe right and and that is really what insurance is for so health insurance is a very common catastrophe that is you know when you're in your 20s you tend to think you're Invincible you have no health problems you know everything's great and then you have an accident something H you know all kinds of things can really derail you so being underinsured whether it's for health insurance renters insurance if you're renting right you are one roommate forgetting to lock the door away from like getting wiped out um uh car insurance right not insuring your vehicle for its replacement value but just getting the bones minimum which I think a lot of people do I did that once and never again after somebody else hit my car and I you know like that was it I had to dig deep in my pockets the car was I was it's not worth insuring this car it's only worth a couple thousand bucks well let me tell you I was very sorry I made that decision right so being underinsured is a huge risk for people and most people don't understand they're running it insurance is cheap health insurance different story every other kind of insurance is really pretty cheap and we have to take a short break right now but when we come back going to talk more about your book your best financial life welcome back to decoding retirement we're talking with an Lester who is the author of your best financial life an I want to talk more about the book and uh in the book you have some actionable advice I want to get to uh one is this notion of stash the acronym and how young adults can hack their brains to stash more money that's it um and we have actually been talking about a little bit right a stash uh stands for sort of the five things you should be thinking about number one is save for a rainy day right that emergency savings fund number two tax advantage savings so using uh the power of compound returns and the growth of that money to really uh grow your money so t t tax aware savings uh the a is assess your budget and pay off debt so once you start your emergency savings fund once you're getting at a minimum the match which is your first Target right to get that match and get the free money free money then you start paying down debt now that is a little there's some disagreement in the people sort of talk about this stuff about whether you should be tackling debt first or long-term savings first for me the power of compound return over time plus the 401K match if you get it is more important than aggressively paying down debt once you get that match you get the free money which is doubling your return um because they're doubling what you put in right out of the gate then you aggressively pay off debt after you are debt-free for everything but low interest rate debt and again people can argue about what that means in my book I refer to anything under 7% as being low interest rate Which is less than what you might earn in the stock market or in a balanced portfolio um so typically a mortgage T some federally guaranteed student loan right is below that 7% rate everything else you should be paying off as fast as you can then you go to the fourth step of stash um which is the the S which is uh uh max out your for stay the course and max out on your uh retirement savings and get up to that 10 to 15% and then the H stands for have fun right once you get to that let's call it 15% savings rate you really should then be allowing yourself to enjoy more maybe you're going to save more money and save it up for a bigger down payment or uh for a fancy vacation or maybe then you want to think about not retiring at 67 but at 60 or you know that's when you have a little more room to think about different kinds of goals but you know I think executing that stash is really about making sure you've got the emergency savings fund you are have eliminated all of your high interest rate debt and you are putting again 10 to 15% into that long-term savings right so as you're talking and and you mentioned the Ant and the grasshopper story a little bit ago I think about how many young people have two things going on present bias the possibility that they value today's dollar more than tomorrow's dollar and this notion of fear of missing out and having fun so I'd rather go out to this and do that or this concert or go to London and see Taylor Swift or whatever the case may be because tomorrow I'll have another dollar and I can worry about that then so true so true I mean I uh you know I'm out there giving speeches and stuff and in one of my speeches I won't do the whole thing now but I'm like so I'm watching Netflix and it's 10:00 and the next episode starts and I hit skip intro and think wait a minute what time do I have to wake up and then it's 10:30 and then I hit skip intro again and then the next thing you know it's 1 o'clock in the morning and you think I've only got one episode left I'm going to keep watching right we've we've all done that that is present bias in action right there right what is happening right now is far more important than the future which is tomorrow morning right so it's a thing um I think the most important thing we can do is is get curious about how we are wired like it took me a really long time to accept that I am a grasshopper I routinely start reading a book at 9:30 and at 2:00 I'm like oh boy am I going to be sorry tomor I still do it right and I have learned not to let myself start reading without either setting my phone alarm on and putting it across the room so I have to stand up to turn it off okay that's my signal stop reading and go to like I I'm bad at that I'm bad at that kind of impulse control right I just am so I know that about myself with something as silly as staying up late reading a book and I can then create hacks turn on my phone alarm set it Out Of Reach so that I have to stand up which disrupts me enough to go wait whoa what time is it I better put my phone I got to go to bed you can do that with food you can do that with money right how do I understand what my own biases are my own impulses enough to figure out how to interrupt them right so a one of the most powerful things that is now helping gen zers and anybody who changes jobs is getting automatically enrolled right when you and I started working we got these you know 150 or 200 Page enrollment kits that we had to fill out and mail in with hundreds of pages of information to look at like that was horrible what the stats were 50 to 6 % of people signed up if your employer signs you up only 3 to 7% of the people drop out right it's magic that's a huge hack so is your employer automatically increasing your savings rates that that's another hack most people stay with the plan they don't drop out because they know they should if your employer doesn't do that for you automatically you can do it to yourself by again either asking them to increase your contribution rate or just saying Hey Jan one got a ra I'm going to I'm going to bump up my rate right those are hacks that will help you stay on track so as I look at your book and the topics in there and I think about your children which you I believe dedicate the book to yes so have they Incorporated your advice it's funny you know it my older son uh like me uh has an eye for like you could put me in a store with no price tags and I would uniring find the most expensive thing it's a gift not a good one but it's a gift um and my older son is like that but he is being really ruthless about creating guardrails for himself and he is 100% you know you know my children were also fortunate enough to to graduate from college debt free that was something my husband and I felt very strongly about they're on their own for grad school uh but but they have managed to you know get out of college debt free and and so that is a huge boost that they and and I I said that to my son when he started I'm like well look you you you're not paying off student loans you should be throwing money in your savings plan so so they're following that my younger son um is much less uh like me and much more like my husband he's like I don't have the money I don't care um uh but he's also a musician and is going to be leading a really different life right it's all on him to be saving and investing and you know we've had a lot of talks about how do you think about managing a a gig a gig world when you don't have a 401k you don't have somebody automatically enrolling you how do you think about structuring your spending if you have great uncertainty about what your income is going to be like yeah so quick question given the amount of jargon and how obscure this can be to some people whose day job is this and this requires a whole another day job uh should young workers go to a financial adviser for help I think financial advisors can be incredibly helpful I think most people starting out have pretty straightforward Financial lives and not to talk what I used to do for a living I used to manage Target date funds for a living right so so I think a Target date fund is a great answer for someone just starting out or a balanced account or a robo platform I don't know that you need a financial advisor unless you are struggling with how to budget and save and then I think having someone who can help you understand your own finances um understand where your money is going you know someone who takes a percentage of your assets um when you're just starting out I think those fees are probably going to be very high and there might be other places to find that kind of help so an it's now time that we turn our attention to questions that we get from our readers and listeners about money and retirement in the segment that we call ask Bob the first question that came in in essence uh goes like this uh is there an upfront charge when I convert my traditional IRA to a Roth IRA and in essence the answer is no there's no one charging you a feed to do that but however you will be paying an ordinary income tax on the distribution from your tradition IRA and you need to be aware of what that tax will be and how it might affect other things if you're Medicare benef if you're a Medicare beneficiary you might um be subject to Irma if if that puts you into a higher uh income bracket modified adjus as gross income is the jargony term and if you're Prem Medicare and on the ACA plan it could affect your the advanced premium tax credit that you get so and it can also bump you up into a higher tax bracket so so uh it's interesting I was just talking to my parents financial adviser about that my parents are uh both in their 90s and uh doing some chatting about justce subject and it was going to bump them up like four tax brackets if they did a conversion it's like Wella never mind we're just going to leave that money right where it is thank you very much because that's it would radically alter all kinds of things about now most people again if you're younger may not matter that much um we can chat a little bit about you know if you're just just starting out and have the choice about contributing to a Roth or regular like we can talk about how you might think about that decision but that conversion right the government's going to make you pay not necessarily your service provider like that should be free yeah so one last final word is you don't have to do a full conversion you can do a partial conversion right so another question that came in is can I withdraw money from my Roth IRA after I've contributed and the answer is yes if you've held that for 5 years otherwise you'll pay a penalty on that distribution and uh there are a couple other nuances to that but in essence if you've had the Roth IRA open for 5 years you can withdraw money from it um any thoughts well 59 and a half is one of those ages that you need to pay attention to where the half comes from I do not know um but that is the age from which you are sort of normally allowed to start withdrawing before that you'd pay a early withdrawal penalty Roth IRAs have other things you're allowed to pull money out for you know down payment on House Education expens and stuff so you know a Roth gives you a little more flexibility but you still have to keep an eye on the fine print so thank you an for sharing your thoughts on these questions from our readers and listeners if you've got questions about money or retirement email us at asob yahoofinance.com that's all the time we have today on this episode of decoding retirement stay tuned for future episodes where we'll be talking to other experts who can help you plan for and live in retirement this content was not intended to be Financial advice and should not be used as a substitute for professional Financial Services