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How I Started Saving for RetirementSubmitted by Integrity Advisory on February 26th, 2019
By Matt Ahrens, CIMA®
When I started in the financial services industry in 2007, I knew it was important to start saving for retirement. In high school I sat through presentations and classes where we discussed the growth potential of putting money away early thanks to the power of compounding. The thought of having a million dollars at retirement is powerful on any 18-year-old—think of all the cool stuff I could buy if I had a million dollars!
As I entered the financial industry, I quickly learned how hard it can be to stretch retirement money over 20 to 30 years. A new emotion gripped me: fear. Fear of not having enough money to retire when I want or the way I want. I had visions of golfing every other day even though my wife always beats me on the golf course (it’s healthy to keep the pride in check).
So, in 2007 when I started my first job at Security Benefit, I wondered how much I needed to contribute to my 401(k). They matched 100% of the first 5% of my contribution. I did what most people do—I contributed 5%. Enter the Great Recession and my meager savings looked pitiful. I started to worry about my future and decided I would increase my contribution by 1% every six months. At the time, my budget wouldn’t allow for me to jump from 5% to my goal of 15%, but I didn’t feel a 1% increase. Any time I got a pay increase I bumped my contribution up another 1%, and before I knew it, I was sitting at my 15% contribution goal.
Why did I pick 15%? I read financial articles online and 15% seemed to be a good number. In reality I didn’t know if my 15% was sufficient enough to get me to the golf course in retirement. When I joined Integrity Advisory in 2015, I helped us start a 401(k) service. Many advisors are afraid of 401(k) plans because of the time and added regulations, but I’ve always felt that a bonus of servicing 401(k) plans is the opportunity to give back. I get a chance to meet with younger employees who, like me, had no idea how much they should contribute to retirement or when they should get started.
I quickly learned that these younger employees wanted to get on the right path, but there was some friction we would have to overcome first—taking action. It’s easy to leave things the way they are today and not make changes. Studies show only 1 in 5 employees go online to look at their 401(k). If I tell these employees we need to increase their contribution, it requires them to register for the website or find their password, and it all starts to sound like too much work.
So, I did what any good father of two would do—I scared them. In 2017, I had the opportunity to join JP Morgan at their annual Defined Contribution Summit in New York City. JP Morgan is also JP Morgan Chase Bank, so they have access to millions of accounts to view spending trends, savings trends, etc. They use this data to create powerful slides that show the importance of saving early for retirement.
Consider the table below. Find your age down the left-hand column and your current household income along the top. The intersecting cell is your multiple. Take your multiple and multiply it by your household income. As an example, if you are 40 years old and your household earns $200,000 a year then your multiple is 3.7. $200,000 multiplied by 3.7 is $740,000. Assuming you want to maintain your current lifestyle in retirement, you should have at least $740,000 saved for retirement today.
This model assumes a 10% annual gross savings rate, pre-retirement investment return of 6%, post-retirement investment return of 5%, inflation of 2.25%, retirement at age 65 (spouse at 62), and a retirement lasting 30 years.
I have another chart I pull out when talking with clients who have not even started saving for retirement. This second chart shows the percentage of their annual salary that they should be contributing to their retirement today if they’re looking to make up for lost time. These charts have the desired effect of overcoming the friction of taking action.
As you read this, if you are concerned that you are not investing enough for retirement, please take some time to have a conversation with us. If you’re interested in a quick phone call, please feel free to schedule some time with Tony or I on our calendar here. We’d also be happy to have you come by the office if that is more convenient for you.
The F Word
Fiduciary has become a trendy word in the financial services industry. When I wholesaled for Security Benefit in the Upper Midwest, I worked with advisors who sold products on commission, and others that, like us at Integrity, were considered fiduciaries and worked on a fee-only basis. To make matters more complicated, some advisors are considered “fee-based” so they can sell on commission, earn an advisory fee, or both. Understandably, folks who are not in the financial service industry can feel overwhelmed when trying to find the right advisor.
Many of the large firms you see on TV like Edward Jones, Merrill Lynch, Morgan Stanley, etc. are fee-based. Their company requires them to do only what is suitable for you, and not necessarily what is in your best interest. This absolutely does not mean that they are bad people, but there can be temptation in that arena to sell a product to solve a problem rather than thoroughly analyzing the situation and helping work through the problem. I saw many advisors fall to that temptation when I was their wholesaler, and it was that reason that I always knew I would work for at a firm where I would be held to the fiduciary standard.
The problem I am seeing today is that some advisors who are supposed to be fiduciaries are still capable of providing bad advice. Many national RIA firms employ local sales people who meet with prospective clients to gather assets for the larger firm. Those sales people are supposed to be acting in the best interest of the client, but their motivation is a commission from the firm. I recently met with a wonderful woman in northern Kansas City who was talking with a sales person from one of those well-known national firms. This firm regularly runs radio ads touting their hate for annuities, how they’re always “on your side,” and how they’re not like other money managers. To keep a long story short, their proposal to her was not in her best interest. It was their attempt to manage more money, no matter the cost to this individual.
I say this because it seems that calling yourself a fiduciary is no longer enough. When I introduce our firm now to new people, I do say that we’re a fiduciary, but I also say that integrity is more than a word in our name—it’s one of our guiding principles. Being a fiduciary may not be the gold standard it once was, but we strive to act with integrity in all our dealings and interactions. It is my hope that you can see this integrity in our actions, and if at any time you feel we let you down, I ask that you let us know right away. We have wonderful people in our company, and we all come to work with the goal of serving our clients and making you feel like family.
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The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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