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Not knowing how much money to contribute to retirement seems like a small problem, but has the potential to damage your finances for a lifetime. And you don’t want to be stuck in your retirement years counting pennies and avoiding vacations.

In this episode, I discuss the ‘ripple effect’ of bad financial planning and the small changes you can make for retirement income that lasts a lifetime. 

Show Highlights Include:

  • How to plan your perfect retirement with the “Billy Graham Effect”. (1:53)
  • How to retire at any age using the ‘rule of thumb’ in retirement planning. (6:42)
  • The different contribution rates to recommend at each age (and how to ensure you’re saving enough for retirement each year). (12:54)
  • The ‘Fidelity’ strategy for funding your dream retirement (and never running out of cash in your vacation years). (18:17)

To schedule your complimentary retirement track review, head to https://onecapitalmanagement.com. You can also call us at 805-410-5454 or text the word ‘TRACK’ and we’ll reach out to you.

Read Full Transcript

Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.

Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [0:26.1]

Brad: Welcome to Make your Money Matter. The show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett and it's my goal to help distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple to help our clients and you listeners take control of your finances and build the life you deserve. Friends today, the challenge is no longer the access to information, but rather it's finding the right information and more importantly, how that applies to you. And that's my commitment to you here today and each week on the Make your Money Matter podcast because after all your money matters and knowing how to plan your financial future is vital to your financial success. And before we get started on today's episode, I want to thank each of you for listening each week here on the, Make your Money Matter podcast. If you haven't already done so you can go to our website at onecapitalmanagement.com. You can look on the media tab and there you can download and subscribe the Make your Money Matter podcast. You can also download and subscribe the podcast on any platform where you would otherwise download a podcast, whether that's the apple app on your phone, Google podcasts, Spotify, SoundCloud. Leave us a message and a comment, it's always good to hear how we're doing. And if you like the podcast, tell someone you like, and if you don't like the podcast, I guess tell somebody you don't like, but I guess share it because today's episode, I want to talk about ripple effects. And what that means for a question that we get asked quite honestly, pretty often here at One Capital Management, as it should be in how much is the right amount, I should be contributing to my retirement plan. [2:06.7]

It may seem like a simple question that is involved with conversations around whether it's a traditional IRA or a Roth or a 401k, and which one's the right approach. All of which we talk about here as advisors, but that question has a lot to do with ripple effects and these small seemingly innocuous decisions we make actually have a large impact on greater things, whether it's retirement planning or life in general. In Detroit, Michigan, there was a humble Sunday school teacher, but the name of Edward Kimball. And he had a passion for investing in his students. Now real quickly, have you ever heard of a guy named Edward Kimball? I mean, I hadn't. And one of these students was a young boy who happened to work in his uncle's shoe shop. Now Edward noticed that this boy wasn't really interested in Sunday school. So, he took it upon himself to go meet him at his job at the shoe store. [2:56.7]

Now that encounter changed everything. You see that boy gave his life to a cause his name was Dwight L Moody, and he went on to become one of the great evangelists and crusaders of his time. And during one of these conferences that he was leading, he went to Liverpool, England. And while he was preaching there, there was a man in the crowd named FB Meyer who was transformed by Moody's message. Moody invited Meyer to tour America with him at the time and at a conference Meyer asked the crowd a very specific question that challenged the crowd. And in the crowd, there was a man named John Wilbur Chapman who rose to that challenge. Billy Sunday, a professional baseball player at the time attended one of John Wilbur Chapman's meetings. He became an evangelist and was transformed himself. He quit baseball and began preaching. Sunday, went on to be one of the great evangelistic speakers and thinkers of the 20th century and probably the most famous evangelist of his time. [3:59.3]

In 1934, a group of believers who were introduced to the church through Sunday, asked evangelists, Mordecai Ham to organize a gathering in Charlotte, North Carolina. Now one of these gatherings, a man attended and gave his life to God. That man was Billy Graham. Now Billy Graham is a household name. If you haven't heard about him, look him up. He has reached an estimated 2 billion people. He's evangelized and shared the message, the gospel more than any other person. But if you remember at the beginning of this story, the humble Sunday school teacher in Detroit named Edward Kimball, that none of us had ever heard of before, he's who started this timeline by taking interest in a boy in his Sunday school class, by seeking him out, going to his uncle's shoe shop, where he worked investing in him and talking with him, challenging him. Remember that boy was Dwight L Moody and the ripple effect that ensued because of the decisions of Edward Kimball had made plenty, more rings and ripples out in this vast ocean that he could ever imagine. And he died probably never, truly understanding the great impact of what he perceived most likely to be a very simple act of kindness and care. [5:13.4]

Friends each and every interaction we have on a daily basis, a weekly basis matters. And the decisions we make have consequences, both good and bad and are far beyond ourselves. We've all heard the term ripple effect as I mentioned, it's the continuing or the spreading of the results of an event or action that we have done. And sometimes again, those events or actions at the time seem minuscule or small, or basically insignificant. And if you're anything like me, I like to see results, at least maybe not right away, but I'd like to see where at least I'm going, I have a goal in mind. Something I talk about quite heavily on the Make your Money Matter show as well as with our clients here at One Capital Management. And some of the things that we talk about, and one of the main topics today, the question we're going to help answer here and going to be discussing regarding how much you should contribute to a deferred compensation plan. You might be asking Brad, why are you starting the story about this timeline of events of all these men who introduced other people to other people? [6:16.1]

Well, again, the ripple effect that ensues by one small act, whether it's an act for yourself for someone else matters. And so, when we start the conversation around asking someone or seeking advice around what's the appropriate amount I should be contributing to when it comes to my retirement plan? It's not a small question. It's actually a big one that can have ripple effects for a long, long time. So, let's start at the basics. Let's if you just Google it for example, or you looked at some white paper, you'll find different discussions and points. And you're usually generally going to find, again, a generalization of somewhere between 10 and 15% is the rule of thumb, if you will, they should take from your income and put towards your retirement plan. [7:02.8]

Now, I want to dissect that a little bit because if you're making a $100,000, 10 or 15%, it's 10 or $15,000. Well, if you're making, let's say $200,000, that same 10 to 15% is already over the maximum limit. The current maximum for those under the age of 50 is 19,500. So right away understanding that a rule of thumb percentages may not pertain to, or you might already be capped out when it comes to your ability to contribute to your retirement plan. And that right there leads us into how these contributions are made. Because when we're talking about a 10 or 15% of income going towards your retirement plan, these contributions could be made into a 401k plan or 401k plan with a match, which is from your employer, an IRA, a Roth IRA, or even taxable accounts, depending on what your goals are. [7:52.2]

In fact, the other day I was talking with a prospective client and as we're going through the discovery process, we were talking about funding for retirement. And he brought up a goal and he's a younger, mid-twenties. And he brought up a goal is that I want to be financially free by the age of 40. He wasn't necessarily trying to say, I want to retire by 40. He wants the options to work, but he wants to be financially free. So obviously we were going through concepts of debt, reduction, cashflow, managing your investments appropriately. And that said, and something I say commonly to clients here, and this is an important one is it's not always what you own, but how you own it. I don't want to restate that. It's not always what you own, but how you own it. What do I mean by that? You can talk all day long about the investments inside of your investment plan, but it's also good to structure the investment plan to make sure it works for you. So, for example, this prospective client that we were talking to, we need to make sure we had a healthy mix between tax deferred or otherwise known as retirement vehicles like IRAs Roth, 401k and taxable accounts. Because if his goal was to be able to live off his investments in roughly 15 years, he's 40 years old. So, he is about 19 and a half years younger than when he could access his retirement vehicles without a penalty. Because right now, the way it stands is 59 and a half age, 59 and a half is the age, in which if you're under that and you need to pull from IRAs or 401k plans, you have the penalty associated with that distribution on top of your taxes. [9:23.8]

So, and mind you, there are also some exemptions around that. Some rules of thumb you can get through. And we'll talk about that on more specific basis, if you'd like, but for his case, and for those thinking about this for now, understanding your mix between taxable assets or otherwise known as assets you can access prior to retirement ages, let's say above the age of 60 is really important when it comes to your planning. So again, not always what you want own, but how you own it. Cause you want to own something that's more of a growthy stock, if that's a word, okay. If you want to own more of a growth stock, you'd rather own in something that's tax deferred maybe comes out tax-free. Roth IRA kind of comes to mind in that regard. So, you want to make sure you go through not only what you're investing in from an investment management plan, but also how you're owning it, which leads us back into the same conversation of how much should I contribute towards my retirement, and again, it's understanding your goals and objectives. [10:12.9]

If your goal in my example, for this prospective client, I talked to last week who had a goal of being financially free and also being able to access the investments that he's saving and working for the next 15 years, we need to make sure that we do that in an appropriate manner so, we're not having penalties associated with those distributions for him to pull from those accounts. So, understanding we have to have some for later and what later means to someone, maybe something different to someone else. Later for him meant 40 15 years from now. Later for someone else might mean 30 years when they're 50 or 60. So it's really important to put into context what your retirement planning means. Because the returns retirement planning, does it mean you're 65 years old. I talk about this heavily on the, Make Your Money Matter podcast, as well as on the, Make Your Money Matter radio show that we do, which has demographics a little bit in older, I would say in their fifties and sixties. And I say that only because typically we think, okay, when someone says retirement planning and you've heard me for the past few weeks now is we're going to do this every week on this show around retirement planning, it sounds like, okay. That's like when I'm 60 or something years old, the reality is it's not, it could be your forties, if that's your goal. I'm not saying it is, but if it is, it's really important to understand where you lie as the power of your overall plan, because you should be in control. [11:32.9]

I've said this before, and I'll say it again. Money is a great employee, but it's terrible boss. So, we want to get our clients in control of their plan in control of their monies. And we are a partner to them. We help them facilitate the planning, understand the do's and don'ts coordinate that into their life, custom tailor and fit it into what their goals and objectives are. And by the way, if you haven't done that with someone and you are looking for that trusted advisor, you can give us a call. You can call us at (805) 410-5454. You can also text us, text the word track T R A C K to that same number (805) 410-5454 and what we tell it to you to set that retirement track review meeting, to take a look at it, where you're at in your retirement planning. And remember retirement planning, and the question talking about today of how much should I be contributing to that retirement plan doesn't mean it's a retirement plan for your sixties. It could be whatever you want to define it as, and set your objectives to align with that. Make sure your plan is going with that. So, every time that you are making an investment, either it's a dollar cost averaging contribution to a taxable account, an IRA, a Roth, or if you have questions on which account is most appropriate for you, that's where you want to find some good counsel, get good advice on it. If it's not us seek it out because it's really important. [12:52.8]

Now, steering back into the question, the main question today of how much should I be contributing to my retirement plan? You know, there are many variables to consider as I mentioned, when thinking about the ideal amount. Are you married? Maybe. Is your or spouse employed? How much can you expect from social security benefits? I mean a few questions to bring up. So, it's really more of an art, not a science. And retirement age again, calls for a certain amount of comfort, but it also is different for every individual. Will you spend your time, I don't know, gardening, traveling, starting a new business, riding a motorcycle across country. I have one client that started a rock and roll band, when he retired in his mid-fifties, I have another client who has set a goal out to visit every baseball park in the United States. So, your goals and objectives can be whatever you want and again, at what ages you want. And however, you want to structure it, it's important to find counsel to help build that plan for you. And regardless of your age and expectations, you know, again, the rule of thumb is, and I'm going to start there and I'm going to end with more specific advice here. But the rule of thumb is from a lot of advisers or blogs or white papers or shoot if you just Googled it on Investopedia, you're going to find that somewhere between 10 and 15%, 10 and 20% of your salary is a good amount. Then comes to the question of what type of retirement plan. [14:13.7]

And again, as I mentioned, my hypothetical for the prospective client, we talked to last week around defining his retirement. His retirement happened to be 40. So again, having that mix between his taxable account, something he can access prior to age 59 and a half, as well as his company at the time also has a 401k with a 4% match. So, it's a great conversation, but how does it look? That's free money. I'm going to say that loud and clear. If your current employer, the 401k plan has a match, that is the ideal place to start. Because there really isn't much free money out there, that is free money. That is a money that's going to be contributed to your time and plan from your employer, incentivizing you to help your retirement. It's a great and blessed thing, make sure to do so. Before you just go and crank it all the way through there, it's important to say, okay, how much we'll want to put there and how much I want to put elsewhere? Again, back to your own specific goals and objectives is really important to put into context. [15:11.5]

Now let me throw some stats out for you right now. Currently again, this is based on investopedia.com, personal finance statistics. The average balance by age, in a 401k plan. Cause I got a question sometimes from some people saying, you know, is this good? Is this enough? And the reality is that I’m going to say this loud and clear, there is no right or wrong amount. It's the amount that works for you that matters. But to give you perspective for those 20-year-olds out there between the ages of 20 and 29, the average 401k balance is around 10,500. The average contribution rate, this is why I'm bringing this up based on our question today of how much we should be contributing. The average contribution rate is around 7%. Okay. For those 30-year-olds between the ages of 30 and 39, the average 401k balance is 38,400. The average contribution rate is 8%. And for 40-year-olds, the age is between 40 and 49, the average 401k balance is 93,400 and the average contribution rate is 8% For 50-year-olds ages, 50 to 59 the average 401k balance is 160,000 and the average contribution rate is 10% For 60-year- olds between 60 and 69 average 401k balance is 182,100. The average contribution rate is 11% For 70-year-olds between the ages of 70 and 79, average 401k balance is 171,400 and the average contribution rate is 12% [16:47.2]

And real quickly on the 70-year-olds as of January, 2020, the further consolidated appropriations act removed the age limit that made it impossible, really for individuals 70 and a half or older to make contributions to traditional IRAs. You know, personally, I think that opened up an additional retirement savings options for those currently working or a lot of my clients running their own businesses still in their 70’s. So that's where that balance is interesting. Now, one thing you'll notice is the contribution rate for the age ranges I gave, went up. Remember in our 20’s, the average was 7%. 30’s was 8% 40 stayed the same around 8%, 50’s and 60’s went to 10% and then 11%. And then our 70’s went to 12%. Now there's a lot of things you can bring up as to why. But one thing I'll mention is that typically in our 30’s and 40’s and 50’s, we start getting higher earnings power. So, we're able to defer more. That just makes logical and practical sense, right. [17:45.8]

So, for those 20- and 30-year-olds out there thinking, oh my gosh, I got all, you know, max out and get to this 10 or 15%, this guy on Make Your Money Matters talking about right. Remember it's all customizable too. These are averages, doesn't mean it's right for you. This is where you seek counsel, it's important. And it's really important to make sure that that number works for you and we're heading towards a direction that we can actually mathematically help you design for the right amount for you, and then not only the right amount, but then where we are putting it. Because again, the second question to this is where we put the retirement assets. Roth, IRA, 401k after tax assets. Again, it depends on your retirement goals. So, understanding the retirement savings goals, what you should aim for kind of the big questions, what should I aim for savings wise? [18:32.8]

You know, fidelity had some pretty concrete ideas as I was reading through there. You know, again, it's more of a kind of generalization, but it's good. By the time you're 30, the company calculetes, you should have saved an amount equal to your annual salary. I want to restate that. They're saying that by the time you're age 30, the company fidelity calculates that you should have saved an amount equal to your annual salary. So, if you're earning $50,000 by age 30, you should have $50,000 banked for retirement. By age 40, you should have three times your annual salary. So, by age 50 six times your salary and by age 60 eight times and age 67, ten times. So, you kind of start thinking about this and kind of going, okay, what's the overall average employee 401k contribution rate. This is again from Fidelity's findings 8.9%. So, remember that rule of thumb. I mentioned at the top of the shell around 10 to 15%, the average amongst Americans right now is 8.9%. Pretty interesting if you think about it. [19:31.4]

So, what I want to aim for today to answer the question of how much Brad, should I be contributing to retirement plan here at one capital management. We really like going through that and I don't want to make it overly complicated. I'm really, I promise you, we don't do that. And I'm not trying to make it overly complicated, but it is a more contextual question than just a simple number. It's understanding what your goals and objectives are for what type of retirement you want to have. If you're looking for a 30 year down the road, retirement, that's one thing. If you're looking for my prospective client, I talked to last week, a great young man with a good head on his shoulder, starting in a startup company, really trying to get his game plan in order. And we're now since working with that client, it's a really great thing to kind of say his goals and objectives were again. I want to be financially free and available to work if I won't do, but if I don't want to work, I don't have to buy 40. Well, that's an interesting dynamic because now the type of retirement plan or the type of retirement accounts that we'd be investing in change a little bit. So, customization and tailoring your retirement plan. And, and again, retirement plan isn't something that you just wait to your sixties. It can be any year or time line that you want, making sure you seek counsel to build that plan and then put the investment management, the portfolio in line with that. [20:52.0]

Because again, it's not what you own, it's how you own it. So, talking about the amount that we're putting in to retirement plan, and then talking about the retirement plan itself, what types of accounts to use is going to be a specific design for each person. And I wanted to at least give you some of the averages today and what we're seeing out there from some of these reports from Investopedia and Fidelity's findings, and just kind of give you a generalization. But once you go granular into your specific situation, it really becomes more myopic what you want to be doing for you. Because you're in control and the reality of seeking counsel is to find a good partner, to be able to assist in that. And again, if you haven't done that, you can give us a call. You can call us at (805) 410-5454. You can also text us, text the word track T R A C K, to set your retirement track review meeting with one of our advisors here at One Capital Management. You can text the word T R A C K to (805) 410-5454. You can also go to our website at onecapitalmanagement.com. There you can schedule some time with myself or one of our advisors and review what works for your retirement custom, build your retirement and find out what your amount to contribute to retirement planning is. We know the averages, we can look at them, you can read them, you can listen to this podcast and understand them, and they have their place of merit, but understanding and going granular into what works for you is what matters, cause remember you always want to Make Your Money Matter. [22:18.3]

I want to thank you for listening to the, Make Your Money Matter podcast. And for those of you in Ventura County, you want to listen to the, Make Your Money Matter Radio show, we are 6:00 AM and 10:00 AM every Saturday morning on KV TA 1590 am. And before acting on anything discussed today, remember to speak with a financial advisor near you about your specific situation, or again, if you'd like our help, visit us at onecapitalmanagement.com or give us a call (805) 410-5454. [22:47.3]

And next week on the Make Your Money Matter podcast, we're gonna be talking about the question of how much income can I receive in retirement from my investment. We're going to talk about withdrawal rates, what a sustainable withdrawal rate looks like and making sure it works for you. I'm looking forward to it and as always Make Your Money Matter. [23:05.6]

The information in this podcast is educational and general in nature and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [23:29.1]

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