A high number of Americans do not have enough savings for retirement. Many are relying on Social Security benefits, with some experts predicting Social Security might disappear in the near future. Others think that they are too young to start planning for retirement or are intimidated by the process of setting a 401(k) account. This is why it is important to start retirement planning. Los Angeles Public Library is very fortunate to have a “financial guru” as part of our staff. Richard Kraus, is a librarian working in the Business & Economics Department at Central Library, and while he has no formal financial degrees, licenses or certificates, he has been fortunate enough to become a “millionaire next door”, helped to create Money Matter$, and enjoys sharing with and learning from others about financial topics. In addition to investing in "blue" chips, he enjoyed baking and sharing cookies featuring "chocolate" chips. Mr. Kraus kindly agree to be interviewed and give information on best practices to start saving for retirement.
Disclaimer: The following should not be construed as financial advice or recommendations but only as sharing of experiences and suggestions for your consideration.
What is retirement?
I think retirement is really about life goes on, a new chapter after the working life you have lived for most of your years. It may be long, it may be short, for most it will be somewhere in the middle. It can be a time of excitement, a time of relaxation, a time for connecting with family and friends, a time of loneliness, a time for working or volunteering, a time for leisure, a time for travel, a time to stay at home, a time of joy, a time of difficulty. It may come with different phases: go-go years when you have health and energy to do what you set out to do; slow-go years when may be less ambitious in what you want to do and what you can do; and no-go years when you are no longer able or willing to do as much. Some of the keys to a positive retirement have nothing to do with money: good health, people in your life, and having a reason to get up each morning will all make for a richer retirement than all the money you can save.
Why save for retirement?
Social Security, no matter how you feel about its future, was never intended to be a sole source of support (average monthly benefit for retirees as of December 2017 was $1,404 per month and the absolute maximum for a high wage earner retiring at age 70 in 2018 is $3,698 per month). In addition, fewer and fewer people will have a retirement pension from their jobs paying a steady benefit at retirement. This means that improving the money available in retirement both for savings and for income is up to you. In retirement, as in your working life, you will continue to need both income and savings, along with insurance. You will need income to supplement your Social Security and pension benefits for your regular expenses that will continue in retirement, starting with basics such as food, clothing, home, and transportation. In addition to income, having savings and insurance will be needed to cover the unexpected, the emergencies, health issues, and the bad things that happen to us all. And having extra savings can empower you to afford the better things in life such as that special vacation or a new car or generous gifts to people and causes you care about. To put an attention-getting number on all of this: for a retirement of 15 or more years that is active and comfortable, along with covering health issues that may come up along the way, the amount of money you may need at the start of retirement to supplement your income and savings in a meaningful way could easily be at least $250,000 (in today’s cost of living: the true number would be much higher in the future) or much more. Your number would depend on your Social Security benefits, Medicare and other health care coverage, pensions, working during retirement, where you live, how your expenses may change in retirement, what kinds of savings and investments you use, and how long your retirement lasts.
Who should save for retirement?
Everyone should make some effort to save, if possible, something toward their retirement. Saving is not an all-or-nothing proposition. Having something can always help, even if it may not be enough. Saving for retirement will help prepare for two extreme possibilities or, more likely, whatever falls in-between. The good extreme is to be free to retire on your own terms, when and how you want. The bad extreme is to be as prepared as possible to retire when you are forced to stop working because of health concerns, job layoffs late in life, taking care of others, a family relocating, etc. Many will come to retirement somewhere between those extremes, perhaps retiring differently than they had intended, but still having some control over parts of it. And some, by choice or necessity, will work as long into their lives as possible.
What kind of saving accounts should a person have?
I very loosely divide up my money to cover different needs, goals, and dreams into four categories (similar to the bucket strategy that some authors and advisors have suggested): money I need now (this year), money I will need soon (next 2 to 5 years), money I will need later (5 to 10 years), and money I will need much later (10 years or more).
In my opinion, savings accounts are best used for the “now” and “soon” money. The type of saving account should match when and why you need the money and the bank, credit union, or other places you choose should be based on which ones offer good services, low fees, and competitive rates. For the money, I need later and much later, I am more inclined to consider investing, such as in stock index mutual funds, for greater growth potential, but keeping in mind that also comes with greater risk of losing money, as well.
A suggestion I use from a number of financial authors is to designate separate savings accounts for different goals, such as one account for unexpected emergencies, one for funding my next car, another for my next big vacation, one for anticipating expected major expenses such as insurance premiums, new eyeglasses, etc. Having these separate accounts help keep me clear on what money I have set aside for different goals. You can do this by setting up accounts at different banks and credit unions or by taking advantage of a service at some banks to set up sub-accounts for different goals.
For goals that are one to five years away, an option to get a little boost in interest would be to use certificates of deposit (CDs) which pay higher interest than a regular savings account in return for committing your money to the bank or credit union for a set period of time, such as one to five years.
An example of a helpful website for finding and comparing savings accounts and CDs would be Bankrate.
As far as investing for the long term goes, that is too complicated a topic to cover here and I would suggest looking at some of the books I list at the end that offers a few different, though generally conservative, approaches. A few basic guidelines:
- Prefer low fees and expenses so they do not nibble away at your money
- Beware the costs of taxes for investments that are not in a retirement account
- Select a mix of investments that offer a strong likelihood of at least keeping ahead of the rising cost of living over the long-term
- Commit to investments only when you understand what your investments can and cannot do and why you are investing in them, keeping your expectations reasonable and realistic
- Understand the tradeoffs you are making between the risks you are taking and the gains you are aiming for
- Create a plan that will let you sleep at night and that you can stick with even when times get tough
- Get help if you need or want it, but ask questions and try to educate yourself enough so you can trust but verify what your adviser is telling you and doing on your behalf
- Long-term investing should be boring most of the time: If you want to invest for entertainment or excitement, take a small portion for playing with as “mad money” and keep your “serious money” in your long-term plan
Why should you maximize your 401(k) contribution?
A key to saving for retirement is to take advantage of tax-favored accounts. The traditional, tax-deferred versions will reduce your taxable income now but will be taxable when you take the money out. The Roth versions do not give a tax break at the start but will be tax-free later when you take money out. They also allow you to move money around from one savings or investment to another without having to pay taxes for doing that moving around, as long as it keeps its tax-favored status. These tax-favored accounts include the 401(k) offered by many businesses for their employees; the 403(b) offered by many schools and universities for their employees; the 457(b) frequently offered by government employers, such as the City of Los Angeles, and the SEP IRA, SIMPLE, Solo 401(k) options for self-employed and small businesses. In addition, there is the IRA (Individual Retirement Account) which can be opened by those whose work does not offer any of the other accounts and by those fortunate enough to have more money to set aside for retirement beyond their workplace plan. The IRA may also be suitable if you are not satisfied with the plans offered by your employer or if you are changing jobs and want to consolidate your retirement money.
There is a wide range of advice about how you should save into these retirement accounts, with popular suggestions being, save early, save often, save automatically, save at least 10% to 15% of your current income, and save at least enough to qualify for any matching contribution from an employer, if the employer offers it, because it is a guaranteed free boost to your savings. And if you are trying to catch up for lost time or trying to build up enough to retire early or want to have a very comfortable retirement, then the advice would be to consider maximizing your contributions to the IRS limits (limits for 2018 are IRAs: $5,500 per year under age 50; $6,500 per year for 50 and older; 401(k), 457(b), 403(b): $18,500 under age 50 and $24,500 per year for 50 and older).
However, before simply following such generic advice, you should consider your own situation. First, you must balance what you save for retirement with competing priorities and goals: buying a home, saving for education, paying down debts, etc. Next, you must consider how far away you are from retirement: how much time do you have for saving up and how much have you saved up so far? Then, consider what other sources of money, Social Security, pensions, side gigs, etc., you expect to have in retirement: how much will you need for additional income and reserves from what you can save up?
Does retirement planning affect my ability to apply for financial aid for college?
The assets already saved up are not counted, but the contributions made during the base year do count as part of your income in determining financial aid eligibility. A helpful explanation may be found at Fastweb.
Tips on how to save? Four suggestions for saving:
- Connect saving with goals or values that truly matter to you: It provides motivation, priority and focus so that you are not saving because some scold like me told you to do it or you know you are supposed to but, rather, because it connects to you and the drive to save comes from within.
- Pay yourself first: Saving should not be depending on what is left over at the end of the month.Take it off the top to help force you to spend less than what you make.
- Saving automatically: Do not depend on your willpower and your remembering to save. Set it up to be done automatically through payroll deductions or bank transfers.
- Having balance: In their book, All Your Worth, Elizabeth Warren, now a senator representing Massachusetts, and her daughter Amelia Tyagi stress the importance of balance with 50% of your income paying essential expenses, 30% available for enjoying life now, and 20% for first paying down steal-from-tomorrow debt and then for building your future. They allow for the times that your life may require a different balance such as when going through job loss, health crises, overwhelming debt, starting a family, or getting close to retirement.
Putting all these together form what I like to call the GPS approach. A GPS device plots a course from where you are to where you want to go. If you get off-course, it recalculates. I think that is a sensible way to save. I also like to have GPS mean Guilt-free Planning System; it’s not about regretting what you coulda, woulda, shoulda done, but focusing on how to reach your goals from wherever you are now. All the rest of the techniques that help savings, such as cutting back expenses, clipping coupons, shopping carefully, budgeting, etc. all work better with these four suggestions in place. For tips and reminders about savings, consider pledging and signing up for Los Angeles Saves.
We live in a world where a lot of value is placed in materialistic things. What suggestion do you have to help people distance themselves from this value?
Money is a tool. It is up to you to decide how you want to use it in your life, to make it fit your values, beliefs, priorities. Some may see it as a tool for buying and owning material things. It can provide a level of security, knowing you can handle most of the expenses—both good and bad—that come your way. It enables you to support, help and generously share with the people who matter to you. It gives you the means to pursue dreams and expand the choices in life available to you and your family. It allows you to support issues and causes to improve the quality of life for others and contribute to the world around you. Wealth is not just for the lucky, the powerful, the greedy, the status-seekers, the inheritors, the tycoons, the dishonest, and the misers: decent, honest, hard-working people like you can have it, too.
What do you foresee is going to happen with Social Security benefits?
There are different opinions and political spins about the state of Social Security, the future of Social Security benefits, what should be done about it. The Social Security Administration issues regular reports from its trustees, such as this one for 2018, making projections and predictions about the how long and how well the Social Security program can continue to pay out its benefits. From what I have read, it is not likely that Social Security will be allowed to fail, but it certainly seems that Social Security will need a significant adjustment with some combination of increased worker and employer contributions, an increased age for qualifying, or reduced benefits. A good readable book on the subject is Falling Short: The Coming Retirement Crisis and What to Do About It.
What are some of the most common scams that people fall for while trying to plan for retirement?
For retirement savings and other forms of investment, we all need to be alert to scams, to the level and quality of advice we receive from the financial industry to identity theft, to protect ourselves from ourselves.
The California Department of Business Oversight offers two similar booklets that are very helpful guides to financial frauds and scams; California Department of Business Oversight Booklet on Common Financial Frauds and Scams and California Department of Business Oversight Booklet on Protecting Yourself from Fraud. The U.S. Consumer Financial Protection Bureau offers help on preventing, recognizing, and reporting fraud on their website as well.
The financial industry shares some of the blame even when their advice and services are legal and legitimate. Journalist and author Helaine Olen wrote a critical and cautionary look at the financial industry, financial literacy efforts, and financial gurus such as Dave Ramsey, Suze Orman, and David Bach; Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. There has been some debate in recent years about the standards that financial advisors should observe when providing advice and services to clients arguing over conflicts of interest and limits on choices; the fiduciary standard, I do what is best for you, even if I cannot sell it to you, versus the suitability standard, may not be exactly what you wanted but it is still good and I can sell it to you. It is important to know what you are getting if you are getting financial advice or services.
Identity theft is a growing threat to our credit and finances requiring our diligence and attention. The U.S. government offers several websites that may be helpful, including this one from USA.gov, and the U.S. Federal Trade Commission’s IdentityTheft.gov.
Even the brightest, best informed, and richest are susceptible to overconfidence, biases, and flawed thinking; the infamous Bernie Madoff fraud was a classic case of smart people being taken in by a scheme that took advantage of that. Jason Zweig covers many of these money psychology issues in two of his books; The Little Book of Safe Money: How to Conquer Killer Markets, Con Artists, and Yourself and Your Money, and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.
Are there any books you would not recommend? For example, they have advice that is harmful or outdated?
Rather than labeling or identifying any particular books as harmful or even calling attention to them, I do think it is worth applying some common sense and be skeptical of any little-known, insider secrets, huge gains with little or no risk, or a system guaranteed to beat the market. Know yourself and what you are capable of understanding and doing. Get help in evaluating your decisions. Draw what is helpful and useful to you from a variety of sources. Of course, also pay attention to whether the information may be outdated: if the book is focusing on ideas and principles, they may hold up over time, but if they are depending on current market conditions, economic conditions or tax laws I would be more careful.
Lastly, what are some of the books that you suggest for people to read and learn more about retirement?
These are by no means the best books or the only books, but some of the ones I have read that I have found helpful and most of them are very readable. Some go beyond retirement to include a well-rounded approach to your finances.