Saving for retirement: we all know we should do it, but it’s hard to sock the money away when it feels so far off. In this episode Daniel, Kat, and Lauren get into the details of retirement planning, and answer some of your questions like: What should I be doing to prepare for retirement now, even in my 20s?
The views, information or opinions expressed during the Friends with Tax Benefits podcast series are solely those of the individuals involved and do not represent those of Intuit, TurboTax or any of its brands. The primary purpose of this podcast series is to educate and inform. This podcast series does not constitute financial, legal or other professional advice or services.
Kat: Hey, Lauren. Hey, Daniel.
Daniel: Hey, Lauren. Hey, Kat.
Lauren: I was watching the movie The Curious Case of Benjamin Button, which is loosely based on a short story by F. Scott Fitzgerald and made into a movie starring Brad Pitt. And as I was watching, and it’s a story of a man who is born an old man and then ages backwards and it really made me think of this week’s topic, which is planning for your financial future.
Daniel: And I actually think I saw it and I remember nothing except Brad Pitt was in it. I’m super curious. Was he saving for his youth?
Kat: Saving for daycare instead of for retirement?
Daniel: Yeah. Yes.
Lauren: They say that youth is wasted on the young and if you were an older person and then age backwards, that might not be the case, so there might be insights or even appreciations. I think there’s so much that we in our youth take for granted. Our energy, sometimes our physical health, our capabilities that we may not always have access to, so if you are in a position where you are more aware of those benefits and could appreciate them in a different way, how might your choices change?
Kat: Really and truly, when you’re in your 60s or in your late 50s when you’re able to cash out on these retirement accounts, you still have potentially so much more life ahead of you and things that you’re going to want to do. It’s hard for us, younger in our life, to think of 30 years or more down the road, when really and truly, the days will be here swiftly. Sometimes I look back and I’m like, “Wow. College was how many years ago?” and the time goes by quickly. What is the saying? The days are long but the years are short?
Daniel: The days are long, the years are fast.
Kat: Yeah. Before you know it, that time will be there and I think it’s beautiful that maybe even career or the profession or the passions you have now are not what you will have 20, 30 years down the road, but having saved for it to give you a little bit more financial freedom when you are at that space will give you an opportunity to enjoy your retirement even more.
Lauren: As we talk about retirement and planning for the future, I’d love to know what’s been on your mind, Daniel.
Daniel: Well, I’ll tell you what’s been on my mind thinking about the future. Here’s what I want to plead with myself and my loved ones and you listeners is the importance of knowing that we have to prepare for it and social security, if it still does exist when we all retire, is not going to be enough for us to live on. It is a nice supplement, but you really need to have additional income. And so that’s just one thing, is you have to plan for it.
The next thing I want to say is that we’ve talked about the stock market. It can go up and down and that’s just the nature of the beast. And so as you get closer to retirement, it’s really important to shift from the more volatile, the more up and down of stocks to a more stable mix. And I’ve talked about this before. There are products that have an algorithm that just shifts that mix for you as you get older and that’s what I use because I don’t have time to think about that. I want to fix sprinklers and mow my grass. I’m into irrigation right now, not retirement. And so work with a money manager or get an algorithm to do that for you through some product, but you need to shift to a less volatile investment mix as you get closer to retirement.
And the last thing that I want to share, this was so cool. A friend of mine, he has fortunate enough to have extra money and he’s purchased a rental home. And what was so cool about this, he said, “I’m in my 40s now and I have my home I live in and I have this other home that I’ve invested in. And I plan to have both of them paid off by the time I retire and so that will just be income that’s coming to me.” And so this is something I think we’ve talked about before, which is passive income. It’s money that’s working for you that you don’t have to do anything for, so that could be your retirement, your 401k that is just paying you, that you can withdraw from a required minimum distribution as you get older or rental income. But it’s just awesome to see there are different ways, either through investment or through real estate, of taking your retirement and actually making money without working when you retire, so I was inspired by that. And even though I can barely afford my house right now in San Diego and the idea of being able to afford a second one seems silly, who knows? But that just struck me as a new way to think about another way to get passive income as I retire.
Kat: I think another thing to focus on is that if you were fortunate enough to get an early start on your retirement, that’s great, but you should not be discouraged if you’re later on in life as well, too. No time like the present and better start now than never. So put aside what you’re comfortable with not having in the short term and let it sit so that when you are able to take the funds out, that’s when you’re going to see the most return on your investment. There are certain rules that will let you, depending on your account, pull the money out if you need it or take up to the contribution. So what you’ve put in, some accounts will let you take out up to what you’ve put in out without a penalty. It’s all going to vary depending on the type of account, so you’re going to want to do some of the research on benefits behind why you might choose one retirement account over the other.
Once you’ve had an opportunity to maybe establish yourself and your retirement plan, my suggestion to folks that are, “Okay, try to use the tools and the advice and all the things you’re learning, if you’re able to, to help your children as well.” Some of these retirement accounts have benefits that will allow them to take the money out early if they wanted to use it towards higher education, so before being of age to pull them out to retirement, so that might be something that you might consider opening that account. And I think that, at least myself, I used to think of retirement accounts and retirement options as something that I did when I had my real first big job when I’m full-time employed.
But honestly, maybe even it’s at a teenager, maybe your 14, 15 year old has a small part-time job and they’re making some income. They’re able to even explore individual, some IRA accounts of their own, even if they’re not getting a 401k through their part-time job. But they’re making income, so they can start that early even, preparing for their retirement. Doesn’t have to be a large contribution. Folks talk about giving 200 something dollars a month when you’re in your 20s. But if you start in your early teens, a hundred bucks or 50 bucks could go a long way, 40, 50 years from now when they’re actually able to use the funds. So your kids will probably be like, “Retirement? I need shoes this summer.”
Daniel: I’m thinking of my daughter just turned 16 and she’s looking for a job and I just think it would be hilarious to say, “Oh, did you buy some new clothes?” “I put it in my retirement account. [inaudible 00:08:28]”
Lauren: That would not surprise me from children of yours, Daniel.
Daniel: I know. Well, what about you, Lauren? What are you thinking about retirement wise?
Lauren: It’s funny. So I’ve actually been reading the book All about Love by Bell Hooks and in the book, she talks a lot about different kinds of love and she establishes a definition of love as a combination of care, commitment, knowledge, responsibility, respect, and trust. And I love this definition and I’ve been thinking a lot about how that applies as an action to a lot of different areas of my life. And this comes to mind for me, actually, when I think about retirement because one of the questions I think in planning ahead is how do you care for yourself? How do you take responsibility for yourself? And I’ve been thinking a lot about that and how it relates to my self care and how I manage my finances, to me, is a really big element of my self care. I think a lot about daily of planning for the future and taking care of my wellbeing both now and safeguarding it for the years to come, is one of the ways that I show self love and self care to myself.
And I think when you reframe something like retirement planning from this big, scary thing to something you’re doing as part of your self care, which is a huge part of the conversation right now, it can make it more exciting and palatable. You really want to engage with it. And I think there’s lots of challenges to saving for retirement, especially when you’re younger. I think a lot of people really struggle. And it’s really hard to save for retirement if you’re broke, if you’re struggling to make ends meet now or pay your rent now or put gas in your car now, because the prices have gone up so high, how do you plan for retirement? And I think it’s so important to really make sure you can get to a place where your needs are met right now. Then you’ve got a foundation to really start looking ahead and planning for the future.
And I think some of us also don’t really have vehicles to invest that are really easily available to us. I’m really privileged, as are you Daniel, to work for a company that has a really great retirement plan and a really easy vehicle in place for retirement, but not all companies offer 401ks or company matches. If you are working three different jobs as a part-time cashier or an Uber driver, they’re not really easy vehicles set up by these companies to help you invest.
So I think it’s important, one, if you have the privilege to work for a company and in a position where you’re offered a retirement plan, take advantage of it, especially if there’s a company match, which means that the company you work for will contribute a bit to your retirement plan as well. When I was younger, I read quite a few books on money and personal finances and one of the books I read was The Money Book for the Young, Fabulous, and Broke by Suze Orman. And Suze recommends if you’re really young, fabulous, and broke to invest up to the limit that your company will match to make sure that you are taking advantage and not leaving that money on the table. And then beyond that, to focus on things like paying down your debt or saving for more short-term needs and that was definitely an advice that I took early on in my career to make sure that I was investing up to the match and then investing elsewhere as needed.
Daniel: I like that, Lauren, because I think it’s really easy for people to say, “Well, let me just pay off this debt. Let me pay off this credit card before I start saving for the future.” And the thing that we keep hammering is you got to invest for the long term for it to pay dividends and so invest to get the maximized match and then hit your debts. And that applies, I think, whether you’re fabulous or not fabulous.
Lauren: I think the goal, at least for me, is to be fabulous.
Daniel: Okay. Okay. Well, you are.
Kat: You will love yourself. The self love that Lauren’s giving, I know she’s going to feel it twofold when it’s loving her back. Hey, you did this for yourself and here’s what you did extra when you are ready to retire, so I love to think of it as self love because honestly, if you think of the numbers that you’re contributing, if you’re giving 200 and something dollars a month to this, that might have been two massages or two facials that you did for the month, or hey, at the rate that manicures and pedicures cost, Daniel, I know you probably don’t feel this hurt-
Daniel: Don’t do it.
Kat: But that’s maybe less than your weekly mani pedi of what it accounts to. So not to say to cut those things, because obviously you do them because they make you feel great too, and they have some type of reward value to them too, but also think about how your retirement, when you are able to retire and you don’t have to work and maintain this retirement, how great you’ll feel about those smaller sacrifices you made in your 20s, 30s, 40s, when you’re in your 60s and you’re getting this money just coming to you and you’ve already worked for it. So I really like that idea of doing what you can now and then as time goes on and you’re able to do more, then do more.
Daniel: One really important thing that I want to call a little bit of attention to is we’ve been talking about maximize your company match. One thing to stress there is you can invest more than that. I did work for a small company that had a very small and company match, it was 2%. And so I think a lot of people might say, “Oh, cool. I’ll maximize my company match and invest 2% in my retirement.” You are not going to retire till you’re 600 years old if you only invest 2% of your income. And so at that point I could afford 8%. So I invested 8, they matched 2%, but you can go above that company match point.
Lauren: Right. I think if you can go above it, it’s a great idea to do that. And if you can’t, start where you are. I think a lot of people feel so much guilt and shame, like, “I wish I started younger.” And I think if that’s the position you’re in, I think it’s so important to be easy on yourself. There’s a reason you didn’t start younger, whether it was because you didn’t have the money or you didn’t really have the knowledge and there’s still time for you now to make a change in that. Now it’s time for our Q & A, where we’ll be A-ing your Qs with our resident tax expert Kat. You ready, Kat?
Kat: Yes. Let’s get into retirement.
Lauren: Retirement funds are locked away until a certain age. What do you do if you retire early?
Kat: Conveniently enough, while retirement funds are locked away for a certain age, depending on the type of retirement account you have, there are actually certain exemptions that will allow you to withdraw the funds early without having to pay the typical 10% early withdrawal penalty. So some of those exceptions include higher education expenses or to buy or build or rebuild your first home, so it depends on the type of account you have.
Now, if you have a Roth IRA, you can withdraw the contributions that you’ve made without penalty earlier than the typical 59 and a half. But honestly, to see the best and biggest return on your investment would be to leave those funds untouched until you’re 59 and a half so you can see the most return on them. So if you’re planning to retire early, something you want to consider is to have some financial plans in place to support you until you’re 59 and a half to take out the funds because those funds are locked. You won’t have access to all of them upfront. So I mean, technically you could withdraw the funds and be prepared to pay the 10% early withdrawal penalty, but ideally, you want that money to stay there so that it can continue to grow for you. That was the whole point of storing it away or making those contributions over time. So if you want to retire early, that’s cool, but you also want to make sure you have a means to support you through that early retirement until you come of age to access all the funds in your retirement account.
Lauren: So Kat, you mentioned a couple of key phrases there that I really want to stop and unpack for our audience. First, you mentioned the terms exemption, and that’s just a fancy way of saying an exception to the rule. So the rule is your retirement funds are locked until you’re 59 and a half, but there are some exceptions or exemptions, which is the fancy way of saying that. So Kat, you also mentioned the term Roth IRA, and I know there’s a couple of different, really common types of retirement savings vehicles, so a Roth IRA is one of them, a 401k is another. One of the key differences between a Roth and a 401k, for example, is that a Roth is post-tax, so it’s money you’ve already paid taxes on. And then when you put it in your retirement account, you don’t have to again, pay taxes when you withdraw it. Whereas a 401k is pre-tax, so in other words, it comes out of your paycheck before your paycheck is taxed. And then when you withdraw it, you then have to pay taxes then.
Kat: Yes. And that’s also similar to a traditional IRA or IRA account or traditional one is the same way. It’s an individual retirement account, again, but you’re putting those dollars in pre-tax income as well. And then when you are withdrawing the funds at retirement, you’ll then have to pay the tax that you deferred when you were adding it in the beginning, so that’s the difference between the Roth IRA and 401k or traditional IRA.
Lauren: My 401k has lost money during the pandemic due to the stock market. Any help?
Kat: I would suggest you don’t want to focus on that because really with your 401k, with these retirement vehicles, you are in it for the long term. So historically speaking, the stock market trends to go upward over time. So just leave the money as it is and wait until you are able to actually cash out those investments in your 401k or other retirement accounts, but you’re in it for the long run. So sometimes even without the pandemic on a daily basis, the market may go down and then come right back up in that same day or in the days to come, so it’s probably best to just maybe not check it as often as you check your checking account.
Lauren: I already have a 401k and an IRA from a past job, both of which I contribute to. What else should I be doing to prepare for retirement now, even in my 20s?
Kat: Kudos to getting an early start on preparing for retirement in your 20s. I’m sure by the time you are able to pull this money out of your account, you’re going to see a great return on your investment, hopefully. Now, what I would suggest is that you continue to keep giving the maximum allowable contribution that you’re able to until you’re at the point of retirement, but maybe you could think of other ways to diversify your investments. Perhaps you’re in a position that you can add some real estate to your portfolio, perhaps a rental property to have some income coming in. So it really depends with how much additional income are you working with that you’re able to invest, but I would just continue to give the maximum allowable that you can to your 401k plan and your IRA plan and just see where else you might be able to invest your additional funds to get a long-term return on them.
Daniel: One comment to that 20-something who’s investing, I used the internet to crunch some numbers for me. Listen to this. If you start at age 23 and you save $420 a month, you will be a millionaire by the time you’re 67 at a 6% increase, which is pretty typical. On the contrary, so that’s 23, if you start at age 35, in order to reach that same amount, in order to become that same millionaire, you need to save $900 a month and that’s compound interest for you. So there’s 12 year difference between those two starting points, 23 and 35, and you have to more than double your monthly savings. So just start early, don’t stop, automate it, and your future self will say, “I love you, former self.”
Kat: Also, don’t be discouraged if you are 35 and you’re now at a place where you can get a start on it, too. Maybe you don’t have the funds right now at your income level to give that $900 or so contribution, but you might get there in a few more years of earning, so put what you can now. Better late than never, essentially.
Lauren: Kat, thank you so much for answering our questions and thanks to all of our listeners who submitted those Qs for us to A. Now, as we wrap up this episode, I really want to leave you with one of my favorite quotes from The Curious Case of Benjamin Button. “There is no time limit. Stop whenever you want. You can change or stay the same. There are no rules to this thing. We can make the best or the worst of it. I hope you make the best of it and I hope you see things that startle you. I hope you feel things you’ve never felt before. I hope you meet people with a different point of view. I hope you live a life you’re proud of. If you find that you’re not, I hope you have the strength to start all over again.” So, thank you so much for listening. This is the final episode of season one with Friends With Tax Benefits. Thank you, Daniel and Kat, for being my friends.
Kat: Thank you, Lauren, thank you, Daniel and all of our listeners. I feel like each week as we’ve answered questions and we’ve shared our personal experiences, we all can say we’ve learned something over this season, so thank you so much for your time every week with us.
Daniel: Thank you, too. This has been the highlight of my week, learned a ton, and I just feel grateful for the time we spent together. That awesome quote, which gets me fired up, and the new knowledge I’m going into the next stage of life prepped with.
Lauren: Yeah, you can all get better and better.
Kat: Yeah. I can’t wait to share even more and more.
Lauren: So everyone, keep learning. You can still follow us on TurboTax across your social, so check out the TurboTax blog, check us out at TurboTax on Facebook, Twitter, Instagram, and TikTok, and let’s stay in touch. Stay friendly.