[00:00:00] Andrew Rafal: Welcome back, listeners, to another episode of Your Wealth & Beyond. And today, we are very excited to have Sarah Holden on the show. Sarah, how are you this morning?

[00:00:12] Sarah Holden: We’re doing great out here in Washington, DC. Thanks so much. How are things your way?

[00:00:18] Andrew Rafal: I’m sure a little bit more calm than the DC area with the two weeks and counting to the big day.

[00:00:24] Sarah Holden: Yes, indeed.

[00:00:27] Andrew Rafal: So, you know, listeners, the Your Wealth & Beyond Podcast is developed to help each of us build wealth and find purpose. In today’s show, we’re so excited to have you on, Sarah, because today’s show is going to be helping whether we’re an individual or a business owner to learn the fundamentals of how we can better save for retirement. And, Sarah, your background for most of your career has been on the retirement side. Is that something that when you were growing up, you kind of knew this is what I love? Or how did you get into the path of working with ICI and previous to that with the Fed?

[00:01:04] Sarah Holden: Actually, retirement and studying retirement was the furthest from my mind when I started out on my career. I went to the University of Michigan and got a Ph.D. in Economics, focusing on international economics, actually, and then went to the Federal Reserve Board where I was a staff economist. And a position opened up at the Fed to analyze the US retirement system and the pensions and the IRAs, and I took the opportunity to totally change topics and move towards studying the retirement market and doing numbers for the Fed for the financial accounts that get published every quarter. And then the Investment Company Institute, which has a research department, also was building expertise around the retirement area, because so much of our retirement system is indeed invested in mutual funds. So, if you have an individual retirement account or a 401(k), chances are you’ll hold mutual funds inside those accounts.

And so, I ended up going over to ICI two decades ago and have been focusing on understanding what retirement savers are doing both at the beginning of their careers and at the end of their careers as they transition into retirement.

[00:02:25] Andrew Rafal: And so, when we think of, and we hear this a lot that people are better at planning a vacation than planning for the retirement. And over the years, you’ve seen a lot of different behaviors but let’s talk real high level of why people are so bad at planning for the retirement. What do you think are some of the mistakes people make? Why this is so hard for people?

[00:02:46] Sarah Holden: I think a roadblock is that retirement is far off. So, it’s thinking about your older self and people don’t think about their older selves. They focus more on the person they are today. And it’s just so far down the road that it’s kind of easy to procrastinate and say, “Well, I’ll get to that later.” And there are also quite a few decisions to make to get on the path to saving for retirement. I think really, the key is to break it down, take it one step at a time, and little by little you’ll get to building that nest egg. So, in the case of retirement, the first best place, typically, to start saving for retirement is in your plan at work. So, if you have a job that offers a retirement plan, chances are that today it’s going to be a 401(k) plan or a 403(b) plan. So, this is a defined contribution plan, where it’s important for you to be sure that you are participating in the plan.

And what’s very important is to be sure that you are participating enough to get employer money. So, nine out of ten 401(k) participants are in a plan where their employer actually puts contributions into their account but often what the employer will put in depends on how much the individual puts in. A typical example is if I put in 6% of my pay over the course of the year, and my employer offers $0.50 on the dollar, the employer will put in a 3% contribution. So, at the end of the year, I’ve got a whole 9% saved towards retirement. So, it’s a really great rate of return right off the bat. And also, it literally is leaving money on the table if you aren’t taking full advantage of that employer contribution. So, typically, best place to think about retirement saving is at your job. Check to see if you’ve got a plan, what kind of plan it is, and make sure that you’re participating in it.

[00:04:52] Andrew Rafal: Yeah. And you hit on that most companies whether it’s a Safe Harbor match or it’s based on the contribution they put in, but anywhere from 3% to 6% is what we see. And so, if somebody’s not taking advantage of that free money, they’re literally just giving it away. And so, if we go before 401(k) plans and then we’ll jump back in and talk a little bit about it but like from our standpoint if we’re in a room with a group of 30 clients, and we asked, “Raise your hand, if you have a pension,” nowadays, what do you think, Sarah? From ours, it’s usually about 15% to 20% will raise their hand, those that are fortunate to have a pension, but the majority do not and that’s really because of this advent of what you discussed, which is the 401(k), which took effect late 70s, early 80s. So, with pensions, what happened there in the 70s and 80s? Why did the employers decide to take the risk off of them, and now, put it on the individual investor?

[00:05:53] Sarah Holden: Actually, there was a shift from defined benefit plan design to define contribution plan design in the private sector. And technically 401(k) plans are pensions as well under the Department of Labor. And what happened, I think, was really a couple of changes. First, really, the defined benefit plan is a good design if you have a workforce that stays at the same job their entire career and retires from that job. And so, in order to really get a benefit from that traditional pension, you need to have been at a single employer really for the bulk of your career and retire from that employer. And the American workforce has actually always been a very mobile workforce. And the defined benefit plan is not the best design for a mobile workforce because early in my career, if I have a defined benefit plan, the benefit will be based on my salary and how many years I work there. And if I leave there, that benefit’s kind of frozen in time. It’s based on those early-career dollars, that early-career salary. It doesn’t get adjusted for inflation. And someday, when I come back to claim it, I will have a benefit but it won’t have grown as I’ve gone through my other jobs.

Whereas with the 401(k) plan or a 403(b) plan, any kind of defined contribution plan, those very first dollars that I contribute out of my very first paychecks can compound and grow over the entire rest of my career, whether I stay at that employer or move to another employer, because I may be able to leave the account behind. What many people will do is roll the account over into an IRA. I may be able to roll it over into my new employer’s plan, but those early dollars get to stay with me and grow for the rest of my career.

[00:07:55] Sarah Holden: So, indeed, there’s a design feature about defined contribution that really makes it useful for a workforce that’s mobile, a workforce that’s changing jobs, or if you have someone who goes in and out of the workforce, while they are out of the workforce, their account can still continue to grow. There’s also a lot of talking about the shifting of the risk. So, with a defined contribution plan, it’s true. I as the participant need to be sure that I’m participating that I’m contributing, I then typically need to select what the investments are going to be that I’m going to put those contributions into. And so, there’s some responsibility on me to handle those decisions. But the defined benefit plan was not without risk too. The employer could go out of business, the employer could not fund it enough so you could have a plan that was underfunded, and you might not get all that you were promised from it.

So, there were indeed risks with the defined benefit plan just as there are risks with a defined contribution plan. They’re just slightly different in terms of whether they’re on the worker, they’re on the employer, they’re on sort of both.

[00:09:07] Andrew Rafal: Yeah. And if you’re that fortunate few that has the pension plan from the defined pension plan, and then also the contribution plan, you’re in a much better position because then you have that with social security and you’ve got a really great way to have that income in retirement. But for most, as we get back to the contribution side of things, the 401(k), what kind of trends have you seen over these maybe the last decade now that more and more companies are auto-enrolling employees so they don’t even have a choice or they’d have to make the choice to opt-out? So, are you starting to see the trend of employees putting money in at an earlier age because of this?

[00:09:49] Sarah Holden: So, we have really in terms of you always see the news stories about millennials and how they haven’t bought houses yet. They have student debt. They are later in forming a family and starting a household. And yet they are indeed saving and investing for retirement at a younger age than the generations before them. And in large part, it’s because when they get to that first job, chances are there’s a 401(k) and chances are if they don’t do anything, they will be automatically enrolled. So, they still have the option to opt-out. So, it is still a choice but it’s sort of the easier choice that if you do nothing, something good happens to you, you start saving for retirement paycheck by paycheck rather than you’re left sitting on the sidelines. And so, they do end up saving for retirement and investing for retirement, starting really at quite a young age. So, a very positive trend there.

And I think with the automatic enrollment design, we’ve seen innovation over time as well in terms of most plans will have an initial contribution rate that might be 3%, 4%, 5%, 6% to start you out but then we’ll have an automatic increase built-in. So, that in a year, when you’re a year older, you’ve probably gotten a bit of a raise, the contribution rate will go up by one percentage point and now you’re saving a bit more for retirement. So, it helps these young workers start saving at a lower rate but then also automatically increase them as they mature and age through their careers. So, a positive trend there in terms of getting younger folks engaged in saving for and indeed investing for retirement at that first job. Interestingly, though, we also see that younger investors or younger individuals like Roth IRAs. And so, if you look at the Roth IRA market, it’s in large part quite a few young investors opening up and contributing to Roth IRAs. And so, that’s a very active choice.

[00:11:53] Sarah Holden: As an individual, you need to research where you’re going to open the IRA. Are you going to go through a brokerage firm or an advisor, an insurance agent? Are you going to get some kind of help? Or are you more of a do-it-yourself person? You could just go through a discount broker or you could go directly online to a fund company. But however it is you go about opening that IRA, it’s on you, the individual, to research that and to open the IRA and then to decide whether you want to do the traditional IRA or the Roth IRA. And a lot of young investors, I think, are recognizing that they’re early on in their careers so their salaries aren’t that big, their tax rates aren’t that high, and they will put in an after-tax contribution to the Roth, get all of the tax deferral inside the accounts that don’t pay taxes on it as it grows and compounds. And when they get to retirement, they’ll be able to take those distributions or withdrawals tax-free.

So, young investors, some very positive signs for them, I think both in terms of voluntarily or being automatically enrolled at that first job at a 401(k) or a 403(b), and also seeming to do some research on their own and seeking to open Roth IRAs.

[00:13:13] Andrew Rafal: Yeah. And we’re seeing more and more companies within the 401(k) plan offer the option for the Roth contribution as well. So, that’s obviously beneficial. If we have a younger person whose income is not as high as it is maybe they get in future in their career. So, they’re not getting a great tax deduction by putting it in the pretax. So, having the Roth option is wonderful there. And then also for some of the higher income, we work with a lot of clients that are making well over 200,000. They can’t put into a Roth IRA, but their 401(k) plan allows them to make after-tax Roth contributions. So, this is where we look at where tax rates are right now and you and I, Sarah, we can’t predict where they’re going to be but the thought process is probably going to be higher in the future. So, a lot of people are taking advantage of the Roth 401(k) contributing some if not all into it and allowing them to then grow that money tax-deferred and then down the road can take that money out tax-free, just like the Roth.

So, listeners, if you have a 401(k) plan, what you want to make sure you find out is does it offer the after-tax or the Roth portion? And if it does, you may want to look at that as a potential option for you. Again, not giving you advice on that, but it’s something to look at and talk with either your trusted team and to look at taking advantage of that.

[00:14:34] Sarah Holden: Yeah. I think as people look to decide between the traditional where you get the tax deduction, the tax break now versus the Roth where you get to take the money out tax-free in retirement, really the sort of question is what’s my tax rate while I’m contributing versus what will my tax rate be in retirement when I’m taking the money out? So, you know, we can’t predict the future, so people do try to think about those rates at those different points in time. I think the other thing that people think about is having a pot of money in retirement that you could draw on for when the roof leaks or the car breaks down or something happens where you need a bit more money than you would normally be taking out of your account. Having the Roth account gives you a place where you could take out that bigger withdrawal without it impacting your taxes at all. So, for some folks, they have it in their mind as the lumpy expenditure fund, compared to their traditional account, which might be their more regular income fund.

[00:15:44] Andrew Rafal: Right. And it also can be looked on as to help cover the cost of potential long-term care, assisted living, things of that nature. Now, listeners, remember, if you do contribute to the Roth portion and you get a match from the company, that match is going to go into the pretax portion. So, just things to know. For me, Sarah, what I do is actually put 50% of my 401(k) contribution into the pretax, the traditional, and then 50% to the post-tax. So, I’m paying a little bit more taxes now than I would if I put it all in the pretax, but I look at it as having diversification, controlling a little bit of my tax destiny, and just not knowing where things are going to go. So, it’s a great way for a business owner to be able to do that as well. Now, when it comes down to when you’re building out, the 401(k) continues to grow, where are you seeing with people trying to allocate within? Are they trying to do it on their own? Or are they going more into target dated funds? What’s been the trend as you look at retirement accounts over the last five to 10 years?

[00:16:51] Sarah Holden: There’s definitely been a trend of recognizing that not everybody is a do-it-yourself investor. So, there’s on average more than 20 investment options in the typical 401(k) plan. The do-it-yourself investor looks at that more than 20 options and says, “That is great.” There’s international equity. There’s domestic equity. There’s domestic bonds. There’s a full range of things to choose from that the plan sponsor has selected to offer a range of risk and return. So, the do-it-yourself investor is thrilled at that opportunity. But we recognized over time that some folks maybe aren’t that engaged with the idea of figuring out stocks versus bonds and all those risk and return and those things. And so, there’s the option of choosing in most plans, a target-date fund, and the target-date fund is a fund that is diversified, and it rebalances over time as it approaches and passes the target date.

And the target date is your anticipated year of retirement. And so, it’s basically going to start out when you’re young and far away from the target date. It’s going to be mostly invested in equities, so reaching for growth. As you’re aging and moving through your career towards retirement and the fund is moving towards and past the target date, it’s rebalancing to become focused on income because when you get to retirement, that’s what your focus will shift to be. And so, they’re a great solution for someone who’s busy, has other things to do, other things they want to focus on, or maybe doesn’t feel confident in choosing amongst all the different funds that there are in the plan. This is a solution that is easy to figure out which one is right for you but offers professional management of the assets inside the fund, again, with this diversification and rebalancing over time.

[00:18:52] Sarah Holden: So, the trend has been not to take away the choice. So, all those other options are still there but to add the target date funds to the lineup so that the investors who want to stop there at that point and say, “You know what, I’ll just have the target date fund,” they can do that. And the other investors who want to be more engaged in the process can choose among the other funds. And at this point, we have more than half of 401(k) plan participants are investing in target-date funds. So, quite a few have either been defaulted there. So, if you’re in an automatic enrollment plan, chances are the default is a target-date fund. But there are some who have actively chosen and said, “You know, I’m going to hand this off to the investment professional. I’m going to invest in the target date funds.” So, some voluntary actually actively choosing the target date. Some people choosing to allow themselves to be defaulted into it.

[00:19:50] Andrew Rafal: Yeah. We, here at Bayntree, we help oversee over 30 401(k) plans with about 6,000 employees and it’s the same. Some of them will reach out to us and ask help of how they can allocate but the majority, especially as they’re starting, it’s just easier to go on the target date fund. And as they build that up, then it can be one where they can spend more time or have somebody that they can work with. They can help them choose the allocation that might be a little bit more diversified or using funds that inside of the plan that may be a little lower cost but having that strategy there. So, it’s definitely, I think, for a lot of people as they’re getting started, to have it easy and simple is the best way. Otherwise, people had too many decisions and then they end up not doing anything.

[00:20:37] Sarah Holden: Yeah. I think that’s right. It just makes it nice to have. You know you’re getting professional investment management. It’s going to be diversified and it’s going to rebalance for you over time. So, it’s not static. Someone is watching it and making sure that it’s progressing as you’re progressing towards retirement yourself.

[00:20:57] Andrew Rafal: Now, you mentioned a little earlier that this trend of the younger, the millennials, they are investing even sooner than the Gen X but what are your thoughts? And what’s your team’s thoughts on, especially since COVID, over the last five, six, seven months, we’re starting to see this trend of day trading again and we’re seeing the advent of Robin Hood is kind of targeting the younger investor. So, I mean, from our standpoint, I look at that say, “Okay, great. It’s getting people involved and learning and understanding the markets,” but does it cause for you guys a little bit of trepidation that we’ve got now the, I’m not saying it’s the late 90s, but now it’s Robin Hood is catering towards making it almost like a video game and people could get as we know and you know, it’s very hard to continue to make money by day trading or picking and selling stocks against the true professionals.

[00:21:54] Sarah Holden: For the most part, 401(k) plan participants stay the course through market ups and downs. So, really, for the most part, we see that the discipline of 401(k) plan saving, which is that you do this paycheck by paycheck, so it’s little by little, people aren’t really trying to time the market in their 401(k) plan because they are doing it just little-by-little paycheck-by-paycheck automatically. And now this doesn’t mean that they couldn’t decide at any point in time, I could change the asset allocation of my account so I could go in and reallocate among the funds that I selected. Or I could decide that my contribution allocations could change, that I’m going to change which funds I’m buying with each of those contributions that goes in. And we do a survey of a defined contribution plan record keepers, where we ask them sort of a few key metrics.

It’s kind of to keep a finger on the pulse of what’s going on in these plans. As we go through, we started the survey during the global financial crisis, and then we’ve just continued it. So, we still had it going the first half of this year when COVID hit in March. And what we’ve seen is that for the most part, these participants, they keep on contributing. So, only 2% of defined contribution plan participants stopped contributing in the first half of this year and they also tend to stick with their asset allocation. So, only 5% changed the asset allocation of their contributions, and fewer than one in 10 changed the asset allocation of their account balance. So, they basically just kept on course despite the fact that, I’m sure as you know in March, the market fell by more than a third in less than five weeks.

[00:23:47] Sarah Holden: So, that was a bump in the road for them but they, for the most part, really stuck to their guns with regards to saving and continuing to invest. Although I would note more than half of them who are in target-date funds, there was reallocating going on underneath the hood inside the fund for them, but it was not a participant-directed change. So, it doesn’t get counted in my statistics.

[00:24:14] Andrew Rafal: Yeah. I mean, one of the values of the, in a sense, dollar cost averaging buying in every paycheck is. You know, we’ll explain that to the 401(k) participants is that it’s okay, but market volatility can be our friend because now you’re getting to buy more of those shares at a lower value and your dollar-cost averaging in. So, it’s that autopilot mentality and they start seeing it as time goes on and they start saying, “Okay. Well, this is really doing its thing,” and then they blink and all of a sudden three years go by and they’ve got 80,000 in their account that they’ve been saving and putting away and getting the matching. It provides them that confidence and it’s those little wins we talked about. I think the biggest thing for somebody is to just get them started, “Oh, I’m only making X amount of dollars and I need every dollar so I can cover my expenses,” but if you just did that 3%, they’re not going to miss it that much and it gets them on that habitual investing cycle that they get used to it.

And so, that’s the key and I know you guys are great at trying to promote that because a lot of our clients who have well over seven figures, now as they enter retirement, they didn’t make 300,000, 400,000 a year. They made 60,000 to 80,000 but they’ve saved religiously, and they lived within their means but they stayed the course. And they did it year after year after year after year.

[00:25:36] Sarah Holden: Yeah. I really think that’s the key education that goes on in the workplace is really that nine out of 10 defined contribution plan participants say that they appreciate that the retirement plan helps them think about the long term, not just their current needs. So, there’s a very basic just first step of the education that goes on in the workplace in that you need to take that little bit aside today. Don’t think about today. Think about your future self. Think about that long-run plan and that little bit today will grow, as you said, to be something very significant down the road. It will just continue to compound over the rest of your career. Eight in 10 of them say that knowing that they are investing little by little makes them less worried about the short-term fluctuations in their account. So, again, in education going on in the workplace about the 401(k) plan to tell them that this is a long-term goal.

There will be ups and downs along the way and they do indicate, the participants themselves (we do a household survey and the people say), “Yes, I recognize that this will happen but I’m less worried about the short-term ups and downs.” And recognizing that I don’t know that the average participant knows what dollar-cost averaging is but they’re buying stock on sale when the market’s down. And when it goes back up again, they see the benefit of that in their account statements for sure.

[00:27:08] Andrew Rafal: Yeah. Sometimes we, in our space, we get into some of the lingo, and they’re like, “What are you talking about?” So, I like that. Its stocks are on sale, buy now.

[00:27:17] Sarah Holden: Buy now. That’s great. Stocks are on sale. Get some.

[00:27:22] Andrew Rafal: I don’t know if you guys have enough data yet but with the pandemic since March, April, and the CARES Act came in and allowing money to be taken out with these certain parameters, have you noticed from your record keepers the data? Did people take advantage of that? Or was it more of a little blimp, and nothing really changed that much in regards to whether it be distributions or loans taken out over the last six, seven months?

[00:27:49] Sarah Holden: So, the CARES Act went in at the end of the first quarter, so March 27^th, and we have data through the end of June. So, we have the first half of the year. So, we’ve only really sort of had a full three months of having the CARES Act available to folks. That said, not too many people have taken advantage of the new provisions. So, what we saw over the first half of the year with regard to just regular withdrawals was 2.8% of participants took a withdrawal of some kind and that includes 1.1% who took a hardship withdrawal. And then on top of that, though, being record kept separately, are the coronavirus-related distributions or the CRDs. And those are actually a new kind of distribution and they’re the ones that the CARES Act put in.

And they’re different from the other distributions in really some key ways. Policymakers wanted to allow people to have access to these special savings. These are retirement accounts, they’re earmarked for retirement, they have special tax treatment. We’re really trying to hang on to them to retirement so that we can have them in retirement, but we recognize that along the way emergencies and things happen. And so, policymakers made it so that if an individual was impacted by COVID, they could do one of these coronavirus-related distributions or CRDs. They wouldn’t have to pay the 10% early withdrawal penalty. They could spread the tax implications of doing the withdrawals over three years. And very importantly, unlike other withdrawals, they could actually put the money back into either the retirement plan but if the plan didn’t allow it, they could actually put it into an IRA.

[00:29:49] Sarah Holden: So, you could get the money put back into that special retirement bucket over the next three years. So, it’s a little more like a loan than an actual distribution and it’s sort of a safer way to tap the account because you do have the ability over the next three years to get the money put back into the account. So, we only saw over the first half of the year about 3% of people take advantage of those CRDs and at the same time, though, we saw loan activity go down. So, I think people are recognizing that they are a bit like a loan. And loan activity fell a bit over the first half of this year.

Another change instituted with the CARES Act was the loan rules were changed. So, somebody impacted by COVID could take more out and have a more flexible repayment schedule. So, again, recognition that we’re in a tough time, in the short term, we may need some access to these special accounts that are earmarked for retirement, but trying to make it that it’s in a way where the money could find its way back into the account, again, for the individual.

[00:32:26] Andrew Rafal: And when we think about a lot of our listeners are business owners or may have a job where they’re W2 and they have a 401(k) plan, but then they may have whether it’s a side job, side hustle, or they are a pure business owner, what are some of the top ways that a business owner who may have 1099 income, but what can they do to save for retirement if they do not have a 401(k) plan and they want to put more away than just the traditional IRA or Roth IRA at the 6,500 limit?

[00:33:03] Sarah Holden: Yeah. So, the Department of Labor has a wonderful booklet online that has a table in it that lays out all of the options for a self-employed person or a small business owner who wants to set up a plan. And as a self-employed individual or a small business owner, you could create a 401(k), a solo 401(k) if it was just you, a defined benefit plan. You could do cash balance. About a third of the assets in private-sector defined benefit plans are actually in cash balance defined benefit plans. Or you could do a SEP IRA or a SIMPLE IRA. So, there is a nice long list of options for the small business or the self-employed individual to open. And you mentioned the, sort of, what if I’m a person who I don’t actually have any earned income but I’m in a household where maybe my spouse has earned income?

And what I think is a neat feature of the US tax code is in the IRA space, there’s recognition of the household as a unit that’s in it together saving for retirement, and a spouse with earnings can open up an IRA for a spouse who doesn’t have earnings so that that spouse now has a nest egg for retirement as well. So, it’s called a spousal IRA. You need to be married, filing joint. The spouse who’s working with earnings needs to have enough earnings to cover the contribution to the spousal IRA and the spousal IRA will be in the spouse’s name, but it’s a recognition that the household is in it together. So, the spouse who doesn’t have earnings could be a business owner who just doesn’t have earnings, could be someone who has stepped out of the labor force to care for an elderly parent, to care for children, could be a student who is in school who doesn’t have earnings. So, recognition that the household is in this project together and the spousal IRA is an option that might be useful for many people.

[00:35:15] Andrew Rafal: Yeah. And with the end of last year with the SECURE Act, one of the benefits that they put in were allowing people that were continually working past 70 ½. If they had earned income, they could now continue or they can contribute to a traditional IRA. Up until that point, they had to stop once they turn 70 ½. So, that is exactly what you said, Sarah. That’s a great point and that still rings true. If we have one working well into the retirement years, they both can add to whether it be the traditional or the Roth or a combination but that’s something that you couldn’t do prior to this year. So, that was one nice thing with the SECURE Act, as well as, of course, pushing back the required minimum distribution a few years to 72.

[00:36:06] Sarah Holden: Yes, both of those changes in the SECURE Act, ICI was very supportive of recognizing that. With our increased longevity, you want to be able to work more years and so why shouldn’t you be able to save in an IRA during those years? So, that the 70 ½, age limit for contributions was removed. It was great news for, you know, as we’re having longer lives and longer careers, and moving in the same direction, the required minimum distributions used to have to start after you turn 70 ½ and that got moved up to 72 recognizing that the more years I have to live in retirement, you don’t want me to start drawing that money too early. And so, allowing people to have that a bit more wiggle room there, also very helpful. And in the traditional IRA space, about 3 and 10 IRA dollars are actually subject to required minimum distributions with the age 70 ½.

So, this is really a significant rule for people in terms of most IRA owners don’t take the money until they are required to. Most of them use the RMD as their rule of thumb or is the way that they take the money out of the IRA. And so, moving that age from 70 ½ to 72, I think will allow some people to move that nest egg along a bit further.

[00:37:49] Andrew Rafal:  Also, a little known tidbit that those of you that are working in your 70s, one little trick that if you did have a 401(k) and you were a full-time employee, one of the things you could do is potentially if you had an IRA outside of the 401(k), you could roll the IRA into the 401(k) plan. And if you are a full-time employee, even if you’re over 72, starting next year when required minimum distributions will be mandated again, you will not have to pull out any required minimum distribution from your 401(k).

So, that’s something that a lot of people who are working may not need or want that RMD. So, this is a great strategy to be able to allow your moneys to grow and continue to defer and then start taking out the required minimum distributions after you fully separate or become a part-time employee. So, that’s something that a lot of advisors and just a lot of individuals that are working later in their years, they’re not aware of that rule regarding 401(k)’s full-time employment and required minimum distributions. And I know, Sarah, we briefly touched quickly on business owners, and in the show notes, we’ll have the link out to how and what type of plans that can be created. But this is where, as a business owner, you really need to make sure you’ve got a trusted team to help you because if you’re self-employed, the easiest, sometimes the most beneficial is to create the solo 401(k) and that can also have a Roth option.

[00:39:38] Andrew Rafal: You could potentially, Sarah, one of the great benefits of having your own business, you could add in the profit sharing. And then for some of our clients, we also will look at the cash balance plan in conjunction if they have employees with or not employees but with the 401(k) and the profit sharing. So, there’s a lot of different avenues in regards to being a business owner and helping to defer more of your hard-earned dollars into retirement, which we think is a great thing because it also not only forces you to save, helps you save on taxes, but it also diversifies your risk from having so much in the business, which so many business owners and entrepreneurs do. They have all of the risks in the business itself.

[00:40:20] Sarah Holden: Yeah. I think as, you know, small business or self-employed really, your options are really any type of plan so that you can take advantage of those higher contribution limits compared to just an IRA. So, a lot of good options for them to choose from in order to get those assets, as you say, earmarked for retirement and separate from the business, so to speak.

[00:40:50] Andrew Rafal: And then as a business owner and owning an advisory firm, I want to teach my family and my daughter who’s 14 now and this, listeners, if you have kids that are young, we want to get them thinking about saving and investing and teach them because, Sarah, unfortunately, they’re not getting into school and they don’t even really get into college. So, one of the things that my daughter, that she actually did during the summer and now with COVID, she was able to help more than she normally has but she comes in. She helps us here. She works. And so, what we do, because she’s on the payroll and she doesn’t love all the work I make her do, Sarah. It’s not so much fun with the shredding and the faxing stuff and things of that nature but what we’re basically doing is helping her now, because she has earned income, we are helping her set up and she has a Roth IRA.

And so, she’s not a full-time employee so she can’t invest in our 401(k) plan but what’s neat is being able to show her and sit with her and have her pick some companies that she knows. This is more on, you know, we picked some index funds, but then I also have her pick a couple of companies that she knows and she watches the money and she watches the account, and it’s a great way to get her started at 14 in this mindset that, “Wow, this is pretty neat. I can put money in and I can watch it and hopefully, it does grow.” So, it’s just a great way for you, listeners, who have kids that are working for you to have them start the clock early and it’s a great way for them to start deferring and compounding and have that money there for them when they need it in the future.

[00:42:21] Sarah Holden: Yeah. I think that it’s really such an important lesson and it really is not taught in our schools that when you have earnings, when that first paycheck, no matter how little it is, whether it’s your babysitting, you’re shredding things or walking dogs, whatever it is that you’re doing, when you start having earnings to not spend it all the minute it arrives in your hand or bank account and putting some aside. And typically, you want to put aside an emergency fund for when things come up down the road or you want to put aside for retirement, thinking of your future self. And really, if you don’t take advantage of either the plan at work or an IRA, you are missing out on some tax advantages that the US government has offered you to encourage you to save for retirement.

So, I think it’s important to be sure to take advantage of those, the tax deferral, and save for retirement so that down the road, you do have that account to complement Social Security. So, the bedrock and the foundation across the US is Social Security, and the IRAs and the defined benefit plans and the defined contribution plans were designed by policymakers to complement Social Security so that we can replace our income in retirement. And I think that it’s important to start that little by little lesson early on is great.

[00:43:57] Andrew Rafal: And the other type of account that we’re really big fans of and we hope it gets more and more popular is the HSA or the Health Savings Account. And that’s kind of that trifecta of tax, tax deduction, tax deferral and then if used for purposes of medical and so forth, have it come out tax-free. So, it’s that pinnacle. It’s to get all three. Do you think knowing the policy of what the government’s trying to do is have a save more for our retirement and also to help with health costs? Do you think they’re going to continue to increase the maximum amount that we can contribute as a single and as a family to these HSA accounts?

[00:44:35] Sarah Holden: Yeah. It’s hard to tell which way limits will go in terms of because it’s a cost to the government, allowing the tax break. On the other hand, saving for retirement, saving to cover your health expenses are something that the government wants to encourage people to do. So, can’t predict what will happen down the road but interesting that HSA as they were really designed to handle health expenses during a given year, and then it was recognized that they are indeed a powerful savings tool to help cover health expenses actually in retirement rather than the health expenses during this year. So, I think there’s been an evolution in the thinking of how they fit into our retirement plan, in addition to, of course, the 401(k) or the 403(b) and the IRA as you’re going along.

[00:45:30] Andrew Rafal: Yeah. I think a lot of people just got confused because the FSA, that flexible spending account, well, it had to be used by the end of the year. The HSA, I was using it back in the day as more of a slush fund, put the money and get the deduction and take it out for prescriptions or if there’s a surgery or whatnot. But now what we’ve been personally doing and what we’ve been teaching our clients is let’s look at the HSA as another retirement bucket. The power of the deferral being able with most of these plans, you can invest it the same way you can in a 401(k) and different types of mutual funds and target dated funds. But what if we let this grow and all of a sudden in retirement, we have six figures plus that can be there to help with Medicare premiums, that can be there to help when our healthcare costs are going to be obviously much, most likely larger than they are while we’re working. So, I think, from that standpoint, we are going to see the trend. We hope it continues where people aren’t just putting and taking it out but rather looking at it for what it is, which is one of probably the best retirement vehicles because you get all three.

So, our hope is that they allow for more and more of those limits to increase. And, listeners, if you have a high deductible plan that offers the ability to contribute to an HSA, you really need to look at that if you can afford it because it is in a sense, almost given away free money in the sense of the tax deduction and how it can work for you in the future. So, Sarah, as we come to a close here, just kind of over your years whether it’s from family or colleagues or friend, but what’s the best money advice that somebody’s given to you that you’ve taken and you’ve utilized all these years,

[00:47:13] Sarah Holden: I really think there are three keys to success in terms of saving for retirement. First is make sure that if you have that plan at work, that you are not leaving money on the table because that employer contribution is so powerful and you literally are leaving money on the table if you don’t take full advantage of it. So, to be sure to start early and take full advantage of that any employer money. And even if there’s not an employer contribution to take advantage of, the tax treatment you’ll get for saving for retirement by contributing to a plan. So, step one is be sure you contribute and you get all your contributions.

The other key is when it comes to investing, ask yourself how comfortable you are with the market going up and down. Most 401(k) participants will reach for at least some equity in their portfolio so that they can reach for growth, particularly when they’re younger and they’re early in their career. And then rebalancing over time towards income as you are heading towards retirement. So, reaching for those investments, looking at those investments, diversifying, don’t put all your eggs in one basket.

And then the third key to success is to really try to preserve that account. As you tumble through your career and you change jobs, there’ll be a temptation that there’ll be a small account balance somewhere that you’ll be like, “Oh, that’s so small. Maybe I should just spend it today,” but roll it over to an IRA or if you can roll it to the next plan so that it can continue to grow for you. Because what starts out small when you’re young compounds to be something really significant when you get to retirement. So, the third key to success is to the best of your ability, try to preserve those assets to get them to retirement.

[00:49:11] Andrew Rafal: That’s great. It really breaks it all down there and, like you said, start early, save often, stay the course. We do see if you have four or five different 401(k) plans that are out there, you just don’t even know what you have. And so, just the simplification of consolidation sometimes is the key. So, whether you’re a do-it-yourselfer or you have an advisor, you got to continue always to take ownership of it. Even if you have an advisory team, Sarah, they’re hopefully out for your best interest but still, you can’t put your head in the sand. You have to take ownership for you and your family so that you can enjoy that final chapter which could be 40 years in retirement. And so, the key is, as you stated earlier, envisioning the longer term and focusing on not just short term gain but that long term benefit of saving, compounding, and having the money work for you for a long period of time.

[00:50:10] Sarah Holden: Yes. And I would note that ICI has a website, ICI.org, where all of the research that I talked about is available. So, if you’re wanting to go look to see how do other 401(k) participants in their 20s allocate their assets or in their 40s, you can go and see, well, what have other people done with that 401(k) account? What have other people done with their IRAs? And we also have an education foundation, ICIEF.org, where you can research some of the terms you and I were throwing around like dollar-cost averaging and compounding and risk and return and inflation and laid out in bite-sized pieces. So, you can do this little by little and sort of build a vocabulary and build a repertoire so that you can become more and more engaged in this process.

[00:51:04] Andrew Rafal: That’s great. And this will all be in the show notes and besides the great work you guys are doing, the research you guys are doing, the continue updating the data, if somebody was getting started out or maybe in their 20s and 30s, is there any book on money or retirement that you’ve recommended over the years that can help somebody that’s really maybe simple that helps them get on course?

[00:51:25] Sarah Holden: I actually refer people to the websites of the regulators who oversee all of this. So, the Department of Labor has educational information on being sure that you take advantage of the features of your 401(k) plan or to help you set up a 401(k) plan. The Securities and Exchange Commission has an investor page, which explains investing in IRAs and mutual funds, and exchange-traded funds. And I think it’s important to have a place to go where they’re not selling you anything. It’s the Department of Labor, it’s the Internal Revenue Service has information, or it’s the Securities and Exchange Commission. They’re the government agencies that are overseeing the rules of the road for all of these products and plans and investments and they’re trying to give people information about them to help them figure out the best thing for themselves.

[00:52:21] Andrew Rafal: Excellent. Well, we appreciate you taking the time today and we appreciate all the work that you and your team at ICI is doing. It’s no small feat to help educate people and to get them on a good track for retirement and helping on the financial literacy side because it isn’t like we talked about. It’s not taught in school. So, this is a great way for them to learn and to really take ownership so that they can have a successful retirement.

[00:52:48] Sarah Holden: Yes, indeed. And really, you don’t have to do it all in one day. So, take it on little by little. It can be as simple as opening up an IRA and starting automatic contributions to it that are, you know, it could be $25 even. And just to get in that habit of buying into the market a little bit at a time and know that it will grow into something quite big at the end of the day.

[00:53:16] Andrew Rafal: It’s like training for a marathon. You’re not going to start tomorrow and be able to run a marathon but if you get out there every day and you have a training program and you focus, you have a routine and regimen, you’re going to be able to run that marathon. It’s the same process here. So, listeners, time is on your side. Unless you’re trying to start this at 68 and retire at 70 then we’ve got a whole bunch of problems there. But then we’ll have to tell you to go back to work to about 80. But, Sarah, we appreciate it. Listeners, everything we talked about today will be in the show notes. Sarah, thank you so much. We hope you have a great end of the year and you stay safe and healthy.

[00:53:52] Sarah Holden: Thanks so much for having me.

[00:53:54] Andrew Rafal: All right. You’re very welcome. Well, listeners, stay tuned for a brand new episode of Your Wealth & Beyond later this month. Happy planning, everybody.

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