Money Rehab with Nicole Lapin - “I Feel Behind on Retirement Savings. How Can I Catch Up?”

Episode Date: June 13, 2023

It is not easy to build up retirement savings. And if you're feeling that stress, you’re not alone. Last year, a survey found that 55% of Americans say they feel behind on saving for retirement. That's how today's listener Andy feels. Nicole gives three tips for kickstarting your financial future. Money Rehab Episodes Referenced in This Episode: Target Date Funds: https://link.chtbl.com/A-R_jRxt  Back Door Roth IRA: https://link.chtbl.com/OmdfFe0G  Robo-Advisors: https://link.chtbl.com/ZFGnL-aO  Find out whether you’re eligible for a Roth IRA here: https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. During the thick of the pandemic, I think we were all just focused on keeping our work steady and getting by, right? But now that we're less in financial triage, we can go back to planning for the future, which is, as I like to say, simple but not easy. And trust me, I really do get it. It is not easy to build up a nest egg for retirement. And if that's you, you are not alone. Last year, a survey found that 55% of Americans

say they're behind on saving for retirement. Within that 55% is Andy, a money rehabber who called in with this question. Hey, Nicole, this is Andy. I have a situation more so than an actual question, and that is that I am 41 years old, and I feel really, really behind on my retirement savings as well as investing, and I would love for you to discuss this on your show. I'm a really big fan. I'm kind of new to it. I've only been listening for a little over a month now, but I really, really enjoy it. And I just love all the advice that you give. And I would love to hear your take on this. So thanks so much. And I'm looking forward to it. All right, Andy, so many people have this very concern, and it's such an understandable one. But as my tattoo says, there will be time.

But there is no time like the present, so let's get started today. Your question on investing, Andy, jumps a little bit ahead. Before you can get out there and ride the waves of investing, we've got to make sure we can swim first. So take a look at your total financial picture. There are two big questions you need to answer before you charge the waters of investing. First, what's your debt situation? If you have a student loan with 4% interest and you're making regular payments large enough to pay it off soon, great! But if you have 20 grand in credit card debt with a 20% APR and you're making minimum payments, let's focus on paying off that first. You don't need to be 100% debt-free before you can start investing, but you do need to have a handle on your debt situation.

If you have a larger sum of higher interest rate debt, tackle that first. Consider doing a balance transfer to a card that will give you a 0% APR for the first year and then spend the year aggressively paying down that debt. Here's the second big question. Do you have an emergency fund? If not, you need to build up that emergency fund before you start investing. I know, I know you wanna get out there and buy your stocks

and buy your bonds and watch your money grow, baby grow. Not just stick it in the bank, right? But listen, you need to have an emergency fund first or here's what happens. You have a crisis, you need money. You pull that money out of your retirement fund. You're hit with taxes and fees and you lose all that time and money in the market. It is a bad deal.

If you have an emergency fund to draw on first, you can protect your investments even through difficult times. The general guideline is that you should have enough cash to cover your expenses, so housing, food, transportation, bills for as long as it would take to find a new job. If you can find work pretty easily, three months is probably enough for you. If your work is more niche, then consider trying to aim for a year's worth of funds stashed away. Now, once you have a handle on your debt and your emergency fund, you're ready to start investing.

And Andy, it is not too late. It is really not. You are never as young as you are today. And today is as good a day as any. Start by taking stock of your situation and your goals. If you're a single guy who drives an Uber and plays in a band and wants to do that forever and ever at the end, you're going to have a very different set of needs than if you were a married attorney with three kids. Using that same monthly number you used for your emergency fund, figure out how much you need to live on. Then you have to sit down and ask yourself a whole bunch of retirement questions. When do you want to retire? What kind of retirement do you want? Do you want to drive a golf cart around a little town in the South? Or do you want to travel to Europe every six months?

It's totally up to you. It is not my retirement. It is yours, Andy. But really picturing how you want to spend your retirement gives you a way to visualize and budget for the future. Use all of this information to create your target number. I can't give you that number. This is going to be a very personal thing for you and only you.

Once you've done that, let's choose where to fund your retirement account. Does your job offer some sort of 401k or do you need to open an IRA? A 401k retirement account allows you to pay into an account before taxes and the money is only taxed when you take it out. You are taxed, but you'll be taxed. You're an old man. If that isn't an option though for you, then take a look at IRA accounts. Remember, you aren't going to do this all in one day and you don't have to. There will be time. Now back to IRAs. There are two flavors of IRAs, traditional and Roth. With a traditional IRA, you pay taxes when you take the money out, similar to the 401k. With a Roth IRA, you pay taxes when you put the money in.

In other words, a traditional IRA is pre-tax and a Roth is post-tax. Can't decide between the two? By the way, you don't have to. You don't have to put a ring on one retirement account. You can get all of them. The more, the merrier. Generally, I'm a fan of the Roth if you're eligible to open one. If you're making a ton of money, that's awesome, but you

might not technically be eligible to open a Roth in one step. Stay with me on this one. In order to see if you're eligible, check out the table I linked in the show notes. But if you make too much money for a Roth, first, yay you. Second, there is a sneaky way to get around this that is perfectly legal called a backdoor IRA. This is sort of a specific instance because it only applies to people who make six figures, but I do a whole episode about this, which I also linked in the show notes if you're curious. When you're ready to open the retirement account, just go to a financial services provider like Fidelity or Vanguard. They aren't paying me to say this, but those are the general types of companies that you can open a retirement account at. You connect your bank

account and you start regularly depositing money. That's it. Choose auto pay and you don't have to think about it. Generally, I recommend people try to put 15% of their money into the end game. So retirement, investments, savings. Given that you're starting a little later, Andy, I would try to push it to 20% if you can. As for what to buy with your account, I would consider these three things. First, index funds. I would definitely stay away from picking individual stocks when you're just starting out. After all, you don't start out surfing 20-foot waves, right? You have to learn to get comfortable in the water first. And you may never be interested or comfortable picking individual stocks, and that is a-okay. Remember, mutual funds are managed by professionals who

pick stocks for a living, and they can't manage to outperform index funds. Number two, target date funds. Target date funds are a package of stocks and bonds that change depending on how close you are to retirement. So let's double click on that. When you first buy target date funds, they're going to have an asset allocation more on the high risk, high reward side of the spectrum. So likely more stocks, less bonds. And as you get older, the asset allocation shifts to something less risky, which makes sense, right? You don't want to risk losing a big chunk of your retirement savings on the eve of your retirement. If you want to learn a lot more about these, I've linked an episode I did with author Ramit Sethi where we

dive deep on all things target date funds. Number three, there is no shame in the robo-advisor game. A little dictionary note here, robo-advisors are offered by brokerages, and it's just a fancy term for a computer program that will invest for you based on your goals. Robo-advisors are a really good way to enter the market as a new investor. To set one up, you need to first create an account with a brokerage, find their robo-advisor program, and then answer a survey where there are no wrong answers. On the survey, you'll be asked about your retirement goals, how much risk you feel comfortable taking on, things like that.

Then you transfer some money into that brokerage account, and boom, the robo-advisor invests your money for you based on your goals, and you don't need to buy anything yourself. So how are you doing, Andy? Still with me? I know it's a lot of information I just threw at you, but this is the strategy I'd recommend for starting out with investing in general, but slightly dialed into the more serious and aggressive given that you're starting later. For today's tip, you can take straight to the bank. When you're looking at buying index funds, you're going to see a lot of options to choose from. You're going to see a lot of ticker symbols when you just type in index funds in your search bar on your brokerage account. But you can't just stop there. You have to pick an actual ticker.

So I'll call a couple out for you today. I'm not recommending them just for your educational purposes. One has a ticker symbol VOO, which is Vanguard's fund that tracks the S&P 500 or hundreds of the biggest stocks in the market. And the second one you should peek at has the ticker symbol SPY, which is basically the same thing, just VOO has slightly lower costs associated with it. You can buy these through any brokerage, Vanguard, Schwab, Ally, Fidelity, Magnify, the list goes on and on. It matters less which account you open and it matters more when you open the account. And the best time to open that account, if you haven't already, is today. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab?

And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.