NerdWallet's Smart Money Podcast - Fall Money Tasks, and Saving Enough to Retire

Episode Date: September 19, 2022

As we head into fall, is your money where you want it to be? To start off this episode, Sean and Liz give you a few easy money tasks so you can end the year right. Then they answer a listener’s money question about how to save enough money to retire — including when to start spending what you’ve saved up. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail].

LES WESTON And I'm Sean Pye. a few fall money tasks. Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Liz Weston. And I'm Sean Piles. If you have a question about how to manage your money, call or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. Subscribe to get new episodes in your feed every Monday. And if you like what you hear, please leave us a review and tell a friend. In this episode, we're talking about how to save enough to retire, including knowing how much money you need and how to get there.

But first, it is time for our fall money check-in. As always, we will keep this list short enough that you can knock it out on a Sunday afternoon. These frequent lightweight check-ins make it easier to stay on top of your money. Right. And a good first place to start is by checking in on your financial goals for the year. We like to talk about SMART goals. That's an acronym for goals that are specific, measurable, attainable, relevant, and time-bound. So I would say go back and think about what you wanted to accomplish in January. See where you are. Are you three quarters of the way through accomplishing that? And if you're not on track for that, that's fine too.

And if you had some goals about your investments, it wouldn't be too much of a surprise if you were not on track because the market's been fairly crazy lately. I would say if you are worried about your investment goals for the year, remember that investing is a long-term goal, longer than a single year. And while recent market downturns can seem scary, remember that selling what you have in the stock market right now can lock in losses. Yeah, there's a lot that we can't control when it comes to investing and life in general.

And what the stock market does is one of them, but what we can control is continuing to invest no matter what, and the amount that we set aside. When the market is being crazy, sometimes it pays to up your investments, like invest more. When you're buying in a down market, you are buying stocks on sale. So if you really feel like you need to do something, the first thing I would check would be your asset allocation and make sure that it still aligns with your goals. And your asset allocation is basically how much money you've got in stocks versus bonds versus cash. And those can get out of whack. If the stock market has a real run up, then you're going to have too much in stocks. Maybe you need to cut back. The other thing you can do is simply put more money in. That makes it feel like you're doing something

without panicking and selling. I want to talk about money goals that folks may have entirely abandoned from the beginning of this year. I think that it's fine to still do a mini retrospective of your finances so far. Look at things like your savings. What was your balance in your emergency fund in January? What is it now? Go through your expenses. How much are you spending on things like groceries in January versus now? Chances are you're spending more. And are there any changes in how you're managing your money on a day-to-day basis? I actually fall into this camp of people who kind of dropped their money goals for the year because of the way the economy has been shifting. I had a pretty big expense at the end of last year that

sucked up some money from my emergency fund, and I thought I would be fine to make my same regular contributions. But seeing the way the economy has felt shaky this year, I decided to allocate a lot more money into my emergency fund every month, and that has meant shaky this year, I decided to allocate a lot more money into my emergency fund every month. And that has meant that I haven't been able to really meet my primary goal this year, which was back in January, to max out my retirement account. And I think that's fine because things change throughout the year. Yeah, exactly. I would try to, as much as possible, maximize retirement savings when you can. But there's a lot of other things going on, a lot of other goals that you've got to meet. So that makes a lot of sense.

Right. And I know that it is just barely fall, but it's also a good time to think about next year. What do you want your finances to look like in January? How do you want to end out this year? It can be hard to not feel cash strapped after the holidays when you spent a bunch of money on presents and travel and all of that. And so I'm trying to think about where I want to be in terms of my savings. And we'll talk about it a little bit later, but that might mean cutting back on how much I'm spending on presents this year. Well, another thing people should keep in mind are taxes. If you haven't done so, running a bit of a tax projection could be helpful. Or if you have a tax pro,

turning to that person. That's something I just did because I want to make sure that we are on track to have the right amount withheld from our paychecks from our business to ensure that we don't have a big bill come April. The second money task for folks this fall is to take a look at your spending and look for a few places to cut back. One number that was totally eye-opening to me is that U.S. households could spend an average of $11,500 more in 2022 than they did in 2020 for the same goods and services. And that's according to a recent NerdWallet analysis of federal data. That's a lot of money. That's a lot of money. Almost $12,000. It's really nuts. Yeah, it is. And the only way that most households are going to make it through that is finding

places to cut back because you probably are not getting $12,000 more in your paycheck. Right? No, that'd be nice, but that's not going to be the case for most folks. And it can be hard to find ways to cut anything from your budget. But we like to recommend people look for at least 5% of discretionary spending to trim just to account for inflation. And there are a few areas where you can look at that. So I would say start by looking at your credit card bill to understand what exactly has gotten more expensive. Chances are it is things like your grocery bill or gas has gone down recently, but it could go back up and it's just gotten more expensive throughout the year. So I would say if you go to the grocery store, save your receipt, and then notice what costs more than it did maybe a few

months ago. For me, I am surprised by how expensive cream cheese has gotten. It's such a random item. Is that a thing in your household? Yeah. We love some breakfast bagels in my house. And it seems like they've gotten twice as expensive for a package of cream cheese as it was in the beginning of the year. It's really ridiculous. But what's helped me a lot is that I recently made the shift to a vegetarian diet. And I will say that my weekly grocery bill is at least $30 less because I'm cutting out things like my lox bagels that I used to love so much and even just meat in general throughout the week. Vegetables are generally less

expensive. And yes, you have to get more creative with how you're cooking, but it's been saving me a good amount of money each week. Yeah. And there's a great cookbook out there called Cool Beans. If you have always disparaged beans, it's a great way to get your protein. And there are a ton of super recipes in that one. And it's available at your library, probably. Oh, that's also a great way to save money. Yeah. Yes.

But you mentioned getting ready for the start of the year. And I think, isn't that when student loan payments will restart? Yes. Student debt payments on federal loans are set to resume at the end of this year going into next year. And this is even after student loan cancellation, right? Yes. I will say that is our third money task. Get ready to take advantage of student debt cancellation. If you haven't yet, listen to last week's podcast episode where we talk about this. But an application for loan cancellation should be available by early October. That's what we're hearing so far.

You can actually sign up for emails from the Department of Education at ed.gov slash subscriptions, and they should notify you via that service of when the application is available. Okay. And I understand that if you made some payments on federal loans during the pandemic, in other words, when the payments were suspended, but you decided to pay down your loans anyway, you can get that money back? Yeah, that's pretty nice. So our student loan nerds recommend that you should do so now if you are in a time of financial hardship, but maybe wait if you're not, since we don't know exactly how this application to get your money refunded will shake out. As we're seeing in some states, you might have to pay taxes on the debt forgiven, and

it's unclear whether any of this money that you might get refunded could also be eligible for taxation. Okay. Well, obviously, stay tuned to Smart Money, and we'll have further updates on that. Absolutely. All right. And now we have one last bonus money task for you, and that is to get ready for the holidays. Start off by figuring out your travel plans. Our travel nerds say that September is actually the cheapest time to book holiday travel. Oh, that's interesting. So if you know that you're going to be going home or going somewhere else for the holidays, start looking for great airfares now. Yeah, do it sooner than later,

because come October, November, when most people begin to think about this stuff, it's going to get a lot more expensive. And also it's the holidays. So you got to think about gifts, who you're giving gifts to and how much you're going to spend. Yeah. So if you haven't set aside cash already for this, maybe think about doing that over the next couple of months. And if you are going to be using credit cards, which is a great way to protect yourself from fraud and also get some points while you are shopping for the holidays, think about which cards you have will be able to get you the most amount of points for your shopping. I also have a big spreadsheet that I've used year after year

because it's not just travel and gifts. It's also entertaining. It's decorations. It's all kinds of different expenses that can roll up into this time of year. And having that spreadsheet really helps me think about the costs in total. And then I can make trims or change things because, you know, as you said, you're probably going to be cutting back a little bit on gifts to accommodate the other things that you need to spend or save money on. So, you know, having a better idea of what the total cost is going to be can be really helpful. I love that idea as well, because you have also a historical record of how much you've been spending one year to the next. And so you can

really see the impact of inflation this year versus what things look like, say, in 2020. Yeah. And it also keeps me from giving somebody the same gift twice, which has happened. Oh, man, that must have been embarrassing. Oh boy. Yeah, well, there we go. One thing that I've started doing is getting gifts gradually. That way, if I'm visiting somewhere,

like I was in San Francisco last weekend and I was going around Japan town, I found the perfect gift for one of my friends and I just picked it up and it wasn't super expensive, but knowing that I can just knock out that gift now versus in December means that I can spread out the costs. And I don't have to have this mad dash of getting everyone a gift all at once. It helps me feel like I'm making steady progress. And I just don't like feeling stressed

against a deadline. And this helps against that too. Yeah. And I think our shopping nerds recommend that as a way to not only spread out the cost, but take advantage of deals when you find them. Oh, absolutely. And since this is particularly hard for me, I would say also come up with your own gift list. In other words, things that you'd like somebody to give you. I'm always scrambling at the last minute, like, I have so much, why do I need anything more? But actually it does help to have some ideas that you can throw out. Even if your loved ones ignore them, at least you've responded somehow. I know. I feel the same way. I feel self-conscious and kind of weird asking for a specific thing, but it can make the lives of your loved one a

lot easier because they don't have to scramble around and think, what would be the perfect gift for this person? Just kind of tell someone. They will be happy, you'll be getting what you want. It'll be a win win all around. Okay, well, what's on your list, Sean? I think the first thing on my list is actually this vegan cookbook is called Mission Vegan, wildly delicious food for everyone. And it's from the guy who owns Mission Chinese, which is a pretty famous restaurant in San Francisco that is incredible. So I think I'm going to get that and just experiment with my cooking a little bit more. Oh, that sounds great. What about you, Liz? Well, I have no idea. That's why I'm going to get started. Well, add this to your list for the weekend, knock it out, and we'll reconvene next week. All right, sounds good. Now let's get to this episode's money

question. All right. This episode's money question comes from Jennifer, who left us a voicemail. Here it is. Hi, my name is Jennifer. I'm a public school teacher ending up 31 years doing it. And I would really, really like to retire from education sometime soon. But I'm concerned. I feel like there's not enough money in my 403B. I'm putting away about $1,000 a month into it. I still have a mortgage. I have a car payment, and I'm 58. I don't know if you could offer any tips for teachers. I know we are very, very lucky to have a pension and healthcare, although they are going to gut our healthcare is what we're hearing in the next round of negotiations on our contract. And by the way, I don't know if it matters, but I do make about $101,000 a year. I have no dependents, but I feel like I don't have enough money. I guess

everybody feels that way. I just feel like I need some professional tips. I'd be so grateful. Thank you. Bye-bye. All right. And this episode, it is just Liz and I answering Jennifer's question. Let's dive in. So Liz, part of why it's just you and me, a big part of why, is because you know a lot about retirement and you've answered tons of questions about how to know whether you have enough to retire and all of the complicated ins and outs of it. So let's start with the basics here. How could someone know whether they have enough to retire? That's the question, right? Especially when we're facing a funky market and inflation and just the normal human worries about a big change in your life. Because when retirement's

a long way away, it just is this abstract thing. And then as you get older and it gets closer and closer, you realize, whoa, I'm actually going to have to live on this money that I'm putting aside. How am I going to do this? So my best advice is web calculators and web tools are great when you're in the saving process. But when it's time to start spending that money down, you really need to talk to a human being. You need to find somebody who has been through this before. This is your first time, right? So you need to have a human being who is experienced at guiding people through retirement and a fee only financial planner can be that guide for you. They have done this over and over. They know the questions to ask and they know the things to watch out for because this is the first time that you're doing it. you don't know what you

don't know. And it's really easy to make mistakes that you can't recover from. And that's the scary part that you screw something up, you can't fix it. And now you're going to run out of money too quick. Can you think of common mistakes that folks will make going into retirement that might be irreparable? Yeah, one of them is taking social security too early. There are so many people who grab it at the first instance, which is typically when you turn 62. That's the earliest you can take social security. You're accepting a permanent reduction in your check when you do that. And people don't realize how long they're likely to live. And most people are going to live past what's called the break-even point, where if they had

waited, the value of their checks would more than outweigh the ones that they're passing up. Because it really is set up so that if you wait a little bit, you're going to get a much larger check. That's the bottom line. Isn't it that every year you delay taking social security, the amount that you get just goes up and up by a certain percentage? Yes, exactly. Which is why it's almost always worth waiting at least until your full retirement age, which is somewhere between 66 and 67. But often it's worth waiting until you're 70 when your check maxes out. But I hear from so many people who just either can't get that through their head or they don't believe it, or they're just certain that they have to grab it now because

social security is going away. Social security is not going away. It's like the most popular federal program. The trust fund is going to run out of money at some point, but even if Congress doesn't fix that, and chances are very good it will fix it, but even if Congress doesn't, the system is still taking enough money to pay like 80% of what's the benefits that have been promised. So, you know, grabbing social security early because you're afraid it's going to run out of money is just not a smart move. But all this stuff is something that you need to talk over with a financial planner who's really informed, understands how Social Security claiming works, and can help you with

other things like Medicare choices. Yeah, I was going to ask about that, because that can be very complicated to navigate too. So what consideration does someone have when it comes to Medicare choices? Well, typically, you need to sign up for Part A, the part that's free, you know, that you typically don't pay premiums for, and that covers hospitalization. You also need to pay for Part B, which is the doctor's visits, and that is a monthly premium. And then there's Part D, which is the prescription insurance. And there's also something called Medicare Part C, which is like a private insurance alternative to traditional Medicare. And our listener mentioned retiree

health benefits. Now, those are increasingly rare. They used to be fairly common where people could continue to get health insurance through retirement from their company. Now the plans that still have that typically end them at age 65 when you apply for Medicare. So if you do have this rare benefit, you want to find out exactly how it interacts with Medicare. And if you don't have this benefit, you want to make sure you have some other health insurance to make sure you're covered if you are retiring before Medicare age. So there's just way too much to go into now. We got a ton of information on our site about that, but it's super complicated and there are some serious downsides if you make the wrong choice. You really want to get some help with this. Yeah. One thing that strikes me about retirement is that there's a big difference between saving enough throughout your life and somehow being one of those magical people that has saved enough. But actually feeling like you

have enough money to retire is a completely different thing. So I want to talk about that as well. How do you flip the switch from working your entire life to retiring and then actually going from saving all that money to spending that money. A lot of people have trouble with that. I was just looking at a study that said that most middle income couples continue saving, continue building wealth into their 80s. Part of it is it's just really hard if you have a lifetime of saving and that habit built in, it's really hard to stop. But on the other hand, there's also some big end of life expenses that a lot of people have to deal with long term care, medical bills, all that kind of stuff.

Most people have to be comfortable with the idea of seeing their balances go down because most people are just not going to be able to save enough to where they can only essentially live on the interest or only live on dividends or, you know, not touch their principal. Most people are going to have to pay that down. That said, I think a lot of people are more comfortable with spending down or with the idea of touching their principal if they have guaranteed income that's enough to cover their expenses. So for some people that might be social security, that's guaranteed income. Other people might want to buy what's called an immediate annuity. That's basically you give a chunk of money to an insurance company, and they give you a stream of monthly payments, typically that last for life.

And if you've got your basic expenses covered that way, then you can feel a little bit more comfortable. If your money's in the market and it's going up and down, you know, okay, well, at least I've got shelter covered and food and transportation. I'm going to be fine. Yeah. Well, how can folks anticipate the amount of money that they'll need in retirement? One approach is that you can look at your current monthly spending, multiply it times 12, and that's how much you need to cover a year's worth of expenses, and then multiply that by the number of years that you would estimate you'll be alive in retirement, I guess. How do you think that shakes out in practice? It's really tough to figure this out if you're several decades away from retirement. But as you approach retirement, you're going to have a much better idea of what your expenses are likely to be.

And then you take a look at the income side. OK, what are you expecting to get from Social Security? And as I said, it's typically worth putting that off as long as possible and maybe drawing down from your retirement funds, if that will allow you to put off starting Social Security. Then you have to figure out how much are my medical expenses likely to be, because I'll still have to be paying for Medicare premiums and typically a supplemental policy on top of that. There's so many moving parts to this. That's why people really need to talk to a financial planner. They have powerful software that can factor in all kinds of things, including if I draw too much for my retirement funds, how is that going to affect my Medicare

premiums? Because those are also sensitive to your income. Your premiums can actually go up if you make a lot of money. When you're a long way from retirement, you can pretty much figure on a sustainable withdrawal rate from your retirement funds of about 4%. Somewhere between 3% and 4% seems to be workable. But as you actually approach pulling the plug on work, you want to be really confident that you have enough and it's sustainable. And that's just not something you can do with rules of thumb. Yeah. You mentioned the importance of talking with a fee only financial advisor and also someone who has gone through this before, because there's so much that you don't know that you don't know. I'm wondering what questions you think someone who is talking with an advisor about

this should bring up. Well, obviously the first thing is how do you get paid? Because you want don't know. I'm wondering what questions you think someone who is talking with an advisor about this should bring up? Well, obviously the first thing is how do you get paid? Because you want to make sure you actually are talking to a fee only financial advisor, not a fee based one, because fee based is very different. They can accept commissions that might affect their recommendations. I'd like to see at least a CFP as a minimum credential, that Certified Financial Planner, that's the credential I have. I would hope that they would have other clients like me in my similar situation, especially with teachers. Our questioner is a teacher, and there's lots of things that affect teachers' retirement that may not affect other people's

retirements. That can be an interplay with teachers' pensions and social security. There can be issues with their 403Bs, which are different than 401Ks. If I were a teacher, I'd want somebody that specializes in teachers. I would also be curious to hear from a financial advisor like this, what hiccups their other clients have encountered that maybe changed their plan over the course of being retired. Yeah, exactly. This is kind of like, in a weird way, estate planning, because you want an estate planning attorney with a little gray in their hair so they've seen their plans play out and they know what can go wrong. I think the same thing is true for retirement planning. And I mentioned the hiccups between Social Security and teachers' pensions. The issue is a lot of teachers don't pay into Social Security.

So if they do happen to have earned a benefit or get, say, a spousal benefit, it can be reduced by their teacher's pension. Exactly how that works, again, is super complicated, and you're going to want somebody's help to navigate that. We should also maybe talk about different forms of retirement because a lot of folks nowadays who are retiring or maybe leaving the job they've had for quite a while, but are still working part-time or freelancing. How do you think that fits into retirement planning? I think it's a really good idea to have some kind of glide path. I think the idea of just quitting

and walking away on certain days may sound really good, but the reality is we get a lot from our work. We get social interaction. We get an intellectual stimulation. We get a sense of purpose and walking away from that suddenly can be a real shock to the system. So for that reason, for psychological, emotional, social reasons, having some kind of glide path where you're stepping down to part-time work or consulting, something like that is really a good idea. And then you add into it the financial benefits of that because the money you're earning is money that you don't have to pull from your retirement funds. It allows you to either spend a little bit more or make sure that your money's

going to last longer or in some cases, both. It's really powerful to have some income coming in in those early years. Yeah. Some people aren't in the position where they can choose when they retire, either for personal or perhaps medical reasons, they are forced to retire. How do you think they can manage this really difficult transition? Well, Sean, you made a really good point because unfortunately, many, many people retire earlier than they expect, and that can really throw a wrench into their plans. So as always, if you can possibly talk to some sort of fee-only advisor, if you can't afford a fee-only CFP, there's also financial coaches, accredited financial coaches, accredited financial counselors that tend to focus on people who are middle income and they're a little bit more affordable often.

So that's something to check into. You just definitely want to know what's ahead. And you want to make sure that as you're drawing down your retirement funds, that you're doing it in a sustainable way. I think a lot of people just try to wing this and spend whatever they've got and they run out of money too fast. So especially if you're retiring before you meant to, you are in grave danger, I think, of running out of money too early. So you want to get some advice about that. And it's possible that you may have to make some big changes to make this work. You may have to sell the big family house and move into somewhere smaller. You may need to even

relocate to a different community in order to make your money last. But it's better to do that early when you have the energy and health or even more energy and health than you'll have later. So it's better to do that early than wait until the last minute when you're out of cash. Yeah. And no matter what, make sure that you're getting help from someone because there are various resources available for different income levels that will help you navigate this very complicated transition. Yes. And our teacher is a little too young for Medicare. And a lot of people who are in that situation where they're retiring earlier than they expect aren't eligible for Medicare. So you want to check out the Affordable Care Act exchanges because most people are going

to get some sort of subsidy to make that more affordable. And you do not want to be without health insurance, I don't think at any age, but particularly as you get older. There's just too many things that can go wrong and just cause catastrophic bills. So you want to make sure, if at all possible, you have that coverage. And you hear these horror stories about people getting gigantic medical bills that drain their retirements, and that can leave them in an even worse place. And your retirement funds are safe in bankruptcy, whereas your medical bills can be wiped out. So I hate hearing about people who have drained their retirement funds to pay medical bills because they could have been protected

in bankruptcy. So if you are in that situation, you definitely want to talk to a bankruptcy attorney about your options before you start either draining your retirement funds or your home equity to pay for that. Something else I wanted to touch on was the impact of inflation on people's retirement plans, because they had saved a certain amount over all of these years, expecting things would be maybe a certain price. And now the price of all these things has gone up from housing to gasoline to groceries. What effect do you think current inflation rates are having on people's retirement plans? Typically, the people who have been most vulnerable to inflation are the ones on fixed incomes. So the ones in retirement. The good news is that if you do get Social Security,

that has a cost of living adjustment built into it. So that can help offset the ravages of inflation. But you typically just can't earn more money to make up for higher prices. That's why it's so important to talk to an advisor so that you know that your financial plan has been stress tested so that you can get through inflationary periods without running out of money. And some people may find that they want to go back and get a part-time job to help cover some of these increased expenses too, which if they're capable to do that is I think an okay option as well. Oh yeah, absolutely. Any way that you can get more money coming in can help offset that. And then just being as savvy a consumer as you possibly can be. One of the upsides to retirement is that

you do have more time and you do have more control of your time. So there are things that maybe you could do for yourself that you might've paid for while you were working. Everybody's inflation rate is different. It depends on what you're spending your money on, how you're spending your time. But knowing that inflation is out there and that prices are rising can make people think, oh, maybe I want to put off retirement a little bit longer, save a little bit more money. Again, run this all past your advisor. Make sure that you're making smart choices because there's also a limit to time and energy.

You don't want to put off retirement indefinitely and then wind up too sick and not able to do the things that you want to do. Well, you hear stories about people who saved so much for retirement. They wanted to travel the world. And then when they actually did retire, they're not able to do all the things that they had in store. Yeah. We are not guaranteed good health. We are not guaranteed energy. You really have to make that trade-off in deciding, okay, this is time for me to enjoy the life that I've been looking forward to. And I think, I keep coming back to the professional, but I think having somebody really take a look at your retirement plan and give you their opinion and run it through some

powerful software, that can give you the comfort that you need to pull the plug or start that glide path or however you decided to do it. Just having that one extra person with some experience looking over your shoulder and going, yep, you can do this. That can give you the confidence to go forward. All right. Well, Liz, do you have any final thoughts for our listener or anyone else that's thinking about retiring?

I think if you get the okay from your financial advisor, I think it can be a very exciting time in your life and something to really look forward to. Great. Well, I would typically bid adieu to you, but you're helping me through the episode. I'm not going anywhere. No. So now let's get into our takeaway tips. I'll start us off here. As Liz said, first up, get expert advice. You've never retired before, but an experienced financial planner has guided many people through this process. Next, make sure your health is covered. Know how any retiree health insurance interacts with Medicare. Finally, think about inflation. The rising cost of living might

mean delaying retirement or working part-time. And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more information on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Sean Piles and myself. We had production and audio editing help this week by Rosalie Murphy. and review us wherever you're getting this podcast. This episode was produced by Sean Piles and myself. We had production and audio editing help this week by Rosalie Murphy. And here is our brief disclaimer,

thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.