The Rachel Cruze Show - Why Most Middle-Class Retirement Plans Fail (And How to Fix It)

Starting point is 00:00:05 I talk to people every day about their money, and retirement is one of the biggest pain points that I hear. So today we're going to break down the common retirement mistakes that keep people from building wealth and what you can do to set yourself up for success. So make sure to like, subscribe, and share this episode with a friend. All right, the first mistake that I see when it comes to retirement is that people start investing before they're ready. And listen, I know everyone says, like, investing as soon as possible because of compound interest and all of that is so true. Yes, and I am all for investing early. But you want to make sure that you have a good financial foundation below you before you start investing.

Starting point is 00:00:43 Because it's not going to be great. If your roof leaks, you're like, crap, I got to like spend thousands of dollars on that, but I don't have it. And we have all these bills to pay with debt and everything. And oh my God, what am I going to do? But I have, you know, $50,000 in my 401K. But that's not helpful because you can't use that to fix your roof. So that is why the baby steps are so important.

Starting point is 00:01:03 So remember, get $1,000. That's the very first step you're going to do. Then I want you to pay off all of your debt, everything but the mortgage, and then once all your debt is paid off, then bump up that starter emergency fund to three to six months of expenses. Then you invest. So yes, you do pause investing until those other three steps are taken care of. Because again, you want a firm foundation below you when it comes to your money. And investing is important. Absolutely, we are all about it.

Starting point is 00:01:30 But making sure that you are debt-free and you have your fully, funded emergency fund in place when that begins. So let's pretend that you have debt and you're like, well, I'm still going to invest, but you don't really have a ton of margin to invest. So maybe you only have, what, $200 to invest. And let's say you start that at age 30. Then you have around $1.2 million at retirement, which is great. We're not mad at that. But let's say you got out of debt first. And that freed up close to $400 of margin. If you put that with the $200 you would have invested, that would be $600 that you could invest. And let's say you started three years later.

Starting point is 00:02:07 Well, then you would end up with $2.6 million. Do you get that? So can you invest and still retire a millionaire? Yes, absolutely, 100% if you have debt. But if you pay off your debt, that frees up the margin for you to invest more. And the power of compound interest is more in your favor at that point, even if you start a few years later. So that's what I want for you.

Starting point is 00:02:28 I want peace and I won't math on your side. That's why we wait to invest until after we've paid off. debt and have a fully funded emergency funds. All right, the second mistake when it comes to retirement is only investing up to your company match. So a lot of people I talk to on the Ramsey show, I'm like, okay, well, are you investing? Like, yes, I take the match for my 401K. And that's it. So for some people, that may only be 4%, 5%, 6% of their income. So I want you investing 15% of your income into retirement. So what the power of that is going to do is make sure that you are set up more than ever for having a comfortable retirement. So 15%'s a lot. So think about this. The company match

Starting point is 00:03:09 is amazing. So I actually want you to go up to the match. Let's say your company matches 5%. Go up to the match. Well, 5% minus the 15 we want. That equals 10. You have 10% of your income left. Then go over to a Roth IRA, max it out if you can. And if you do, max it out. And you still have some percentage of your income left. Go back to your 401k and finish it out. So that's the way you want to look at it. But that 15% is really big, you guys. Don't just go up to your company match. Do more. And you're going to be able to do more because remember, you are debt-free, which is huge. All right, the third mistake that people make when it comes to retirement is only relying on social security or a pension plan. So listen, Social Security, we're paying into it.

Starting point is 00:03:54 So let's hope it's still there. We get to take some out and that we get a check. That's really nice. but usually for most people it does not cover the expenses that they have going into retirement. And it doesn't give you an abundance of cash. It just doesn't. So it either is going to like get the bare minimum done, if that. But it's definitely not going to set you up for a retirement life where you can flourish, right? Like what we were just talking about, like instead of having $3 million and Social Security, some people, they don't invest in anything. And they just depend on Social Security. So I don't want that. Now pensions are incredible. They are great. They're a good plan if you have one in place and if that is like part of the package of where you're working. But here's the thing with pensions. When we're talking about that 15% of investing, whatever percentage of your income is going into a pension, I want you to divide it in half. And that half, after you divide it, is part of your 15%. And the reason we do this, so you're going more. So let's say your pension's 10%. I would say then 5% I would include in that 15%. And some people are, Rachel, that is so much. Are you kidding? The problem is that you don't have the control over a pension and what it's invested in. Within a 401k or your Roth IRA,

Starting point is 00:05:06 you get a lot of choice in what your money is being invested in, which is great. So if you don't like something, you can change it. With a pension, it's locked in. So while it's great because it is kind of a locked in retirement plan for you, you just don't have the control. And I want you to be able to have the control. So again, if you're getting Social Security or a pension, absolutely incredible. But remember, 15% is what we're shooting for. Now, there are things that you can do right now to retire well, no matter what your income is. And so we're going to talk about that here in a second. But first, I do want to tell you about one of our sponsors, Fairwind's Credit Union. The holiday season should be about peace and not payments. And that is a big reason why I love Fairwin's Credit

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Starting point is 00:07:07 Okay, now we thought we talked about some mistakes when it comes to investing in retirement. Let's talk about how to do it correctly. Well, first things first, again, you need to be debt-free and have a fully funded emergency fund. I know we've said it before, but it really is a big deal. because you want to be able to do these things in order. Because as my friend, Dr. John Deloney always says, is that you are solving for peace. We want peace in your life.

Starting point is 00:07:29 And what the baby steps show is a very tactical plan to create control and peace over your money. So again, it's the $1,000 emergency fund, get out of debt, and then bump up your starter emergency fund to three to six months of expenses and then start your 15%. So the second thing you want to do

Starting point is 00:07:45 is, again, invest 15% of your income into retirement. So I know we talked about this, but it is so, so important. So that 15% again, remember, the match beats Roth beats traditional. Do your match at your 401K or 403B. Fill up the Roth, and then if you can go back to a 401K, that's great. All of those options, honestly, are better than just a traditional IRA or even a traditional 401K. If your employer offers a Roth 401K, we love it.

Starting point is 00:08:14 We absolutely love it. So the 401K is great, again, if your company has that benefit. And then the Roth IRA, open it. Open up a Roth IRA. If you are filing taxes every year, you are eligible for it. So once you are debt-free and have that emergency fund, please fund it is one of the best investments that's out there, honestly. And if you are married and your spouse is not working, they can open up a spousal Roth IRA. So you guys can kind of double up, which helps so much because, again, this all grows tax-free. Anytime you see the word Roth, that's what we want. So whether it's a Roth 401K, that's awesome, or a Roth IRA. That means all the

Starting point is 00:08:48 growth, you're not taxed on. And remember when we talked about compound interest, what you put in is only a very small percentage of what you're actually going to use, because most of what is going to be sitting in that account at retirement is growth. And that means you are not going to be taxed, which is beautiful and wonderful. And that is what we want. So for your 401k, right now, you can contribute to $23,500. And a Roth IRA, you can contribute up to $7,000. Now, both of these have some catch-up contributions that you can do as well. But I would sit down with the financial advisor and kind of look at these options. But remember, 401k Roth IRA, it's what we love. All right, the third thing that you can do to set yourself up for retirement is don't invest in

Starting point is 00:09:26 anything you don't understand. This is a big mistake that a lot of people make is that they hear this like awesome thing. It sounds great. But they're kind of confused by it, but someone's telling them it's a great option. And they're like, okay, I'm going to just trust you. I'm just going to do it. Don't blindly put your money in something you don't understand. I want you to be able to understand it so well that when you leave that office of that financial planner, you could explain it to a sixth grader of like, here is what I'm putting my money in. And honestly, you guys, a lot of this is just jargon. A lot of the words they throw around can feel intimidating. But it's just words. And like, you can learn the meaning of them. It's really, really not that hard. It's, it can't be a

Starting point is 00:10:01 learning curve just to kind of get into that world. But do it because, again, the biggest mistake that people make is like, well, they said it was good. So I'm going to just do it without fully understanding. So remember, there are some bad investments out there. I'm not a big fan of single stocks, too much risk, Bitcoin. it's all over the place. You know, there's just some things that are risky out there. So I always go really old school, which is just like good growth stock mutual funds, index funds, things that are spread out. You know, you're able to have like 90 to 200 stocks in a mutual fund or even, you know, the S&P 500, like an index fund. Like it's all 500 companies. Like that's great. Like

Starting point is 00:10:41 spread your money around. That is really important. Now, thankfully, you don't have to do this alone. I know I mentioned an investment professional or an investment planner to help you. So I would have you connect if I could sit down with you and just say, please connect with a smart vester pro because there is one in your area and they are professionals in this arena, but they're ones that have the heart of a teacher, not the heart of a salesman. So I will put a link down below for you to find one near you. Now, if you're not there yet, maybe you still have debt or you're still trying to get your emergency fund in place, I will put a link down below for you to find one near you. emergency fund in place. I will put a link down below for our investing guide. So this is a really good place to start to continue to kind of get a big picture of what to do. So that way, when you pay off your debt and you have your emergency fund, you can hit the ground running. Now, if you want to know

Starting point is 00:11:29 more about wealth building, make sure to check out my episode, How to Become Financially Literate in 8 minutes. You can click right here. Or if you're listening on podcast, I will put a link below. All right, you guys, remember to take control of your money and create a life you love. Thank you.

The Rachel Cruze Show - Why Most Middle-Class Retirement Plans Fail (And How to Fix It)

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