Get Your Kids to Save More Money

May 24, 2021 David Kennon

Five Retirement Savings Tips for Your Kids   Concerned your kids are not properly preparing for retirement? You may have a good reason. According to a Business Insider website article, “Only half of Gen Xers have a retirement account, and that’s a catastrophe in the making.  And only 36 percent of Gen X is actively saving for retirement.” (Millennials, on the other hand, seem to be starting retirement saving earlier and are more actively saving.)   Let me give you a few facts and insights. I usually expound on how many retiring Baby Boomers are worrying themselves sick about running out of money. I discuss how many retirees are in much better shape than they realize. I reveal ways how you can get the most life out of your money. I encourage you to empower yourselves to live the retirement you deserve.   But let’s also make sure your kids will be financially prepared for their retired years. Remember, you never stop being a parent.   5 Tips to Give Your Kids About Saving for Retirement   Pay yourself first. This simply means that the money you are saving should come automatically out of your paycheck or bank account. Do not promise yourself that you will save whatever is leftover at the end of the month. It does not work. At all. Give until it hurts. Maybe saving $100 a month sounds reasonable and comfortable. I strongly suggest you start saving $200 or even $500 per month. Choose a number that feels a little scary and uncomfortable. You can always lower the amount if it ends up being too much. Most people adjust quickly to their new savings plan and find they are able to save more than they first thought. In my experience, few people increase their contribution once they start. Invest into a 401(k) or IRA. These accounts give you a tax deduction upfront and defer taxation until you withdraw the money. In addition, by using a retirement account the money is more “tied up” than normal savings. This might make you hesitate to use money from your retirement accounts for non-retirement reasons. Another great reason to invest in a 401(k) is matching. Many companies will match their employees’ retirement contributions, up to a certain point. Don’t throw away free retirement money. Invest 100 percent of the money in the stock market. Don’t make this more complicated than it is. We are talking loooooong term investing here. Stocks have been returning an average of 10 percent over any meaningful time period throughout economic history. Understand the power of compounding interest. It doesn’t especially matter how much you save, but for how long you save it. Let’s assume somebody invests $100 per month into a 401(k) or IRA and places 100 percent of the money into the stock market.   The first number is the age you start investing.  The second value is the amount of your own money invested.  The third is the final value at age 65. Age 20 /  $54,000 Saved/   $948,000 Final Value Age 30 /  $42,000 Saved/   $357,000  Final Value Age 40 /  $30,000 Saved/   $130,000  Final Value Age 50 /  $18,000 Saved/   $42,000  Final Value   Whoa. That is eye-opening. Even for me.   One last tip for talking to your kids — encourage them! Rather than telling your son or daughter they are not saving the right way, encourage them to start saving something!   Be Blessed,   Dave

 

Beware New 50% Tax Penalty

May 17, 2021 David Kennon

Let’s talk about Required Minimum Distributions (the money the government forces you to start taking from your retirement accounts at age 72).   Marilyn and Billy Noel sit at their kitchen table, distressed. “This is ridiculous, now that we are getting older, the government is requiring us to start taking money from our IRAs. We don’t need the money! They are forcing us to pay taxes. Thanks a lot, Uncle Sam.”   “What are we supposed to do with this cash?” Marilyn laments, “It’s been making a lot of money in our IRA. Now what? CD’s and savings accounts are paying basically nothing.”   Let’s take a look at how they are approaching this situation incorrectly.   I’m often reminded by concerned clients, “I need to start taking out money at 72 from my retirement accounts or I will get a big tax penalty.”   This is true. The IRS can levy a 50% penalty on any money not withdrawn. There is quite a bit of confusion around this topic, and often a certain level of unease. Let’s get rid of that fear!   The Required Minimum Distribution (RMD) was instituted by the government to stop retirees from deferring their retirement accounts forever (without needing to pay taxes). Uncle Sam doesn’t like that.   RMD’s are required from IRA’s, 401k’s, or any other retirement account on which you have never paid taxes.   Many of you believe that the RMD withdrawal is a large portion of your retirement account. It’s not.   At age 72 you are only required to withdraw 4% of the account value. Age 73– 4.15% Age 74– 4.2% Age 80– 5.35% Age 90– 8.77% Age 100– 15.87% Age 110– 32.26%   As you see, during your retired years you will probably never need to take out more than 10% per year and even that is way down the road.   If you both pass and your kids get the money, they have ten years to empty out the account (using something called a “beneficiary IRA”).   So don’t let RMD’s be too scary. Just make sure you take out enough. If you are working with a financial advisor it’s something they should be doing for you.   Now let’s get philosophical. According to the Employee Benefit Research Institute, only 18% of Americans take out more than their RMD. This flies completely in the face of the Retirement Revolution lifestyle.   Why are you letting the government tell you how much money to spend?   As you know by now, as long as you invest your money in a diversified portfolio of stocks and bonds (with at least half the money in stocks), you can safely spend 5% of the account each year.   If that is the case, as you take your monthly distributions, you automatically fulfill your RMD. Your RMD doesn’t have to be from the principle, it can be from the growth as well.   Even more importantly, why are retirees waiting until age 72 to start using their money? And when they do, why are they reluctantly being “forced” to do so? Your retirement accounts are for your retirement. Many of you should start using 5% the first year of retirement.   Another note. Some people genuinely do not need the money they receive from their RMD distribution. Like Marilyn complained, “What do we do with this money now?”   The answer is simple but often misunderstood: You invest the money right back into the same portfolio. Notice I didn’t say, “put it back into the same account.” You can open up a non-retirement brokerage account and invest your money exactly the same as it was inside the IRA. You are not restricted to CD’s and money markets. You can invest the money however you want.   So to review:   1. Don’t wait until 72 to start spending your retirement savings. 2. The 5% withdrawal will automatically fulfill your RMD for years and years. 3. If you don’t need it, invest it into a non-retirement brokerage account. 4. Don’t let the government tell you when to use your money.   On a related note, this week I met with a wonderful couple in their mid-eighties, and after speaking to them for a while they said, “I wish we met you twenty years ago! We have more money than ever. What were we waiting for?”   Why did they live like they were broke with money in the bank? Fear. This is why I write these articles each week. I am attempting to battle the overwhelming tide of negativity to empower you to stop hoarding. Within the confines of a well-developed plan, you can enjoy life, be more generous and live confidently that everything will end up okay.   Be Blessed,   Dave

 

How Much Longer Will Social Security Last?

May 10, 2021 David Kennon

Social Security is Not Going Broke   The solvency of Social Security is, understandably, a hot topic. The program supplies the majority of retirement income to the majority of retirees.   The fear that Social Security may disappear makes it even harder for Baby Boomers to spend a little bit of their savings once they retire.   Many people have the attitude of, “If Social Security goes bankrupt, I will need as much in savings as possible to survive. I better not spend a penny or I could be in big trouble if the system crumbles.”   To make matters worse, I have been seeing an increase in scary articles on the internet about Social Security going broke.   Why the increase? Because you click on the articles. News outlets are going to keep producing headlines that grab your attention. It doesn’t really matter if the articles have any academic merit.   Here are some doozies: Social Security isn’t going broke; it’s already broke. Report: Social Security Will Bankrupt America Faster Than We Thought 5 Signs Social Security Is Going Insolvent I want you to make your financial decisions based on the facts, not some random guy’s opinion.   According to the annual trustee’s report, Social Security is fully funded until 2034 at which point it will be 75 percent funded until 2093. Proactive steps are already being taken to keep the system afloat for as long as you are alive.   In 1983 the system was facing similar funding problems and with some simple overhauls, the system easily continued functioning properly.   Congress has already begun increasing the earnings limit on Social Security taxes. It has been increasing incrementally for years. In the year 2000, you had to pay payroll taxes on the first $76,000 of income. Today the limit is $128,400.   If Tom Brady makes $30 million dollars, he only has to pay Social Security tax on the first $128,400. There is serious discussion about abolishing this policy. It would super-charge revenues for the system.   Note: As of January 2021, President Biden is proposing that people will need to pay this tax on all of their income. There are also several proposals to increase the retirement age to 70. But this would not apply to you.   Cutting Social Security benefits is absolute political suicide. Can you imagine the politician who comes out and says, “If elected I will cut your Social Security and your parents’?”   As Dwight Eisenhower once famously said, “Should any political party attempt to abolish Social Security…you would not hear of that party again in our political history.”   Social Security is backed by the full faith of the U.S. government. What does this mean? The federal government has all kinds of ways to increase funding for any sort of program.  Minus the federal government collapsing.. then we all have bigger problems.   Social Security is the financial bedrock for most people in this country. Cutting benefits would cause widespread bankruptcy, foreclosures, and other economic devastation. Social Security is one of the last programs the government will ever cut. It is just too important to the fabric of our society.   To summarize: You will get what your Social Security statement says that you are going to get. And you will get it for the rest of your life.   Don’t let this common misconception sabotage your retirement. Be comforted by the fact that you don’t need to obsessively save until your dying day because “you never know” if Social Security will still be there. It will be.   Be Blessed,   Dave

 

It Doesn’t Matter If You Die

May 3, 2021 David Kennon

Sam and Sarah Mayer, ages 83 and 85, go to visit a local financial advisor.   “Sonny boy,” Sarah quips, “We have $500,000 in the bank and it’s making basically nothing. We were wondering if we should invest it in something.”   “Well,” he remarked, “You guys are old as dirt. I guess we can’t put you into anything too risky.”   “Old! We don’t even buy green bananas anymore,” she laughed.   “The standard rule is that you should subtract your age from 100 and that is how much you should put in the stock market,” the advisor informed them.   “So I guess we might want to consider putting 15% in the stock market and the rest into very conservative government bonds and money markets.  Maybe even in some fixed annuities.”   Sam nodded. “Makes sense to us. We certainly don’t have time for our money to recover if the stock market crashes. In fact, we are actually able to save money each month now. We are spending less than our Social Security and pensions. So we can probably put more money into this each month and make it grow even more!”   Sarah added, “We’re saving this money for our dear grandson anyway. If we don’t need it, we figure we can bless him with it. He had three great-grandkids for us!”   So Sam and Sarah put their money in this ultra-conservative portfolio and went home…never realizing their poor decision.   This anecdote outlines a concept I’ve battled for years — that as you get older, you need to become more and more conservative with your investments because you “don’t have enough time to make it back.”   Not only do I think this is a ridiculous idea, but the results can be incredibly expensive.   Let’s think about why this thinking is so faulty.   Markets recover very quickly. Even if they put 100% of their money in the stock market (which they shouldn’t), historically, recovery times have never been more than 3 or 4 years. So this whole concept of “We don’t don’t have time for this to recover” is assuming both of them will die in the next three or four years.   Granted, that is possible. This is why 100% in the stock market is not a good idea, either.   Now, let’s look at someone who invests 70% of their money in stocks and 30% in bonds. Remember that when stocks go down, bonds go up. In the past 50 years, the worst return would have been from 2008, where you would have lost 24%. Certainly not fun, but it’s not like you went bankrupt. With this portfolio you would have made all of the money back in a little over one year.   Quick note: The second worst return of this portfolio over the past fifty years was in 2001 where you would have lost 12% and the third worst was 4% in 1976.   Think about that for a second. In fifty years you would have lost a noticeable amount of money two times!   “But Dave, what happens if you need a bunch of money for medical expenses!”   I’ve spoken at length about how huge medical expenses just do not happen as long as you are on Medicare. The only real scare is a nursing home. You would have to start drawing down this money. But strategically all you need to do is use the money from the bond portion of the portfolio first (which is up if the markets are down). By the time your bonds run out, the stock market will have more than recovered.   But here is the main thrust of my argument. There is a 95% chance that they will never use the money. There is probably a 1% chance they use all of it. They’re pretty long in the tooth. They are happy with their lifestyle. They don’t want more stuff. Money doesn’t mean much to them. Their budget is not going to increase.   So if you think about it, what is this money for? In other words, whose money is this really?   It’s their grandson’s. There is a 90% chance he will get most, if not all, of the money. So what does this mean?   They need to invest the money as their grandson would.   It’s as if the advisor sat down with their grandson directly and advised him on a portfolio. A lot of professionals in my industry would look upon this as blasphemy, but with twenty years of experience I have absolutely no doubt this is the appropriate strategy.   By Sam and Sarah investing the money according to their age, they are taking money away from their grandson. Probably a lot of money.   Let’s say this conversation happened ten years ago in 2011 and Sam and Sarah made it all the way to 2021.   If they had invested $500,000 in 15% stocks and 85% bonds, the current account balance would stand at around $900,000. Not bad! Certainly better than getting .1% at the bank.   But what if they used the 70% stock/30% bond mix? In 2021, the grand total reached $1,500,000.   Oops. I’m sure Sam and Sarah’s grandson is grateful and will do great things with his $900,000. But the point is, they could have made him a millionaire.   I strongly believe that anyone, regardless of age, should have at least 60-70% of their money in the stock market.   The only time that it doesn’t make sense is if you are sure you are going to spend the money in the next five years. Most seniors do not have those plans.   Don’t buy into the traditional thinking. It’s a bunch of hooey. You need to invest your money based on what it is for, not your age.   Be Blessed,   Dave