Hello and welcome to the life. By Design, podcast brought to you by strategic. Alright. And I'm back here with Aaron Evans again. For those of you that maybe missed our last episode, Aaron is a senior advisor and partner here at strategic. He's a CFPC FA and he really focuses a lot on retirement and getting folks ready for retirement and. What that looks like in their plan.

Yes, we talked about comprehensive financial planning here at strategy. For most people, one of the biggest goals in their plan is making sure at some point that they can retire comfortably and in the way they want to. So it's part of every single person's plan. We we prepare here at.

Strategic. Yeah. And and I think it's one of those things. And we touched on this a little bit last episode where I think it's for younger folks. You know, I remember myself when I was young and. Even now, to a degree. Where it's it's in my. Mathematics somewhere in my calculations, but it's not at the forefront of what I'm concerned about day-to-day, right?

Sure, sure. And you're thinking about, yeah, how how can I go on vacation this weekend or can I lease the car I want to lease or can I buy a house and maybe not thinking.

Hey.

Too far down the road in terms of retirement and we talked about maybe making sure that we're not being too biased to the short term. And what are the things we can do to make sure we don't let that retirement goal creep up on us without having.

Right.

Prepared well and I think with everything it's it's all about balance, right and.

Well.

With.

And taking small steps to get you where you need to go. And so I think one of the things that we're going to talk about is kind of some of the vehicles, but of how to save and plan for retirement. But maybe we need to start a little bit earlier than.

That, yeah. So a lot of the vehicles that are intended to save. Retirement. Are meant to keep those dollars there for some time. So before we even get into those, we make sure that we cover the basics. It's a little bit of the blocking and tackling of let's just make sure we have a little cash on the side for the emergencies, right. We don't want you to put all your money into a, a, a special vehicle and then need it because you lost your job and you can't pay the bills.

Yeah.

Best practices? Let's just make sure we have some pure emergency cash reserves on the side before we start allocating dollars towards retirement specifically.

Yeah.

And so is that so? What is? What would be like your for? If I'm a younger, you know, maybe maybe one of our kids, right? Like my my kids are getting into their 20s and so like.

Yeah.

They're starting to their job. They're starting their career or or getting into it like, what's the recommendation that I could?

Make yeah, best practices are somewhere in that three to six months of your recurring expenses. So whether it's your rent, your mortgage, your car payment, the utilities, food and grow. Series, making sure you have enough there. Again, you're protecting against those emergencies like loss of job or if you do own a home, you know the boiler going or the roof needing repair. What we don't want to have happen is having to whip out the credit card or take out a loan or worst case, go into your retirement account and have to deplete that to pay for those expenses. So three to six months, depending on your income, the type of income, whether you have a spouse that has income, general best practices.

OK, so alright, so I do that it takes me a little while. I get my three to six months, I've got it saved. Roughly what do I?

Yeah. Do. Yeah. So now kind of going back to that demographic of getting your first job or maybe earlier in your employment, we're seeing that a lot of employers are offering defined contribution plans or as most people know them, 401K plan might have another name depending. On where you work. And really taking advantage of those plans. And what we talk about with people is just getting your foot in the door is big, right? Starting contributing something to those plans. Getting those dollars out of your discretionary pocket and into that pocket for the long term, that may be small to start and one of the things we really see is most of those plans encourage participation through some sort of employer match. Not everyone there might be some companies that have a more profit.

Hmm.

Sharing.

Mm-hmm.

But if there is a matching contribution, we often encourage people to start by at least trying to capitalize on that match and what that means is they may say, hey, if you're willing to put up to 3% of your salary into this plan, we will double it and match that for you. And in a world where there's not a lot of free money out there. This is not exactly free money, but close. Yeah, and you're leaving it on the table if you aren't at least getting to that match. So that's a good early goal is can I maximize the match that my company may be offering? That's a good starting point.

Well, that's, you know, for my kids, that's something I've always kind of talked to them. About from a benefits package standpoint is going yes, you make this much money a year or this, but here's all the other costs that are incurred from from employing you that your your employer is calculating towards this. So take advantage of all those things because that's actually part of your salary and your benefits.

Yeah. I think it's a question younger people are now asking when they go to work at a company, what is the 40 K plan look like? What match do you offer? And so there are a variety of different ways to match. But looking at that as a a good start and again making sure you can take advantage of that because that's extra money for you and over time that adds up, especially if you start.

Right. Yeah. And so a question that I've seen and have asked myself is, let's say I'm younger. I I don't really have a ton of responsibilities or other expenses or I'm I'm you know I'm set. On that is. There a maximum that I can put in?

Yeah. So there are annual maximums that you can put into 401K plans. Most younger people maybe if they're fortunate enough to get there, they are there, but there's dollar limits that are set in terms of what salary you can put in. Annually and it changes every year. We'll get to this, but as you get a little older, they actually increase those. There's catch up contributions for people who are age 50 and additional ages. As you get closer to retirement. Now, there's even a super catch up contribution for a a small age window. So yes, ultimately our goal is to get people to. Approach that maximum maxing out their retirement plan contributions if it fits into their overall plan. And so again start by taking advantage of the Max. Use features like auto escalation or just you know your own increase in your salary to work towards getting towards that dollar limit in the plan. And that's a pretty good goal for people. If you can get to that, you will be making significant progress, especially if you're able to get to it.

Early on, like you mentioned, yeah. And so with the 401K specifically. Well, those are pre tax, right?

So most of them are traditional 401K plans where you are putting money from your paycheck into that plan before you go on your pay stub and see all the taxes that come. So most of them offer what is known as a traditional pre tax 401K contribution. We are now seeing that a lot of plans are offering another option, which is a Roth 401K. Most of us have heard of a Roth IRA. Now there is a similar tax structure offered within the 401K plan and we'll get to the. The discussion of Roth IRA's, but there are income limits on Roth IRAS, where some people may not be able to participate in those, but there's no income limit in terms of participating in a Roth account within the 401K plan so often that can be a good option for people as well. Well, the difference there is now you're putting money in after tax, but when you go to take it out in retirement, the income tax has already been paid. So a really good tax advantage vehicle. So we'll see people participating fully and traditional because that's what works for them and maybe they're going to get more money into the plan versus doing the Roth option and after tax. We see people splitting, maybe doing a little bit of both. Yeah. And if some people are very confident in their tax structure now and in the future, they may be all raw. So it it's circumstances of each individual client make help us make those decisions. But important to know, there are those different options now, OK.

So I've put away some savings. I've got my my employer sponsored plan that I'm whatever that may look like that I'm putting into. What's what's my next step?

Yeah, it's a really good point. If you're fortunate enough again to take advantage of that employer match. And then eventually get to the maximum contribution limit. That is a question we get a lot of people go, OK what do I do next? And it's a great place to be. And we talked about this in the last episode. There's this mentality of in 401K, our retirement plan, world money just comes out of your paycheck. You don't see it. It goes into that plan and maybe you check your balance. Every now and then, but it's kind of out of sight, out of mind. Where now? I've got money that's coming into my bank account from my paycheck, and I do see that regularly, right? I. Look at that. Quite quite.

Yeah.

Yeah. And there's a couple of different options. One, there are other savings vehicles for you, so you may qualify for a Roth IRA Array if you are under the income limits, even if you participate in a in. A. 401K plan. There are other tax advantage vehicles, so there's things. Like health savings accounts that coincide with your high deductible health care plan that may be viewed as a retirement savings vehicle. But ultimately you can just build after tax wealth. And I mentioned tax diversity in the last episode. I may have a lot of money in my 401K plan. That's pre tax. It's nice to build pre income tax. That is, it's nice to build a pool of assets that may not be income taxable or may not have penalties. If I want to touch them. Before or access them before I get to that retired.

Hmm.

In age, but it's an interesting concept. That mentality we see shifts dramatically now that the money is in my bank account where our advice may be very simply to mirror what you're doing in your retirement plan by setting up regular contributions into an investment account, buying at all different price levels of the market. But once it's in your bank account. That mentality shifts for a lot of people, and it's harder to get that started or commit to that.

Yeah.

Yeah. So how like how do I balance that? Because I know we talked about this. A little bit earlier, but you know we there's a lot of things I have going on. I'm, I'm I did the first two steps and I I feel pretty good about that. But now like you said that that money looks a little enticing, like I gotta build a deck this summer for, you know, for the backyard or something.

Yeah. Yeah, everything in in moderation, right. So we found that it is another thing where if you can just. Get started and get that small habit started. It works out pretty well. We'll we'll run across situations a lot where we. Say well, why do? You have $150,000 in your bank account. Are you saving or something? No, I just kind of built it up over time. OK, well, let's. Maybe put $500 a month into an after tax investment account, or $1000 a month and see how that goes for six months and all of a sudden we get to that six month point. Well, they still have 150,000 in their bank account. So it it didn't make or break their financial plan. So it's really getting started getting in that habit of making those savings and. Treating it a little bit like you do with that 401K plan, where it's kind of just, hey, that's another thing that I do every month out of sight out of mind and really can impact peoples success down the road.

Yeah. Yep.

And have the advantage of, hey, if I do need to get to that money, it's not special purpose retirement fund. It is money that I can get to, maybe for kids, college, home purchase other things as.

Well, so in line with all of that and kind of like my benefits that we were just talking about and let's say I've, I've, I've done a couple of those and. I've heard this a lot. Some some employers offer HS's or health savings accounts. How does that tie into retirement? And yeah, like what? What's the connection there?

Sure. So we just touched on it. So a health savings account is. Attached to what's known as a high deductible health care plan. So you have to be eligible to have this health savings account and that is to make sure that you can use some pre tax dollars to help pay for those healthcare expenses that make up that deductible for you. And and most people may not be able to may they may need those dollars for those health expenses, right. It might not fit into their.

Yeah. Sure.

Budget to to save them. But ultimately those HSA funds can turn into a retirement savings vehicle. There are ways to take some of those dollars that are also pre tax. Invest them and ultimately convert them into a retirement account when you retire. So if you're capping out those contributions to the 401K or the retirement plan now, you might be able to put a little bit more money and there are thresholds, dollar limits for HSA's. But that is a way now we're seeing additional funds being set aside for retirement particularly. If you can meet. Those healthcare expenses with your just general funds and out of pocket cash.

Yeah. And then I know we touched on this. A little bit. I believe last episode, but just something for our audience to think about. If I had worked somewhere else and had a retirement savings vehicle there, how does that look? What should I do? What can I do with those?

Yeah. And we talked about this. We see this a lot. I've I've got an account somewhere. I worked for three years at this other company. I don't even know where it is. So organization is key. When we ultimately get to that retirement and and even early on knowing what you have and kind of where your dollars are.

Yes.

We see this a lot. So first thing, locate those funds. You have a lot of options when it comes to retirement plan assets from a prior employer 1, you potentially can leave them there. Not recommended again kind of defeats the purpose of getting organized, but you may be able to roll those into your current employer plan if it allows for that feature. So you can consolidate maybe two or three pre prior employer plans into your current plan and now it's all in the same place. Or you also would have the option to roll that into an individual retirement account, an IRA or Roth IRA, depending on the tax structure where again, you can consolidate those into one account that you now have access to and it retains the tax structure of those assets where they were previously. So it's not a taxable event, it is simply a consolidation and getting those assets into one place where you can keep track of them. Four year Ultimate retirement goal.

OK, So what is my next step?

So again, if you've really built a a pool of 401K assets. You are building after tax wealth. Now you're really eyeing. OK how do I start to prepare for retirement? How do I plan for retirement? So just starting to do some of those projections, right. If I continue to contribute on this path where my headed and also outlining starting to think about what is your retirement picture? Look like down the road. So what are the expenses? I'm going to need to meet in retirement. What does my retirement life? Look like so just really again saving at the onset is the best thing. We're getting started feeling like you're participating. But then as you get a little bit further down the road starting to bring a little bit more definition into what the ultimate goal will look like for treatment plan standpoint. There may be a little bit more. Sophisticated planning as well. We talk about things like converting Roth assets again, that's down the road converting from traditional assets to Roth, but that's a little bit closer to the retirement picture. But ultimately we want you to start to really define that picture.

MHM.

So we can. Dial in are you on track or off track headed into retirement?

1. Yeah. So I think what I want to do now is I'm going to name off some retirement plans, OK? And because I think this comes up a lot like. I mean this come up for me in. The past so. I don't know what any of these do or what any of this means, right? So like, I think we can do this just really quick and maybe you can just give us an overview and and and I'll start easy 401K, we've talked about this a little bit so.

Yeah, a lot of acronyms in. The world of finance. 401K is the most common vernacular for a defined contribution plan. I think it's important to go back to.

OK.

Our parents and maybe even our grandparents generation, they had defined benefit plans or most people are familiar with the word pension. Pensions were plans where employers were employers were setting aside money for their employees so that when they retire they have assets to live off of. Those have for the most part.

Hmm.

Yeah.

By the way, so we're not seeing a lot of companies sponsoring pension plans. If you work for the government, yes, you will still see those pension plans in place. But most people do not have that benefit, so the onus is now on you as the employee to save for your own retirement. At 401K is the most common structured plan that we see out there, particularly if you work in the in the private sector for retirement savings. But again, it is a defined contribution plan that you have to do.

Yeah.

Versus the old way of of the employer kind of forcing your hand and putting aside money for you. So really more important than why you have to.

Participate in those and like we said that.

One is pre tax pre tax but it it may have that raw feature. OK so there are you have to ask that question. Hey does my 401K plan have that raw feature and then you can make the decision? Have how to participate in?

Those. So let's talk about that for those who. Don't know what what is Roth? What does? That mean?

Yep, so traditional money going in before taxes come out. It grows tax free until you retire. These plans do have penalties if you do access these funds prior to retirement. That's why they're giving you these tax advantages. So you are paying the income tax down the road versus up front. That's why it's called pre tax. I put my money in before income tax grows tax free so no capital gains tax.

Mm-hmm.

Then when I go to distribute the money is taxed. If and when I distribute those funds, the Roth is a little bit different. Where I pay the tax upfront, so I pay my income tax, I put it in after tax doc. I get that same benefit of tax free growth, which can be decades for some people, but then down the road when I go to take it out, no income tax and that has some advantages because we just don't know where taxes are going to be 20-30 years.

From now, right. And it separates it from the unknown. A little bit.

Correct. Yeah. You you know what you're paying today, but you, you know, you may not know what those income tax rates are going to be in the future. So some people like the Roth going back though some people may. They have more money going into their plan. If they can do it on a pre tax basis versus paying those taxes and then contributing. So it's a.

Balance. So a lot of times with Roth it's it's also combined with IRA.

Yeah. So the word Roth was initiated through what was known as a Roth IRA and similar to. Four, OK, there's also what's a Traditional IRA? Those are retirement savings vehicles, and there's a whole slew of rules about who can contribute to them. If you are participating in a retirement plan. If you're not, is your spouse participating in a retirement plan and are not? And then there are separate income thresholds for whether or not you can make. Tax deductible contributions to IRAS or even participate in a Roth IRA. The the participation limits, so the contribution limits to those are lower than the the 401K plan world. But it is important to sit down, either with an advisor, your tax preparer, to know, are you eligible to participate in those? Is your spouse eligible to participate in those and at what level? And will they be tax deductible or not on the Traditional IRA? So it's complicated. The tax structure of those are the same, where you're either putting money in pre tax. After tax setting it aside for.

Right.

Retirement. Ultimately, you will pay the income tax at.

Some point eventually, right? It comes. Yeah. OK. So those are those are the 2 main ones. We hear a lot about. So. So I'm gonna hit some other ones that have come up that we someone may hear about which is one of the I think one of the top ones probably 403 B right.

You're sure? Yeah, 403 B is a very similar structure to A41K, but is often in the nonprofit sector or the. The public sector. So if you work for a school district or a nonprofit organization, you may say, well, I don't have a 401K plan. I have a 403B plan. It is very much structured the same way, but just has a little bit of. Different title attached. To it. OK, so you can think of it, it's not the exact same, but you can think of it very much as in the same way as a four, OK.

1. And then there's some very specific ones for folks who are like in the government like 450 sevens, right? And and other things like that?

Yeah, there. Yeah, there's a lot of what we'll call supplemental plans. So you may be highly compensated. So there's additional plans where you can set aside additional funds like a 457. Plan. Typically you see them again in, in government or or public sector. There may be deferred compensation plans, all sorts of additional ways to. Set aside money for retirement, so again important to partner with an advisor, understand the components of those plans. Can I participate in them? But there's a lot of different ones out there and and they can be structured in.

Yeah, you're right. A variety of ways, even within. The structure of like a 401K like. How that your employer puts into it right like they could just do a percentage or they could do a profit sharing or like there's all these other like layers within just a standard 401K too, right?

Sure. Sure. So yeah, what is the match? Is it vested? Meaning if I leave this employer or do they get to keep a piece of it, when does it vest? How does it vest? So there's definitely some nuance there that you need to be aware.

Of and then make sure you understand and I think this is, you know, when we talk about kind of. Value of having a financial planner working with strategic is being able to explain this to you because you you're not. You know, our audience out there isn't expected to be the expert in this, right? That's why we're here and what we can help.

Yeah. And we've and we've just had the experience of seeing these different situations with a variety of clients, so. We've seen the different types of plans across the hundreds of different employers. We're familiar on how to navigate the websites, the planned documents, all those things. So yeah, we we can really partner with you to make it easy and set it set in place a plan that makes the.

Most sense for you. So and I guess just kind of to to wrap us up here. A little bit. I think that the overall thought here is I know we started this kind of talking to younger folks and like, hey, you're just starting off, but really no matter what age you. This is all good advice that you should be implementing, even if you're, let's say, 4550, and you're like, oh man, I was not paying attention early on. Yeah. Start now. Like, get started. Get started. Yeah.

Yeah. Yeah, exactly. Pay attention. Get started. Look for opportunities to dial up those savings vehicles, whether it's, you know, in a retirement plan through your company or outside, or you have a special vehicle, always participation building those healthy habits again, making sure we're not.

Mm-hmm.

Sacrificing our long term ultimate goal of retiring for near term expense, you know there's a saying you can borrow for a lot of things in this world, but you can't really borrow for retirement either. You have the plan and the income and the assets to retire or you don't and you have to keep working. So it is important. Get started. Look for ways to increase.

Hmm.

Ultimately, we need to make sure that that plan is on.

Track. So yeah. Yeah. And I like that's positive outlook, right? Like, is, even if I'm a little bit older and maybe I I wasn't, you know, younger and we all are younger and dumb sometimes, right? That. Hey, it's OK. There's a plan for you. You call, you call us. There's a plan.

Use your plant and and as it. Yeah. And as as I mentioned. Even what they call catch up contributions to make sure as you do get close to those retirement dates and you get a little closer, they allow you to save a little bit more knowing you had to raise a family and yeah, and and do a lot of things as you were in your earlier years. So there are advantage ways to save for retirement even if you.

Right.

Are a little later.

Love it. Well, thanks Aaron.

Awesome.