PF Hour Episode 24: JD and Jim talk to Jeremy of GenXFinance about Retirment

For this week’s episode the guys were joined by Jeremy of GenXFinance.  Jeremy is a Charter Retirement Planning Coordinator (one of the core elements of a CFP).  He specifically works with 401(K) contributors and helping people with their portfolios.  He can be considered a “plan administrator”.

Outside of his professional life, Jeremy moved online to reach a broader audience than he could at work.  He feels that he is in a unique position being a member of GenX and can relate to people his age that may have kids or may have to take care of their parents one day.  People his/our age don’t have pensions or social security and that’s why they need the type of help he can offer.

Common Mistakes People Make with Their 401(K)’s

Jim started the show off by asking Jeremy about the mistakes people tend to make when contributing to their 401(K)’s.  There are a lot of mistakes people can make, but Jeremy highlighted the following three:

• Not Saving Enough – The biggest mistake people make with their 401(K)’s is not saving enough.  You really can never save too much, although you don’t want to hamper your current lifestyle too much just to save for retirement.  Some people start late and therefore don’t have enough saved.  Some people start early but fail to put a large enough percentage of their salary into their 401(K) to make their money last throughout retirement.  When considering how much money to put in, there are a couple rules of thumb.  The company match is the bare minimum you should contribute.  Its important to look at what you want to do when you are in retirement.  If you plan on extensive traveling, joining country clubs, etc., you likely will need to save a lot more than someone who plans on staying locally and just visiting with family. For those that are unsure, a good starting point to contribute is 5% of your salary.

• Sticking to the Default – A lot of people set up their 401(K)’s and forget about it.  Sometimes those people fail to invest that money, and it just sits there, as if it were in a savings account, accruing a small amount of interest.  In terms of structuring your 401(K) most should look at primarily large cap stocks and then secondarily invest in international stocks.  A good rule of thumb tip that the guys discussed was about asset allocation.  The tip stated that the percentage of your assets that you should have invested in stocks is 120 minus your age.  For example, if you are 25 (like me) I will want to have 95% of my assets invested in stocks for maximum growth potential.  Another similar issue is that people often forget to rebalance their 401(K) to ensure their risk is diversified properly.

• Thinking things are going to be okay – A lot of people, especially the younger generations, feel that time is on their side and they will delay contributing to retirement until it’s almost too late.  When a younger person fails to start immediately, they lose the power of compound interest.  As Jim explains in this video, waiting one year doesn’t mean you are only losing out on one year of investing, you are missing out on 40 year of investing (however long until you retire).

What today’s Economy Means for Retirement

Jim asked Jeremy if he could give advice to all sorts of different age groups when they take social security into account as a form of retirement income.  Jeremy was quick to say that people have become more cautious and more aware of saving for retirement as social security seems less likely to be sufficient income as it was years ago.  He went on to say that younger generations shouldn’t count on having social security at all, and therefore really need to plan accordingly.

While the market was headed down, Jeremy saw several near retirees making adjustments and locking into their losses.  It’s one thing to make some of your investments more conservative, but if you completely reallocate your funds on a downturn, you miss the opportunity for the market to recover and for you to gain some of your losses back.

Another tip that Jeremy offered was how much you should have in your retirement nest egg to live comfortably.  The current wave of thinking is that you want to have a large enough nest egg to be able to spend up to 4% of your portfolio annually.  This will allow for interest to replenish what you spend, and you won’t touch most of the principle in your portfolio.

JD then asked Jeremy what his thoughts were about the Roth IRA.  He stated that he couldn’t be a larger fan of the Roth.  With its withdrawal rules, tax free growth, and availability to be used for college education or if you are a first time homebuyer, the Roth is an exceptional vehicle to save for retirement.  Jim did bring up the much talked about Roth IRA conversion benefits that will be seen in 2010, allowing people to transfer their IRAs into a Roth IRA by paying the taxes on the money transferred.  Jeremy said this is a great idea if you can afford to pay the taxes, however there are people that fear a value added tax that was talked about a week or so prior by Nancy Pelosi.  This would make the funds in your Roth taxed again when you spent it during your years of retirement.

Additionally, Jeremy discussed delaying retirement to support one’s parents.  It’s a very tough and emotional decision for some that may not make sense financially.  However, an emotional decision rarely makes sense financially.  Often times the parents have two options, which is pay for the care they need or go on Medicaid.  The latter being a less than ideal option.  In order to prevent such a situation for yourself and your children, Jeremy recommends looking into long term care insurance.  However, he warns people not to start this type of insurance too early.  It may be worth looking into if you are relatively healthy and in your 40s or 50s.

Another thing that was discussed between the three gentlemen was people’s pensions and how they seem to be shutting down.  One anecdote which was given described a situation where employees were given the option to cash out their pension plans or let them sit until retirement.  A lot of people considered the pension as found money, paid taxes on it, and then paid the penalty for early withdrawal.  If this situation were to be faced by you, Jeremy recommends rolling the money over into an IRA.

Callers & Chatters

Mike Piper (Oblivious Investor) asked Jeremy from the chat room, “Regarding administrative expenses (i.e., expenses aside from fund expense ratios), what portion is paid by the employer and what portion is paid by the plan participant? (Or does it vary for each of your company’s clients?). Jeremy said that it can vary from employer to employer.  It is definitely something to look into and be aware of.  He expanded by saying that not all plans are created equally and generally speaking, the participant often times pays more than the employer.

L. Hanson asked from the chat room for Jeremy to confirm that there are no penalties when rolling a 401(K) into an IRA.  Jeremy responded in the affirmative, saying that the only thing that had to be paid when rolling over would be applicable taxes.

Brett McKay (Art of Manliness) had a couple of questions for Jeremy.  First he asked the age old question of whether to pay off debt or save for retirement, or both. Jeremy responded by saying that you should definitely do both.  Retirement saving is open-ended and you can add as much to it as possible, while debt is closed ended.  Jeremy finished by saying that it’s better to do something in terms of retirement because of the power of compounding.

Brett’s next question involved how the recession is effecting younger people’s retirement planning.  Jeremy had some interesting insight as he says people may start to shy away from viewing real estate as an asset that always appreciates.  Furthermore he said most of GenX will view this downturn as an opportunity, because they have seen some of the cyclical nature of the market.  However, some of GenY may be scared.  If you are a GenY and started investing in your 401(K) at your first job around 2007 or 2008, you likely lost half of everything that was invested.  That may be enough to scare younger people out of the market for years to come.

An anonymous caller called into the guys to say that he views the market as dangerous and he thinks housing is the best option especially as the real estate market starts to recover. Jim disagreed with this philosophy but Jeremy said it had some validity as long as it was not the sole asset the caller held.  Jeremy said to treat real estate like any other asset class.  You don’t have to be a homeowner to invest in real estate.  Real estate could be a means of diversification for some portfolios.

Concluding Thoughts

Jeremy concluded his hour with the boys by recommending a few books on retirement that don’t get too complicated for the reader.  The first book he recommended was Books that he recommends that don’t get too complicated. The first book he recommended was “The Number: A Completely Different Way To Think About The Rest of Your Life” by Lee Eisenberg.  The second book Jeremy recommended was “The Power Years: a User’s Guide to the Rest of Your Life” by Ken Dychtwald.  The second book talks a lot about personal reinvention after 40 and he recommends that to everyone that feels like they need to do “something”.