When you start a new job, you often have a massive packet dumped on your desk, explaining your company's retirement plan options. It can be overwhelming. Today, Paula Christine breaks it down, with the help of her "401k Guru," Shannon Maloney of Strategic Retirement Partners.
The most important thing about a workplace retirement plan is that you should always participate, particularly in a company match situation. After all, if you saw free money laying on the street, you'd pick it up, right? Shannon explains this in easy numbers.
Once you elect to participate, which plan should you pick? The choices can be vast, but Shannon explains the "do it for me" plans, that come with target retirement dates built in.
Many people fall into the trap of borrowing money from their retirement plans. Paula and Shannon talk about why this is a very bad idea, and should only be used as a last resort.
"To Roth Or Not To Roth" - Shannon walks us through the difference between Roth and Non-Roth retirement plans, and the differences in the seed (when you put the money in) and the harvest (when you take the money out).
Finally, Paula and Shannon speak specifically to women. It's not that women are "risk averse," it's that they are "debt averse." And most women, especially moms, know how to stretch money.
To reach out to Shannon regarding the workplace plan you have for your employees, email her at Shannon@SRPretire.com.
For bigger picture financial help, you can email Paula Christine: paula@paulachristine.com, or visit her website: https://paulachristine.com/
Disclaimer: Investment advisory services are offered through Strategic Retirement Partners, an SEC registered investment advisor. All the opinions and comments made on this podcast today are the opinions of Shannon Maloney and not the opinions of Strategic Retirement Partners
Paula: Welcome. And thanks for tuning in to Beyond The Paycheck. I'm Paula Christine. Majority of people live paycheck to paycheck, never seeming to get ahead and watch other people live life. I've been there and it sucks. I hated the feeling of watching other people live their life as I struggled. What if I could change that? That's my goal. One podcast at a time.
As a financial coach, I've seen people save millions of dollars with little income and others who have substantial income and save nothing. I have heard all the excuses about why you didn't save enough money. Money was tight. I got into debt. I didn't know what to do. I had to keep up with the Joneses.
Nobody ever really says that, but we all know the truth. No more excuses. It's time to pay yourself first. One of the easiest ways to pay yourself first is in your employer retirement plan. Today I'm joined by Shannon Maloney with Sstrategic Retirement Partners. She's a certified employee benefits specialist, but I call her my 401k guru. She knows everything about the 401ks 403bs, 457's. Everything you need to know about retirement plans. Welcome Shannon.
Shannon: Thank you so much, Paula. I'm very glad to be here.
Paula: Okay. Shannon. I started a new job and the HR person drops a 401k packet on my desk. I'm like, what the heck do I do with this? I don't know anything about investing. I need every dollar of my paycheck. I'm embarrassed to ask for help. So what do I do?
Shannon: That's such a question that everybody has, especially at their first job. You're dumped with a packet that's over an inch thick and you are inundated with what looks like math. The most important thing that you can do is to participate.
Some employers allow you to participate either by a dollar amount or a percentage. I want you to think about your employer retirement plan, not as a retirement plan, but as your paycheck in retirement..As Paula said, this is how we're going to provide our paycheck when we're not working anymore. So you need to think about this contribution to your retirement plan, as important as your mortgage.
So we want you to think of a minimum to start at as 6% of your pay. Now, that seems like a really big number, but what I want you to do is take a step back, multiply your pay by 0.06 and then divide that by the number of payrolls. So for example, if you make $40,000 a year, And 0.06 that's $2,400 a year.
You divide that by 24 payrolls because that's what most of us have. That's a hundred dollars every two weeks. So that's $50 a week. And is that something that you can afford?
Paula: So Shannon a lot of employers have to do an employee match. And what I find difficult to understand is even when people don't even put enough money in to collect that employer match and therefore are giving up what I call free money.
Shannon: Absolutely.
Paula: Talk about the employer match for a second.
Shannon: So I think that that's a really important concept, Paula, because you and I, if we saw $5 on the sidewalk, we'd pick it up right then. But all too often, an employer contribution is something that's overlooked, as you said. And that employer contribution is called a match.
So if I put money into my 401k plan, my company is going to give me money to match. So if you and I did the same job and you participated in the 401k plan, you received that a hundred dollars extra from the employer. I don't participate in the 401k plan. I don't receive that money from the employer. So our recommendation is to find out what the match is and make sure you're contributing at least up to receive enough of the match.
So some matches start at three. Some start at four. A lot, start at six. So for example, if your employer match is 50 cents on the dollar up to 6%, which means if I contribute 6% of my pay to the company 401k plan, my employer is also going to match me three. So that means I have 9% going into my employee retirement plan for my paycheck in retirement.
So that's really important. Take a look and find out what the employer matches. If you can't find it in that thick packet, ask your HR person or the office manager, they should be able to tell you exactly what that employer matches.
Paula: Okay. So I get signed up for the 401k I put in my 6%. My employer's matching. Now I look at the 20, 25 different sometimes even more than that investment choices. And I don't have a clue. I just, I don't know which one to pick.
Shannon: Right. There's two ways to take a look at that. The first way is to see if your employer offers what we call, "do it for me" funds. Those are funds that have your numbers in it.
So it'll be 2015, 2050, 2045 funds. Those funds are funds where someone else is managing your asset allocation. Which is just a fancy way of saying your mix between stocks and bonds. The most aggressive you buy that fund is the day that you buy it. And it will slowly get more conservative until it hits that landing point of 2035.
So if I have 40 years until retirement, I don't ever have to think about that fund anymore,,once I put my money into it. So think of that plan. When I go to make a birthday cake for my kids, do I want to go to the bakery and buy a cake that's already made? That's my do it for me fund. Those other 24 funds in that employer list is like me going to the bakery aisle and picking each and every ingredient to create my own cake, which sometimes is great. And sometimes might not be so great depending upon my skill as a baker and how much I want to spend learning about that. It's the same thing for investments.
Paula: Well, I'm not a baker, so I'm going to go pick the I'm going to the bakery and buying the cake. Okay. So we've signed up, we've picked our fund and something has happened now, you know, we're contributing for a few years. And we got a little bit behind on our bills. And so we think we're going to take a loan and I know that that happens and I know that option is available, but it just makes me cringe. When I think about having someone do that, talk about why you would not want to take a loan from your 401k.
Shannon: That's such a great question. And I was actually meeting with participants yesterday, Paula, and someone wanted to take a loan from their retirement account. And my first question to them is why do you need the loan?. And when we really drill down to it, it was because he wanted something, not because he needed something. And because he heard that it is better to take money from myself and pay myself back than to go to the credit union and go borrow money.
That is one of the biggest myths out there. So when you take money out of your 401k, as a loan, you have to pay it back after tax. So you pay that back over five years after tax, but the money that you had that you saved so much and sacrificed to get into the market is now not earning any compound interest.
It's not earning any of that investment return while it's coming out of the market. So if you had $20,000 in your account and you took a $5,000 loan, your account is now only $15,000 in the middle. That's trying to help you grow that till your retirement nest egg.
Paula: I know people do it. I just, every time I hear that somebody has done it, you know, you hate to tell them that they made a mistake, but they just don't understand the impact that that's made in the long-term.
Shannon: Right. It's a terribly big impact over the long-term. And we really want people to understand it's a last resort, not your first resort.
Paula: I've gotten my packet in front of me and it has two choices. I can do a traditional 401k, or I can do a Roth 401k. Can you explain the differences for me?
Shannon: Absolutely. We call this to Roth or not to Roth. So when you think about Roth, Roth is just a fancy word in the retirement industry for after tax money and 401k is pre tax money. So people think that there's a big difference. So pre-tax 401k money is going in before I pay my taxes to uncle Sam, but I'm going to pay taxes to uncle Sam when I take it out. With the Roth money, I'm paying taxes right now.
But I don't have to pay taxes on it when I take it out. So when we look at this, we say, do you want to pay taxes on the seed? Which is what you do when you put in money as a Roth contribution. Or do you want to pay taxes on the harvest? Which is what happens when you put it in as a pre-tax contribution.
And there are ways within your plan where if you're not sure, which is the best for you, sometimes your employer will let you do half and half. Sometimes we say, if you already have that employer match that 3% employer match, that is always going to be pre-tax. You're always going to have to pay tax on that harvest when it comes out.
So you probably want to really truly look at having some of that go Roth, whatever age you are. There's a lot of people that only think you should do Roth as a younger person. We think you should take a look at Roth, no matter what age, because not only should you diversify your investment portfolio, but you should also diversify your tax portfolio when you're finally taking those distributions,
Paula: Right, when you get out to retirement, we want to have a couple of different buckets of money to choose from. So you want your tax free, your Roth bucket. You want to have your traditional, whichis your taxable bucket. And ideally you want to have what we call a broker or non-qualified, but totally different conversation.
But we want to have that too, because that's taxed at capital gains potentially. So we have the ability to, at retirement. I have different options. When we look to taking money out using tax strategies or efficiently during retirement, I truly think the Roth 401k is the best option, but that's just my opinion.
You have to find out what's right for you. So Shannon, anything else that you can think of that you find that it's very important that people should know about when they're starting to save in their 401k?
Shannon: I think there's two really important things, especially for women. Number one, there's a misnomer out there that says that women are risk averse. We're not risk averse. Look at some of the men that we've all been with. Right? So really, and truly what we are is we're debt averse, right? So we like security. So sometimes women don't contribute to a retirement plan because they really, and truly are focused on paying off their debt first. So the first thing I want to tell women is pay yourself first.
Even if it is only that first hour of pay that you make, please contribute that to your retirement plan. We live longer than our male counterparts and we make less than our male counterparts. So it's really important that we take advantage of that. The second comment I want to make, especially for women is that women tell me that they just they're living paycheck to paycheck and they can't really figure out anything that they can put into the retirement.
Well, I know my mom, and Paula, and I know your mom and we, as both mothers, we've been able to figure out how to make a dime out of a nickel to spread our money over time. We do that all the time for our kids and our family. I want us women to take the same responsibility for our investment savings, which is our retirement.
So take and find that money. If it means we can't have that Starbucks coffee every week or every day, I don't have it put that into the retirement plan. If it means we don't get to buy our kids exactly what they want exactly when they want it, and they have to wait a little bit, please do that. This is so important. Your financial independence is the most important thing that we have. And the best way to do that is through your employer retirement plan and saving money for yourself so that you provide that paycheck in your retirement.
Paula: Great advice. Shannon. Very much appreciate you being here. If you have any questions about starting a 401k for your business or having your current plan reviewed Shannon, how can they get in touch with you really easily?
Shannon: They can go ahead and send me an email at Shannon@SRPretire.com, which will be after this. And they can also contact me through my LinkedIn profile or they can call me at my office number, which is 248-773 7046. We're passionate about helping both you, your company and your employees be able to retire.
And to us, that definition has have financial independence when they're ready.
Paula: Okay. So if it's an individual and not an employer, and they have questions about their 401k, who do you suggest that they reach out to?.
Shannon: So they're very first place. If they have a financial advisor, we recommend that they reach out to their financial advisor.
They can always reach out to yourself. They can reach out to us. We may not be able to give them any kind of advice, but we could give them guidance. We also recommend that you talk to your human resources professional because sometimes with your retirement plan, there are advisors associated with that who can answer your questions directly.
And the last place to go is whoever the record-keeper is. So that would be whoever's providing your retirement plan, whether that's Fidelity or Empower or TransAmerica, they all have call centers that are staffed with investment professionals who can answer your basic questions.
Paula: Shannon, I know you have a fancy disclosure that needs to be read.
Shannon: So a.
Paula: Thank you so much. Again, if you have any questions, feel free to reach out to me at paula@paulachristine.com or visit my website at paulachristine.com.
Thanks everybody. And take care of yourself.