WHEN TO START SAVING FOR RETIREMENT? 5 THINGS TO THINK ABOUT

00:00

Aaron Task

When should you start saving for retirement? At first, the answer seems really simple now. Or at least as soon as possible. But this is actually a more nuanced topic than first meets the eye. Welcome to the In the Know podcast.

I'm your host, Aaron Task. And our guest for this episode is Rachel Aguirre, Head of U.S. iShares product at BlackRock.

Rachel, thanks for joining us. So first, why isn't this as simple as just save as much as you can as soon as you can?

00:33:05

Rachel Aguirre

First of all, thanks for having me and you know, while that's a great phrase, you can't save money that you don't have. And what do I mean by that?

You know, if you spend every dollar you earn, you won't have anything left for retirement saving. So the precursor or prerequisite to starting on your retirement journey is to set a budget.

You want to understand your current position, what money's coming in, and what money is going out. And that includes setting a budget for your daily expenses. It includes paying off high interest debts. It also can include creating an emergency fund. So you can think of this as laying a foundation after which you can begin building the house or saving for retirement in this case.

And, you know, when someone sets out to build a house, the first phase of work actually happens underground. It's leveling the ground. It's laying the foundation. It may not seem as exciting as when the siding on the house goes up, but if you want to build a home that will last, you need to start with a solid foundation.

1:51

Aaron Task

I love that analogy. So, okay, so let's say for the sake of argument, I've got that foundation that regular life expenses budgeting under control. What are your recommendations or how do I start to figure out how much do I need to save for retirement.

1:55

Rachel Aguirre

Okay, so this is where it actually starts to become fun, because to know how much you need to save for retirement, you actually have to start by doing some daydreaming. And I'm actually not kidding there. You want to ask yourself some questions. Specifically, what do you want your retirement to look like? Everyone has a different vision of what they want their retirement to look like.

2:29

You want to spend some time thinking about what you want yours to look like, and this is going to help you figure out how much you're ultimately going to need and also help you choose the right balance of growth and safety when it comes to targeting your investment. So the first question you want to ask yourself is when do you want to retire?

While the typical retirement age of 65, we find that more and more individuals are actually looking to retire earlier than that. And in fact, there's a whole F.I.R.E. movement you may be familiar with: Financial Independence and Retiring Early. But the key point is that when you plan on retiring has implications for your saving and investment needs.

3:16

So you want to think about what makes sense for you. And then the second question you want to ask yourself is, well, how do you plan to spend your time in retirement? Do you want to travel the world? Do you want to give back by volunteering with an organization that's meaningful to you? So however you choose to spend your time, the activities you plan on doing are also going to impact how much you're going to need to save.

And then one more really important question to ask yourself is where do you want to live during your retirement years?

And that's because the cost of living can vary a lot by location. So that too, is going to have an impact on how you should set your goals.

3:50

But to get people started and to help in terms of providing a savings goal, some financial experts suggest that you take somewhere between 70 to 85% of your pre-retirement income and divide that by 4%.

And the resulting number is one that could likely last through retirement. And that would be a starting point in terms of your savings goal. So why 70%? Where did that come from? Well, many people find that a lot of their expenses do go down during their retirement years. Housing costs can be one example. So if you decide to downsize or you move to a location, if you have kids who've left the home right, these housing costs often go down pretty significantly.

And then where does the 4% come from? Why do you divide by 4%? Well, that is the amount that many financial professionals suggest. You may be able to withdraw every year to meet your annual spending needs while still leaving you with enough saved and invested to last through retirement.

Now, one thing to keep in mind and remember here is that the goal is to invest through retirement, not just to retirement.

5:07

Aaron Task

Right. That's a great point, because it's not just getting there. Then you have to as you're talking about daydreaming, what do you want it to look like? And you have to live in your retirement, of course. So any specific tools or you know, you mentioned the 4% rule, are there other concepts that you would recommend people think about.

5:20

Rachel Aguirre

Well, there are a ton of tools out there. And the thing to keep in mind is that they exist to help make it easier for people to put their plan into action. And I actually like to use the analogy of preparing for a trip. Your destination here, though, being retirement. So, you know, step one, you've figured out your goals that setting your destination.

But next, you need to pack for your trip. You need to prepare for that trip. So what type of luggage are you going to need to bring? What do you actually need to pack in the bags themselves? So we can think of luggage as the types of investment accounts that you're going to need or you may need. And the what we pack in our bags can be thought of as the types of investments that we will ultimately consider putting into our accounts.

So there are three main types of investment accounts that we have to work with. The first are tax deferred accounts like 401(k)s, traditional IRAs. You can think of these like your checked bags. Those bags meet you at your destination. They're considered tax deferred because you pay taxes on your investment gains only when you ultimately make withdraws in retirement.

And because you can fund a 401k or a traditional IRA with pretax money, you may be able to save on taxes in the current period. And the benefit of deferring those taxes into the future is more money stays invested each year along the journey, which then can grow and compound more for you over time. So you can think of those as checked bags.

They meet you at your destination.

7:04

The second are tax free accounts, namely Roth IRAs, which you may have heard of. These also, I like to think of as checked bags. They meet you when you arrive at your destination. But maybe we can actually think of these like the newer bags.

They have spinner wheels on them, for example, and I find them easier to get around with.

And the reason a Roth IRA is also considered tax free is you fund it with after-tax dollars. So all of the growth that you experience can be free of taxes. So you don't get a tax benefit upfront, but you potentially save more in the future. And these accounts can be especially valuable if you believe you may be in a higher tax bracket in retirement than you're currently in today.

7:58

All three of those account can be considered your checked bags. But then there's also taxable brokerage accounts. Those you can think of as your carry-on bags. They do come with a little extra hassle. You need to lug them around with you at the airport. And in this analogy here, you can think of that as being the taxes that you pay up front.

But the benefit is you always have access to taxable brokerage accounts. There's no long wait at baggage claim, no waiting until you're 59 and a half to withdraw funds without penalty. So all of these accounts can be valuable. You may need, in fact, all three types of bags or, you know, many people may want all three types of these accounts to maximize flexibility in planning.

8:46

And then the final step is to actually start packing your bags so you know your destination, you know what types of bags you're going to want to bring. And then finally, what are you going to put inside of those bags? What are the investments ultimately that we should consider making? And this is where ETFs can offer investors a number of different benefits.

And I want to specifically talk about target date ETFs for a minute. These ETFs are diversified portfolios, and they automatically adjust their strategy from more aggressive to more conservative as the target retirement year approaches. Target date ETFs really simplify the investing process and can take some of that work off of your hands.

So how does a target date ETF work? Well, you can think about the first step as though you're taking off -- you’re starting your career. It's in this phase that you're going to mostly be invested in stocks to provide you with the most growth potential early in your career when you're furthest out from retirement and generally have the greatest ability to take risk.

10:09

Next, during the middle phase of your career, you're going to want to start considering changing or adjusting your asset allocation. So you may want to consider starting to get exposure to bonds and other assets that can help reduce overall risk in your portfolio. Now, as you approach your destination and you begin to prepare for arrival, you're going to want your allocation to bonds and other assets that can increase diversification to continue growing.

And the transition from growth to income is a gradual process that focuses on increasing diversification and helping to reduce large swings in the value of your investments.

The point being that as your retirement horizon gets closer, target date ETFs really take the burden off of the investor and it does that automatic rebalancing for you so you don't have to be a portfolio manager, you don't have to consider your ever changing risk tolerance and constantly adjust the portfolio yourself. Target date ETFs do that dynamic rebalancing for you as your retirement date draws closer.

So I like to think of them as providing the quality of professional and dynamic portfolio management in the convenience of an ETF.

11:02

Aaron Task

Well, I love the idea that it's being done for me. If I'm an investor in a target date ETF and I love the analogies you've shared with us today. You know, the budgeting is the foundation of the house and then the luggage. I really appreciate that. And of course, you know, appreciate your time and insights.

Before we wrap…what is your message, though, for people who might be thinking, well, I haven't saved enough, or I started too late?

11:43

Rachel Aguirre

Well I have some good news for you? And that is that it's never too late to get started. No matter what age you are, just getting started today can help put you closer to your financial goals. Now it might require a more concerted effort on your part. But don't be discouraged. Don't put off to tomorrow what you can do today.

Start today and get on the path to reaching your goals.

12:02

Aaron Task

Alright, our guest has been Rachel Aguirre, Head of U.S. iShares Product at BlackRock. Rachel, thanks again and thanks, everyone for tuning in. Consider talking to a financial professional before taking any action.

12:11

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