Episode 6 – What’s the best way to save for retirement?
Episode transcript:
[musical intro]
Jenny
Okay, Welcome back to Fund Your Future with DRS. So, Seth, today we’re talking about saving, specifically saving for retirement. And what is that sort of magic number that you’re supposed to have that everyone asks, how much do I actually need to save for retirement?
Seth
Yeah, I was thinking about this… there’s TV commercials that… “What’s my number?” And I think people — like public employees who have pensions — sometimes that just adds another level of complexity into the question. Like, “I know I’m going to have a pension, but how much is it going to be and how much is going to replace and how much do I need to have on top of that, do I need to have anything in addition to that?” So yeah, I’m excited to talk a little bit more about how different people might think about it.
Jenny
Yeah. And because one of the options is looking at the percentage. What percentage of my income am I spending or saving?
Seth
Yeah, I think it’s really sometimes an easier way to think about it. Like you’ll hear people say that you should save 10% of your income or 15% of your income or 20% of your income to be on track for retirement. And I think once again, that really depends on, well, how are all the different ways you’re saving?
Are you saving in your pension plan? Are you saving in a 457 plan or DCP? Are you… do you have money that you’ve already set aside? I sometimes think about when people talk about like a number, like I need to have $1,000,000 saved. It’s like, well, if you have $1,000,000 at age 30 versus $1,000,000 at age 60, or a million at age 70.
Those are very different scenarios. And when do you need to have this money saved and so that’s why oftentimes I go back to percentage, like if I am saving 15% or 10% and I know my pension is going to replace a certain amount, a certain percentage of my income, then I can feel like I’m on track. Because even if I ask you, Jenny… if I told you: you need $1,000,000 at age 65, how would you know how much to start saving today?
Jenny
Yeah, I think it’s a scary figure to think about. One, it seems like a lot of money and two, with inflation. So if, like you were saying, if I have $1,000,000 in the bank today, hopefully I would be investing that money so it’s continuing to grow. And I think that’s a good takeaway for our listeners is that if you’re keeping your savings account in just a general bank, a general bank savings account does not gain very much interest.
Yeah. So, if I have $1,000,000, I’m going to put it into my Bank of America savings account. It’s not going to gain that much. It’s just going to basically stay $1,000,000 for the next 30 years.
Seth
Right, exactly.
Jenny
So, I think that’s the importance of investing and all of these investment plans.
Seth
That’s exactly right. And I think one of the things that’s intimidating about that – that means that you could lose some of that money at some point, like it’s a paper note. Like it’s not real until you actually need the money. I was just talking to a colleague in our office a couple of weeks ago who’s, you know, much closer to retirement.
And she was really nervous about like how much money was in her supplementary savings account.
Jenny
Was this a DCP account?
Seth
Yeah, yeah, yeah. Okay. She had her DCP account and the market’s been going crazy and she sent me an email, “Oh, I’m really, really freaking out.” And we just sat down and talked and it wasn’t like, you know, I’m certainly not her investment advisor, but just trying to like, reassure her what was what was keeping her up at night.
What was really scary. And for her, it was like she knew she had one big expense when she was going to retire. She’s going to pay off her house or buy a new house or something. And she needed a certain amount of money to help that transaction. And she already had that money set aside. She had that money saved.
So letting her know, like you got that ready to go when you turn 65, everything else in that account you’re going to use when you’re 70 and 75 and 80. And it’s still got time. And I think that’s kind of to your point, like saving money in the right vehicles for the long term versus the short term. And thinking about… we’ve talked about emergency funds in the past.
That’s not necessarily retirement savings. I’ve got that money set aside for something more specific and maybe not specific. I don’t know what it’s going to be, but I’ve got it set aside for something more immediate where what we’re talking about today is more saving for the long term. For when you’re 70 or 80 or 90 or 100.
Jenny
Yeah. I think what we want to reassure our listeners is the safety of investing in DCP that it is… Correct me if I’m wrong here… It’s the one that’s managed by the Washington State Investment Board.
Seth
Yeah. So, they pick the funds… this is one of the things I think is really great. The Washington Investment Board, who are investment professionals, who manage all of the pension funds for the state of Washington. They select a group of mutual funds that then employees, public employees in the state can invest their additional supplementary retirement savings in. And so, you can choose between ten or 20 different funds.
But they are… they’re selected by professionals. We work really hard — DRS and the State Investment Board — to keep the costs relatively low of those funds, which I think is also important. Something to keep in mind. The State Investment Board selecting those funds I think can help kind of reassure people that it’s one less decision you have to make.
And I think that’s oftentimes when people think about investing for their retirement, there’s so many decisions: how much should I save? Where should I save it? That can be a little bit overwhelming.
Jenny
Yeah. Yeah. I think the biggest takeaway here is the security of investing in DCP, because it’s a set up through the state. We want it to be this stable option for people. A lot of times people hear the word investing and I think they kind of get nervous like, “Oh, I’m going to lose my money. I don’t know.”
It’s like during the pandemic, a bunch of people bought stock in GameStop and then like won a bunch of money, they lost a bunch of money. There’s all this fear around investing, but we want people to know that DCP is a safe way to invest. You have all these financial advisors behind it and you’re not going to lose your money.
Seth
I think it’s important to understand, like with any investment, there’s risk.
Jenny
There is risk, but of all the investments out there, this is probably the safest one that you could do.
Seth
You’re not signing up with a person that you don’t know. You don’t know their background… “are they going to run away with my money?” And there are plenty of great financial advisors in the state and people who can help talk through your specific situations, which I think is really beneficial. Like I was mentioning, that colleague who came to talk to me, she saw that her account had gone down ten or 15 or 20% because the market has gone down.
And I think one of the things that’s important to remember with investing, I remind people about this often is that when the market goes down, you’re buying things on sale. And people love to buy things on sale, right? I was talking to a different colleague about this, about looking at how many shares you’re buying versus what the what the value is or the price.
It’s like, oh well this month I actually got to buy 30 shares instead of last month when the price was higher. I only got to buy 25. So I’m buying more. And I think the thing to keep in mind with investing and especially through DCP is really, you know, you mentioned investing in GameStop one specific company, whereas the funds that are available, you investing in hundreds or thousands, you’re buying little tiny pieces in all of those.
Jenny
Yeah, that’s a great point and that’s for trying to explain how investing works. That’s why it makes it so safe – to be able to invest in DCP or your private Roth IRA… all of these investment companies are investing your money in lots of different buckets of money and that’s why it’s so safe. So, if one of those buckets drops, you’re have all these other things lean back on.
Seth
Yeah, that’s exactly right. You always hear the term when you’re talking about investing “diversification.” ‘You don’t want all your eggs in one basket’, as the saying goes. And I think sometimes people think about that, well, I need to have five or ten different funds and oftentimes those different investment funds, they have the same or similar underlying investments.
You might not need as many separate funds because you’re still getting that same diversification.
Jenny
Yeah.
Seth
That’s probably outside of our area of expertise.
Jenny
Yeah.
Seth
Or maybe as far as we can go.
Jenny
Yes. But yeah, kind of getting back to what people need to know when they’re trying to figure out that magic number, they’re trying to figure out how much should they save for retirement. I think our biggest takeaway is basically just looking at – when you get a raise, to use that as an opportunity to increase your savings.
Seth
Yeah, I think what most of us do is we spend what we have. And so, if you’re anticipating a raise, if you know you’re going to get a raise and you can start saving that money right away, you don’t notice it’s gone. And it doesn’t necessarily mean that you have to save all of the raise. If you save half of the raise or up 1% of a 3% raise.
And I think one of the things to be aware of is when knowing when you’re going to get those raises. I think for a lot of state employees, we tend to get a raise in July, but we also can get raises on our anniversary dates. A lot of school employees will get increases in salary every school year. So, in September, they go up a step on their pay scale. So that’s a perfect time to set a little bit more money aside or to start setting money aside.
Jenny
And going back to saving with DCP, we always try to encourage people to set up a percentage of DCP. So instead of saying “I’m going to contribute $100 a month to DCP,” “I’m going to contribute 1% of my income with DCP.” So that way your savings is increasing automatically with those rates.
Seth
Exactly. And then you can dial it up another percent when you get another raise and. Yeah, exactly.
Jenny
Yeah. So, Seth, when someone comes to you and says “help, I’m trying to I’m freaking out because I’m trying to prepare for retirement. I’m going to retire in 20 years. What should I do?” What do you say to them?
Seth
Oh, gosh, there’s lots of different things you can say. And I think people are oftentimes overwhelmed by trying to get to a specific dollar amount. And in my mind, what it comes down to is like, how much are you spending now? Do you want to continue to spend that amount? And then you can start to talk about percentages or kind of like pieces of the pie.
And I think for public employees, I know we’ve talked about this in the past, but knowing how much you’re going to receive in your pension helps replace some of that amount that you’re going to need to save. That’s really where we’re a lot of people working in the private sector don’t have that pension amount, so they might have to be saving more.
And for all of us who are in pension plans, we’re contributing to that. That is part of our retirement savings. But the average public employee works about 21 years. And so, if they’re a PERS Plan 2 member, that means that they’re going to get about 42% of their salary replaced from PERS and if they’re also participating in Social Security, that might replace another 20 or 30%.
And so, there’s a gap still that they need to have additional money saving. What I usually talk about is like with DCP, can you start by saving 1% or 2%? For folks who are already saving and looking at how much they’re spending. And then how much would their pension replace of that? So looking at how much is that actual gap?
Is it $1,000? Is it $5,000? Then thinking about that in terms of like, okay, so I need an additional amount of money per year. And then a general rule of thumb is – you multiply that number by 25. So, for somebody who doesn’t have a pension, if they’re spending $100,000 a year, you multiply that by 25, they’re going to need two and a half million dollars.
Jenny
Oh, gotcha. Okay.
Seth
So it kind of puts a target number out there to think about. It’s just a rough kind of, you know, back of the envelope sort of calculation that anything that is like set in stone. But I do think it helps people think about, okay, that that’s a number I can think about. But as you said earlier, sometimes those numbers feel really big and overwhelming and there’s no place to start.
Yeah, and that’s where going back to thinking about percentage of salary. “Okay, I’m currently saving 5%. Can I get to 6%?”
Jenny
Yeah. Or I’m currently saving 1%. Can I get to 2%?
Seth
Yeah, exactly. Yeah, exactly. Trying to figure out how to level up year after year after year and then realizing that’s going to really compound over time, as you were saying, yeah, that money that you’re investing is going to grow and grow and grow and at the start it’s not going to feel like it’s growing really much at all.
But yeah, that is that amount gets bigger than the way I like to think about it is, your money starts working for you and your money can work much harder than you can. Your money doesn’t take days off. It works overnight. It’s always there working for you. And so, you’re putting your money to work for you.
And eventually then… that’s what you’re hoping for in retirement is that that money is then paying you not to work.
Jenny
Right. Exactly. That’s ‘playing the long game’, which is what they generally call it. Yeah, right. It might not seem like a lot right now. And the woman that you were chatting with being concerned about the market fluctuations, the market does go up and down. That’s just the nature of the market. But when you look at it over the course of 20, 30 years, it’s going to go up.
We can say that, you know, with pretty good conviction looking at the market for the last 300 years, Yeah, if you are putting money towards your retirement account, that you’re making those strides towards savings and looking at those little ways of “what can I increase to…”
Seth
Yeah, to get.
Jenny
…To get there.
Seth
So you introduce a term that I hadn’t heard before earlier…we were talking before we started recording: the Tripod of Savings. Yes, I like that. I like that visual. Do you want to tell the audience a little bit about what that means.
Jenny
Yeah. So, it’s sort of this idea of a three-legged stool of being able to find stability in retirement. So, one leg is your pension that you’re getting from your job. One leg is the Social Security that you would get from the government. And the third leg would be any sort of investment like DCP or a Roth IRA, any sort of those number of investment accounts.
So again, diversifying gives you enough ability to lean on these three legs to be able to say, “okay, with these three pots of money, I can feel confident going into retirement.”
Seth
Yeah, yeah. There’s security with that. And if, one of those legs is bigger or stronger, then maybe the other leg doesn’t need to be quite as big or strong. But I do want to try to figure out how to balance those legs out. So one isn’t taking all of the weight.
Jenny
Yeah. Yeah. And not necessarily that they have to have the same amount of money in them, but just that they are those sort of three foundation blocks for your retirement.
Seth
Exactly. Three things that you can rely on.
Jenny
Exactly.
Seth
So, we’ve talked a lot about DCP as a way to save for retirement. And I think both you and I are very big advocates of it because of where we work and what our jobs are. But not all public employers participate in DCP. But most public employers have some sort of what’s called a 457 plan, which is what DCP is.
It’s a just part of the IRS code. It’s like a 401(k), it’s supplementary retirement savings. So I think one of the best things you can do if you don’t know where to start is go talk to your HR person and ask: “how can I save more for retirement? I mean, I’m ready to save more. How can I do that?”
And the nice thing about those employer-sponsored plans is that the money comes right out of your paycheck, and once again, it kind of goes back to you don’t know it’s there. You know, your spending will adjust.
Jenny
It’s happening automatically.
Seth
Exactly behind the scenes and that automatic savings makes it really easy. So, I think that’s one vehicle. The 457 plan or DCP, if your employer offers it.
I know one of the very first conversations you and I ever had that got me excited about the possibility of doing this podcast was about Roth 457 and you were one of the first… not Roth 457… just Roth IRA.
Jenny
Just a Roth IRA. Yeah.
Seth
I’m already confusing my terms. You mentioned that you were saving in a Roth IRA, and I hadn’t run into a lot of other people at the DRS who were doing that, and you seemed really excited about it. And you’ve been doing it before you even started at DRS. So, I’m just curious if you want to share a little bit about what a Roth IRA is and how it works.
Jenny
Yeah. So, I think I just started looking at… I was reading some finance books and seeing videos online and hearing advice from different financial advisors. And one of the advice was that with a Roth IRA, you are paying the taxes upfront before… whereas with something like a DCP or 457 account, you are paying the taxes.
It is tax deferred. So you are paying the taxes later when you turn 65, or when you basically start to say, “I’m ready to withdraw. I’m 65 now and I’m ready to withdraw these funds from my DCP account.” So I liked one person’s advice, which was do the Roth IRA because that way you’re paying the taxes now because we don’t necessarily know what the tax rate is going to be by the time that I’m 65, 30 years from now.
So I liked that sort of option. I can just pay a little bit of the taxes each year. And then when I turned 65, I have this big pot of money that I don’t have to pay taxes on.
Seth
Yeah, that’s exactly right. The kind of the option of either paying the taxes now or paying the taxes later. And it really is a personal sort of preference, or personal decision. I think there are folks who really like DCP or 457 plans because they want to lower their current taxable income. They want to pay less in taxes now.
I think almost everyone within the personal finance space will always say, if “you’re not putting money into a Roth IRA, do it.” It’s just kind of a I wouldn’t say maybe I would say a tenant of personal finance, but it’s an additional savings vehicle. And I think I should have mentioned this from the start, but IRA stands for Individual Retirement Account.
And so, I think that’s where it gets a little bit intimidating because it’s your decision. You’re not doing it through your employer. You’ve got to you’ve got to make a number of choices along the way.
Jenny
True. Although I will say that I use what’s called a robo advisor. So I’ve gone through a company called Betterment. It’s Better-M-E-N-T, Betterment.com And there’s a number of these robo advisors out there, but they do charge a small fee. But you can say, “I want to set up a Roth IRA.” They set it all up for you.
I basically just set up my automatic deposits. I say “I want to deposit X amount into this account every month” and they take care of all the investing for me, and then they just send me the tax forms in March and say, “Here’s what you should give to your tax advisor.”
Seth
So, I started a Roth IRA, like when I was 22 or something. Like just, just really because kind of a very similar experience you have doing a bunch of reading. It was like, well, “this this is what I should be doing.” Like I want to start saving for my retirement. And I went to a financial advisor because I was intimidated and didn’t know what to do.
And for a long time I was just investing through him and then eventually said, “You know what? I’m just going to pick a mutual fund. I can pick a mutual fund. It’s well-diversified, but it’s a little bit less expensive because I’m picking it versus my financial advisor.” And so, I switched to Vanguard at the time. And there are lots of different companies where you can do like you said, lots of robo advisors.
There are places where you can do it yourself Vanguard, Fidelity, Schwab, TD Like there are probably a thousand different places where you can do that sort of thing. But I do think that sometimes can be intimidating for people. And so trying to figure out like, what’s the way to like dip your toe in? And there are lots of different ways to dip your toe in and get started.
But yeah, there are limits on how much you can put in, but it’s usually just like getting started is pretty straightforward. You just like you said, pick how much you want to, how much you feel like you can afford or how much you want to get started.
Jenny
Yeah and I know as an average state worker… Yes, there are limits but I’m never going to max out the amount that I can deposit into those accounts. So I’m okay.
Seth
And so I think the only other type so we talked about 457s or DCP and we talked about Roth IRAs, one other account, another vehicle for people to save…for folks who work in school districts, is a 403b account, which is a lot like DCP, a lot like a 457. It’s just another tax deferred vehicle that people can save money.
And it’s funny you were mentioning about…not being able to, or to be… kind of intimidated by the maximum for these accounts. I was listening to a podcast a long time ago about a guy who was a public school teacher, and he was maxing, his 403b account AND his 457. So, he said, he went into… I’m not sure I’m getting this 100% right, but he would go into his payroll people and have to tell them like “I’m trying to get my paycheck basically to zero.”
Like, like I think he was living off of his wife’s income, if I remember. Right. Okay.
Jenny
Yeah. Yeah. He had some other income coming in. Yeah.
Seth
Yeah. He had a way to make it work. But one of the things I took away from the story was it’s not too late to start saving for retirement.
Jenny
Definitely. Never too late.
Seth
Yeah. And so, if you start with a little bit when you’re young, you might not have to save as much when you’re closer to retirement, but you can save more when you’re later in retirement. Kind of make up time. I think that’s if I remember right. I think that’s kind of what he was doing. It was like, I’m just going to dump as much money as I can because I know I’m getting close to retirement.
That 403b is just another option for school teachers. Not just school teachers, school employees. Anybody that works within the school and somebody could talk to their payroll or HR folks and see what options they have within their school.
Jenny
Yeah, that’s great.
Seth
Is there anything else that we needed to talk about today or is that?
Jenny
I think that pretty much covers it.
Seth
So we talked… remind me what our tip of the day was.
Jenny
So, when you do get a raise that you use that as an opportunity to increase your savings and setting up those percentage contributions so that it happens automatically.
Seth
Yeah. One thing we didn’t talk about with that tip specifically is I know there are ways within the DCP program and there probably are with other accounts is not only can you set up a percentage, but you can set it up so that the percentage increases every so often. So say, you know, “I started at 1% and next year I want it to go to 2% and the next year I want it to go 3.”
You can just set that up from the start and so you don’t have to think about it in the future. I think the other thing that we probably should mention is that you can always go and change these amounts.
Jenny
Definitely.
Seth
You’re not locked in.
Jenny
You’re not locked in. If you’re set up at 4% and then all of a sudden you have a family crisis happen and you’re saying, I need a little bit more of that money right now. You could bump it down to 1% or something else.
Seth
Yeah, you can take a pause. You can turn it back on. You can turn it back off.
Jenny
Definitely. The money is still there. It’s not going anywhere.
Seth
Yeah, I think that’s one of the things that people get nervous about. And then all of these different plans have different sort of emergency access rules that are probably beyond the scope of our podcast. Yeah, beyond the scope of our knowledge. But I think that’s the other thing. Sometimes people get worried about this money getting locked up. And usually there are, you know, kind of emergency situations that you’re allowed to get the money or some of the money or the money up to the amount of your emergency out.
Once again, that’s why we have emergency funds set up. But there are opportunities in different ways to do that. And so, I would just encourage people not to be feeling like that’s a reason not to start saving, you know, supplementary retirement account.
Jenny
Yeah, definitely.
Seth
All right.
Jenny
Great.
Seth
Thanks for chatting.
Jenny
Yeah. Thank you so much.
[musical outro]
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