MP recently spoke with Anne Lester, who worked on all aspects of retirement for 28 years. She spent 20 years as Head of Retirement Solutions for JPMorgan Asset Management. She holds patents for her progressive design to simplify and automate the retirement planning process. Lester is a regular commentator on an array of retirement issues for industry, rank-and-file, and public policy. Media coverage includes CNBC, Bloomberg TV, “The Wall Street Journal,” “The New York Times,” and countless industry publications. “Barron’s” featured Lester on its cover for her outstanding career. Her policy-related work includes testifying for the US DOL and the SEC. She founded the Aspen Leadership Forum on Retirement Savings in partnership with AARP. Its goal is to find breakthrough solutions to Americans’ far-reaching problem of inadequate savings.
MP: What are five considerations we should have when managing our everyday finances, and why?
AL: Sure, they are:
Most people aren’t wired to delay gratification. This makes it hard to save for the future, especially for things like retirement, which can seem very amorphous and far away to most people under 50. Because of this, it’s important to take advantage of workplace savings programs like 401(k)s if you have access to them because they help you save automatically before the money can hit your bank account. If you don’t have access to a workplace savings program, consider setting up an automatic withdrawal into an IRA.
Giving up something hurts more than getting something feels good, which is why it can be hard to start saving or to increase how much you are saving. You need to cut back on current spending, which hurts – a lot! One trick is to think about increasing your savings rate every time you get a raise or a windfall (like a tax refund). A great rule of thumb is to save ½ of every pay increase. That way, you aren’t feeling the pain of giving up your current spending, and you’ll be surprised at how quickly your savings start to add up.
Falling victim to our emotions, namely fear and greed, can make it hard to invest your money. It’s easy to become paralyzed by indecision – waiting for the perfect time to buy or sell stocks or overwhelmed by the sheer amount of information out there about how to invest. Worse, our emotions can also lead us into dramatically reacting and selling things in a panic if the market is down. Repeatedly selling when the market falls, then buying back when the market is up when it feels safe again, is exactly the opposite of what you should be doing (buying low and selling high), a great way to lose money instead of making it. One solution is to automate your investing using a target-date fund, a balanced fund, a robo-advisor, or a financial advisor. That way, you don’t have to worry constantly about managing your money.
Lifestyle creep is a real thing. Also known as the Hedonic Treadmill, lifestyle creep makes it so easy to constantly feel like you are living paycheck to paycheck even when you have been getting raises. It’s what happens when you move out of your starter home into a larger home or trade-in your old car for a new one every three to five years. A great strategy for combatting it is to save half of all your pay increases. That way, you can increase your lifestyle but continue to expand your savings.
Forgive yourself if you are struggling. According to the American Psychological Association, money is overwhelmingly the number one cause of stress for Americans. Instead of beating yourself up for a poor financial decision you made, figure out what you can do next time to avoid making the same mistake, and think about applying some of the tips above.
What are the five biggest mistakes we make with our finances, and how can these mistakes be avoided?
Not having emergency savings. According to a report released by the Federal Reserve in 2019, nearly 40% of Americans would struggle to pay for an unexpected expense of just $400. The single most important thing anyone needs is an emergency savings fund of at least three months’ living expenses. That way, when the car needs a big repair or the furnace needs replacing, you don’t have to scramble to figure out how to pay for it. And if you suddenly lose your job, you’ve got at least a few months of breathing room to focus on finding another job.
Not saving for retirement. According to numerous studies, 15% of Americans have nothing saved for retirement, and another 15% have barely saved anything. If people want to retire in their mid-to-late-60s, they need to be saving at least 10% of their gross paycheck for retirement. 15% would be better.
Being underinsured. Buying insurance feels painful for many people – after all, you are paying for something you hope you never need. But in addition to medical insurance, other kinds of insurance that are often overlooked are renter’s and collision insurance for your car. Both are almost never required, and many people decide they don’t need them. Theft and smoke or water damage to your apartment can have a devastating financial setback if you suddenly must replace most of your belongings or your car.
Not paying down high-interest debt aggressively. Many people try to pay all of their debts off simultaneously. But not all debts are created equal. If you have a high-interest credit card debt or high-interest student loan debt (with rates above 8%), it might make sense to make just the minimum payments on low-interest-rate debt so you can completely illuminate the high-interest rate debt first.
Prioritizing our children’s education instead of our retirement. Once you become a parent, it is the most natural thing in the world to put your children’s needs in front of your own. So many parents start saving aggressively into 529 plans (which allow for some tax advantages for savings designated for college). Saving for your children’s education is fantastic, but it shouldn’t happen at the expense of your retirement savings. Remember, there are many ways to manage college expenses, including scholarships, loans, and choosing less expensive schools, but no one can help fund your retirement but you.
Leaving Current Job
What are three things we should consider when considering leaving our job, and why?
Have you saved enough to cover any gap in wages? Make sure you don’t completely wipe out your emergency savings if you don’t already have another job lined up.
Do you have a plan for continuing health insurance? You may be leaving your health insurance behind when you quit. Make sure you have a strategy for maintaining your health insurance or switching to a public plan if you don’t already have a job lined up with an employer who offers medical insurance.
Pay attention to your retirement benefits, and don’t walk away from them. If you have contributed to a 401(k) plan, do you know if you have fully vested your employer’s contributions? Pay attention to the vesting schedule because it may make a lot of sense to wait until after you are fully vested if you are close to a vesting anniversary. And whatever you do, don’t cash out of your plan. Either keep it with your former employer or roll it into your new employer’s plan (if they allow that) or an IRA.
How can we assess our financial well-being as we reconsider our current career paths?
There are many dimensions to a life well-lived. Certainly, financial well-being is a critical component for all of us. Still, I have found that most people tend to focus on measuring things that are easy to measure – like money – rather than on the level of satisfaction that a career is giving them, which is a much more nuanced thing to figure out than how much money you have in an account. I have found it helpful to think about needs, wants, and desires. I never want the pursuit of desires to push me into a job or career that I don’t find enjoyable or fulfilling or one that is so all-consuming that I can’t enjoy the things I have.
How can we make proper adjustments to our budgets as our employment situation changes, and what do these adjustments look like?
Building up to an aggressive savings budget (15-20% of your pretax income) is an excellent way to ensure that a change in income won’t derail your long-term financial plan. For starters, you will have hopefully built up a robust emergency savings fund that can help tide you over any bumps or short-term gaps in income. And if you accept a job with a lower salary than you had been earning previously, it may be possible to maintain your prior standard of living and temporarily lower your savings rate, assuming you have reason to believe your income will eventually rise to your prior level.
If your income increases, make sure you save at least ½ of the increase. And if you are in an industry with a relatively unstable income, or are self-employed, be even more aggressive with the size of your emergency savings and think about saving even more than ½ of any increase you receive.
How can we start preparing for a financially stable retirement early in a way that doesn’t change our current situation too much?
Savings, Investment return, and time are the variables at play. It’s hard to predict investment returns, so the most important thing you can do is focus on the variables you can control – how much you save and when you start saving. So, make sure to save early and often!