On yesterday's Faith & Finance Live on American Family Radio, SMI’s executive editor Mark Biller discussed a simple but effective approach to making up lost ground in retirement preparation.
To listen, click the play button below. Scroll down for the transcript.
Faith & Finance Live with host Rob West airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(More radio appearances by members of the SMI team are posted on our Resources page.)
Transcript
Rob West:
"So teach us to number our days that we may get a heart of wisdom." That's Psalm 90:12.
Hi, I'm Rob West. If you're a few years from retirement and your savings aren't quite where you want them, you might feel like you've run out of time, but maybe you don't need a time machine to solve the problem.
Today, Mark Biller joins us with some encouraging words about beefing up retirement savings. And then it's on to your calls at 800-525-7000. This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (opening music ends)
Well, Mark Biller is the executive editor at Sound Mind Investing, an underwriter of this program. He and his colleagues provide a wealth of biblically grounded wisdom on investing and financial stewardship. He's a good friend and a frequent contributor.
Mark, great to have you back.
Mark Biller:
Thanks, Rob. Good to be back.
Rob West:
Mark, as people near retirement, one question seems to weigh heavily on their minds and that is, "Have I saved enough?" Would you agree?
Mark Biller:
Oh, absolutely, Rob. Even people who've saved quite a lot, they wonder if they'll have enough! And that's largely because there's so many uncertainties related to retirement, especially healthcare related, which tend to kind of accumulate later in life.
So the good news is if people feel like maybe they haven't saved enough, all is not lost, and that's what we're going to talk about today. There's one simple solution that really can move the financial needle quite a bit and that is to work a little bit longer. Now, a few years ago, a study on this topic concluded that at least for some people that are nearing retirement, working even a little bit longer than they planned, can have the same benefit as having saved a higher percentage of their income over the last three decades of their career.
Rob West:
Interesting. I mean, that seems to challenge everything people value about compound earnings. So maybe tell us a little bit more about that study.
Mark Biller:
Yeah, sure. So it came out of Stanford in 2018 and was titled "The Power of Working Longer" — and the key takeaway from the research was this: Delaying retirement by just three to six months has the same impact on the retirement standard of living is saving an additional one percentage point of income for 30 years.
Rob West:
Wow.
Mark Biller:
Now, that's a pretty amazing finding. Of course, for those nearing retirement with the fear they hadn't saved enough, that's a big relief because a few more months of work does seem like a small price to pay to make up for decades of maybe under-saving.
The thing is, Rob, as with any research, the output is only as good as the input. And to understand the results, you have to know what assumptions went into the research. And, in this case, that does take just a little bit of the shine off of the study's overarching result.
But that said, there are still some important and encouraging implications for those nearing retirement. Maybe a little light on their savings.
Rob West:
Yeah, let's dig into that. What were the key assumptions behind the study?
Mark Biller:
Yeah, so there are four main ones. It was designed around a theoretical worker that we'll call "John," and these were the four key assumptions. One was that John began saving for retirement at age 36. He contributed 6% of his pay and received a 3% employer match for a total of 9%.
Rob West:
All right.
Mark Biller:
Second one is John plans to retire at age 66, which for Social Security purposes is his "full retirement age." That's an important one we'll come back to.
The third one is John plans to claim Social Security right at the beginning of his retirement. And the last one is that John plans to use all of his retirement savings to purchase an inflation-indexed annuity. That's a little bit of a weird one. We'll dig into that a little more, too.
Rob West:
Yeah, I'd certainly like to know more. Mark, why did delaying retirement have, then, such a significant impact in their model?
Mark Biller:
There were two main factors, Rob, and the biggest — first and foremost — was that the higher Social Security benefit that John would receive by waiting even just a few months.
The second big factor was the higher annuity income that would result from him waiting. And that's because the older you are when you buy an annuity like this, the bigger the monthly benefit you can buy with the same amount of money.
So the assumptions that the researchers made for this theoretical worker, John, may be quite different than the circumstances of any particular individual. So for example, you may have a higher or lower income than John did, you may have started saving for retirement earlier or later, the performance of your portfolio may be better or worse. The point is there are a lot of different possibilities.
And the last point that we brought up about their assumptions was that it assumed that [retirees were] going to be buying an inflation-indexed annuity with their full retirement savings, which most people aren't going to do that. We certainly wouldn't recommend it. And one little detail, Rob inflation-indexed annuities aren't even available anymore. So that's kind of a key point!
But, like I said, there are still some really important things we can draw from the study.
Rob West:
Well, let's talk about the practical takeaways or encouragement from the study, even if the assumptions might be a little off.
Mark Biller:
Yeah, there's one giant one, Rob, and that is the power of delaying the start of your Social Security benefits. That is the power of this study in a nutshell. It's why we highlighted it for our SMI readers — and that is again, to restate it, that working even a little bit longer and pushing your Social Security start date closer to 70 years old can meaningfully change and increase your monthly retirement income.
Rob West:
Yeah. Let's review — We talk about this a lot, but I think it's important because we get this question often — let's just review the details of what happens to your Social Security benefit when you delay past full retirement age.
Mark Biller:
So, for each month that a person delays claiming their Social Security benefits beyond that "full retirement age," the monthly benefit amount increases by two-thirds of 1%. Let's translate that to an annual number. That means for each year that you delay your Social Security beyond full retirement age, your benefit goes up by 8%. So that's a big deal.
A second benefit, Rob, is because Social Security benefits are themselves already indexed for inflation, that means that when you wait beyond your full retirement age to claim Social Security benefits, you're essentially buying yourself, and potentially your spouse, an increasingly attractive inflation-adjusted annuity. And that's a really compelling offer that can change someone's retirement savings picture quite a lot.
Rob West:
So what we're talking about here — I mean if you take it early at 62, your first opportunity, you're going to take about a 30% reduction. If you wait until age 70, you're going to have about a 24% increase.
But, clearly Mark, you gave up the benefits between full retirement age and age 70. The data I've seen — and maybe this is a moving target — but for the average retiree who waits beyond full retirement age to fully age 70, it takes about 12-and-a-half years to get paid back and then be kind of "in the money" with that 24% higher check. Is that about what you've seen?
Mark Biller:
Yeah, it is. And those are great points. It definitely means that there's a strong personalization factor to this decision, your health, your spouse's health, that sort of thing. And a lot of people I think tend to look at numbers like that and think to themselves, "Well, my chances aren't that great that I'm going to live into my mid-80s to make this worthwhile."
And the only thing that I would add to the numbers that you threw out there, Rob, is that when a couple makes it to age 65 together, if they're in reasonably good health, the numbers that I've seen suggest that it's a 50% chance that at least one of those two will live to reach age 90.
So when you think of it in that context, and again the spousal benefit which comes into play for most people that are retiring with Social Security, you start to look at that a little bit differently. "Even though I didn't think my odds were that good, the actuaries say that the odds for one of us making it well beyond that 82-or-so point are actually maybe stronger than I think."
Rob West:
Well, and going back to the original premise, I mean for folks that haven't saved enough or feel like they haven't, having that check that's guaranteed "mailbox money" — 25% roughly higher than what they would've gotten, if they can delay and work longer — could be a game changer. I mean that could be the difference between balancing the budget and maintaining their lifestyle or not.
Mark Biller:
Oh, absolutely. Plus there's the benefit that if you're working longer, you're adding more to your savings while you're working, and you're not drawing down your savings as long because you've got your work paycheck a little bit longer. So there are multiple angles where this is helping both increase your nest egg and make that nest egg last longer.
Rob West:
Well, and one other benefit on top of that. I mean, assume you're at the peak of your earning potential there in your final season of work, and you're knocking off some of those early years where you didn't make as much for your high[est] 35 [earnings years], you could be seeing increases on that in addition to the automatic adjustments by waiting
Mark Biller:
Great point. We should have talked to you before we wrote the article!
No, that's really a good additional point. And I would just emphasize Rob, that while we're talking about working all the way to age 70 and that kind of thing, like we said with the opener here with this study, even just extending by six months or a year, you're moving the needle a considerable amount really every month that you're delaying that retirement decision.
So it really is kind of an obvious but yet a really powerful fix for people if they're looking at their savings and feeling like they're a little short.
Rob West:
Mark Biller here today. He's executive editor at soundmindinvesting.org. Back with your questions in the next segment. Stay with us!
Rob West:
All right. We're going to head to the phones and talk to our amazing callers today. By the way, Mark's here answering your investing-related, retirement-related questions. If you have a question, we do have a few lines open. 800-525-7000 is the number to call.
Jackie in New York, go right ahead.
Caller:
Hi!
Rob West:
Hi, Jackie. How can we help?
Caller:
It's too late for me to put off retirement. I retired a little early, but I didn't start my Social Security until my full retirement age.
But anyway, I have a 401(k), I have another IRA rollover. The first one's $126,000. The smaller one is $46,000 — the IRA rollover. And then I have very small one when I went back to work part-time, and it says it's a 403(b). That's like $3,600.
So I'm not sure if I should just stay put with that. I have savings, I don't have to go into debt. I have no debt, so I have a savings that I can rely on for emergency.
Rob West:
All right, very good. Mark, your thoughts for Jackie?
Mark Biller:
Yeah, Jackie, I think that from the sounds of things — just to clarify, it sounds like you're able to pay most of your expenses from your Social Security, other income.
Are you actually drawing money out of these investment accounts to pay bills and that sort of thing?
Caller:
No, never did that. Did not plan on it unless I purchased a house closer to my kids and grandkids. And with the — I retired before COVID and everything has changed so much that I've just left all my money where it is. But I do not have to use that for anything.
Mark Biller:
Okay. Well, that's a beautiful place to be in Jackie. It really gives you a lot of flexibility. So I guess the first thing that I would say is, from what you've described, I don't think that you need to do anything that you necessarily have to make any changes with it. Any changes that you would make would really be preference choices. If you don't think that those accounts are performing the way that you'd like them to, if they're not invested the way that you'd like them to, then you could look at making some changes.
Sometimes, leaving your money in a 401(k) can actually be the best thing because sometimes those can be a very low-cost way of investing. The fees are sometimes not very prohibitive at all.
Now, the other option, of course, would be like with the Rollover IRA that you already have, you could roll these other two retirement accounts into either that same IRA or another Rollover IRA like it at the broker of your choice.
The main reason for doing that would be if you wanted to invest those in a way that you weren't able to invest through your 401(k). A lot of people hear me say that and they're like, "Well, what would that even look like? Because all I do is invest in index funds, the S&P 500 index or a bond index fund."
And if that's the way you invest and you're happy with that, then there usually isn't a reason to move those accounts at all. It's more for people like our SMI readers who want access to a broader range of investments that the rollover will usually come into play. So that's kind of how I would frame that up.
What do you see, Rob, that you would add to that?
Rob West:
No, I think you're exactly right. You're in a great position here, Jackie. I think the key is — to Mark's point — do you want more flexibility and opportunity to invest in a wide range of investments, and you want the simplicity of everything being in one place, just easier to manage it when you don't have three statements and three accounts to keep up with. That's where that rollover can really shine.
Apart from that, if everything's working, there's no reason why you can't leave it right there. Hopefully, that gives you a few things to think about.
Donna, you've been waiting patiently there in Texas. Go ahead.
Hi, Donna, are you with us?
Caller:
Hi!
Rob West:
Hi, there.
Caller:
Yes. Sorry, I took you off of speaker phone.
Rob West:
No problem. How can we serve you today?
Caller:
Thank you for taking my call. Yes, my granddaughter, Alexis, she's 25 and she's been offered a position with an engineering company that has an ESOP — employee stock [ownership] program — that, they say they're employee-owned.
Is that a wise investment for her future to go with them? They also offer a 401(k), but it's optional for her.
Rob West:
Okay, yeah. Mark, your thoughts?
Mark Biller:
Yeah, so the ESOP is probably going to have certain terms that go along with it, and so it's hard to talk generally or at least to say whether it is or isn't a great option. Generally speaking, an ESOP is a benefit to an employee and, so being a benefit, generally those are attractive. Now, the specifics can certainly vary depending on the person's situation.
So with a 401(k) available, we always ask about what kind of match do they have and that sort of thing.
I would say that the first priority for a really young person — you said, I think she was 25 years old, probably doesn't have a lot of savings at this point — may need to be building up an emergency savings reserve at the same time that they're starting to engage with these employer-related plans. The way I would look at it, Donna, I would look at the 401(k) first — look at the matching.
I would want to get the full match on the 401(k) because that's guaranteed money. Now, of course, it's certainly not going to hurt to look at the terms of the ESOP plan as well, and if those are attractive terms, then I would not have any problem putting some money into that plan alongside the more guaranteed 401(k) match.
Of course, again, the terms of that ESOP — it could be that that money is all but guaranteed too. It's just hard to know without knowing the specifics of that plan. But generally speaking, that's an added benefit. So even if she doesn't take advantage of it right away, that's generally a nice thing to have at least available as an option.
Rob, your thoughts?
Rob West:
Yeah, I totally agree. The only downside is her savings [are] tied in that ESOP to one company's success, which can add some risk if it struggles, and shares are often locked in until she leaves. So I think — to Mark's point — that's why the vast majority of these firms also provide the 401(k). That's where I'd start. Get the benefit of that matching, if there is any.
And then she should understand — just as a part of evaluating the company — the vesting schedule and any other benefits as she's making this decision. But at the end of the day, it's a great perk, and it can give your daughter free company stock for retirement, which is not a bad thing.
Caller:
Okay. Well, it indicated that the first year you're 20% vested, then it raises each year up to five years to where [inaudible] vested. And their 401(k) is a 5% match.
Rob West:
Okay. Yeah. So that's a huge benefit. She needs to take full advantage of that first, and then I think the ESOP is a benefit on top of that. So it sounds like, at least from this part of evaluating the merits of this offer, this is a good one, and it sounds like they have a rich benefit package.
Donna, thanks for your call today.
Let's go to Wint in Louisiana. Go right ahead.
Caller:
Hey, Rob and Mark. How are y'all?
Rob West:
Hi! Doing great. Thanks for your call today.
Caller:
Yeah, thank y'all for taking me. Thank y'all so much for hosting this program. I'm in my mid-30s and newly learning about investing in finance, so it's been really helpful.
Rob West:
Awesome. Glad to hear.
Caller:
I have two questions, if you all have time. The first one, I have a couple of [401(k)s] from different employers that I started with, and I was wondering if it's better to consolidate into one. I was thinking — because one of them is with Edward Jones and I've already matched biblical values with them — I was thinking to consolidate with them. Do y'all think that'd be the move? And then...
Rob West:
Go ahead with the second part of that as well.
Caller:
And then the second question, I was thinking of opening of Roth and I started looking at different companies. But do y'all have a recommendation for a company to open with that matches any biblical values?
Rob West:
Excellent. Mark your thoughts on consolidating these, as well as opening that Roth IRA?
Mark Biller:
Yeah. Well, I don't know if you heard the conversation with Jackie a little bit earlier, but the main advantages of consolidating the 401(k)s would be the convenience of having them all in one place and the ability to invest those exactly the way you want. If you're not able to do that in the current 401(k) plan location, and it sounds like you have a situation at Edward Jones where you're able to invest according to the biblical values, and maybe [with] your other 401(k), you're not able to do that. So that would be a reason to potentially roll that 401(k) into the existing IRA or a new IRA if that needs to be the case.
As far as the Roth IRA, you could opt to consolidate again with wherever you're moving the 401k money to also have the Roth IRA there. They wouldn't be the same accounts, but you would at least be only dealing with one institution that way. That may be attractive.
I'll tell you what we tell our SMI readers when, we have a number of different brokerages that our clients work with, all the ones you've heard of — Fidelity, Schwab and so forth — and most of those will give you a wide variety of investing options. And so if you have a particular fund, say a particular "biblically responsible investing" fund or ETF that you like, you would be able to purchase that through any of these discount brokers. Fidelity and Schwab are the two big ones. They have a lot of great services for individuals. A lot of our clients use them, but there are a number of other good choices as well. So you've got a lot of options there.
Rob, help make sense of all that information I just threw out.
Rob West:
No, I think that's exactly right. I think you could see a benefit from consolidating, especially if these are small accounts. Getting them in one place might open up some other options. As you said, you can get to a company that better aligns with your values and have even access to faith-based investing investment options in terms of that Roth. You could go to a Fidelity or a Schwab and have plenty of options in terms of investments that align with your values. So I think you're in great shape there.
Let's do this. You sound like you're somebody who wants to learn and you're trying to get into this whole area of investing. We're going to send you a copy of the Sound Mind Investing Handbook as our gift to you. Stay on the line. We'll get your information. I think that'll be a blessing to you as you just start to learn God's way of investing, and also some real practical information. Thanks for your call today.
Back with more questions after this Betty, Tim, coming your way. Stay with us.
Rob West:
Let's go to Oregon. Hi, Betty! How can we help?
Caller:
Good morning. Thank you so much for taking my call. My situation is this, I'm 70 — well, a little more than 70-and-a-half — and required minimum distributions start at 73. I've been doing the qualified [charitable distribution] giving now since I was eligible at 70-and-a-half.
But I'm going to have a big tax hit because the majority of my investments is in a traditional IRA. I do have a Roth, but like I said, the bulk of it is in traditional, which obviously I have to draw at 73. So is there a way to lessen the tax bite on that other than converting to Roth — which I already did once, a portion, and that was a huge tax hit. But, so is that the only way? Or are there other mechanisms to reduce the tax hit?
I was hoping that the no tax on Social Security would happen, but I don't know. Do you know anything about that impact...
Rob West:
Probably not. It's too early to know what's going to happen there. It is certainly being debated.
Are you planning to take out more than you would like to give charitably from this account?
Caller:
Well, I am going to do all of my giving from that account period. I mean all of my tithing and everything from that account. But I don't need more is the thing, so I'm going to be forced, forced to take it out.
Rob West:
If you basically just give through the qualified charitable distribution an amount equal to the required minimum each year starting at age 73, then you won't ever pay any tax. Because when it goes straight to a charity, it does not get added to your taxable income, thereby allowing you to satisfy the required minimum and never pay tax on the money as it comes out.
Caller:
Okay. Where can I find a chart where I could approximate what that RMD is in fact going to be? Is there a website or something where I could look that up?
Rob West:
Absolutely, yeah. It's just irs.gov. They publish that information there for you and you could just go look up what your balance is and what your age is, and it would give you the factor to use. It's called the IRS's Uniform Lifetime Table, and it would calculate your annual required minimum for you based on the information you would provide.
Caller:
Okay. Because I'd rather give it to my charitable causes than...
Rob West:
Well, and that's the beauty of the qualified charitable distribution, Betty, is that money went in tax-deferred, but it can come out tax-free. You don't get the deduction, but it's never added to your taxable income so long as it goes straight from the IRA custodian to your church or other 501(c)(3) ministry.
And as long as that qualified charitable distribution each year is equal to or greater than your required minimum, well, you've satisfied your required minimum and you don't add $1 to your taxable income for the year!
Caller:
Perfect. That's the way around it. I love it. That's perfect.
Rob West:
All right. Thanks for your call today, and I love that you're a giver! We appreciate it. Thanks for calling.
Mark, let's come full circle to where we started today. We opened by talking about those folks that are feeling ill-prepared for retirement, and we talked about working longer. We talked about delaying Social Security, but there are some other financial advantages to working longer, too, and I'd love for you to kind of tie a bow on this today.
Mark Biller:
Yeah, so you've got multiple benefits like we were talking about earlier, Rob. One, you are — while you continue to work — you're able to add to your nest egg.
Two, you're not drawing down your nest egg because you haven't retired yet, so you don't need to pull money out of the account. Your nest egg doesn't have to last as long.
And then the big one is that [your] Social Security benefit is ramping up at a rate of essentially 8% per year, plus that's going to be inflation-adjusted down the road. So those are a few big ones.
We actually touched on a couple of others. There are a number of these benefits that all come together. So while it's emotionally perhaps not real appealing to continue working once you've kind of set your eye on a particular date or a particular age to retire, it really can be a very simple kind of emergency release valve if you're looking at your numbers and saying, "We really have not saved quite enough." Just delaying that even by a short time, can really move the needle.
Rob West:
Yeah, no doubt about it. Well, folks, if you want to dig into this a little bit deeper, this article is phenomenal. We'll give you a lot of great insights. Just head to soundmindinvesting.org, just click on Retirement Preparedness — What a Difference a Little Time Can Make.
While you're there, you can check out the SMI newsletter and all the benefits of membership at Sound Mind Investing and the SMI Private Client Group.
Mark, always a joy to have you, my friend. Thanks for stopping by.
Mark Biller:
Always my pleasure, Rob.
Rob West:
All right, we'll talk to you real soon. That's Mark Biller. He's executive editor at Sound Mind Investing, an underwriter of this program.
Folks, thanks for being along with us today. I hope today has been a blessing to you as well as very practical and helpful. Big thanks to my team today, Taylor Standridge, Sandy Dickinson, Devin Patrick, and everybody here at FaithFi.
For the entire team, I'm Rob West. We'll see you tomorrow. Bye-bye!
