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Episode 33: You're never too young to plan for retirement

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All Xero Gravity episodes

Hosted by Elizabeth Ü and Gene Marks

Here’s to retiring in a good place — figuratively and literally. On Xero Gravity #33, we’ll help you with the former. Starting with a Roth 401(k) and Roth IRA — it can happen sooner than you thought.

With innovative new legislation and an arsenal of instruments to ensure small business owners make the right types of investments, today is a great day to get inspired to put your future finances on the right path.

Rochelle Odessor, Vice President of Madison Planning Group, and Justin Follmer, MBA, from Coastal Wealth Advisors, catch up with us for a deep dive into the retirement details.

So tune in for powerful portfolio advice. And get a jump on sipping coconut cocktails alongside crystal clear, blue waters, or chopping firewood accompanied by a front yard view that stretches beyond the horizon.

Small Business Resources:

Episode transcript

Hosts: Elizabeth Ü [EÜ], Gene Marks [GM]
Guests: Rochelle Odesser [RO], Justin Follmer [JF]

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Xero Gravity Promo You’ve just tuned into Xero Gravity. A podcast for small business leaders and entrepreneurs across America. Now to your hosts, Gene Marks and Elizabeth U.

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EÜ: Welcome everyone to Xero Gravity. On today's episode we're going to be talking about what you should do to plan for retirement. I know that this can sometimes be an overwhelming topic but if you do it right, that means you can be sipping your martini under a palm tree somewhere sooner than later, right?

You're about to be doing that, right Gene?

GM: I just want you to know Elizabeth, I am officially a member of the AARP. I got my letter in the mail, so this is a topic that I guess must be near and dear to my heart, right?

EÜ: Yeah, I know. They do also tend to send letters in mail to people who don't actually qualify yet, so don't get too excited.

GM: I qualify on age, just not savings, but okay.

EÜ: This is one of those things that you can really have an effect on, depending on what you do and when, so I'm so glad that we're going to be talking about this today. I know that for me, one of the things that I really had to do was consolidate all of the different retirement plans that I had from various employers, and I still think that I have about six remaining, but I am at least feeling comforted that I am some part of the way in my retirement journey.

GM: There was something specific I read that, something like more than 50% of small business — and remember there are a lot of small businesses that have 1 employee or 2 employees — don't have any retirement plans at all, and it is really unbelievable. We have a little 401(k) plan for our little company. It's a few hundred dollars a year to administer.

Then there are options to put money away separately and personally as well. I've actually been all about that. You want to make sure that whatever money as a business owner you're making gets put away so that you have retirement in the future, because you're not going to be able to sell your business for as much as you think you're going to sell it. Stop fooling yourself.

Having money put away for your employees is huge, because I run into clients all the time, where they don't have retirement plans. And then employees get older, and they have issues, and they come back to their employer and say, "I'm in financial problems and I need some help." Suddenly the employer finds themselves — if they're a small business owner — they're like, "Oh jeez, I guess I’ve got to help you out." Setting up a retirement plan, a 401(k) plan; is really important, not just for you, but also for your employees’ wellbeing. It's an issue near and dear to my heart and I'm looking forward to this conversation.

EÜ: For those of us who are employees, it's also not enough to just assume that your employer is taking care of you. You're going to need to make sure that you're taking a step so that you personally are planning for your retirement. Gone are the days where your employer just takes care of everything. You worked there for 30 years and then they pay your pension. It's just not happening.

We have a lot of new laws and a lot of new instruments for making the right types of investments to look after your retirement.

I'm looking forward to talking to our guests today. Today we'll have on the show Rochelle Odesser, vice president of Madison Planning Group. Also, Justin Follmer, who's a financial planner with the Coastal Wealth Advisors.                            

GM: IRA, Roth 401(k), regular 401(k), 529 plans, my IRA, right? We're going to try and make sure this conversation is as least confusing as possible. I think it's important information that we're going to need to know.

EÜ: Definitely important information. And I think the number one message that we want to send home for everyone is that you can't retire unless you do participate in 401(k) retirement; all the alphabet soup of options that Gene just mentioned. Let's hear what our guests have to say.

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Pre-recorded guest quote

RO:     “I encourage people to look at their retirement savings as a longer term investment. That's a place where they can take some risk.”

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EÜ:   Our guests today are Rochelle Odesser, vice president of Madison Planning Group, and Justin Follmer, financial planner with Coastal Wealth Advisors.  Rochelle and Justin, thank you for joining us and welcome to the show.

RO: Thank you.

JF: Thank you so much for having us.

EÜ:   I have to ask: how many people do you think are actually appropriately planning for their retirement right now? Rochelle, why don't we start with you?

RO: Numbers or percentage?

EÜ: Let's go with a percent.

RO: Probably less than 50 percent I would say, are properly planning for their retirement.

EÜ: Wow. Justin, is that percent about where you would guess as well?

JF: Yes, I believe it would be lower than 50. Yes, absolutely lower than that.

EÜ: Just to be clear, the risk of not planning for your retirement means what exactly?

JF: The risk of not planning is working longer and having to work in years where health is going to slowly degrade, and that's the major risk.

RO: I would agree. Having to work longer. Not just that, but also a combination of perhaps having a lesser lifestyle than you might like, because you haven't the financial resources to do the kinds of things that you would like to do, or that you thought about doing when you were in your 40's and said, "I'll do that later on."

GM: Rochelle, let me ask you something. I have my own company; I have 10 employees, we're a service firm. We have no assets. That's the kind of business that we are and we've been around for about 20 years. I've accumulated cash over the years and I'm curious about your thoughts. Does it make sense for a business owner to keep cash in their business for retirement? Or do you recommend that they take cash out and put it somewhere else? I'm curious to know what you normally recommend a business owner to do when it comes to putting away money for retirement.

RO: Sure. You should really do both. I'm very much a person who believes in balance. A small business owner is very concerned about cash flow and wanting to invest back into their business and may be reluctant to take money out to put in for something that's a longer term. I know many small businesses — it depends upon what the business is — think that their business is their retirement plan. I'm going to sell it when it gets to be the time and then I'll have a boatload of cash and that's going to carry me. That doesn't always work out in the end. You have to do both, I think, in order to really ensure yourself a more comfortable existence later on.

GM: Justin, let me ask you. Rochelle is right: I'm very hesitant to take money out of my business, because what if I need it for cash flow? Do you recommend to business owners any type of cash that they should keep on hand in their business? Where they can take the rest and actually put it somewhere else outside of the business for retirement, in an IRA or something like that?

JM: Absolutely. It goes back to having that proper balance. I think that a proper business owner working with their accountant and their advisor can come up with a projection of what cash flow needs are going to be for at least the next year and proper planning is going to include one year, two years, five years out to determine what kind of cash you're going to need. That type of scenario can be kept in the corporate account. The remaining can be used to fund retirement. It is all about balance and what you can afford.

Having a certain type of retirement fund could potentially open you up to where, if you did over-extend yourself by putting more into the retirement funds, and then now you may need it, you could possibly look at loan options. There are certain situations where you can access them for your short-term needs at the expense of your long-term retirement.

EÜ: Obviously we've moved away from the business model where your employer is offering a pension plan for you. That's a very, very rare situation if you're in the private sector. Chances are you need to have been working there for 30 years already, to be in a company with that situation.

Rochelle, for those listeners who are pretty much going to be on the hook for planning their own retirement, what steps do you recommend to get more of those people in the 50 percent who are not planning, into a place where they can look forward to on-time or even early retirement, with enough resources that they can enjoy the activities they want to enjoy?

RO: If they are working for a firm that does offer some kind of retirement plan like a 401(k), certainly participate in that and get into it as soon as possible. I know especially for young people, if it's a first job or even a second job, they may be reluctant to save that money for later on because they feel they need it for cashflow right now. But participating in the 401(k) allows you two advantages: it gets you in the habit of saving because it's automatically taken out of your paycheck before you even see it. You learn to live on a little bit less, which is probably the way that most of us have to learn to live, if we want to achieve those kinds of things that we want for later on.

GM: Justin, let me follow on what Rochelle's asking: she is mentioning getting a 401(k) and it certainly makes a lot of sense. If I'm a business owner and I offer no retirement plan at all to my employees — and a lot business owners don't — what would you recommend about a business setup for
a lot of choices? There's 401(k)'s, there's Roth IRA's, there's set plans, defined benefit plans. What would you recommend for a business owner to do that's simple but effective?

JF: We use the 401(k) as this catchall phrase, and that's a specific subset of retirement. You mentioned a few of them.

For a small business that currently doesn't offer a plan, I always suggest next time you come around to suggesting a raise or giving your employees a raise, revisit it with the idea that you could potentially give that raise in form of offering a simple IRA, for example. Offering a simple IRA is going to prevent a lot of the upfront costs of hiring a third party administrator to do plan testing, and the fees that are associated with setting up that type of plan. And its administrative costs. Whereas you
can do that very cheaply with a simple IRA. Each participant gets their own IRA account, and it's still employer payroll deducted and funded as lower cost for everyone involved. That is definitely one option.  

EÜ: It does seem like you're really relying on the employer to light the fire under the employee. Rochelle, you were saying for young people especially, they need some more encouragement to participate early. I know we've seen all kinds of statistics that show the earlier you participate, the less that you actually have to contribute on a monthly or annual basis to grow your retirement fund significantly.

Do you have any other ideas for encouraging young people to put money away into their retirement funds early and often?

RO: Anything that you can set up that happens automatically I find works very well. If you are a freelancer for instance, or you're a contract person, you can still set up your own IRA. If you can have that money automatically taken out the checking account on a monthly basis or a bi-weekly basis, it's smaller amounts, it may feel less of a hit than waiting till the end of the year to put out a larger amount of money. Anything that happens automatically seems to work very well.

EÜ: Do you have a recommendation for a minimum percentage that people should set aside, or is it really depending on their salary for instance, or how much they're bringing in?

RO: It does depend. I encourage people to look at least 1 to 2 percent of their annual income. That amount seems to be able to be easily budgeted into all the other things that people are maybe responsible for. Once they're used to doing that, they can increase it accordingly.

EÜ: Right. Maybe increase by at least 1 percent every...

RO: Right, every year.

EÜ: Justin, maybe you have some insights too. I know there are different types of retirement accounts. Some which take your income after tax and some that are pre-taxed. Can you explain to our listeners why one might consider one versus the other, or even both?

JF: Sure. It comes down to where you believe your career is going to take you. And, by that I mean where you believe your income is going to be towards or near retirement age (that currently by our standards is 59 and a half). It comes down to what your income is going to be at that time, and then the next question is where the tax bracket will be. You plan for that down the road and determine that is it better for you to contribute to the Roth IRA, which is the one that is after tax dollars, meaning you get taxed now, and to the benefit of tax-free earnings and tax-free withdrawals at retirement. It's different for every single person.

What you plan to look like down the road may be completely different than what actually happens. The Roth IRA and Roth 401(k): you're paying taxes now to not pay them later, essentially.

GM: Rochelle, I have to ask as well: there's been some news recently about the government’s new “My IRA” accounts released by the treasury department. It's supposed to be a really easy way for people to put money away, for employers to help their employees. Have you bumped into this at all with any of your clients? Do you think it's something that will catch on? Do you have any thoughts on whether you would recommend this?

RO: I think it's a terrific idea and I'm disappointed that the government doesn't have a better way of advertising or getting the word out about it. Again, it can happen automatically. They can do it in a very small dollar amount, which could easily fit into someone's budget and allow them to save now. And if they need to access it, they will not get penalized as long as the money's been in there for a period of time.

If they don't access the money then it will roll over and be available for retirement. Because for many younger people especially, they have trouble saving up, having an emergency fund as well, then saving for something longer term, like retirement that could be 30 to 35 years
down the road.

GM: That's great. That is great.

Justin, let me turn to you now. I have three kids in college and it's shocking, and you don't want the tuition that I'm paying every year for these guys in college. I invested years ago in 529 plans. It was a huge thing for me. I find that a lot of people don't know much about them. I was curious about if you recommend 529 plans to your clients, and if you can explain what they are for our listeners to get a little understanding as to how you could put money in for higher education.

JF: Sure. That's exactly what it is. It's much like a retirement account but it's earmarked strictly for education. Money gets contributed. There are maximums per state; each state has its own plan. They even have other types of plans that are pre-funded education plans outside of the 529 plan. Money grows tax-deferred. It is tax-free, used for qualified education expenses. There's a list of those: tuition, books, room and board, certain things that the checks can go directly to the college or it can reimburse the parent for contributing to or paying those bills as long as you have that documentation for your accountant.

GM: It was a huge help to us. You're right: it reimburses tuition and it reimburses for books. It did not reimburse for my kids’ alcohol consumption, which is a good thing.

JF: No.

GM: I certainly was against that.

JF: There's a lot of grey area in there.

GM: Don't think they didn't try!

I did want to just give a shout out to that. If you've got young kids and you want to put money away for college education, I'm glad you do agree; 529 plans really are good investment.

All right Elizabeth, over to you.

EÜ:  Rochelle, I'm wondering: let's say we now have our retirement and our savings and our education savings in all these different buckets. We've got a 529, we've got a simple IRA, we probably have a few rollover IRA's, and we have our 401(k) with our current employer. Now the money is at least put away, but how do you recommend we actually invest this money? It's one thing to save it and it's another to know where to invest it.

RO: Right. Investing it is really the right term. I encourage people to look at their retirement savings as a longer-term investment. That's a place where they can take some risk. If it's in a 401(k) through work, there are probably a number of mutual funds that have options to them to put the money into, and that's where I would suggest putting it. Many times they will have advisors or people who will help an employee figure out what's a comfortable investment portfolio for them, who may have a well diversified portfolio or funds that are going to have dips when the markets go down, as well as allow them to be in the market when the market goes up.

They may change that as they get closer to retirement, but that's certainly an area that they need to look in. Many people will tend to be more conservative to say, "Oh my god, this is my retirement money and I want it to be safe." They're not going to take advantage of activity in the market to help that money grow. If they're looking at current interest rates, it's going to take a very long time for that money to reach any kind of good level that they would like to see down the road.

EÜ: I understand that most employers now — if they're offering an employee match plan or if they're offering their employees any kind of retirement plan at all — they need to offer a range of mutual funds that are re-balanced and reinvested by professional managers regularly, based on the date of retirement. Is that the easiest thing to do?

I know that I look at some of the retirement options that are available through investment options in my various retirement plans and it's completely mind- boggling. Clearly people do this for a full time job. For me, it's just confusing. Should I just go with those life cycle funds (or whatever they're called) that say I'm going to retire around 2045, and just manage this for me?

RO: It is an easy out option but if you do have the advantage or can talk to someone who has a little bit more experience, you might be able to pull out the offerings from your plan funds that might better suit your overall investment objectives.

The target date plans tend to get very conservative according to the date of when they're coming up. I've seen people who will get to choose the date very close to their age, where they're not getting any kind of investment activity at all. But it is an option and at least it's there. People can utilize that and again leave it to the professionals, as you said.

EÜ: We're talking about retirement here. What do you wish your clients knew? Rochelle's already suggested to participate early and often with as much as you can. What do you wish that your clients had known about retirement? Let's start with Justin.

JF: I think it's important that when you start to build a retirement plan for yourself, plan what you want your retirement years to look like. I think that's where it needs to start and then you back into what your contribution amount would be. Instead of one to two percent, maybe it's three to four. Maybe for what you want your retirement to look like it has percent of your income, or something even larger than that.

Then from there, you determine, "Okay, now that I know that I can contribute this much, what does my money have to earn over the next 20 to 30 years in order to accomplish that retirement goal?" Then that earnings number will back into a number with how you allocate accounts. It's kind of doing a full 360. What you guys have been talking about is how do you choose the investments? What do you invest in? Do you do the target day of retirement? Do you do an allocation fund? Do you do individual securities? What is the ultimate goal then?

I wish the clients would understand that sometimes working backwards is the best way to do it. Start with what you want it to look like and then back into where you are now and then what you need to do to get there.

GM: That's great. Rochelle, what about you? You deal with a lot of clients I'm sure, business owners and individuals. What do you wish people would know? What mistakes are they making when it comes to retirement planning that you kind of want to smack them across the face and say, "don't do that."

RO: I do agree with Justin that if people have a sense of what they want their end result to be, it may help them realize the kind of rates of return, and allow them the ability to invest in a way, earlier, that will help them get there, and be able to weather those ups and downs in the market.

I think to me that's one of the more frustrating things. I have several clients for as long as I've been working with them who will still call me on a market downturn being a little concerned, being a little nervous on what changes they should make because the market went down. I think that can be, if left to their own devices, they're really shooting themselves in the foot about that, and would not be accomplishing what they need to accomplish.

EÜ: Along those lines of accomplishing what we need to accomplish as far as our retirement goes, let's move on to The Elevator Pitch. Here is where we have a short segment encouraging innovation and entrepreneurship. We're going to ask you, Rochelle, and you, Justin, to compete against each other to deliver an elevator pitch for a random product or service. The person with the best pitch today will take home a $100 Amazon gift card. Each of you will have 90 seconds to pitch your business idea for a product or service.

Let's get into what we're going to be pitching on today. According to a new report from JP Morgan Asset Management on millennials and money, we see that millennials will have to finance a retirement that could even be longer than the number of years that they're actually working. Given the challenges ranging from staggering levels of student debt to global job competition, can you please pitch us a product or service that will assist millennials in saving for their retirement, despite all of these challenges?

You must identify the problem; that's rule number one. Two, your pitch must offer a solution. Three, you must identify your target market. Four, your product or service must have a compelling and marketable name. The last rule: number five, is that your pitch must be creative and outside the box.

Why don't we start with you, Justin.

JF: The vast majority of millennials are living on a fixed income, high amounts of debt, and spending many more hours at their jobs than generations before. This is causing millennials to work longer for the same wage. Combine this with a slowly growing economy that's constantly clawing at their wallets in an effort to catch a small chunk of their pay, and one can easily see that the ‘need it now’ generation has much higher priorities in mind than saving for retirement.

But that can all change. According to Small Business Administration, 99.7% of US employer firms are small businesses. There's a reason this is the case. Working for yourself allows you to build wealth in ways you can't yet imagine. Why would you work extra hours to make the owner of your company wealthier? That's why I've developed Swipr, an acronym that stands for Smart Work In Preparation for Retirement. A suite of software packages and corresponding smart phone applications that teach you the necessary steps in developing your own business, and thus a separate income stream to fund your financial and retirement goals.

You simply choose a city, state, and industry your new business will be in, and the software gives you step-by-step instructions to setting the business up, funding it, hiring employees, managing operations, and marketing; all while making retirement funding a priority along the way.

No longer can you state, "I'd like to start my own business, but I just don't know how." Buy Swipr and a list of specifics, you just implement the steps.

GM: That's awesome!

EÜ:  Wow this is a very comprehensive solution here!

RO:  I'm very impressed.

GM Very impressed.

JF: I've watched enough Shark Tank to know how this works.

GM: I was about to say I have a feeling that's a Shark Tank pitch if I’ve ever heard one.

EÜ:  Okay, great. Wow. All right, Rochelle. Are you ready?

RO: Mine is called the Snowball. For those young people who have their first job and are looking where I'm going to put my money first, the Snowball is a place where you can start saving a little bit each week. You get to a certain dollar amount and that's going to roll over into retirement. It's going to help you get into the habit of saving and it's going to help you set it up and do it automatically. I believe the Snowball is going to help you learn to start saving, be able to increase it as you pay off your student loans or any other debt you may have accumulated while you were setting up your first apartment, and then put that towards working towards your retirement.

EÜ: Wow!

GM: Love that too! That's really good.

EÜ:  I love that too. I really love how Rochelle; your solution really does speak to some of the challenges that we spoke of earlier, and the fact that getting into the habit and automating these things makes it much easier.                        

GM: It's funny, first of all Justin, your solution was great and thought out and addressed all the things we asked you to address. And it has a cool name for it, and all of that, and yet Rochelle, your solution is actually a little bit more practical, right? That's where I'm kind of juggling the two because the Snowball application is a simple app that's kind of guiding you along and making sure that you're saving every week. Whereas Justin, your application is basically saying, "This is going to give you step-by-step instructions how to start, manage and grow your business, while putting money away." Obviously — and I know you know this because this was just a silly exercise — but there are more factors involved than just following an instruction guide to starting up a business. Having said that though, even though Rochelle yours is more practical, I'm going to lean towards Justin’s only because it was more fun.

RO: I agree.

EÜ: I'm willing to give the nod to Justin this time with a caveat that in general, a business plan that is this wide in focus would probably have a lesser chance of success, given that it's trying to do so many things and particularly that you didn't identify a target audience in terms of a sector. You're going to have to do a lot of research to make sure that this tool is actually useful to a wide number of people, whereas Rochelle's is going to be something that would be applicable to any new employees in the marketplace.

Again, I did think that Swipr was super creative. I loved the acronym and clearly we need to make sure that small businesses are thinking about retirement from the get-go. All really great reasons to give Justin the win in this case.

Again, I wish I had had the Snowball app when I was younger. I hope that somebody will develop that, please!

RO: I'm going to look into it now.

GM: Justin, you're going to be getting a $100 Amazon voucher for your awesome idea.

EÜ: Rochelle and Justin, thanks so much for joining us and for all of your great tips today.

GM: I have one final question for both of you guys but maybe we can take it offline. Do you have any good, hot stock tips for me? Just one or two, please? …We'll leave that for another day.

RO: Yeah. Thank you folks.

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GM: If you have any questions you’d like answered on the show…

EÜ: ...tweet us at Xero using the hashtag #XeroGravity. Or, text us your questions, to 415-813-9878. We’ll answer them on next week’s show!

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EÜ: Wow! That was a lot of information. I'm really excited about some of the things that I know I can do differently right away, and much like Justin's last piece of advice, I'm going to start at the end point. When you look at all the different options you have, it can just be completely overwhelming. But I love that. Start from what you think you need to retire and work backward from there.

GM: I agree. I also thought Rochelle's input was really good. She helped me a lot in deciding on some of the choices that I have as a business owner. Keeping a certain amount of money in my business based on my cashflow, and maybe putting something outside into an IRA or something that's an external investment. I think that's real good.

EÜ: I loved Justin's advice too for those of you who have small businesses and are thinking about offering a retirement offer to your employees. He recommended the simple IRA as one of the least expensive and easiest to set up options. That was a great piece of advice too.

Also Rochelle saying that the more that you can automate these things and get into that regular habit, the easier it is to plan for retirement. You just get used to saving; you don't even have to think about it anymore.

Even though we talked about Justin's math equation, that's a one-time calculation. Maybe every couple of years or so you might re-visit that number if you think that your retirement might be longer or more expensive than you were planning. You might want to reconfigure your calculations. But then once you have everything automated and setup, that money is just coming out of your paycheck or your bank account every month, depending on how you've set it up.        

GM: Yeah, it's all well and good but neither of these guys gave me any good stock tips. I don't know what is up with these financial planners. They talk about putting money away and being conservative and I just need a good, hot stock to invest in. I got to find somebody.

EÜ: Yeah, everyone wants that silver bullet, right?

GM: Man, where is it?

EÜ: I don't know, I still feel like one of the best investments you can make is to make sure that you're happy. Even just find a job that you love and then it isn't such a burden to keep working longer.

GM: Or buying a case of Jack Daniels; whatever works.

EÜ: Exactly, that might be a good short-term plan.

So glad to have had Rochelle Odesser, vice president of Madison Planning Group on the call today, and also Justin Follmer, financial planner with Coastal Wealth Advisors.

So much great information, so many to-do items for me, and I hope that you listeners also have a couple of new tools in your toolkit as far as planning for your own retirement.

GM: Awesome stuff. Thanks everybody for joining us. We'll look forward to seeing you on our next episode of Xero Gravity.

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