retirement savings | january 7, 2022
Podcast: Prioritizing Retirement Savings
Our experts offer tips on how to prioritize where to put your next dollar.
How do you decide whether to save for retirement or put that money toward other competing savings goals like debt repayment, saving for a home, or a child’s education? Our experts offer tips on how to prioritize where to put your next dollar.
In this episode, host Michael Davis is joined by Michael DiJoseph and Roger Young. Listen to learn ways you can catch up on saving for retirement as well as how to prioritize short- and long-term financial goals.
Michael Davis: Welcome to T. Rowe Price's CONFIDENT CONVERSATIONSTM on Retirement. My name is Michael Davis, and I'm thrilled to be your host. I've spent my career working to help people build a durable retirement. It is such an honor to do this work and an even greater privilege to be with the retirement experts here with us today. These professionals can help you feel more confident about your own retirement, whether you're planning for retirement or already there.
This episode focuses on competing priorities and how people can save for retirement while also taking care of their many other financial needs. My guests today are T. Rowe Price experts, Roger Young, a CERTIFIED FINANCIAL PLANNER TM professional and contributor to Kiplinger, and Michael DiJoseph, a chartered financial analyst and published retirement author. Welcome to the show, Roger and Mike.
Roger Young: Thanks. Good to be here.
Michael DiJoseph: Pleasure to be here.
Michael Davis: Great to have you here. It is clear that people want to save for retirement, but research suggests that people may not save as much as they would like, especially in light of their competing financial obligations. They may not know where to put their next dollar. Sometimes this lack of clarity can feel overwhelming and be a confidence killer in terms of getting started or staying on track.
So, Mike, let's start with you. Can you help set the stage for this conversation by outlining some of the basic but critical personal finance concepts that people should understand to better save for retirement, while also balancing their other financial goals?
Michael DiJoseph: Wow. Well, it can all be a bit overwhelming, so I guess that's why we're having the conversation today. We'll start simple. I would say the importance of starting early and the power of compounding in particular, some of the tax advantages, and the different features of certain types of accounts. Some of the other things we'll talk about today, I'm sure debt management, budgeting, and then, Michael, the F-word.
Michael Davis: Which is?
Michael DiJoseph: Flexibility. I had you.
Roger Young: Thanks for clarifying.
Michael Davis: The censors can relax.
Michael DiJoseph: But yeah, seriously, I think flexibility is one that's a crucial, but often underappreciated.
Roger Young: I like your comment about flexibility, and, Michael, you alluded to that. "What do you do with your next dollar?" is a question we sometimes get. There's not necessarily one right savings hierarchy for everyone, not necessarily the same answer for everyone. So, flexibility is important. But yes, you do have to back to those key concepts of the longer you have to save, the better you'll get compounded returns, hopefully, and better set yourself up for the future.
Michael Davis: Well said. Thanks so much, Roger. Let's again, just stick with the basics. How would you describe the difference between saving and investing? And I'll go to you, Mike.
Michael DiJoseph: Thanks. Really simply put, I would say saving is you know you're working for the money, and investing is the money's working for you. Saving is you have the income and the expenses, it's what's left over and you're putting it to work. The investing is, again, putting that money to work for you, to maintain the buying power and to help achieve other goals and try to maintain your purchasing power over time.
Michael Davis: Excellent. So, as we all know, a lot of people struggle to manage their expenses, and budgeting was mentioned earlier in our conversation. So, how important is budgeting, and are there other tools that people can use to manage their savings? Roger?
Roger Young: Well, you know I'm going to say something that might be a little controversial in our line of work. While budgeting is great, I recognize that budgeting can be very hard. It's a wonderful tool to manage your expenses, make sure you're prioritizing saving. But there are reasons why it's difficult for people. For one thing, there are things that you spend on every week or every month, and those you can manage. Then there's stuff–car repairs, vacations–that only come up every several months or once or twice a year.
I personally have been using financial software for about 25 years. I'm embarrassed to say how long that is, but yes there were software 25 years ago. But even with that, I know a lot about my trajectory of my net worth and what I spend on things, but translating that into how you actually change your spending habits on a day-to-day basis is not easy, and I still don't claim to be good at it. So, I say that as encouragement, a confidence builder, if you will, for people out there who might get frustrated or intimidated by budgeting.
So, if you're in that camp, start by just paying attention, right? Pay closer attention, I should say. Not like you don't pay any attention, but there are there are apps out there that can help you. If you at least get a sense of the cadence of how you spend and how much you need to leave at different times of the month for different expenses that are fixed, take advantage of different accounts that you can put money into for different purposes. That's probably easier now than it was in the past. So, ultimately, you just want some tool, something that helps you to slow your discretionary spending before it starts keeping you from meeting your savings goals.
Michael Davis: Well said, Roger. Mike, anything to add to that?
Michael DiJoseph: Yeah, I would say remember the power of habits and the power of starting small. And so just making small changes here and there. And one tip that I've heard that that resonated with me is, especially for those of us who lack, and I say us, who lack self-control, consider putting your bills and your savings kind of on autopilot. And so make sure that that is coming out of your paycheck, that those things are taken care of–what we would call the nondiscretionary expenses. And then if you want to take it a step further, ditch the credit card and use the debit card only for those discretionary expenses to make sure that you're not adding credit card debt on top of all the other challenges that we're talking about today.
Michael Davis: Excellent. Let's talk about those individuals under 30. We can all relate to that. We remember what that was like. What do competing financial priorities look like for people under 30 and decades away from retirement? I'll start with you, Roger.
Roger Young: Young people certainly have different demands on their money. When you're under 30 or even over 30, you need to build an emergency fund. You might be paying off your own college loans and other debt. You might be saving for the down payment on a house. Those three examples in particular are ones that we found are the biggest barriers to saving for retirement. We do a study every year called the Retirement Savings and Spending Study, and those were the three things most cited by millennials as challenges.
It's okay to start slowly on saving for retirement, but you do want to get going, get started saving. And ideally then, like Mike said, put something autopilot. Automatically save, but not just that, but automatically increase the amount every year so that you get up to what's an appropriate level of saving.
Michael Davis: That's great insight, Roger. How about you, Mike?
Michael DiJoseph: Yeah. This one hits a little close to home for me. I have two sisters who are both in their 20s. Neither of them work in the investment profession like us, and I think we don't do a great job of teaching financial literacy to people growing up. And so I have this conversation pretty frequently, and you know, for me, I said it early on, the importance of starting early, the importance of compounding. And if you give examples of some of the numbers of, hey, if you start now versus five years from now, that might be the difference of retiring 10 years earlier than you otherwise would have. Those things really hit close to home, I think when you put them in those terms, but at the end of the day, I guess the way I would look at it is it's really hard to take care of yourself 40 years from now at the expense of yourself today. And I think that's okay, right I do think it's important to enjoy the youth, to try to be smart about it. It's all about the balance.
Michael Davis: Really thoughtful. Good luck to your sisters, by the way.
Michael DiJoseph: Thank you.
Michael Davis: So, Roger, you mentioned earlier saving for college and college loans. Just curious, what's the right balance between saving for college and retirement? And is it okay to reprioritize one over the other in the short term?
Roger Young: Yeah. Like many people in our business here, we generally advocate prioritizing retirement. And one quick way to think about it is, it's just a much bigger financial goal for most people than college is. You're talking about supporting yourself for, it could be 30-plus years in retirement, as opposed to, you know, spending for college for four or five–however many years it takes to get that college degree, but a shorter period of time and a smaller expense. So, it is important, again, to get going with saving for retirement, to make sure you're reasonably on track. But you can do multiple things at once, and it's certainly reasonable to do both.
Even if you're a little behind on your saving for retirement, you know you can make the choice to shift gears a bit and put more into saving for college. It's not a wrong thing to do. You do want to be aware that that's what you're doing and make a conscious choice. You know, I will sometimes tell clients what you save in total is more important overall than how you allocate it between two different things. You've got different types of accounts that you use for those different purposes, but ultimately, save more is the first lesson. And then, yes, you can tweak those. It's okay to make those adjustments, particularly as college is getting closer. It's a value thing. Be aware that, okay, I might be delaying my retirement, or I might be scaling back my retirement if I'm increasing what I'm allocating in terms of resources to college.
Michael Davis: How about you, Mike? Any thoughts on that question?
Michael DiJoseph: I would agree with Roger. I would just say keep in mind your priorities. For most people, we're working to give our families and our children the best chance of success that they can have and that future generations can have. So, I would say don't miss the forest for the trees. And then the other thing, and I know Roger may disagree, and this is kind of controversial, but we would say we can't technically take out loans for retirement. We're in an era of low interest rates today and so in a way you can kind of delay that decision on prioritization. You can't do it in the opposite direction necessarily.
Roger Young: I wouldn't really disagree with you. Technically, you can borrow against the house when you're in retirement, you can get other types of loans, but to truly fund your retirement, I'm completely with you. Yes, you can't fund your retirement through borrowing; you have to have some underlying assets there to borrow against. So yes, I would agree that retirement should be the higher priority, but it's not your only priority, and that's what we're talking about here, how to make those judgment calls.
Michael Davis: That's exactly right.
Michael DiJoseph: Just trying to stir the pot and create a little entertainment for us here.
Roger Young: Well, maybe we'll disagree on other things, but that one, I think we're good.
Michael Davis: We have made the assumption that saving for college is a goal of a lot of our listeners, but in some cases it may not be. You have some families that don't have kids, or the kids may not be going to college. So, if saving for college isn't one of your goals, what are the other choices that people would have to navigate, such as perhaps reducing debt or saving or other things?
Roger Young: Certainly, paying off debt is a great goal to have, and it depends somewhat on the type of debt. But, you know, if you have high interest rate credit card debt, absolutely, big priority to deal with that problem. But then a lot of people will say, "Well, hey, should I pay off the house before I retire? Should that be a top priority?" I would say paying off a mortgage is a great goal, and I'm not going to disparage that at all. Just paying off your mortgage though, that alone doesn't ensure a successful retirement. So, again, there's some balance, there are some choices to be made.
Michael Davis: Mike, what are your thoughts?
Michael DiJoseph: I want to tell you the story of what I would say is probably the worst investing decision I've made, yet I would do it again.
Roger Young: Okay.
Michael DiJoseph: What happened is that several years back I got married, had some student debt; my still wife, fortunately, very debt averse. And so starting our relationship together, I made the decision I'm going to take a sum of money, pay off a large chunk of that student debt. And so, since then, I think the market's probably gone up double digits almost every single year. The interest rate on that debt was under 3% or so. And so I look back at it and I say, "That was probably a terrible decision that will even look worse over time as compounding kicks in over time." Kind of what Roger said, it's that peace of mind, and so I would do it all over again because it started us on a journey together of talking about finances and making sure that we're actually meeting our goals.
Roger Young: Mike, I think you hit on the key point: your still wife, you are still married. You made a perfectly reasonable decision, maybe not optimal from a pure numbers standpoint, but, yeah, there's value to that too.
Michael DiJoseph: Yeah.
Michael Davis: That's exactly right.
Michael Davis: So, Mike, why don't you tell us a few simple tips for people to stay on track with their retirement savings even while they are trying to manage all these other competing financial priorities?
Michael DiJoseph: First, do you want to take a step back and reframe what retirement success even means to you. How do you know if you're on track or not if you don't know what you're actually working toward? And so is it retiring at a certain age? Is it a second act, you want to do something other than what you're doing today? That will allow you to know how much do I need per year? What does that equate to in dollar terms? And am I on track to have that much? What market return might I require to actually reach that amount? Roger had mentioned using software, or if you're working with a financial professional, there may be a way to actually turn that into a probability, where it says this is your percentage chance of reaching that goal. That's one.
And then, two, I would say a really simple tip is that I think one of the biggest barriers, we're talking about barriers here, one of the biggest ones is going to be lifestyle creep. Again, this is an equation; there's income and there's expenses. You can kind of control your income, right, you have some say in your in your career, in your work, in your aspirations and ambitions–but I'd say much more in your control is going to be the expense side of the equation. And so we say, "Save your raise," for example. If you get a 4% raise one year, you know save 2% of it, increase that savings. And I think what you'll find is, I mentioned early on the power of habits as well. And so if you can start those habits now, they're likely to persist through to retirement as well.
Michael Davis: So, we talked about lifestyle creep as a barrier, other barriers that we should be talking about that we've not discussed?
Michael DiJoseph: I would start with expect the unexpected and plan as best as you can for those things, because it's bound to happen. And probably multiple times over most people's investment horizon, whether it's market volatility or things outside of your own personal situation that affect your ability to meet your retirement goal, or if it's just things within your life, emergencies, whatever it may be. And so I'd say we talked about the F-word, right, the flexibility, so I'd say maintaining that flexibility, preparing for things to maybe not go exactly as the plan and hopefully you can mitigate what we would call the tail risk right, Which is the risk of something really bad happening, meaning your plan just completely blows up. I think we all know that it probably won't go exactly to plan, unfortunately.
Michael Davis: So true. Roger?
Roger Young: You mentioned that the unexpected and things happening. Here's also a potential barrier at the opposite end of the spectrum of change, which is inertia, and that can be a barrier too. One example would be, if you're just getting started or say you're changing into a new job and your employer is good enough to automatically enroll you into your retirement plan, but they enroll you at, say, 4% of salary. And you might just think, "Well, okay, my employer said, '4% is good enough.' Great, I'm good." And then you leave it alone, and for most people, at 4% is not enough. We at T. Rowe recommend getting up to a 15% savings rate. So, I would say be careful not just to accept things the way they are. And that's true in a lot of areas of your life, right? And same thing with saving for retirement. Do keep an eye on it, make sure that you're not stuck in a rut that isn't meeting your needs.
Michael Davis: A lot of our conversation has presumed that people got the 30-/ 40-year horizon to save for their retirement, but not everybody has to start like that, right, life happens. For that audience that got a later start saving for retirement, what can they do to catch up? Mike?
Michael DiJoseph: Yeah, I would start with go easy on yourself, it happens. And the reason that's so important is that you need to turn this into a positive experience, not something that's a chore. It's like you have your list of chores right and you wake up and you don't really want to do them. This shouldn't be a chore. Picture yourself in retirement, get excited about it, think about what you're going to do. And I think you'll naturally find yourself devoting a lot more time and energy into figuring out and planning on how to get there. Now, tactically speaking, there's the catch-up contributions and things like that, so there are some provisions in the tax code where people, as they get closer to retirement, can perhaps contribute a little more to the extent they can, to tax-advantaged accounts. And then the other one, I would say, consider your asset allocation and your risk tolerance, so meaning, your breakdown between stocks and bonds and cash at the highest level. Consider that with a little more nuance than you otherwise might. And what I mean by that, a riskier portfolio you're going to have higher returns, generally speaking, over time. Obviously not a guarantee, but there are trade-offs to that.
Roger Young: Mike, I like that you mentioned the catch-up contributions. We often think in the business, well, that's a great opportunity to ramp up your savings, and it kicks in when you're 50. Which is not a bad time to be rethinking certain things in your life anyway. It's a nice milestone. Now, that said, there's nothing magical that you hit that point and, ooh, I can automatically just save $5,000/$6,000 more than I could in the past. So, it should perhaps be coupled with other things and look for opportunities, where okay, I'm no longer paying for the kids' college. That’s done and I can now redirect some of that money and, again, not have the lifestyle creep, not spend all of that. Or I have paid off the car, or I've even paid off the mortgage. Awesome, great. You've done that, yes, redirecting some of that money. It's nice that the tax code gives us these little reminders to do things and the ability to do them in a tax-efficient way. But also, you know, just think about your life and how to take advantage of different phases of life.
Michael DiJoseph: Yeah. I think that's an interesting framing. We think of it in terms of income cliffs–you stop working and your income goes down. This is kind of...we call it spending cliff.
Roger Young: A good cliff.
Michael DiJoseph: Yeah, a good cliff.
Michael Davis: Agreed. Mike, how often should people reevaluate their financial plans and when they want to retire?
Michael DiJoseph: Yeah, I would say just as a rule of thumb, look at it annually. And I think even more importantly, use it as an opportunity if you have a significant other, if you have family involved in it, use it as an opportunity to have those conversations and to plan together. And then beyond that, I mean the big one is reexamining this all the time as life comes at you, as things happen, as those emergencies come up, as those unexpected things come up, or even as the expected things come up.
Roger had mentioned the expenses are rolling off. That's an opportunity to revisit this, to revisit your life. Maybe, I know this hits close to home for both of you, the college bills start coming due, right, so maybe you're looking at it a little more frequently. But if you're fortunate enough to have a period of time where the unexpected is not happening, I'd say probably look at it annually.
Michael Davis: And do you think with life events that there should be a reevaluation with life events, birth of a child, marriage, those kinds of things as well?
Michael DiJoseph: Absolutely. Absolutely. I think beyond just retirement. We're talking about retirement savings today, but those types of things change everything. And I think that's the importance of planning and not just looking at investing as an investment portfolio, but as a holistic set of goals and a plan to actually help reach those goals. Again, the investment portfolio then becomes the means to an end, not the end itself.
Roger Young: The life events are important, and I liked your framing of "as a rule of thumb once a year." Obviously, you're going to plan for things like having a child or getting married, but you might not do as much financial planning as you'd like. If you at least set that discipline to look at things once a year, you won't get too far out of whack before you rein things back in and make some intentional decisions on how to go forward.
Michael Davis: We've covered just a terrific amount of information and insight for listeners. Any key takeaways you would want to leave with the listening audience on where they should start this process of setting these priorities and being able to balance them? I'll start with you, Roger.
Roger Young: This podcast is about confidence. I wanted to reemphasize our research has shown that the single largest factor that drives confidence in a person's financial future is that person's amount of retirement savings.
So, the takeaway would be even if it's challenging at different parts of your life, different times, we'd encourage you to save consistently. It doesn't need to be the same percent every year, but keep putting away something toward retirement. That should help grow your confidence and, again, build some momentum. Like Mike said earlier, it's a lot easier to focus on something if you don't just go into it dreading and feeling like it's hanging over you. So, build up that confidence and build up some momentum.
Michael Davis: How about you, Mike?
Michael DiJoseph: I would say coming out of this, I hope our listeners understand there's no one right answer. Michael, you're asking these questions and we're not saying yes or no. We're not saying this is the definitive answer. It's different for everyone. Try to find some semblance of balance with all of this stuff and try to maintain flexibility.
Michael Davis: It's hard to believe, but our time is already up. This has been such a wonderful conversation, and I think before we go, it'd be great to leave our listeners with just one final thought, one action step you think they can take to move down this path of being able to manage their competing financial priorities. And Roger, I'll start with you.
Roger Young: It's hard to have it all, so my tip would be choose your priorities that'll help give you confidence that you've made a conscious decision and you can go after it and you can have confidence in achieving those goals.
Michael Davis: Thank you, Roger. How about you, Mike?
Michael DiJoseph: I would say if you haven't started yet, start today. If you have saved, you can just increase your savings rate by 1%. The other thing I would say is consider your asset allocation with a little more nuance than you otherwise might. And what I mean by that, you may be tempted to take on more risk because you think I'm starting late; therefore, I need the higher return to reach that goal. And so, for some, that may be okay, but I think you just need to approach that decision with a little more nuance.
Michael Davis: Just a wonderful, wonderful conversation. Thank you so much, Roger, Mike for joining us today.
Roger Young: Thanks so much. I've really enjoyed it.
Michael DiJoseph: Thank you for having us.
Michael Davis: It's great to have you guys here. Again, I'm Michael Davis, I want to thank you for listening to CONFIDENT CONVERSATIONSTM on Retirement. Be sure to join us for our next episode that focuses on the unique challenges that women face when planning for retirement. If you liked this podcast, please rate us and subscribe wherever you get your podcasts. Until next time, be well and I wish you all many confident tomorrows to come.
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