Merging Into Life: Retirement 101

[00:01:36]
Amanda Greene: Pamela, money can be so hard to talk about. I’m glad you’re here to make this easier. Tell me about yourself.

[00:01:41]
Pamela Capalad: So, I’m the co-founder of Get Shameless Inc. with my husband, Dyalekt. I’m a certified financial planner and accredited financial counselor, and yes, I agree. Money is so hard to talk about, and that’s kind of why I do this.

[00:01:57]
Amanda Greene: I’ve seen how you break this down, and I really like how you simplify how all of this works.

[00:02:01]
Pamela Capalad: One of the big things that I learned, the financial industry in particular, wealth management in general, was the jargon is so jargony that if you ever feel bad that you don’t understand hearing something the first time, don’t. I literally remember subscribing to the Wall Street Journal, and I was like, “I’m going to read it every day, and I’m going to learn everything I need to learn.” Literally, a month later, I was like, “I have no idea what anyone has said in any of these articles.”

[00:02:28]
Amanda Greene: Yes.

[00:02:29]
Pamela Capalad: It took me a year to understand how retirement accounts worked, and I was working in the field. And, so, as we go through this today, and we talk about all these acronyms and all these rules and all these penalties and things like that, just please, I want to implore you to get shameless about what you don’t know.

[00:02:44]
Amanda Greene: I love that, get shameless about it, because I think there is some shame attached to sometimes what you don’t know and also maybe your relationship with money, but there is a lot to understand that I don’t personally feel very confident about. What do you say to people? How do they get past that insecurity of not really knowing?

[00:03:03]
Pamela Capalad: So, I think the very first thing is to figure out how to put yourself in a comfortable place, whether that is having a meal with someone, whether that is putting on your favorite TV show, whether that is pouring glass of wine while you look at your 401(k). You don’t have to be in work mode while you’re thinking about your money. You don’t have to muscle through it or put the pressure on yourself to say, “I’m going to learn all of this in a day.”

[00:03:26]
Amanda Greene: So, when it comes to retirement planning, something that we all have to think about at some point, where do we even begin?

[00:03:34]
Pamela Capalad: Yeah, one of the things that I have started ruminating on is that goals don’t always lead to habits, but habits always lead to goals. I think that when we try to start with a huge goal and think about it in the beginning, sometimes the number feels so big that we give up already. You need a million dollars in retirement, you should have three times your salary by the time you’re 30 in your retirement account, and people hear that, and they’re like, “Wait, but I don’t have anything in my retirement account. OK, forget it.” And, so, instead of trying to think about how much money you should have at a certain point, just start doing it. You’re just saying, “Oh yeah, that’s just what I do.” And, so, when you start to build that habit, then the goals that are tailored to you, because you have been the one thinking about them, will actually start to come naturally. I recommend starting with just doing it.

[00:04:25]
Amanda Greene: They say that about anything. You want to start a new exercise routine, you want to eat healthier, you want to do anything? Just start.

[00:04:31]
Pamela Capalad: Yeah, exactly. Exactly. The goals will come. So it’s never too early, and it’s never too late either. The earlier the better, yes, technically with the numbers of course, but a lot of us, especially when we’re younger, one, don’t necessarily have access to a 401(k), you’ve never heard of an IRA, you’re not thinking about it yet. And, so, the first thing is to make sure that you feel comfortable today, and that means having money in a savings account. So, whatever that savings amount is for you to be comfortable to say, “OK, and now I can start putting money aside towards retirement.” The next thing is if you work at a job, and that offers a 401(k), we call them retirement accounts, and my hands in air quotes, but we call them retirement accounts because of the way that they are taxed and the rules around them. So, really, in the industry, the jargon is also tax advantaged accounts, tax deferred accounts, and all of that stuff also means retirement accounts when you hear this.

[00:05:29]
Amanda Greene: So, a retirement account, a tax deferred account, means that we are investing, stop me if I’m using wrong words.

[00:05:36]
Pamela Capalad: Yes.

[00:05:36]
Amanda Greene: We’re investing money pre-taxed or untaxed into an account, and then, once we are of retirement age and we want to begin using the money, then it is taxed?

[00:05:48]
Pamela Capalad: Yes, exactly. You got it. That’s how traditional retirement accounts work. And I’m saying traditional because traditional 401(k)s, traditional IRAs, SEP IRAs, and IRA stands for individual retirement arrangement. All of those accounts, the benefit of putting the money in there is you’re not paying taxes now. So, if you make $50,000 a year, and you put $ 5,000 into your 401(k), you’re only taxed on $45,000 of money and not $50,000, so you save money on taxes upfront.

[00:06:17]
Amanda Greene: OK.

[00:06:18]
Pamela Capalad: Then, what happens is it grows and grows and grows and grows, and then, when you’re in retirement, the assumption is that that’s going to be your income for retirement, and you take the money out, and you’re taxed on that. So, let’s say you take $10,000 out of your 401(k) at age 65, you get taxed on $10,000, not the whole account. Yeah. So, the taxation part, the tax benefits part is really the biggest benefit of a retirement account or a tax advantaged account like a 401(k).

[00:06:46]
Amanda Greene: I feel like I hear people talk about an IRA and a Roth IRA, and are they the same thing? Are they different things? What’s the difference?

[00:06:54]
Pamela Capalad: Roth IRAs, traditional IRAs, SEP IRAs, simple IRAs, there’s so many kinds of IRAs.

[00:07:00]
Amanda Greene: There’s more.

[00:07:01]
Pamela Capalad: Yeah, I want to stick with traditional vs. Roth because it’s all about how it’s taxed. So, let’s pretend that you are an apple farmer, and you get these apple seeds to plant a big apple orchard. You get these seeds, and you’re so excited, and the tax person comes knocking at your door, and they’re like, “Hey, I hear you’re about to plant some apples. We need to collect taxes, but I’m going to be nice. I’m going to give you an option. You can either pay taxes on the seeds now, or I’m not going to collect taxes on the seeds, but when you got that big apple orchard, I’m going to collect taxes on the apples.” And, so, what do you choose? It depends. So, if you have the money to pay taxes on the seeds now, you’re like, “Here you go, fine.” And then when you pay taxes on the seeds now, you get to keep all of the apples, and you don’t owe any taxes on them. That’s a Roth IRA. A Roth IRA is you pay taxes on the money you put in now, on the seeds now, and then you get to enjoy your apples tax-free.

When Should You Take RMDs?

[00:07:57]
Amanda Greene: OK, that makes sense. So, then a 401(k) is paying taxes on the apples after they’ve grown and are ready to harvest. I like that. So, when it comes to retirement planning, and we want to begin with looking in to see if our workplace has a 401(k), how does it work with an employer matching contributions?

[00:08:15]
Pamela Capalad: The matching is huge. So matching is basically free money. What that means is that if you work for an employer, and they say, “We match up to 3%.” That means if you put up to 3% into your 401(k), then they will put another 3% in there on your behalf. And a lot of times a lot of companies have what’s called vesting, so you have to stay in the company for at least a certain period of time to receive the money. You can’t just take your 3%, quit next month, and leave, but usually the vesting is between one to three years. And so as long as you stay in a company for a certain period of time and you leave, then that money is yours.

[00:08:50]
Amanda Greene: OK.

[00:08:50]
Pamela Capalad: And, so, that is the very first step is really to say, what’s my 401(k) plan? What is the matching? And, if you can, put up to the match amount.

[00:08:59]
Amanda Greene: So how about if your workplace does not match your 401(k)?

[00:09:03]
Pamela Capalad: So, if your employer doesn’t match, you should still contribute to your 401(k). And in general, start with a small percentage, start with a percentage that you feel like is manageable because you can change how much you contribute at any time. If you start with a small percentage and you’re like, “Oh, that was nothing. I didn’t even feel that. Let me increase my percentage.” Then you can go in and do that so you’re not stuck with the amount that you chose at the beginning.

[00:09:27]
Amanda Greene: What are the things to be aware of when putting money away for retirement?

[00:09:30]
Pamela Capalad: Oh, yeah. There is a lot of rules with these retirement accounts, but all of these accounts have specific tax advantages, which means they have specific rules around them. The biggest one is that you have to leave the money in the account until you’re age 59 1/2, or you have to, if you take the money out before that, you have to pay the taxes that you owe on that money and a 10% penalty on top of that. So, if you’re trying to take $10,000 out of your retirement account, you might only be left with 5 after taxes and penalties, so that’s a huge thing to consider as you put money away is the intention is for that money to not be touched until you’re 60 or older essentially.

Retirement Withdrawal Strategies to Think About

[00:10:07]
Amanda Greene: It does seem like there are a lot of rules with whatever direction you’re going in, and you need to understand the rules.

[00:10:13]
Pamela Capalad: Yeah, that’s a big one. And then the other one is that there are contribution limits on how much you can put into a retirement account every single year, and every year it goes up, and when you’re over a certain age, you can put catch up contributions, what they’re called. If you go over that amount, then you might have to pay a penalty as well if you go over the contribution limit.

[00:10:32]
Amanda Greene: So, once you put that money into your retirement savings, it’s pretty much in there for the long haul. I like all this info about starting and making habits. We’re going to get back to Pamela later, but right now I’d like to bring in Kiersten and Julien Saunders.

[00:10:47]
Kiersten Saunders: We run a financial platform called Rich and Regular, and we are basically documenting our journey to financial independence. We started getting really interested in the personal finance movement about 10 or 12 years ago and started writing about it in 2017, and that blog has evolved into a podcast, a YouTube channel, a video series, a book called “Cashing Out: Win the Wealth Game by Walking Away.” And, so, we’re just two people who live in Atlanta and love to talk about money when we’re not chasing our s7 1/2-year-old son around.

[00:11:20]
Amanda Greene: Now, this is something I have been hearing about, the FIRE movement. Can you explain that to me?

[00:11:25]
Kiersten Saunders: Oh, yeah. Oh, yeah. FIRE is an acronym for a financial independence, retire early, and there’s a lot of dialogue around which one is more important, the financial independence or the early retirement part. There are people who identify with one half of the acronym more than the other half, people who want to be financially independent but love their jobs and don’t plan on retiring. It doesn’t really matter what flavor you choose, it’s just getting to a point where money is not the deciding factor for the big decisions in your life. There are so many of us that are guided by whether or not we need the money when we’re making decisions about whether to spend more time with our parents or our spouse or our children or just doing the things that we love. And the point of this movement is to try to unlock you from some of those things.

[00:12:10]
Amanda Greene: If someone wants to jump on board and really take charge of their finances and be part of the FIRE movement, what are the basic principles to this?

[00:12:19]
Julien Saunders: So, I think unless you are a complete novice to personal finance, you’ve likely heard a standard rule that you should save 10 to 15% of your income and stash that money aside, whether you’re saving it or investing it in preparation for retirement. Now, if that’s the case, then we should be asking ourselves, “Well, what would happen if we saved 20% or 30% or 40%?” You may get really crafty and decide that you are going to live dramatically under your means so that you can maximize what you’re saving and or investing. And what happens is if you keep that up over a while, and you find a really good healthy balance between living well-below your means while still enjoying and maintaining a good quality of life, and you are now saving and investing that money, what starts to happen over time due to compounding interest is that your money starts to out-earn you. So, if you’re making $50,000 a year, the moment your money starts to earn more than $50,000 in interest, at that point you become a version of financially independent, and you just have so many more options available to you.

[00:13:20]
Amanda Greene: And living below your means for many people would mean rethinking your lifestyle.

[00:13:26]
Julien Saunders: Yeah.

[00:13:26]
Kiersten Saunders: That’s the hard part. That is what prevents a lot of people from even doing the research on the different flavors of FI, which is short for financial independence. It’s the idea of needing to let go of an identity or a lifestyle that you’ve taken a lot of pride in, and you really have to want freedom more than you want those other things. And that takes a while. That’s a process when you live surrounded by consumerism and in the kind of capitalism that we have. But once you do it, it becomes like second nature, and you don’t even think twice about some of the decisions that you may see your friends and family in some cases making.

[00:14:06]
Amanda Greene: It sounds like you almost need to get uncomfy for a little while with all of the feelings. Then work through those before you can be comfortable and get to the FI part of this.

[00:14:14]
Julien Saunders: Yeah, it sounds very eye-roll inducing or sounds very arrogant in some ways to say the money solves all your problems, but I can tell you from firsthand experience, but also from having thousands of conversations with people around the world about money, we’ve met people who have five times more money than we do, and they’re still working, because they’re not really sure what the future will bring. We’ve met people who have half of the money that we have, and they are living their best life comfortable and having fun and doing all of the things that are most important to them. And, so, we can talk about the numbers. That magical number more often than not is right around 25 times whatever you spend on an annual basis. So, if you spend X amount of dollars on the annual basis, the moment you have 25 times that, and that is invested for you, whether it’s in real estate or property, and maybe if you are super creative and entrepreneurial, you’ve got some type of cash-producing asset or a number of cash-producing assets, you stitch those two together. Once all of that money is kind of churning and working on your behalf, you all of a sudden don’t really have to work because you can safely withdraw around 4% of that on an annual basis and your money will continue to earn interest on your behalf.

[00:15:25]
Amanda Greene: I’ve never considered approaching money that way.

[00:15:28]
Julien Saunders: I mean, I just want people to recognize that it’s an option, that it is a way of life and a path that they can subscribe to as opposed to saving 10 to 15% over a longer period of time. And then what unfortunately happens is we meet that middle road, that middle of your life and that middle of your career when life starts to really happen and you get this combination of illness or children, maybe it’s multiple children, maybe it’s a layoff, and all of those things combined completely derail your plan because you were banking on being able to safely save 10 to 15%. You were banking on earning just as much income for the foreseeable future. And those little hiccups tend to completely derail people’s plans. And, so, we’re just asking them to think about it like you don’t always have to live in a state of fear, find a comfortable kind of nook financially. And the more you do that over time and you continue to invest that money when something happens in your life, you can absorb it, and it does not derail you or throw off your marriage or your ability to be the kind of parent you want to be, or even just give you the freedom to just explore a hobby that you have not been able to explore for the last 10, 15 years. And I think that’s what most people are looking for.

[00:16:36]
Amanda Greene: That’s an interesting way to look at it. One of our most popular episodes this season was about budgeting. If anyone wants to go back, there’s some great information in that one, and it really helps to wrap your head around a lot of what we’re talking about today. I can’t help but think that having more money makes it easier to save more money. So really, who is the FIRE movement for?

Merging Into Life: Budgeting 101

[00:16:57]
Kiersten Saunders: We’ve gotten that question before. It’s for anybody who wants to have a level of agency and control over the decisions that guide their lives, and that could be in a small way or in a big way. We wanted the ability to decide not to have to go into an office Monday through Friday for the years of our son’s life that really matter. Now, that might mean that we go back when he’s 25. It might mean that we never go back, but we wanted the option to be able to take this time and focus on what’s important to us. And I think for everybody, it’s really about answering the question of who you are and what you want, and then you can back into a financial plan that supports that.

[00:17:37]
Amanda Greene: So FIRE, financial independence, retire early. I really do like the sound of that. Let’s bring Pamela back for some final thoughts. I’m curious, is it ever too late to start preparing for retirement?

[00:17:53]
Pamela Capalad: It is absolutely never too late to start. I have worked with clients in their twenties. I’ve worked with clients in their sixties, and I think that the thing to keep in mind is that people are going to make you feel like you’re behind always when it comes to money, always when it comes to what you have in the bank. The thing to remember is you do have agency, and you do have choice in this process, no matter what age you are, no matter how old you are. And if you’re 60, and you’re looking at retirement, you’re like, “Oh my gosh, how am I going to do this?” Start with the habits, start with the one step at a time. You still start there because once you take that first step and then you take the 100th step and then you take the 500th step, it all starts to feel more clear.

[00:18:35]
Amanda Greene: That’s true. You just have to start taking the steps. Pamela, we like to end each episode with a little quiz. Are you ready?

[00:18:42]
Pamela Capalad: I think so. Let’s do it.

[00:18:43]
Amanda Greene: What’s the No. 1 mistake you see people make when it comes to retirement?

Money Mistakes to Avoid in Retirement

[00:18:47]
Pamela Capalad: Not looking. They don’t know how to log in. They don’t look at their statements. They just don’t know what’s going on.

[00:18:51]
Amanda Greene: What’s the best way to bring young people or our children into this?

[00:18:56]
Pamela Capalad: I love this question because I have a 4-year-old, and I think the best way to bring a young person into this is to have money conversations in front of them. You don’t even have to be speaking directly to them, but money conversations don’t have to happen behind closed doors. You can have difficult conversations in front of your kid. You can feel stressed about money and have them watch how you handle it and how you process it, so money doesn’t feel like such a shock to their system when they’re in their teens or when they’re in college and things like that. That’s what we’re doing for our kid, whether or not we’re even explaining everything, just him knowing that there is no taboo around this topic is huge.

[00:19:34]
Amanda Greene: Yes, I love that advice. And Pamela, what’s your No. 1 wish for retirement?

[00:19:40]
Pamela Capalad: My No. 1 wish for retirement is that my son doesn’t have to help me in retirement.

[00:19:46]
Amanda Greene: Amazing. Thank you so much for coming on today. You have given us a lot to think about and explained things in a way that made it really digestible, and I really appreciate that.

[00:19:56]
Pamela Capalad: Oh, thank you so much for having me.

[00:19:59]
Amanda Greene: And thanks again to Kiersten and Julien Saunders of Rich and Regular. I guess the thing to remember is you’ve got options. Start somewhere, because it’s never too late, and then, really work at it. Pay attention to your money and see what you’re comfortable putting away. It might be more than you think. Today’s guests aren’t giving financial advice, but they are giving us a lot to think about. The cafe in Paris might have to wait for now, but maybe someday I can enjoy an espresso from the comfort of my own home. So that’s a start. And, yesterday, I upped the amount that I contribute to my 401(k). I’m nowhere near 40% of my income, but I started the habit, which is half the battle, right?

You’ve been listening to Merging into Life where we navigate life’s milestones one episode at a time. Brought to you by AAA Northeast with assistance from JAR Audio. I’m your host, Amanda Greene.

If you’ve got a second, and you like what you hear, please leave a review. It helps other people find the show. If you’ve learned something that stuck with you, or if you want to suggest a topic, get in touch at podcast@AAANortheast.com.

The views and opinions expressed in this podcast are not necessarily the views of AAA Northeast, AAA, and or its affiliates.