In the 1970s, a group of high-net-worth executives from the Kodak Co. was looking for a creative way to shield more of their salaries from income taxes. They conceived a plan that would allow them to exempt up to a quarter of their income and invest it in the stock market. They took their plan to their congressmen and convinced them to introduce legislation that would add a new section to the Internal Revenue tax code based on those very terms. The section was enacted into law in 1978.
It was section 401(k).
The obscure provision in the tax code went largely unnoticed for the better part of two years. But in 1980, a benefits consultant and attorney named Ted Benna discovered it and figured out how to use it to create a simple, tax-advantaged way for employees to save for retirement. His client at the time didn’t see the power of the opportunity in front of them. But his own employer – the Johnson Companies – would go on to create the first corporate 401(k) plan in U.S. history.
In the nearly four decades since Benna blazed the trail, the 401(k) has become the de facto retirement plan for the masses – at last count, more than 55 million people investing upwards of $5 trillion. It has changed the way Americans think about – and prepare for – their post-work lives. Unfortunately, for many, it has also become a crutch that limits a more comprehensive and perpetual evaluation of retirement planning, and fosters a false sense that anyone can do it well.
At Foster & Motley, our team works with people across the spectrum, from Millennials first dipping their toes into long-term savings vehicles to retirees enjoying the fruits of their planning and discipline. Our sweet spot, though, is the group squarely in the middle – high-net-worth people around age 50 who have built a portfolio and still have plenty of productive years ahead. This group was raised in the American corporate workplace that fully embraced the 401(k), and relied less and less on the “my pension will cover our retirement” mindset of earlier generations. Hence, we’ve created some retirement planning tips for those women and men in the middle.
Make Your Own Rules
Much like dispelling the myth that the 401(k) is the be all and end all, the myth that one size fits every retirement planning situation is just as pervasive. There are so many “agreed upon” best practices and conventions that guide the planning for so many people, but many retirement planning “rules” are made to be broken. Here’s a common one: “In retirement, you will spend 70 percent of what you currently do.” This number might be a good starting place for some, but it’s not the right answer for everyone. Focus on your own situation, and decide what level of spending is right for you.
We’ve had clients find their level at 50 percent, while other plans mean barely reducing (or sometimes even increasing) overall spending in retirement. In fact, Wall Street Journal reporters Dan Ariely and Aline Holzwarth reported recently on research from the Center for Advanced Hindsight at Duke University that identified a staggering pay replacement level of 130 percent, meaning you should expect to spend 130 percent of your pre-retirement income after you retire. According to the Journal, researchers asked participants in a study to imagine their ideal retirement: “To help you think about your time in retirement, imagine that every day was the weekend. How much would you like to spend in each of these categories? How often would you eat out? Which digital subscriptions would you want to have? How would you pamper yourself? How often, where and how luxuriously would you want to travel?”
It’s an interesting take, but it may not fit your situation at all. Finding your target takes a disciplined review of where you spend money now, and how you’d care to spend it in retirement. Be sure to look at current expenses on an aggregate level and think about how that might change in retirement. What outlays will go away? Which new ones will be added? What scenarios could bring added spending? There is some wiggle room here – you don’t need to nail down where every dollar is going. But a broad snapshot of expenses will give you the best road map to craft a solid plan that reflects a realistic spending number and supports the retirement lifestyle you’ve always envisioned.
Don’t Let Tradition Dictate Your Plans
Here’s another “rule” that people mistake for truth: “Retire as early as you can so you can enjoy as much retirement as possible.” Forget the myth – find your own answer with some basic questions. Is your work life still rewarding and enjoyable? Have you effectively reached your savings goals? Do you really want the dramatic lifestyle change of retirement? We all understand that the power of saving dwindles quickly as people approach retirement age. But according to a recent paper from the National Bureau of Economic Research, the power of working just a fraction more can have a significant impact on wealth.
For example, working a single month longer in your career has the same effect as increasing your retirement contributions by 1 percent for the 10 years prior to retiring. A 2018 CNBC article by Jessica Dickler and Sharon Epperson adds even more perspective: “Aside from the added income, working longer also allows you to preserve your retirement savings and even keep building those assets in tax-advantaged retirement plans. At the same time, delaying Social Security past full retirement age lets your benefits grow by about 8 percent a year. If you wait until full retirement age – usually either 66 or 67, depending on when you were born – you get 100 percent of the benefit available to you based on your personal work record. Waiting until 70 could bring your benefit amount to 132 percent.”
Your Time is Now
Perhaps the biggest myth of all is that you’ve got plenty of time to put off your planning. If you’re 50 or 40 or even younger, time is your best friend. Prioritize your retirement planning as aggressively as you prioritize other important things in your life. Don’t put all your eggs in one basket. Or forget to make a basket. Or leave it to chance. Even Benna, the Father of the 401(k), has grown to despise the tool he popularized. It was never meant to be the only means by which people save for retirement, he says. But that is precisely what it became. That attitude and the myriad of other “rules” has increased our collective financial risk.
So, write your own rules. Take command of your own comprehensive plan. It’s what the “retired you” – and Ted Benna – would want.
Ryan English and Lucas Hail are Shareholders with Cincinnati, Ohio-based Foster & Motley. The firm is an independent Registered Investment Advisor, managing over $1 billion in client assets. Foster & Motley combines Financial Planning & Investment Management to provide a comprehensive Wealth Management experience for its clients.
Foster & Motley is located at 7755 Montgomery Road, Suite 100, Cincinnati, OH 45236. For more information, call 513.561.6640 or visit fosterandmotley.com