Is America on the brink of a retirement savings crisis? In this must-listen episode, we delve deep into the current state of retirement planning in the United States. A recent article published by Financial-Planning.com quoted a study that found 47% of Americans stopped saving for retirement last year due to inflation. In this episode we discuss our interpretation of the data and how investors can avoid common mistakes during volatile markets.
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Hello everyone. Welcome to this week's episode of Wealth Builders presented by StatonWalsh. In this episode we discuss a recent study published by US News and World Report on Retirement and Inflation. The study actually reveals some staggering statistics on how Americans feel about their retirement planning. Imposes the question, are Americans facing a retirement savings crisis? We hope you enjoy this episode and feel free to like and subscribe to get updates on our latest content.Speaker 2:
This is Wealth Builders presented by StatonWalsh, a show designed to pull back the curtain of the financial industry and bring true transparency to the forefront of conversation on the show. We cover topics like financial education, current events, and interview business leaders and industry experts with the ultimate goal of helping listeners discover their own path to financial independence.Speaker 3:
Hello everyone and welcome to this week's episode of Wealth Builders Ryan. Today we're gonna be talking about a recent study in a very simple question that was asked our Americans experience in a retirement savings crisis. So we're gonna unpack all the studies, all the numbers behind it. But first , welcome Ryan. It's episode number two of the year. Yeah, we madeSpeaker 1:
It do it . Get some consistency here. I think it'll be uh , valuable, but this is a an interesting way to kick off the year. Kind of a recap of last year, a recent article that I was reading, kind of the topic of this episode was in Financial Planning magazine or their online edition and it kind of talked about some answers to a recent survey as a result of everything that happened last year, inflation performance in the market and kind of the reaction of different generations to that and kind of what happened. And so it was some interesting things that I read and this article and I kind of felt it was valuable to talk about some valuable information to be shared because I think that in a lot of ways when I was reading this article from a personal perspective, I felt like these statistics are accurate in terms of what's going on out there. Then we as an industry and as financial planners probably doing still on a mass scale, a pretty poor job of educating clients. I think the reason we wanted to do this today was just talk about what the feelings are out there amongst different generations. And then two , to unpack those statistics and and why certain things I would say are not really significant and why other answers that we saw really hit home and we felt like there was some significance to that. We want to address some of those things and and make sure that anyone listening out there is getting the most objective take on a lot of this stuff that they can. Cuz there's a lot of information that's always out there and available.Speaker 3:
I mean we're looking at some of these numbers here. We're we're have 'em up on the screen. They're eye opening terrifying. Now we've talked to a ton of people last year and people were all over the spectrum from oh it's okay, it's a good opportunity. So other people, I wanna take all the money outta the market. So let's kind unpack some of these numbers and what may be triggering people to behave this way. One of the things that I know we're really passionate about here in our business is behavioral psychology and the psychology behind how people think about money. But eight and 10 Americans, let's talk about the word recession, the big R word , everybody's talking about it. Has it happened ? Is it coming ? Are we in it now? So eight and 10 Americans are currently worried about recession impacting their retirement. So with that, no when we're talking about the retirement crisis is which is the saving for retirement, how is the recession going to impact the savings of it? I get not want to put your money into a vehicle that might be risky but also with inflation it's affected dramatically cuz you're losing it one way or the other. So Ryan, what are your thoughts on that?Speaker 1:
So I think at a high level recession worries typically translate to people reassessing what they're gonna do with their money. People become gatherers in a sense in in the sense that they like they want to aggregate money, they want to gather money but they don't wanna spend it. And the fear is that what happens in recessions layoffs, people lose jobs. Any kind of economic downturn, there's always this worry that will I have a job? Will I have a paycheck tomorrow? And so the natural inclination is to look at your household and say Where can I cut? Where can I reduce expenses? Where can I stop sending money out the door and try to keep it in house so to speak? And I think that's a natural reaction. I think that's a natural biological reaction. Us as human beings, the reason why we survived so many years is that we hid in caves and built fires and the rest of what happened in nature happened outside the cave and some species made it and some didn't. We were ones that that survived because we banded together. We have a social aspect to us as human beings. We banned together and we wait it out and we use a power in numbers. And I think what happens a lot of times you talked about behavioral finance, is that we use that same PAC mentality. The reality is that we are all from a financial perspective built differently. We think differently about money, we use money in different ways. We have different matters of importance when it comes to wealth. A lot of times people will associate themselves with a recession is bad for everybody and so therefore I have to assume that it's going to be bad for me and so I'm gonna react accordingly. I think that was one statistic that out of all of them made perfect sense to me. I think that it is a natural reaction to become risk averse when you think the sky is fall . I mean it's just , that's true in any aspect of life. You mentioned inflation. Traditionally one of the better ways to beat or outpace inflation is to invest in the market. It's not always the case. I mean you could pick any 10 year period of time and try to measure that out, but I'd say historically speaking the stock market has been one area or one asset that has outpaced the rate of inflation. And by not participating in the market, you're keeping more money in cash or wherever you're keeping that money to avoid risk of recession and all the things that you think come along with that. But you're also causing issues in another side of the coin potentially with lost opportunity in the market. Now if the market goes down, you can make the argument that's, there's not a lot of lost opportunity with that but the market does go back up, which it tends to do in a cyclical way. There is a lost opportunity with that. So I mean there's a lot of things to consider. I think one of our failings as human beings and natural is that we have that pack mentality. We gravitate towards the crowd and that can either help us or hurt us. It really depends on the situation. A lot of times with money it's kind of mixed. It's a mixed bag. So I think that stat was one that not overly surprising, but I think it's still important to address. These are things that we live and breathe every single day and money is so often misconceived as a math problem.Speaker 3:
Something I love that you said there other day during one one of our presentations, we're talking about PAC mentality. You look at a five year old soccer game and everybody's following the ball, all goes down the left sideline, there goes 20 kids running down after it. I think when we hear these things and these stats and it's because you see something on the news financial propaganda and everybody starts talking about following it. Like here's two more stats that are just crazy to me. Almost half Americans, 41% stop putting dollars into the retirement plans last year and when everybody wants to buy low sell high, that's doing the complete opposite there. That's , I have another one too of one in three adults dip into the retirement savings, which I can get. You know it was a tough year last year. I mean look at the price aches right now. It's crazy. Yeah and it's like everything one in three adults dip into retirement savings just to cover the daily cost . YeahSpeaker 1:
And that was one I took personally I think. And because of the fact that is telling me that potentially that one out of three or the third of Americans are basically not doing proper financial planning or and to no fault of their own. I think some of it might just be access to information and access to people. But there's a common misconception that retirement success is directly related to your ability or the amount of money that you save into a retirement account into an IRA or a 401K or some examples four three B if you work in the public sector or for a nonprofit . But that's not always the case. And so what we see sometimes in this study is an indication of that is that people put all of their eggs in one basket. So they put a a 10% of their income into a retirement account but they ignore things like building an appropriate savings account, an emergency or opportunity fund is what we refer to it as in our practice. They ignore those things and so they worry so much about retirement readiness that they ignore what's happening today right now. And that can be a challenge because to put money into a , in a retirement account can be good in a lot of different ways. Taking it out before you get to what's stipulated is the age of maturity or 59 and a half in those accounts could be uh , problematic in a lot of different ways. You have to pay taxes potentially a 10% penalty in some cases if you're still employed at that job, you don't even have access to it other than potentially loaning yourself money out. And you get into all these complicated situations. And a simple solution to that is probably just building a plan around how do I build a foundation of money today that I can weather these storms so that when these things happen I'm not forced to take money out of my retirement account, make ends meet. And last year was a perfect storm in a lot of ways. That stat of stopping the contributions to retirement accounts was interesting because we had rapidly rising interest rates historically in recent history inflation and we had a poor performing market all at the same time. And so for a lot of people they saw their account balances going down, their bills going up and in some cases maybe they've been spending in a way that may have been outside their normal pattern. Things like occurring credit card debt in a time, like a rapidly rising interest rate environment is not a great time to have a lot of money in credit and revolving credit. Especially because now the cost of maintaining that your payment goes up every month. It was a perfect storm in a lot of ways. And I think weathering that storm goes back to the my original point which is have a foundational plan place. And that can be challenging for some, especially if like you said, you don't have access to a financial advisor or someone that you can confide in. And so that was one that was a little personal and one that I think ties into our mission and the mission of other colleagues of ours in the industry of how do we reach as many people as possible and how do we educate them on how to avoid stuff like this? Let's not turn on certain accounts and then turn them off based on the current environment. Let's create a system where things flow efficiently under any circumstance unless it's catastrophic or extreme in nature. And last year could be deemed catastrophic from an economic perspective and all the different things that were going on. But for most Americans in 2022, at least the trickle down of massive layoffs and people losing jobs, some of that happened. But I think from an economic perspective we're still living in a world where places are having a hard time hiring people. So a lot of this, when you look at it from an outside point of view and when you really zoom out on the whole situation, it seems kind of counterintuitive. It seems like the opposite of what a lot of us should be doing. And so there's some education involved in that andSpeaker 3:
Some things . Yeah, for sure. I wanna go back to something you said about creating the foundation of your financial house almost now going back to the STA one in three adults had to dip into the retirement savings. People we hear us question all the time, how much cash do I have on hand? Is it three months expenses? Is it six months income? Is it 12 months income to prevent things like this? Is there a magic number? Is there a formula that people need to goSpeaker 1:
Buy ? Yeah, there's no such thing as a magic number, but here's what I'll say. Like from a financial principles perspective, the ultimate goal should be to get to by the time you retire having 12 months of your necessary income, monthly expenses, you can kind of slice it up in a bunch of different ways. But I think at its core getting at least 12 months of your expenses available to you in cash is a really powerful tool. And some people will say, well like that's a hundred thousand dollars. That's a lot of money sitting in cash, not earning a lot of interest. Up until recently these savings accounts weren't paying much of anything. The reality is that it gives you so much leverage to make choices about how you take and spend your money when you're in retirement And along the way that can also give you a buffer. And it's not the expectation that everyone's gonna get to that point. I mean I don't expect that a bunch of people listening to this are gonna have a hundred percent of that, that number whatever it is available to them day one or even in the first few years. I mean that's a lifetime goal. Three to six months is a little more realistic I think. And again it gets into the conversation of reframing your thinking about what should I have available and why not? I have this cash here and it's not earning anything. And I think that's in an inefficient use of my money. The alternative is what would I do with it if I put it into my retirement account and I were to need it? Then what? Which is a better rate of return. Something that sat in a retirement account for five years, lost money and then I took it out and paid taxes and penalties because I took it early or keeping money in cash that didn't earn anything. But when I needed something I had the leverage to not have to go to a bank or a credit card or there's trade offs to anything. There's trade offs to anything in life and financial decisions are not immune to that. Evaluating your opportunities and your potential emergencies. Cuz life inevitably always throws us curve balls. I think that's an important piece of this puzzle. So you know the example I always use for people is in my own life when my twins were born, my wife and I had no expectation that we were having twins. Wasn't even on the radar and I being hazard to the job. I built this whole like spreadsheet financial model and I had it all figured out and then we went and she had an ultrasound done and they said there's two in there and like talk about a surprise. See yeah, total meltdown of ideology of like super exciting moment, scary moment in a lot of ways. But everything that I had modeled for myself financially was out the door. I had to redo the whole thing and I never really got it perfect and it's still not perfect. And I think the point is that the best thing that you can do is follow a basic set of principles, try to attain as much of that as you can. And the rest of it is like life happens. You can't try to perfect something that isn't perfect and life is just not set up in a way that it's perfect. Things happen and for a lot of different reasons in a lot of different ways.Speaker 3:
So there's no static financial plan. No, it changes every single day. That's why we call our process the living financial plan. Yeah. So let's talk about some of the consequences of this retirement savings crisis and people will stop and save in like the lost opportunity. Cause if, yeah, I'll say it's a 30, 35 year old who's stopped saving for a year or two, what kind of effects does it have on the long term , especially when the market's down and being able to buy at low points and buying back and once it came back and buying higher points?Speaker 1:
Yeah, we are famous as human beings for having terrible timing. And that is true when it comes to trying to time markets specifically. We have terrible timing with it. There's tons of studies out there that talk about this. We talk about it in our, in our quarterly market updates. There's a stat or a chart that JP Morgan Asset Management does that talks about historical periods of time and what different asset classes have done and what the average equity investor has done. And so for the longest time, the average equity investor significantly underperformed the market. So the s and p 500 over a 20 year period prior to the most recent one was six and a half percent roughly. The average equity investor was getting like three. So about half of that. And what we saw with the most recent update of the numbers is they kind of zoomed in a little bit and they went down to a 10 year , year period of time and looked at a really strong market performance period for the s and p 500. And I think the s and p did like 16 in change and the average investor got a lot better, but still not proportionally better. They were at about 8%. And so the point being we are really bad at getting in our own way as human beings and making financial decisions because money is an emotional thing in practice. If we could just put money into the market and pretend like it doesn't exist and let it ride for a while , in most cases we would be much more successful than looking at our account every day and making things move and making trades and putting money here and putting money there. And there's all kinds of studies out there that talk about this, but the ultimate consequences, if you do have poor timing, which most of us do, it's really hard to time the market. Even the best money managers in the world can't do it perfectly. If you do miss that timing, cost to that can be significant. I mean, missing the best 10 days of the market in a 20 year period of time can cost you half of your rate of return. And that hasSpeaker 3:
10 days,Speaker 1:
10 days, 10, 10 of the best days in the market over an extended period of time. 20 years even could be the difference between getting an eight to 10% rate of return to getting four and five. It's kind of hard to fathom, but it's the compounding effect of that lost day, that lack of participation and the compounding effect of that. It's almost hard for your brain to like comprehend that. And every time I see those stats, I even look at it and I'm like, these numbers are insane for certain people. For people with smaller accounts that could be hundreds of thousands of dollars for people with larger account balances, that could be millions of dollars. That's just a scenario where you add or subtract a zero. But at the end of the day, it's proportionally, it's still big number. And that's the consequence. It's if we try to outsmart the market, you ultimately get left behind in a sense.Speaker 3:
So with all this like what are solutions, it's very easy to say, oh, set it and forget it, put it in your account and don't ever look at it. I mean we wish it was that easy, but what is it more financial education? Is it the employer's responsibility to bring in a financial wellness program for the four [inaudible] advisors to be doing more educational in this? What is the solution?Speaker 1:
I've never been one to tell other people how to do their jobs, but I'll say that financial education is key to this process. And however that's delivered, that's up to either the plan sponsor, the employer, the individual, whoever it may be. There are resources, resources becoming more plentiful as time goes on. Access to information is becoming easier, especially financial information. I think as transparency increases, that will solve some of the problems with the financial industry and consumers. But from an investor perspective, I think the biggest thing is having a plan in general. Not necessarily it's easy to say, set it and forget it, do this for the next 20 years and you'll be successful. But we don't think about life and we don't live life in 20 years segments . We live it month to month, year to year. And that's how life happens. Those curve balls that I keep mentioning happen month to month , day to day , whatever frequency you want to use there. But ultimately best thing you can do is build a plan, have a plan, have a set of goals, whether it's just a year out, three years out, I mean start small and start to build a foundation and start to chip away at some of those things. And as you achieve those goals, take it to the next level. Take another step towards reaching out for that additional goal or achievement and just continue to build on that. I think much like investing, building a financial plan has a compounding effect. If we start small and we have the singles and doubles add up to runs over time and they're small victories that add up into one large victory, which ultimately is your financial independence, whatever that means for you, that could mean retiring when you're 60. That could mean never retiring and just being financially able to do whatever you want whenever you need to under any circumstance. So I think that building a foundational plan of some kind, looking at what do I have today? Am I properly insulated from any of those curve balls that life could throw me? How do I remain profitable as a person but as a personal cfo , how do I run my household in a profitable way? And then what do I do with those profits once I have them? Do I invest them? Do I save some? Do I have enough in the places that I need them to be insulated from those curve balls?Speaker 3:
So So what's your favorite saying? We got tell the money where to go,Speaker 1:
Telling money where to go and not figuring out where it went. There's some power in that. There's always power in that. And I think what happens and why this study struck me is that this is a great example of people figuring out where it went and the consequences of living your financial life that way. And that's not to say that these people are doing it wrong. I think again, there's an educational gap that exists between all of the stuff that we have to know as citizens and as consumers about tax code and about investing and about the markets and all this other stuff. Like it's impossible for some layperson to understand this. I mean we're still learning new things every day . Our last episode on the Secure Act 2.0 right after 1.0 has passed and now I saw a funny post the other day. Guy was like, well there's now a proposal for additional changes. Is there a 3.0 coming? And his response to that was, oh please, I've just barely digested 2.0. Which is true <laugh> like, and that's the government doing what they do. It's changing things, it's trying to make something perfect that ultimately never will be. And I think as investors and as investment professionals, we obviously appreciate the effort of driving retirement success for Americans, but it's not really working yet. That's what this study is telling us is that we are not even close to being there. And how do we bridge that gap one firm at a time, one organization at a time. There are great networks of advisors out there that do a really good job at this stuff and there's others out there that don't be honest and that's telling by the stats that we see in the article.Speaker 3:
Yeah, I agree Ryan. So finishing up today, if you're out there and you're listening and you're trying to figure out a plan, don't hesitate to reach out to us, reach out to your current advisor, whoever may be, talk to your company about setting up a financial wellness plan. Cause it , it's so important to combat yours like last year. But as always, thank you so much for listening to this week's episode, wealth Builders. Make sure your like, subscribe, and we'll see you next week.