My First Real Job and They Already Want Me to Retire! Part 2

When is the right time to think about retirement? Expert advice says, when you are young. It's never too soon to start investing in your future!  
 Our host, Alison Crane - Family and Consumer Sciences Agent in Garland County will ask her guest, Dr. Laura Hendrix, University of Arkansas Associate Professor - Personal Finance & Consumer Economics and an accredited financial counselor, questions about how to invest and when dabbling in the stock market is beneficial. Dr. Hendrix has some good advice on finding reliable information to help take some of the worry out of investing in Part 2 of My First Real Job and They Already Want Me to Retire!

Transcript

Intro: (upbeat music playing) Adulting is easy, said no young adult ever. The Grown Up U: Facts for Success podcast is back in its fourth season to help. Join us for podcasts, providing useful advice for living an independent and satisfying life as a young adult. (Music fades)

Alison Crane:Welcome everyone. We're glad that you could join us today. This is part two of our podcast series, My First Real Job and They Want Me to Plan my Retirement?

I'm Alison Crane, Family and Consumer Sciences Agent with the Garland County Extension Service.

And we have once again our special guest, Dr. Laura Hendrix. She is an associate professor and an accredited finance counselor.

Dr. Hendrix, thank you again for joining us today. 

Dr. Hendrix: Thanks, Alison. It's so good to be here.

Alison Crane: Well, we're glad to have your expertise and to be able to ask some questions about some things that a lot of people don't get in school. Even some adults who have been in the workforce for many years are not really comfortable thinking that they have all that they need to be able to do this competently on their own.

We're going to talk about investing beyond the basics of work, retirement benefits and some of the things a person might need to know. So, to begin with, what are some of the reasons why someone might want to start investing?

Dr. Hendrix: Well, thanks for asking, Alison, and thanks for covering this podcast topic for young adults. This can be such a critical piece of building financial security. So, the main reason we look at investing is just to save for the future, to grow wealth. 

Alison Crane: The future. We think the future is down the road, but you never know when the future is really going to kind of just come slamming in the face. Right? 

Dr. Hendrix: That's true. And also, when we think about financial resources, the real purpose of money and our other resources is to help us live the kind of life that we envision for ourselves. So that's really the motivation to save and invest.

Alison Crane: You're right there! We kind of touched on this in the first episode, but how much do you realistically need for retirement?

Dr. Hendrix: Well, you may hear a lot of recommendations, like you should be saving at least 10 to 15% of your income or that you will need at least $1,000,000. Or you may hear that you need 75 to 80% of your pre-retirement income. Or another rule of thumb, I've heard is to estimate 12 times your pre-retirement income. But the answer is it really depends on many other factors.

So, what age do you plan to retire? The more years that you will be in retirement, of course, the more money you would need to cover that.

And then what do you want to do in retirement? People who plan to travel extensively may have those expenses or different things that we do with our time will require different amounts of different kinds of resources.

Looking at expenses and income, we still have housing expenses. When you retire, will you be paying rent or a mortgage, or do you have plans for a home that will already be paid off?

Will you have extra income during retirement? So, some people have a retirement job, or a second career is something that they're looking forward to doing when they retire from their main career that they've had most of their life.

What we ask people to do is sit down and think about what income and expenses they will have long-term and actually write it down. So that may be kind of an odd thing to think about when you're young, but if you can just take some time to envision what you really see for yourself in your future. And for retirement, we think of kind of three phases early middle and late retirement.

Early retirement will be those years when we're more active. So, you're still young and physically healthy enough to do many, if not all, of the things that you're currently doing, and you may travel or be active or have a second career.

And then middle retirement is when aging starts to slow us down, so we're less active and spending more time at home.

And then late retirement is that phase of life when most people start to need some kind of assistance with daily living, such as a caregiver in the home, or they may move to some type of assisted living expenses. And both of those come with a price tag. So, you may have some kind of insurance to cover those, or some people have other benefits that they use to pay for that kind of help that we need as we age.

Ages for these different phases can be different depending on an individual's health, their longevity, and each person's unique life choices.

Alison Crane: Those are some very good points, and I think a lot of times we spend a lot of time preparing for adulthood and being independent for the first phase of life, but we really don't focus and take much time to think about what we need further on down the road.

Maybe looking at some of the adults that you know in your life right now, your parents or grandparents, and think about what they are going through at this stage in their life.

I know for us (my husband and me).  We just entered the empty nest phase and we're already thinking about our house and whether we can actually retire in it or not because we have a tri-level house instead of just a split level. We have two sets of full stairs in our house, and that's something to think about.

Well, if someone wants to start making some investments, what are the first things that they need to consider?

Dr. Hendrix: Well, the first thing I always tell people about investing and thinking about money for investing is, number one, you need to be living within your income. If you're having trouble making ends meet month to month, if you're having trouble paying your rent or paying utilities every month, it doesn't make sense to put money towards investments. So, number one, live within your income. 

And then the next thing is to be managing debt wisely, especially credit card debt. Revolving debt can be costly. You may be paying more in interest fees than you would be earning on an investment. So, it's really important to keep debt at a manageable level and to use that wisely. So, paying down debt may be a goal to set before you start looking for extra money to invest.

Then the next step is to make sure that your current assets are protected health insurance, car insurance, home insurance. So, if there is some kind of crisis, it doesn't take you completely out of the game, completely destroy your financial stability. Having money spent on insurance is a really important step in that financial safety net that we have in place before we start investing.

And when all of those things are in place, so you're living within your income, you're managing debt wisely, and you have a good safety net of insurance, then you may be ready to start looking at investing.

Oh, you'll also want to have a nice little emergency savings fund in place so that if you have some kind of financial crisis, you can cover that.

 When you start investing, one of the first places to look is at your employer provided retirement program if you have one available. Oftentimes, employers will provide a match. So, for example, they may offer to match up to 5% of your contribution. So, if you contribute 5% of your salary, they'll match that amount. That's free money. That's a great place to start when you start investing.

And then when you have that in place, it might be an opportunity to look at other kinds of saving and investment opportunities.

Alison Crane: Well, I know a lot of people have no idea where to begin. 

What can you tell us about investment brokers? That's a term that you might hear when you start to think about investing. What do investment brokers do? 

Dr. Hendrix: Investment brokers simply manage investment funds for other consumers. And if you have an employer provided account investment retirement account, most of the time they will have fund managers or investment brokers who are planning and managing those funds for that for a1k or for three B, whatever the case may be. 

Alison Crane: All right, you can go to an investment broker. How do you find someone that's reliable or is a good stockbroker or money manager?

Dr. Hendrix: So, it's important to look for credentials. Some of the credentials might be a certified financial planner, an accredited financial counselor. The SEC, the Securities and Exchange Commission has a list of SCC registered brokers or advisor or other credentials.

So that's one place to check. And then you'll also want to check references. And then you can usually also ask for a free consultation. So those are the bare minimum things that I would do before making a decision to invest with someone.

Alison Crane: Oh, okay. Well, over Christmas, my sister and her family were visiting us and one of the things my brother-in-law was doing at the time was dabbling in the stock market. He had taken some of their money and sold stocks and now he was in the process of buying new stock.

How do you dabble in the stock market? 

Dr. Hendrix: I think of dabbling as something we do when we have extra income, extra money, or discretionary income. You wouldn't want to take your money that you're, you know, saving for your car payment and dabble in investments with that.

But if all your needs are met, your financial needs are met, and you're secure in making ends meet every month and your employer provided account and other investment accounts are fully funded and you have a little extra money to play around with, that might be something that you want to do. Oh, and your emergency fund is fully funded.

So dabbling is just taking that left over money and other things you might be doing. So, you may be saving for holiday expenses or a vacation or a home or a car. So that would be other savings goals in addition to your emergency fund.

But then discretionary income can sometimes be used to purchase stock in companies or maybe in an investment fund or a mutual fund, and maybe just some things that interest you. So, this could be buying stock in a company that you are a big fan of their product or a company that you really like their mission or something that you think is about to take off.

What comes to mind on this is a couple of years ago when we were first shutting things down and employees were being sent home during the pandemic, I had some friends who their first thought was to invest in Zoom.

Alison Crane: Oh, yes! 

Dr. Hendrix: So that might be an example of dabbling.

Alison Crane: Definitely! That would, I'm sure, be a good investment at the time. 

What are some of the best practices when you are going to invest?

Dr. Hendrix: Well, money and other resources are simply tools to create the life we want, something we talked about earlier. Spending time to envision what your future is and know what you're working toward is important and then actually create a financial plan that includes spending, saving, and investing so you can have saving and investing as line items in your regular monthly plan and start investing early, so your money has more time to grow.

Take advantage of your company's retirement fund and then work toward contributing that maximum amount that your company will match.

Alison Crane: I know when I first started with my first job with Extension back long time ago won't say when I started my retirement fund and things took a hit at one point. And so, I did lose some money, but I was young, and it was able to build back up through time. So, you're right with that, taking time, starting young, being wise in your planning and looking at what you can actually afford to do, those are some big keys to that.

How much is the minimum that can actually be invested?

Dr. Hendrix: It kind of depends. So, there is like a cash averaging for month to month. So maybe if you don't have one big lump sum to invest at one time, you can invest smaller amounts over several months. And we find that those over time, end up earning almost as well.

And also, it depends on what you have available, the resources that you have available, and it depends on the type of investment.

And then it's really important to consider your comfort level with risk. How much of your money are you willing to risk?

And I would also caution people if you co-mingle finances with someone, (so a significant other, a spouse, a life partner), it's a good idea to also take into account that person's risk aversion, their life goals, and their investment strategies if the two of you are managing money in households together.

Alison Crane: There are a lot of things to consider when you are investing. An overriding theme to everything you keep saying is one, you have to have a solid basic budget and a plan. And then you also have to manage debt to be able and free to do that.

Well, as a kind of final thing, let's talk just for a moment about reliable sources for information on investing. Who can you trust? Who do you need to go to try to learn more about this?

 Dr. Hendrix: That's so important for consumers to educate themselves and thank you for mentioning non-biased information. And typically, especially when it comes to financial management, we steer people toward non-biased information.

So, anyone who's trying to sell you a financial product may be a little more biased in what they're telling you. Non-biased information can be found from those who are not trying to sell you something. I usually recommend people to look for government, higher education resources, the Cooperative Extension Service. Our mission is to bring non-biased, research based, reliable information to consumers.

So that's always a safe bet when you're looking for good information, but also other government and higher education resources. And I tend to go to whatever would be the government expert on the topic that I'm researching. Securities and Exchange Commission has excellent investor education materials, and you can go to www.investor.gov to find that.

Alison Crane: Well, that's great! It's good to know that there are some places that you can go to rather than trying to go to a company who's trying to sell you something. Then there are some people or organizations that don't have anything to gain from you working with them. They just want to give you good, solid information. 

Keep in mind, again, we do have episodes, podcast episodes that are talking about the topics of finances and budgeting, things like that. And you can go back and listen to some of our old podcasts.

Don't forget like Dr. Hendrix said, the Cooperative Extension Service has resources available, and we promote lifelong learning and education throughout every county in the state. There are lots of resources right there in your county available for you to take classes or to get handouts so that you can go in and plan with your family or with your partner and be able to make some really good choices when you are planning your retirement.

Because remember, it doesn't have to be stressful getting that first real job and then going in and trying to figure out all of that paperwork and about investing for retirement.

Podcast Closer: 

(upbeat music playing) For more information about this or any Grown Up U podcast or to learn more about Grown Up U educational opportunities, visit our website at https://www.uaex.uada.edu/grown-up-u.

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The Grown Up U podcast series is brought to you through the University of Arkansas System Division of Agriculture Cooperative Extension Service.