The Tony Steuer Podcast with Sarah Holden: Getting Started with Retirement Planning

“My #1 tip for retirement planning is to really do it little by little, otherwise there's a tendency to feel overwhelmed if there are so many decisions to make and how do I handle this, but just start little by little.” - Sarah Holden

In this episode, I spoke with Sarah Holden, the Senior Director of Retirement & Investor Research at the Investment Company Institute (ICI)  about getting started with retirement planning. We also discussed the benefits of increased disclosure in financial services and specific challenges for women with retirement planning.

Bio: Sarah Holden is Senior Director of Retirement & Investor Research at the Investment Company Institute (ICI), the leading association representing regulated funds globally, including US mutual funds and exchange-traded funds (ETFs). Sarah has a PhD in economics and has studied retirement trends and policy, as well as the behavior of investors, for decades. She uses humor and plain English to make retirement and investment concepts clear.

Transcript

VO: 0:07

Welcome to the Tony Steuer Podcast, presented by Paperwork. Be prepared for life.

Tony: 0:19

Welcome to the Tony Steuer Podcast presented by Paperwork. I'm pleased to be joined today by Sarah Holden. Sarah is a Senior Director of Retirement& Investor Research at the Investment Company Institute. In this episode, we'll be discussing retirement planning and the benefits of increased disclosure. Sarah, welcome to the Tony Steuer podcast. Thanks for joining us,

Sarah: 0:43

Tony. Thanks so much for having me.

Tony: 0:46

Yeah. I'm excited to have this conversation with you. So let's get started. This is where I start with everybody, can you tell us a little bit about your origin story? How did you get started as an economist?

Sarah: 0:59

Sure. It's not what I actually started out to be. I thought I would grow up to be a math professor and I was a teenager, came home from shopping at the mall with all my purchases and I was so thrilled at how much I had saved. And my father was like, you haven't saved, you have spent money. And I was horrified at this, you know, declaration of his, that of course I had saved everything was on sale. He goes, no, look at all that you've bought, this is not saving. And so that was sort of a spark of, well, what is saving and how do you manage finances? And I always had an allowance, so I had to learn how to manage that allowance, and then was good at math, and so decided I would be a math professor one day. Headed off to Smith college where I majored in math and then realized that I had almost finished the econ major as well, and ended up going on in economics wanting to learn about, you know, how do firms decide what to produce and what to sell and how to market their goods and how to individuals manage their finances. And I ended up going to, at first to the federal reserve board in Washington, DC, where I was in the research and statistics division working on the flow of funds accounts, which are the national accounts in the United States. And there's a whole lot of different sectors in the flow of funds. And so I was originally doing, actually international economics. So a little bit of a career lesson here is that don't be afraid to just change topics one day and pursue a totally new topic area. The pension expert left and they were looking for someone to fill that position. And I said, well, I'll give it a try and found that it was really a topic that I so enjoy. And there is so much to learn about the process of thinking about and saving for retirement. I know so many young folks, you're thinking about your next step of, you know, high school, college, getting a job, down the road there will be retirement. And it's really important to start thinking about it early. And I think that my path to getting to here was really sort of a long and winding one, but how I ended up at economics and then indeed retirement.

Tony: 3:15

Well, that's great. So I took economics in college, which I barely remember. How, because people don't talk about economists very much or economics, how does economics fit into the greater retirement discussion?

Sarah: 3:31

Well, it fits into the discussion because households, as a unit, a household needs to make decisions over its life cycle in order to earn a living and then build a family, buy a home, do all those things. And those are all economic decisions where, with every paycheck that comes into a household, decisions have to be made. Am I going to put some of it aside for retirement? Do I need to use some of it to pay down my student loan? Do I have a mortgage or am I still saving for the down payment for my house? So I need to put some aside to save for that down payment. So depending on whether you're a younger household or an older household, you have a lot of decisions that you're making with the resources that are coming into your household and economics is really about understanding how people make those decisions and allocate that money, not in any only in any given year, but actually over their entire life cycle.

Tony: 4:31

Well, that's great. So just continuing down the economics path, and then we'll get to talking about retirement planning, but I'm just curious is part of your studies, is it behavioral economics then?

Sarah: 4:42

So that's a different branch, I have touched on that though, because behavioral economics helps us shape, I think, the path of decisions put in front of people. So as an example of a behavioral economics intervention would be if, if you are running a cafeteria and when people first come in to the, the kids come in to get their lunch, if you put the candy and the potato chips and all those food at right at their eye level, as the first thing they see when they come in, they'll be more inclined to choose those less healthy options than if you were to put the fruit right at that level for them or a whole grain bar or something like that. So it's not about taking any choices away or about changing the set of choices, it's about, well, in what order, or how do I present the choices to folks so that they will end up on a path that might be better for them? So in the case of the food at the school cafeteria, it's so the kids might make better choices in terms of a healthy lunch. In terms of a 401k plan, so an employer sponsored retirement plan, it would have to do with how the plan sponsor presents the investment choices to the participants, so that it's presented in a way that they can understand what the choices are and understand which options might be better for them. And in the case of the decision to participate in the plan, many plans will automatically enroll a person in the plan. So now the decision was, whereas before I used to have to sign up, now if I do nothing, the plan sponsor puts me in the plan, puts me on the path to saving. And if I wake up a paycheck later and say, I really didn't want to do that, we could undo that I could get out of that, but if I do nothing, I end up on a much better path. So I haven't changed the choices, I haven't changed, what I've changed is really the path that I end on automatically.

Tony: 6:42

Well, that's great. You said a lot of things that really resonate with me. I talk a lot about behavioral finance and that people make decisions based on a whole range of factors besides just the logical decision making process. And it's interesting to hear how you shape that with economics, that it's a series of choices that people make and that they're presented with, and that's really interesting. I'm also interested about the part where, you know, with the automatic enrollment into 401ks, because then it's almost like we're moving it back towards conversation with pension plans, where people are being nudged to take that action instead of having to make that decision, whether they should invest in their retirement plan where they don't always get started on their own.

Sarah: 7:35

Yeah. So I think really in terms of innovations that we've seen over time in the retirement space, many people will sign up on their own. They'll go to the HR meeting, they'll get the information, and they'll sign up on their own. But there are some people who are either busy or not engaged or worried they'll make the wrong choice. And in which case, if you have a path set in place that will work for most of them, then that's very beneficial. So the example of the path that we've sort of come to in the 401k plan world is: so I'm a young worker, I start my first job. Now it's going to be a 401k plan typically that I'm offered. If I'm automatically enrolled, then I am put into the plan at a default contribution rate. So the employer will choose that contribution rate and we'll come back in a second to, we might want to revisit that and we'll start taking that money from my paycheck. So it's little by little, paycheck by paycheck, putting it into the account. If I've been automatically enrolled and I've not done a thing I will, then they will then need to decide, well, where is that money going to be invested? And I will be informed of all this, but I still have the choice of opting out of the enrollment of opting out of the investment. But if I do nothing, I let the automatic enrollment choices play out for me, I will end up in the plan with contributions going in, and I will typically end up in a target date fund. And a target date fund is a fund that is diversified. So invest in a mix of stocks and bonds. And it has, you know, across all different sectors. It can have an international component. So it really is a diversified investment. And importantly, it's one that's geared to my age, whatever my age might be. So I'm a young worker. I said, I've started out as a young worker. They will put me in a target date fund that has a target date way out in the future, like 2065. And that means that the fund will be rebalancing over time as it approaches and passes that year so that it becomes less focused on growth, which is what it's focused on now because I'm young, and more focused on income because as I get older and I approach retirement, I'm going to want to be focused on income and it will be automatically doing this for me. Now, if I was a new hire and I was an older worker, and I went through this process, I would end up in a target date fund with a much closer date and it would have much more fixed income in it already. So the path is at any point along this path, I could choose to opt out. I could drop out of the plan entirely. I could change the investment. I could change the contribution, but if I do just go with what the plan sponsor has put in place, that's the typical path I will be put in the plan. I'll be in a target date fund and a year from now, when I'll probably get a pay raise, the plan sponsor will probably increase my contribution rate by a percentage point. So I've got a little bit of a pay raise, and now I can contribute a bit more to my plan.

Tony: 10:33

Well, that's great and that sets people up with healthy habits for their finances. One of the things you mentioned and, you know, I think people sometimes don't understand, is can you talk to us about what is rebalancing and how it works and the benefits?

Sarah: 10:50

Sure. So I think really when it comes to planning for retirement and preparing for retirement, the two key steps, no matter where you are in the process, is the first step is the saving step. So the taking some of that current income out of your paycheck and putting it aside. So making that contribution, the second step is the investing step. And this actually is a step that Americans are very good at. When you look at other countries, many of the households they are highly concentrated. They have a lot of holdings in basically bank accounts. And bank accounts, as you know, these days don't really produce much in the way of a return. So really as a participant, most of them will reach for a diversified portfolio. So that means you hold a lot of different stocks or bonds in the portfolio, and to have something that rebalances for you means that the professional manager who's running that fund is going to take a look at that asset allocation in that fund and change it over time for you so that you don't have to go back in and change it yourself. So when you're young, it's probably going to be something like 80% of it will be invested in stocks because it's reaching for growth. Now there's some risk in stocks, stocks go up and stocks go down. So you have to be sure you have a stomach for that, but most young participants, because they've got a big, long time horizon in front of them, they have their labor as an asset basically, which is kind of like having a bond. They have the ability to take on that risk in this diversified way, and so part of their balance will go into stocks and then there will be a fixed income or a bond component. And there could even be some cash in there as well. And the idea there is that you've got a part of the portfolio diversified into something less risky, and then over time as you're getting older and the fund is approaching and passing that target date, it is the portfolio manager is changing that allocation so that if it started out at 80% in stock, by the time you hit the target date, it could be 40% in stock, which means that 60% of it is now in an income generating type of asset because you're headed toward retirement, you're starting to enter retirement. And you're going to start thinking about pulling money out of that investment to help fund your retirement. It will, however interestingly, typically they will keep stock in the portfolio because as I say at the end of your working career is not the end of your investing career. Folks will manage a 401k, an IRA, an individual retirement account. They will have a retirement account that they will be managing throughout retirement and with longevity, what it is that could be a couple or a few decades. So it's not the end of your investing career. It's just a point where you want to have a bit more focus on typically on fixed income rather than on the stock market.

Tony: 13:53

That's great. And I think that's important for people to recognize is that the horizon can be long and as you move through the horizon, you know, the allocations may change, their rebalancing may change, but that you have to keep all those factors in mind as you point out. And that retirement is just more of an age than, you know, it's a stage of life, but you're still investing and continuing on past that in your retirement savings have to, has to last you retirement.

Sarah: 14:33

Now, the other component I wanted to mention in terms of the defaults or the decisions that need to be made. So we we've sort of jumped to the investment decision already. So if you're a do it yourself investor in a 401k plan, there's typically more than 20 investment options in the plan. And they typically include domestic equity. So equity in the United States companies, they typically have foreign stock funds in them. They'll have bonds, they'll have target date funds. So they'll have a whole range of, you know, you can do ESG investing, which is environmental, social and governance. So if you're someone who is interested in the environment or interested in social issues or the number of women on a board, you can select an investment that will look at those criteria as it's choosing the companies to invest in. So there's a full, you know, really big range of choices. And if you're a do it yourself, investor, you jumped for joy of that. And you start picking your funds. As you mentioned, if you're not so much to do it yourself, or you might choose the target date fund, because that's going to have the professional management is going to have the diversification and it's going to have the rebalancing over time for you. So that's sort of the, the investment decision, the 401k. If we step back one, we talked about, you know, being sure you're participating, but also to be sure in your contributions, want to make sure that your listeners look to check whether or not their employer offers an employer contribution. So nine out of ten 401k participants are in a plan where the employer will actually put money into their account. But often the amount the employer will put in is based on what they put in. The most typical formula is if I contribute 6% of my pay over the course of the year, the employer will put in 50 cents on a dollar. So that would be a whole nother 3%. So at the end of the year, I will have say 9% with me doing 6% of it. And the employer doing the additional 3%. This match can sometimes be dollar for dollar. So imagine how great that is. You put in a dollar, you've already got a return of a hundred percent in your employer, put in a dollar to help you along. So it's really important to check that you understand if there's an employer contribution and chances are, there will be one, but to really make sure you take full advantage of it, because if you don't, you have literally left money on the table. This is money they promised you when they hired you. They said, we have a 401k, that's a benefit. You want to be sure you take full advantage of that benefit and make sure that if you one of the nine out of ten that's got an employer contribution, make sure you get all of it.

Tony: 17:24

Definitely. And I keep I, and that is one of the most common financial planning issues that I have seen is that people leave that money on the table is they don't understand the benefit of the company match. So I think that it's just critically important. Yeah. A question with the automatic enrollment in your experience, when employers do automatic enrollment, are they doing it at the level where employees can fully maximize that employer match or is there a disparity?

Sarah: 17:57

So it varies. And that's why it's important to check that the thought behind automatic enrollment was we're trying to pull in workers who, I mean, some people, it may have been too much information for them. Often the folks that end up in getting pulled in through automatic enrollment will be younger people who are focused on other things, or it could be lower income participants who weren't sure they could really afford to contribute. And I think the government had put as an example, a 3% contribution rate and plan sponsors being worried about straying from what the government example was. Initially, were worried to do more than a 3% contribution rate. And so if it's 3% and I've said that the most common formula is 6% to get your full match, then you wouldn't be getting your full match if they started there. Most plans, however, do have this increasing contribution over time. So it'll go up by a percentage point each year. And increasingly, as we've had more time with this design feature in the plans, we've seen that folks don't opt out as rapidly as people thought they would when the contribution rate goes up. So we're pulling you in, we've automatically enrolled you. We're trying to make it painless. We'd like to get you in the plan. So 3% pretty painless. If you put it up to something like 6%, there's a concern will more people say, ah, I can't do that and jump out. So there's sort of a trade off of. You want to get folks to save over their life cycle. But when you're young, we talked a bit about there's competing priorities for that dollar coming in as a paycheck that there's, you know, saving up for families, paying for education, paying student loans, paying a mortgage, getting a down payment on the house. There's lots of competing things for that money. So you don't want to scare too many people out of auto-enrollment. So it's a balancing act of choosing a high enough to make it worthwhile, but not so high that you have some people opt out that you would really like to try to keep in, to save for retirement.

Tony: 20:04

Definitely. Yeah. That's where I see the benefit of financial education, where people being educated about the process and why it's important to save for retirement and how the process works. Is that something you've seen that more employers are doing financial education with their employees around these issues?

Sarah: 20:26

Yeah. So in the, in the US, it really, we don't have a comprehensive sort of national financial education program. So it really, you hope that as children people might have an allowance, they might learn a bit about budgeting and saving for a bike or a video game or something. And then when you get to middle school, high school, it's rare for there to be a comprehensive class on teaching sort of financial education, basic points. So in the United States, really the place where most people get their financial education is actually at their employer at their first job because the employer spends a lot of effort making a benefit package to attract workers, to come work for them. And part of that package will be the 401k. And so they have designed this as a benefit. It is a feature of working there and they want to make it work for people. And so they have a legal responsibility to run the plan for the benefit of the participants, to have a prudent and diversified list of investment options in the plan, and to make sure that costs are reasonable and they've done all of those things. And then they really do want people to plan for their retirement and to participate in the plan. And so there's a whole lot of education that goes on with a 401k plan. Sometimes it's in-person, the HR department sitting down with people when they first start, it can be webinars now, so much more is electronic. It can be once a year, a representative comes from the record keeper. Who's the financial services firm. Who's helping run the plan will come do an educational seminar for the, for the employees. So there's many, many touch points in many, many ways that the employer educates the worker through the 401k plan materials about the importance of saving for retirement nine out of ten, a defined contribution plan participants say that they appreciate that their plan helps them think about the longterm, not just their current needs. So even just that basic message of you need to think about your future self is something, the plan teaches people and they appreciate that. They say they appreciate the investment choice and the investment options. They appreciate the tax advantages. They're also taught about diversification on the majority of them say they are less worried about fluctuations in their account and the short-term because they know they're doing this paycheck by paycheck, little by little. So all of this education about don't put your eggs on one basket, diversify, pay attention to rebalancing over time, which is the target date fund, make sure that you're contributing enough. The employer actually many plans will send you when you turn 50, you can do catch-up contributions. So you turn 50, you get an email that says, guess what? You just turned 50, you can do a catch-up contribution. So there's so many ways where the education or the information is being personalized, but there's also a website typically where it's all available and where folks can learn about all these sort of basics of investing, basics of saving as well as the specific features of their particular plan.

Tony: 24:00

Yeah. And I think that's such an important point is for people who are employees and have an employer plan, especially with larger employers. So they do have these portals where you can get information, if your plants is through, if your employer has a plan through Vanguard. I know for example, my wife does, that Vanguard has an amazing amount of information available for the employees.

Sarah: 24:23

Yeah. And I think The other thing that the plan often has on it, in addition to the, just the sort of educational material, increasingly there'll be calculators where you can put in what your current salary is, what you're currently contributing. They know your current account balance and it will project out for you while if you keep at this pace, here's where you might end up in terms of an account balance, because that's going to look like a really big amount of money. Increasingly, they also report, which means you could take out this much every single year, which sort of gets it back down to, well, this is sort of how much reasonably you could spend of it in a given year of retirement cause you really can't spend the whole thing the first year of retirement. And lets people see whether they're on track in terms of what kind of income they need or in retirement and what this account will generate for them in retirement. And then it lets you play with it. And that it says, what if I were to contribute just one percentage more for the rest of my life, how would that help the situation? And so I think a lot of really great tools that really get to the personal level of, well, here's where you are and what you're doing. Here's how much more time you have until whatever date you pick, whether it's 65 or 67 or 70 whatever date or whatever age. Here's how you can course correct. And if you do it now, this little tweak now could really help you down the road.

Tony: 25:51

Yeah. I think that's a key thing you mentioned there is a little tweak now can be, make an incredible difference down the road. And the other thing you said that I think is super important for people, if every retirement plan is personal, your retirement plan is not going to be the same as somebody else's. So it is important to try out the calculators and see what works for you in your situation and what your goals are, everybody's goals aren't the same. That's fascinating. So Sarah, one of the things that I talked quite a bit on the show about is women and finances and the financial challenges that women have. What are some of the specific challenges for women with retirement planning that you see?

Sarah: 26:39

So I think really the, the two key for women one is, on average, we're paid less than men for the same jobs, but also women are more likely to spend time out of the labor force, whether it's caring for children, caring for elderly parents, there's often interruptions in a woman's work and career more so than in a man's working career. And this is where actually the design of the new world, you mentioned earlier, defined benefit plans, a defined benefit, or the traditional pension basically rewarded a worker who spent their whole career at one job and not only their whole career there, but actually ended their career there because the benefit was based on your years of work and your salary. And so if you were there early on and then left, you would have not very many years and a very low salary and a benefit that would just be locked at that as you went off and did other things. So it was really a plan design, not well suited to a mobile workforce, which we are, but particularly not well suited to women who wouldn't be able to do that distance and stay in that whole time. And so I think the change over time to more defined contribution to the 401k world is actually very helpful to women because that early contribution that you make early in your career, if you leave it in the account, you may leave it at the former employer, you may roll it over to an IRA. However you preserve those early contributions within a retirement account, they will grow the entire time that you are out of the labor force. They will keep on growing for you and keep on compounding for you. So it really is a much better design for a mobile workforce, but also for anybody who is going to be spending some time out of the workforce, because they will continue to[inaudible] that account is yours and continues to grow over the rest of your career. So I think that that's a big plus in terms of plan design for a mobile worker or for women. On the other thing I would note is that interesting little, I consider an interesting feature of our tax code is each Valentine's day, I do my Valentine's day blog, which most people let me warn you, you don't typically go to an economist for anything having to do with romance, but I do my Valentine's day blog. And my Valentine's day blog is"wouldn't it be great to open up a spousal IRA for your spouse who doesn't have earnings". So the US tax code thinks that the household as a unit, that's in this together saving for retirement. And if you are a stay at home spouse, whether you're a student, so you don't have earnings, or maybe you're an entrepreneur and you don't actually have earnings or you're taking care of kids or whatever it is you're doing, and you don't have earnings. If your spouse has earnings, they can use some of their earnings to cover a contribution to an IRA in your name for you. And so it's called a spousal IRA and it allows the household as a unit to take advantage of an individual retirement account for that person who is not actually earning money in that given year. So I think that's a, a great feature of our tax code. That's designed for spouses, either gender, but women can certainly take advantage of a spousal IRA.

Tony: 30:09

Well, that's great. There's a lot to think about. And first of all, if you had challenged me to use the words economists and Valentine's day in the same sentence, I'm not sure I could have gone for it, but I think those are great points is that defined contribution plans do have some benefit for a mobile workforce or for a woman who has to take time off for caregiving. I can't remember the percentage of women who ended up as caregivers, but it's staggeringly high. And so they're out of the workforce for a few years, or as you said, as they start a family and they're out of the workforce while their kids are young because still, women are doing the majority, at least of the younger, younger ages childcare. So that's, that's fascinating. So Sarah, as we wrap up, what's your number one tip on being financially prepared?

Sarah: 31:07

I think the number one tip is to really do it little by little, otherwise there's a tendency to feel overwhelmed of there's so many decisions to make and how do I handle this, but just start little by little. So if you have an employer, look to their plan, to be sure you take full advantage of that. If you don't have a plan at work, then open up an IRA. Three quarters of IRA, owning households got help opening their IRA from a broker or financial advisor, but others went directly to a discount broker or a mutual fund company. So there's many ways to take advantage of opening an IRA and getting those tax advantages that the 401k folks are getting on your own, even though you don't have a plan at work. And so I really think, think of it as little by little, you're only putting in a little bit at a time, which makes it a little bit easier to, in terms of deciding how to invest. You're not, you're putting this in paycheck by paycheck, or if you set up an automatic contribution IRA, it's, you know, every month, a little bit would go in. And I think that that's the way to think of it. And if you do that little by little, your future self will find themselves with a nice nest egg and will thank you.

Tony: 32:22

That's great. So where can people learn more about you, read your blog, and folow you?

Sarah: 32:31

Sure! So all of the numbers I've talked about and the 401k plans, IRAs, all that information is actually on ICI's website. So we have resource centers, there's an IRA resource center and a 401k resource center. Our blog is ICI viewpoints and all of the reports are up on ici.org. ICI also has an education foundation icief.org, which offers educational materials about risk and return and compounding. So if you're wanting to get sort of some information on some of the basic ideas behind saving and investing, that's available on our website as well. And then I'm on LinkedIn, of course.

Tony: 33:13

Fantastic. And for our listeners and viewers, I will post all those links in the show notes. So you'll easily be able to find Sarah and find out what she has to say next Valentine's day and have access. ICI does have a wide array of very useful tools and resources. So Sarah, thank you so much for joining me today.

Sarah: 33:37

Well, Tony, thanks so much for having me. We covered a whole lot of topics.

Tony: 33:41

Yeah, this is, this is really interesting. So I really appreciate your time. And for everybody out there watching or listening, thank you for tuning in to the Tony Steuer Podcast. Please remember to subscribe. Until next time.