Episode 31: Pocket Change Podcast
Are you interested in beginning to plan for your retirement, but you’re not sure where to start? Check out the latest episode of the Pocket Change Podcast with Kevin Smith, LPL Financial Planner for Leaders Credit Union Investment Services. Learn from Kevin as he shares helpful tips and strategies on how to make the most of your finances so you can secure a comfortable retirement.
"If we know exactly where we're going, we can figure out how to get there in the most efficient way on the most tax-efficient basis," says Kevin. "We look at the accumulation phase, obviously, the distribution phase, maximizing Social Security planning, and then the legacy aspect of it."
Summary
As you begin to consider your retirement, it is important to know your financial health and create a game plan for how you will maximize your wealth. One of the first steps is setting goals for how you’ll like to enjoy your retirement, such as owning a vacation home, buying an RV, or traveling internationally. With these things in mind, you can have a more realistic expectation for how much you’ll need to set aside in savings to reach these objectives by creating an income plan. Your income plan can vary depending on how far out you are from retiring. If you’re 30 years out from retirement, it is the ideal time to invest in a Roth IRA. However, your investment strategies will change as you get closer to your retirement by switching from the accumulation phase to the distribution phase.
There are two different phases when you’re considering retirement: the accumulation phase and the distribution phase. The accumulation phase is focused on saving money, and the distribution phase is focused on generating income during retirement. “We're not just focused on the accumulation phase,” says Kevin. “I really believe strongly in beginning with the end in mind, and that's how we approach things with clients."
Key Takeaways
- Focus on holistic financial planning, not just accumulating money.
- When you’re 10 years out from retirement, it might be good idea to begin transitioning into the distribution phase.
- The percentage of income replacement will be lower for social security for future generations.
- It’s never too early to start planning for your retirement.
If you’re interested in learning more about investment opportunities and planning for your retirement, book an appointment with a Leaders investment champion today.
The Pocket Change Podcast is presented by Leaders Credit Union. Learn more about becoming a member today.
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Full Transcript
Shea
Hey, this is Shea.
Carrie
And this is Carrie.
Shea
Welcome to the Pocket Change podcast.
Carrie
Where you'll learn better ways to spend, save, and invest and take control of your financial journey.
Shea
So, Carrie, retirement is a big topic. A lot of people want to know all the ins and outs; when, how, how, much do I need, all those things. So, we're going to get into that a little bit today.
Carrie
Yeah, I'm very interested in this conversation today. I mean, not that I'm that close to retirement. I am closer than you are, however.
Shea
We all want to retire one day.
Carrie
Absolutely, but I do know that a lot of our listeners will be interested in this topic today.
Shea
Yeah, I'm excited to learn more.
Carrie
Me, too. We're excited to welcome our guest, Kevin Smith, LPL financial planner with Leaders Investment Services today. Welcome to Pocket Change, Kevin.
Kevin Smith
Thank you, Carrie. Thank you for having me. I appreciate being here.
Carrie
Tell us a little bit about your career with Leaders Investment Services.
Kevin Smith
Yeah. Let's see. Fifteen years ago, I actually started at Merrill Lynch, and this was back in 2007. I don't know if you remember what happened in 2008.
Shea
Right before the good stuff.
Kevin Smith
2007 wasn't a good year to start in the investment space. So, was with Merrill for about a year, and the crash happened. And when Bank of America came in and bought Merrill Lynch, they laid off 18,000 in the first wave of that. So I just happened to be the lowest guy on the totem pole and was let go from Merrill, which was really a blessing in disguise. I had talked to Todd Swims, the CEO here at Leaders, and knew that he was trying to get the investment Department off the ground, and so three interviews later, here I am. So fifteen years later, I started in April of '09. We didn't have an investment program established at the time. So came in, built the program, and we now have over 1,500 clients and manage about 100 million of assets under management.
Carrie
So their loss is our gain then.
Kevin Smith
That's right. Good to be here.
Shea
Kevin, we're glad to have you on our investments team serving our members. Today, we want to ask, what is income planning and what can our listeners learn about that?
Kevin Smith
Sure. I think traditionally, most people think about the accumulation phase of retirement planning. We're really focused on trying to get as much money as humanly possible into a bucket as tax-efficient as we can. Most people really focus on their 401(k)s, their working years, trying to accumulate assets over that time period. I think what we don't really focus a whole lot on is that transition from the accumulation phase to the distribution phase. And so that's very important in today's times. You have to focus on that distribution phase, and that's really what we try to do at Leaders Investments is focus on the shifting of the gear, so to speak, from the accumulation phase to the distribution phase.
Carrie
So how do you think that retirement income planning has changed over the past twenty years?
Kevin Smith
Yeah, that's a good question. I'll paint a little picture for you. Let's take my grandfather, for example. My grandfather graduated high school, enlisted in the Navy straight after; as soon as he graduated. Was in the Navy, fought in World War II. After the war, he basically went back home and started working for a large manufacturing corporation. It was International Harvester in Memphis. He was there for thirty-five years. It was one employer for a long period of time. Back in those days, you had this thing called a pension, right? When he retired, let's say he retired at sixty-two, he had that one job for his entire career, and he had that pension. That pension replaced his income, probably 85% of his income, his take home pay, just with the pension alone. Well, then he also had Social Security. Well, that Social Security probably replaced 75% of his income. The combination between the two, if you do the math, he was actually making more money retired than he was working, right? Okay, so let's fast forward to my father. He retired, let's say, ten years ago, right? He had multiple employers at multiple different places. Well, he didn't have a pension, so he had 401(k)s all these different places.
Kevin Smith
It was his responsibility to make sure that he saved for his retirement in utilizing those 401(k)s. Today, typically what you'll see is one person will have multiple different employers, different jobs throughout their career, and they'll have multiple 401(k)s that they use to acquire assets at those 401(k)s to be able to use as retirement income in the future.
Shea
A lot has changed, and even with Social Security, like you mentioned, as far as income replacement. What a lot of people ask, and I think what a lot of people want to know is what will be around when I retire, or how do you think Social Security is going to change in the coming years?
Kevin Smith
Yeah, that's a great question. We get that question a lot from clients. They come in, maybe they're starting out in their investing career, and they say, "Am I even going to have Social Security?"
Shea
Will it even be around?
Kevin Smith
Yeah, will it even be around? I think the simple answer is, yes, I think Social Security will be around. I'll date myself a little bit. I'm forty-seven. I've got eighteen more years to work. I wonder the same thing myself. I think it'll be around. What you'll see is, kind of like I talked about before, the percentage of income replacement will be lower. When I retire, it might cover 25% of my take home pay. And the full retirement age will just get older. Now its sixty-seven, well, it might be seventy-five or seventy-six by the time that I retire. I'll be older before I can take it, and it'll cover less of my income, which is all the more reason why we need to focus on accumulating assets and making sure we're taking care of ourselves.
Shea
So knowing all that, what are some of the tools we can use to create that additional income?
Kevin Smith
Typically, when we sit down with a client, really what we're trying to focus on is what have they got coming in and what have they got going out? So when we sit down with a client, we talk about their expenses, their fixed expenses, their flexible expenses. What are they going to do in retirement? What is it going to cost them in money? Somebody might say, "Hey, I'm going to buy a condo in Florida," or, "I want to buy a RV and travel around," or whatever they want to do in retirement, that's going to cost money. We have to figure out what that cost is going to be. We figure out their expenses, and then we have to figure out what income sources they have coming in. They may have had a job thirty years ago that might have had a small pension, so we may have some pension assets there. Do they have a Roth IRA? What is their Social Security benefit going to be, and what's the most efficient time to take it? How do we maximize that Social Security benefit? What other investible assets do they have that we can use to create those residual streams of income?
Kevin Smith
So we'll really look at what's coming in and what's going out, and then we see if there's a deficit, right? Is there a hole? Do we need replacement income? And so once we figure all of that out and we figure out, Okay, there is an income need, We need to fill that gap. How do we do that? A lot of times what we'll do is we'll use an annuity to create a guaranteed income stream. Just by simplest form, an annuity basically is; it's a contract with an insurance company. Essentially what you'll do is you'll take a lump sum of money. Let's just use $100,000, for example. You'll take $100,000 and you'll put it into an income annuity, and it basically will pay you a guaranteed income stream that you can't outlive. It really creates, if you think about it, like a self-pension. You're creating your own pension. The benefit of it is you'll never run out of money. That's the benefit of the annuity. It can create that guaranteed income stream that you cant outlive. Some other tools that we use, we use managed accounts or investment accounts, stocks, bonds, and mutual funds, where you'll pull a distribution rate off of that portfolio.
Kevin Smith
Let's say you're pulling 3% to 4% off of that portfolio. You might aim for 3-4% of a distribution rate. If you've got that same $100,000, that's going to create 4%, $4,000 of income per year. That's a sustainable distribution rate. Typically, you won't run out of money if you have a lower distribution rate.
Shea
Hopefully, you're earning a little more than you're pulling out so it will be sustainable.
Kevin Smith
That's right. It's earning interest as it's growing as you're pulling away. It should be able to sustain your income needs in retirement. Those are some of the tools that we use. There are other ones that we can get into detail on, but that's the high-level overview.
Carrie
People are at different stages in their life and career. What advice would you have to those who are thirty, twenty, or ten years out from retirement?
Kevin Smith
I would say the simple answer would be: Hey, it's never too late to start. Just get started. It doesn't matter how long you've gotten to a retirement, just get started. For the folks that are thirty years out, I would say Roth IRA would be a great thing to invest in. Without going into the specifics of the Roth IRA, basically, it's going to provide you tax-free income when you retire. You can grow the funds on a tax-deferred basis, which is going to grow like your retirement account. You're not going to pay tax on the gain, but when you get to access the funds in retirement, it will be tax-free. That's going to be a big thing when you retire. So thirty years old, I'd definitely do a Roth IRA. That's the first place to get started. Twenty years out, I would probably lean pretty heavily on my employer-sponsored plans. If you're twenty years out from retirement, start fully funding your 401(k)s. Get the full match. Fund your 403(b). Fund those employer-sponsored retirement plans. Ten years out from retirement, you should probably be at least starting to think about the distribution phase, maybe setting some things up into place geared towards, Hey, I'm going to probably need this for income in the future.
Kevin Smith
I would at least start thinking about that. That's where we can come in, help you out, see what you've got, see if there's anything that you might need to transition into to line those assets up for income in the future.
Shea
So you can help our current members, future members with their investment planning and advising, but what makes Leaders Investment Services different from other brokerage firms?
Kevin Smith
Great question. I would say our value proposition at Leaders Investment Services, we try to focus on holistic comprehensive financial planning. We're not just focused on the accumulation phase. I really believe strongly in beginning with the end in mind, and that's how we approach things with clients. If we know exactly where we're going, we can figure out how to get there in the most efficient way on the most tax-efficient basis. We look at the accumulation phase, obviously, the distribution phase, maximizing Social Security planning, and then the legacy aspect of it. What if you don't spend all the money? It's got to go to somebody. How do you pass those assets on as efficiently as possible to the next generation? That's really what makes us different. We don't just focus on the accumulation phase. We do that, but we also focus on all aspects of financial planning.
Shea
If any listeners want to get a hold of you or want to sit down and have a chat about their situation, what's the best way to do that?
Kevin Smith
I'd say probably the easiest way to get a hold of us is the Leaders Credit Union website. The same website that you go to for online banking. Just go to leaderscu.com and click on the investment tab at the top. You can actually book an appointment right there online.
Shea
Book an appointment online, leaderscu.com. You can call and we could make an appointment over the phone. Easy ways to access just by making an appointment and setting up a meeting.
Kevin Smith
Absolutely.
Carrie
Okay, so I've got one last question for you, Kevin.
Kevin Smith
Yes, Carrie.
Carrie
If you were to find some extra change in your pocket, how would you spend it?
Kevin Smith
Let's see, extra change in my pocket. Well, let me actually answer that question with a question. What is the fastest way to double your money?
Carrie
Invest it.
Shea
Compound interest.
Kevin Smith
Fold it in half, right? Fastest way to double your money, right? That's probably what I would do with my pocket change. I'd fold it in half. I'd save it. No, I mean, if I had to really answer the question, I'd probably say...so my son has a big plastic baby bottle that we got him when he was a baby, and it's a bank. And so anytime I've got loose change in my pocket, I'll just plop it in the baby bottle. And I've written on the outside, "Retirement Fund". I'm sorry, "College Fund". That's what I wrote on the outside. So that's his college fund. But yeah, I'd probably just toss it in the old baby bottle.
Shea
Helping out the kids. There you go.
Carrie
That's great. Well, we thank you so much for being here with us today.
Kevin Smith
Well, thanks for having me. I appreciate it.
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