During my time leading our participant education efforts for the retirement plans we manage, I’ve received all kinds of questions. Questions ranging from, “How do I start a 401k?” to “What’s the best way to consolidate my student loans?” However, a question I’ve gotten more frequently is:

“If I have the ability to save more, should I pay off my mortgage or should I put more towards retirement saving?”

I feel like this question has been on people’s minds as our economy has made a nice recovery since 2008. For people I’ve talked with, the question has come up due to a change in financial circumstances such as; an inheritance or some form of windfall, the sale of a home, or a recent bonus. Regardless of the circumstances, these individuals have been sitting on this money in low interest rate saving accounts and are looking for ways to have their money work harder for them. While there is no all-inclusive answer, I’ll do my best to outline some of the pros and cons of paying off your mortgage/making additional payments or saving more toward your retirement account.

Your home.

You will not change the value of your home by contributing more to the mortgage, or even paying it off. If your house is worth $350k, it’s always going to be worth $350k until the market determines otherwise. When you put more money into paying off your house, it’s not doing anything to change the value of the house…you’re basically putting money into an illiquid asset that you can only access when you sell the home or take a HELOC.

Additionally, your house is most likely financed at a low/tax-deductible interest rate. Your interest rate might be in the 4.5% ballpark. With your tax deduction, you’re most likely paying a real interest rate of 3% to 3.5%. That’s pretty cheap money. If interest rates were much higher (like in the 8% to 9% range), then it would be a different story and paying off your mortgage might make more sense.

Investing.

When putting money into a long-term retirement account and investing appropriately, you’re building an asset that can grow at 9% per year, using the S&P 500 as a benchmark, over a long period of time. By putting money in, you’re actually giving those dollars the ability to grow over the years. Unlike putting money into your mortgage, your deferrals will directly affect the type of return and the growth of that account over time. So, the more you put in, the more you will get out in the end.

Example: Keep in mind that nothing you do, except making updates to your home, will increase the value of it. Compare that with an investment/retirement account. Let’s assume there are two different people…one has been putting a fair amount of savings in their retirement account, the other has contributed a much smaller amount. For the sake of the example, let’s call them Kelly and Chip.

Kelly has a $110k account. Chip has a $10k account. It’s 2014 and they are both invested in the Vanguard Target Retirement 2040 fund. The return on that fund in 2014 was 7.15%.

So, to start 2015 and without additional savings, Kelly now has an account worth $117,865 and has gained $7,865 just on return alone. Chip now has an account worth $10,715 and has gained $715 on return alone. Both are good, but Kelly is setting herself up to have a suitable retirement account. By the way, if we assume that neither Kelly or Chip contribute another dollar to this account forever, in the year 2040 (assuming an average 7% rate of return per year) Kelly will have an account value of about $640k, while Chip will have an account worth about $58k. That’s a huge difference! Personally, I’ll take the investment accounts over paying off my mortgage a few years earlier.

Regardless of your views on this specific question, know that if you’re wrestling with anything retirement account related feel free to reach out by phone at 503.905.3100 or email 401k@humaninvesting.com anytime. We would love to connect with you!

 

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A transplant to the Northwest, I recently developed a penchant for hiking. It’s necessary to point out the fact that I’m not a native of the Pacific Northwest, if only to highlight the amount of wonder that I experience every time I venture beyond the city limits. For me, every step reveals something new and exciting that I never encountered in the Midwest. Hiking in Ohio is quite literally a walk in the park compared to the trails out here, and I’ve learned the importance of being organized and prepared. Not long ago, I was packing for a trip to Mount St. Helens, going through my checklist, and my thoughts turned to retirement planning. In part because I knew that I had this blog to write once I returned, but also because I’m actually passionate about the subject. Much like hiking, planning for retirement requires some forethought and strategy. With that in mind, here are my top three hiking/retirement planning tips!

Don’t lose sight of the trail while hunting for Sasquatch...

We’re often asked, “what is the best investment?” This is a simple question that warrants a complicated answer because factors like age, risk tolerance, and estimated retirement date can all influence an individual’s investment strategy.

The Putnam Institute completed a study in 2012 that showed the impact of selecting the top performing investments quarter over quarter (labeled the “crystal ball strategy”) vs. increasing your savings rate. The study revealed that while the crystal ball strategy yielded a higher account balance than the base case, a 1% increase in savings rate “had a wealth accumulation impact 30% larger than the crystal ball fund selection strategy”. In other words, we can’t always control selecting the “best” fund, but we can control how much we save.

I’m not saying that we should stop trying to invest well, (or that we should stop hunting for Sasquatch for that matter). I am suggesting that focusing too much on finding the best investments, can distract from other facets of retirement planning that are just as important.

Quality gear is worth the extra expense...

The retirement planning side of this tip is that saving more now, will greatly impact your savings in the long run. This is something that we all know, but it can be difficult to commit to increasing your savings rate until you see the actual numbers. For example, saving in your 20’s and 30’s has a greater impact on your lifetime savings than saving later in life. Due to, compounding returns, someone who saves $4,000 a year from age 30 to age 40 will end up with a greater balance at 65 than someone saving $4,000 a year from 40- 65, assuming a 7% rate of return. I know that statistic seems hard to believe, but check it out, it’s true!

There’s always another mountain...

It’s important to remember that the day you retire isn’t the end of your journey. A 2012 CDC study reported that life expectancy is 78.8 years, which is up from 70.8 in 1970. The point being, often times when transitioning into retirement, retirees feel the need to preserve their “nest egg”. When in reality taxes, inflation, and health care expenses are eating away at their savings. By recognizing the dual purpose of retirement accounts; providing cash flow and growing for the future, you can climb the mountain right in front of you while also planing for the ones on the horizon.

Have questions about the transition from retirement savings to retirement income? We can help with that!

As far as the hiking goes, it’s going to take a long time for me to see all there is to see around the Pacific Northwest. Personally, Dog Mountain (seen on the right) is one of my favorites.

You should also note that if you’re hiking in the rain, “windbreaker” does not equal “rain jacket.” I may or may not have made that mistake.

Call or email us at 503-905-3100 or 401k@humaninvesting.com

 

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Chances are you drink coffee. I know I do...almost every day. It’s a habit that gets a hold of us somewhere early in our careers and it’s a hard one to kick. In fact, according to the Harvard School of Public Health, 54% of Americans over the age of 18 are coffee drinkers…that’s about 131 million people. According to the same study, Americans spend about $40 billion a year on coffee. That’ll wake you up! (horrible pun, I know). And I bet that if you’re reading this blog article, that means that you most likely fall into the demographic of “coffee drinker”…responsible, working, informed adult…those characteristics generally equal “coffee drinker”.

The Cost Today

So what does our coffee habit cost us? For this exercise, let’s assume that we buy one cup of coffee per working day and that (coffee/americano/latte/mocha [insert drink of choice here]) costs us $2.50, but really it’s $3 because we tip the friendly barista who conveniently works somewhere along the path of our morning commute. Let’s also throw in one weekend coffee for good measure. Do the math and that’s $18 per week, roughly $78 per month and $936 a year. So to answer the question “how much does our coffee habit cost us?”… on average about $1,000 per year.

The Real Cost

But if we dive a little deeper, how much is our coffee habit really costing us? To answer this, we need to think more long-term beyond our initial caffeine cravings. There’s a term we use in finance called “Opportunity Cost” that refers to the potential value of our money if we use it in a different way. So instead of buying coffee, what if we took that $1,000 per year and applied it to our long-term retirement savings? Exciting, I know.

Investing your coffee money for retirement: Let’s assume we’re 40 years old and will work until we're 65 years old, in other words, we have 25 years left until retirement. Let’s also assume that the $1,000 per year of forgone coffee is invested in our 401k account in a way that averages an annual growth rate of 9% per year. That 9% rate of return per year is an average of course, since the stock market is variable from year-to-year and is certainly unpredictable in the short-term. With that being said 9% per year is a fair average if you’re invested in stocks for 25 years.

Summary: 25 years, $1,000 per year, invested in a way to receive 9% per year (primarily US stocks)

At 65, our coffee money will be worth about $85,000. That means that our coffee habit is really costing us about $60,000 ($85,000 minus $25,000). To make it more impactful, the actual cost of a cup of coffee today is not $3…it’s almost $11 ($85,000 divided by 312 cups per year). That means that every cup of coffee you buy today could cost you almost 3 times what you think it does. That better be a good cup of coffee.

Lastly, factor in a matching contribution from your company and your $85,000 could be worth up to $130,000. Still using a cup of coffee as our currency, that is $16 per cup!

How to Respond

Since we now know our coffee is really costing us $11 or $16 per cup, we’re giving up a lot down the road to feed our habit today. I’m not suggesting to change a coffee habit, but rather a spending habit

The video below outlines a few tips I’ve learned over the years to make a great cup of coffee at home and still capture the morning glory that a cup of coffee brings without the cost of a coffee shop.

Disclaimer: I’m neither a barista nor an actor so bear with me and enjoy!

https://www.youtube.com/watch?v=i7Dsy4-ZqZk

French Press instructions:

1. Find a local coffee brewer and buy a 16oz bag of their coffee beans pre-ground to French Press (coarse grind)

2. Make sure you have a french press maker on hand. If you love coffee, this should be a mainstay in your morning routine.

3. Put about a half of an inch to an inch high's worth of your local course ground coffee into the bottom of the french press beacon

4. Using your tea pot, bring about 30 ounces or more of water to a boil on your stove top

5. Once the water has come to a boil, remove the tea pot from the oven burner and let it rest for about 30 seconds

6. Once the water has rested and come down from the boil, pour it into the French Press beacon making sure you douse all of the coffee grounds as you pour it in. Pour the water to the top of the French Press, or the desired amount of coffee.

7. Stir (aggravate) the grounds/water with a spoon

8. Put the French Press Plunger on top to hold in heat and let it sit for 4 to 5 minutes

9. Once 4 or 5 minutes have passed, slowly press the Plunger to the bottom of the French Press Beacon.

10. Pour into your favorite coffee mug and enjoy the amazing flavors that you won't get from Starbucks.

11. Insert $16 into your 401k account and invest accordingly.

Contact Human Investing with any questions about your investments or savings rates. Or how to make a great cup of coffee.

 

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In Human Terms: What exactly is a 401k?

Don’t you hate it when you’re hanging out with your friends or family and they use a word in the flow of conversation and you have no idea what it means? Well, after meeting with thousands of 401k participants over the years we realize that often times speaking about retirement accounts can turn into one of “those” conversations. That’s why we wanted to start a series of blogs titled In Human Terms. The goal of these posts are simple, to break down financial lingo to its simplest form allowing you to build on your financial vocabulary and create your own glossary.

With that being said, we thought there was no better place to start than asking the question, what exactly is a 401k? Many of us have one today or have utilized a 401k in the past, but there are few who know how it started, what it is, and some simple do’s and don’ts when participating in one.

How it Started

The section of the IRS code that made 401k plans possible was enacted in 1978 and was intended to provide workers with a tax break on their retirement savings. In 1980, the real birth of 401k plans occurred when a benefits consultant took the IRS code and created a simple, tax-advantaged way for employees to save for retirement. From there, different amendments have been made, but 401k plans have turned into the primary tool for Americans to save for retirement.

What it is

Unlike a Defined Benefit plan where the employer promises to pay a defined benefit to retirees who meet certain criteria, 401k plans are a type of Defined Contribution plan, where employees make automatic contributions that are deducted from their paycheck. This money, that is sometimes matched by the employer, is invested at the employees discretion into one or more funds provided within the plan. At a minimum, employees will have the ability to invest in stock, bond, and money market funds. If investments grow over time in employees accounts, the gains are left untaxed on a year-by-year basis until taken out in retirement.

Do’s and Don’ts

Do’s If your employer provides a match, take advantage of it. If you do not know what your match is, or if your company offers one, feel free to call us (503.905.3100) right now! Put together an investment strategy that makes sense for your time frame and check in about every 6 months. If the words "investment strategy" don't mean anything to you, we can help you make sense of your 401k and creating a strategy. We've found that the most successful strategies come from participants who take time to set up a good plan and stick to it. Understand the specifics of your plan. Having a greater understanding of things like vesting schedules, loan provisions, and contribution types, can affect how successfully you invest in your plan and can save you money over time.

Don’ts

• Cash out when you change jobs. Ideally you do not have to cash out a 401k, especially if you are under 59 1/2. The consequences are large. For example imagine you have a $50,000 401k account and you are 40 years old. By cashing out, it’s possible that between the 10% penalty and paying federal and state taxes, your $50,000 becomes $30,000.

• Think of your 401k as a bank. 401k loans can be costly, especially if you leave your company. Before using your 401k for a down payment on a home or to take a trip, give us a call and make sure that there isn't another option.

• Put all of your money in the safest investment option. While not always the case, often times using a money market limits your long-term earning power and puts you in a position where your account is actually losing purchasing power when inflation is included.

Like most things, 401k’s are not perfect. However, if you are looking for an efficient and effective way to save for retirement, they are one of the best tools out there. We look forward to hearing from you soon, if not be on the lookout for the next In Human Terms blog!

 

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You may have more options within your 401k plan than you realize. A large number of retirement plans are adding a Roth 401k feature, allowing for additional flexibility with how participants save for their future.

Similar to Roth IRAs, Roth 401k’s are funded with after-tax dollars and offer tax-free growth and withdrawals in retirement. You may have access to this benefit through your current retirement plan and not even know it. In fact, a study published by the Harvard Business School noted that, in plans offering the Roth 401k, less than 9% of total dollars in the plan were saved using the Roth feature*. Truly, this can be an excellent way for retirement plan participants to save. Check out the comparison below...

All in all, it’s important to know whether or not the Roth 401k option is available in your retirement plan. And if it is, should you use it? Should you save into both the Roth and the Traditional 401k? We understand that these questions (like many investment-related questions) aren't always simple. That’s why we’re here to help you understand your options. Questions? Worries? Doubts? Let’s talk about it.

Reach us at 503.905.3100 or 401k@humaninvesting.com

 

*Sources

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The diversity in the people we work with is one of the main reasons we enjoy going on site and meeting with participants or talking with them on the phone. For the purpose of this post, we want to focus on those of you asking about retirement and more specifically how to turn your retirement savings into retirement income. We often hear questions like: should I leave my 401(k) with my company? When should I start taking withdrawals? Or, now that I won’t have an income, how much should I live on?

“Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?”

Recently we had a conversation with a woman who asked us, “Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?” What a great question! This inspired us to assemble a list of steps that addresses her question and other common retirement transition inquiries. So without further ado, here are 5 steps for turning your retirement savings into retirement income!

Step 1: Consolidate your retirement savings into one location

Whether you’re part of a dual income family or have had multiple jobs with multiple 401(k)’s, chances are you have various retirement accounts at numerous investment companies. The truth is, from a planning perspective and from an investment diversification standpoint, having your assets at a single place can provide simplicity and create the foundation to build a financial plan. Often times, this looks like rolling multiple 401(k)’s into an IRA.

Step 2: Identify sources of income

Once your accounts are consolidated, plotting out your different amounts and sources of income is a key next step. Typically, this looks like aggregating social security income, pension income (if applicable), income from retirement accounts, and other income (a part time job, income from a rental property, etc.). Having this information can provide a good baseline of what you are able to live on per year.

Step 3: Identify lifestyle need (how much are you hoping to live on per year?)

Sometimes people have trouble when the word “budgeting” is introduced to the planning process. So rather than creating a budget, create a spending plan (that sounds much more fun right?). By creating a spending plan, this allows you to look at the money you have coming in vs. expenses going out. By finishing this step, you get to see if your inflows are at a surplus or shortage compared to your expenses.

Step 4: Develop appropriate asset allocation and investment strategy

Okay so you’re here. You’ve done the legwork and now it’s time to invest your retirement accounts in a way that can enhance your retirement lifestyle and help you achieve your goals. A few things to consider when developing your allocation:

• Account for market risk by having an appropriate dollar amount in short term investments (money market/CD’s). This will allow you the flexibility of being able to get through the inevitable down market cycles without having to realize losses of long-term investments.

• Account for inflationary risk by having an appropriate dollar amount of your portfolio in long-term growth oriented investments such as US and international stocks. This creates the ability for your accounts to grow above inflation and fund your retirement for the long haul.

• Address dividend and income strategies that can enhance cash flow. By looking at investing in dividend paying stocks, individual bonds, and other cash flow generating investments, you may reduce the burden that your account has to grow each year to meet your spending needs. Having a combination of dividends, interest, and capital appreciation may be an optimal way to generate return over time.

Step 5: Repeat steps 2-4

Has there ever been a 5 step process that doesn’t include the word “repeat”? By continuing to monitor your income and expenses and making sure your asset allocation lines up with your goals, you are ready to start utilizing your portfolio as an income tool.

These steps are a great start when looking at turning your retirement savings into a plan that can generate retirement income. However, there are many other variables when considering using your retirement savings as income (taxes, how it effects social security, required minimum withdrawals, etc.). Remember that we are here to help and support you through this process. If you have any questions or would simply like to have a conversation about retirement please feel free to email or call anytime.

Helpful Links

• Taxes on Social Security Income

• College Savings Options

Have Questions?

Call Us: 503-905-3100 Email Us: 401k@humaninvesting.com

 

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After watching THE Ohio State Buckeyes take care of business against the Oregon Ducks in the national championship game, as an Oregonian, I was disappointed that Oregon did not have a better showing. However, I was pleased that a better playoff system was in place that provided fans with the two best teams in college football putting it all on the line. A little background for those non-college football fans: 2014-2015 was the initial year of a playoff system that allowed a third party panel to select what they believed to be the four best teams based on analytics and the human eye test (watching the games). The four teams competed in a playoff to determine who the best team in college football was this year. This was much improved from the previous Bowl Championship Series (BCS) system that left college football fans wanting far more clarity, and relied heavily on numerous rankings that utilized very subjective data. The point being, in the BCS system, the college football landscape was looking at information. But maybe it wasn’t the best information.

In a way, this got me to thinking about how retirement plan participants select funds in their 401(k)…. often times using highly subjective data and not the best information. So, in honor of the college football playoff, it’s out with the old and in with the new! Let’s look at three ways to help you make better decisions when selecting an investment in your 401(k) plan:

Short-term performance can be misleading.

While short-term performance history does provide some information regarding the fund you are selecting, what’s more important is how asset classes, US Stocks and US Bonds for example, perform over time and applying that knowledge to the fund you are selecting.

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Understanding how an asset class can perform over a long period of time and the best and worst case scenarios (as shown above) help provide context when selecting an investment. For example, imagine it’s January 1st, 2009 and your retirement account just lost 35% in 2008. All the “noise” was telling you to get out of the market, due to what was happening in the short term. However, if you understood the ups and downs of the stock market and kept your account invested in equities, you benefited by potentially returning a cumulative 105% over the next six years (2009-2014)! All that to say, it’s worth evaluating how markets perform over the long term and not relying on short term information when making investment decisions. Even though we all have heard it a thousand times, it’s always important to note that past performance is no guarantee of future results.

A dollar saved is a dollar earned.

In a recent study, one out of every five 401(k) participants believe they do not pay any 401(k) related fees! There is a very high probability (like 99.9% high) that you are paying fees in your retirement account and it’s definitely worth looking at how much you are paying. If you are utilizing a fund that has an expense ratio of 1.00% or more there is likely an index fund that can accomplish the same goal and reduce your costs. In other words, there are potentially tens of thousands of dollars in savings over the course of your working years if you are able to reduce the costs inside your retirement plan. Need I say more?

Utilize “Set it and Forget it” Investment Options.

Whether your retirement plan offers Target Date Retirement Funds, Constant Risk Models (i.e. Growth, Balanced, Conservative) or both, it’s worth looking into if a “set it and forget it” investment option works for you. For many people, this approach will allow you to be diversified among multiple asset classes, manage your risk, and reduce the time spent managing it yourself.

So whether you want to re-examine how you’re choosing your funds, dig into any hidden fees, or consider consolidating into a “one stop shop” type of investment, we’d be happy to discuss these ideas with you. As a team, we want to make sure you feel well-equipped to make investment decisions, using the best information rather than flipping a coin or using some advice you heard from a friend of a friend (of a friend?). After all, whether you’re a Buckeye, a Duck, or prefer a different mascot, we all want looking at our retirement accounts to feel like winning the National Championship.

Helpful Links

• 2015 Contribution Limits

• Tax Savers Credit

Have Questions?

Call Us: 503-905-3100 Email Us: 401k@humaninvesting.com