We're Talking Money - Retirement Planning Blind Spots

Hey everyone, it's Phil Clark from OmniStar Financial Group. It's time for another edition of We're Talking Money. Thanks for joining us. We got a lot to cover today, a new show on the common mistakes in retirement planning.

Dustin Hocken, OmniStar Financial Group. We're excited to be talking to you. These common mistakes, they come up all the time, so this should be very relevant for everyone. We have ten of them. We're going to break them up into three per for the first two episodes and then four for the last episode, and stay tuned, and we're excited to share this with you.

Wealth can be measured in many ways. As it grows, life can quickly become complex, creating the need for more focused planning. Welcome to We're Talking Money with OmniStar Financial Group. OmniStar has been helping clients achieve financial success for more than 20 years in a client-centric and stress-free environment, with a reputation built on a long track record of working with people who want to grow and protect their assets. OmniStar illuminates the blind spots, provides actionable strategies to help you achieve what's most important. This is where you can count on straightforward and unbiased advice from a team of professionals that are passionate about your success.

All right, Dustin, we've got a great show. As we said in the pre-show, we're talking about common mistakes in retirement planning. I think that there's more than ten. We're going to talk about 10 that we hear a lot, and so this is feedback from clients that we've worked with for years. These are common things, but it's amazing to me, Dustin, they get overlooked. And sometimes these, really in a lot of cases they're simple things, they get overlooked and they can cause major, major problems, and you typically figure it out when you're close to retirement, it's too late to fix it. So we got a lot to cover today. Educational for sure, but these things are easy to overcome. If you're not sure how to do it, we're here to help.

Absolutely. And keep in mind these aren't in order, so number one isn't the most common. And some of them are very simple, but some of them you have to think about a little bit too. And if you were just on the outside looking in, you may not realize that you are making a mistake until you really get down deep, start peeling back the layers, start crunching the numbers.

Our number one common mistake for retirement planning is to not save for retirement ahead of saving for children's education. And it's very common. It happens more times than you would think. And as you think about it, it does make sense why it is so common, because you want to do something for your children, you want to set them up. Me personally, I had to take out student loans. I didn't have a lot of help, and I tell people all the time, it would have been so great to have some help. To have anything there is really powerful.

And I think sometimes people get in their own way because they have this goal of saving for college and they want to, it's full right or nothing. I got to save 30 40 50 000 per year for four years; if I can't do that, then I don't feel like I'm helping out. And I always just say, look, anything that you can do is going to be helpful, because you don't want to delay your own retirement savings for your education plan.

It's a great point, and I suppose if we, to use your term, peel back the layers, if we look at it, if we peel back a few of those layers, why is it that people get so caught up in planning for their child's education before they start planning for their retirement? Well, their retirement, on the average, it's a long way from happening compared to their child, who might be two, three, five years old. Maybe they only have 15 years before the child goes to college. And what do we hear about all the time? College cost going up. Friends, neighbors: here's where I went to school, this is where I want my child to go to school. And sometimes the parent can get caught up in that, and so they start putting more focus on education planning than they do on their retirement planning.

And a lot of that is because they have this idea or this notion that they don't want their kids to have any debt when they finish school. I don't want my kids to be at a disadvantage when they come out of school. That's a noble way to think. It's a wonderful way to think. It'd be great if every parent could do that. But the fact is your kids are going to be educated, they can go to work, and if they have to, they can pay for those college debts, if there happens to be some.

What a parent should never do is save for college without some kind of planning and saving for your retirement, because as you miss those years of savings, you get further and further behind, and as you do, it's really, really hard to catch up. Most people don't have the wherewithal to catch it up. So I think a lot of it's because it's so far away. They're thinking more in terms of what they can see, and seeing college is much easier to focus on versus thinking about retirement that might be 40 years from now, maybe, if they're going to work to age 65. So I think some of that probably plays into it. And maybe it's not a mistake for everyone, but I think it is a general mistake.

Those are great points. And the piece that you have to think about, when you think about debt and interest that you may have to pay back versus interest that you earn, or compounding interest that is coming to you that you're going to earn for the rest of your life, those are really, really important, and they're vastly different in terms of value add. So you think about student loans. Yeah, it stinks if your child has to pay student loans. It might take them 5, 10, 15, 20 years to pay off. But you have to remember, the interest isn't the worst interest in the world. It's tax deductible in most cases. And then after that 20-year period, let's say, then that interest is gone. Whereas if you're saving for retirement, you start putting those dollars to work, that interest is going to compound for the rest of your life. So it's not just 20 years, it's 30 years, 40 years, 50 or 60 years. So it's very, very different in terms of interest working for you and then interest working against you.

Last thing I'll say about that, such a great point: don't forget to save for your own retirement. Don't let planning for college get in the way of that. And if for no other reason, remember mortality rates continue to lengthen, to expand. People are living longer. Retirement assets have to last longer, and the need is growing. And so if you don't start saving, you could be behind the eight ball. You could really find yourself in a position where it's too late to fix it, or it's going to cause you to sacrifice more and more and more throughout some of the better years of your life. You may have to pull back more than would have been necessary. So don't forget, you're going to live longer in retirement. All the more reason to start saving early.

And that brings us to our number two most common retirement planning mistake, and it's not taking advantage of compounding interest. So exactly what I was talking about before is, even in the early years, if you don't feel like you can save a lot, as long as you can start saving something, it's going to be powerful, because as those years compound and compound and compound, it is extremely, extremely powerful. Our clients are wealthy people that you may know. They're not that, generally they don't become wealthy overnight. It's just years and years and years of saving, and just doing consistently, having that money being invested the appropriate way. But over time that compounding just stacks and stacks and stacks and stacks.

No doubt about it. To your point, Dustin, you're talking about compounding interest here. Albert Einstein called it the eighth wonder of the world. And compound interest, a lot of people don't realize how powerful that is, but it's so powerful. And when you think about money earning on top of money versus simple interest, the difference is tremendous, but a lot of people don't take advantage of that. So when you start thinking about your saving program for retirement, the longer you wait, because of the loss of compounding interest, you are going to find that the end result is going to be drastically lower than what it could have been. So if you just started saving five years sooner, the amount of money that you would have at retirement, significantly more. We're not talking about a little bit.

In fact, Dustin, we've always given this analogy of save now from, say, age 25. So as soon as you can start saving, that's the right time to save. The minute that you can begin to put money away, as soon as you go to work and you've got excess money, save it. Make something, make something be for you, make something be part of that retirement plan. Person that saves from 25 years old to 35 years old puts in, say, two thousand dollars, or let's say ten thousand dollars a year, for those ten years, they've put in a hundred thousand dollars. If that person never saves another dollar, versus a person that waits till age 35, starts saving the same 10 000, the person that waited until age 35, you'll need to save until you're 65 years old, that same 10 000 per year, and you'll still have less in your account than the person that only saved for 10 years from 25 years old to 35 years old. They'll actually outperform you in terms of total assets.

That's incredible, but that's compound interest at its finest. So it's very, very powerful. And one of the, I guess one of the activities I would say that I like to do on my calculator is just showing compounding interest and the power of saving early. So just another example is, let's just assume that you can save a thousand dollars a month, okay, today, a year, twelve thousand dollars a year. And again, you can take off a zero or you can add a zero, wherever you're at. So twelve thousand dollars a month, let's assume that you get an eight percent rate of return. So nothing crazy, just an average rate of return in the market. So we're gonna get eight percent there. We're going to start off with zero dollars, and we're going to save for 40 years. So just the 25-year-old example: you're 25, you can save a thousand dollars a month, eight percent rate of return, for 40 years, at age 65 you'll end up with 3.1 million dollars in the account.

Wow. 12 000 a year.

12 000 a year, 40 years.

40 years, earning 8.

Okay, so where the rubber really meets the road here is when you do the flip side. So let's just assume that maybe it's student loans, or maybe it's something else that you're paying off, or you're saving up for something else. You're not going to save for five years. So now we're gonna wait until you're 30 to start saving, and not to say that you shouldn't start saving at 30, because you should. But instead of 40, we're going to go 30. We're going to save the same thousand dollars a month, same eight percent rate of return. The only thing we're changing is, instead of saving for 40 years, we're saving for 35 years now. So instead of starting my savings plan at age 25, I'm going to start it at age 30.

Five years, same amount of money? Yep, same 12 000 a year. So we're going to give up five years? Yep. Okay, eight percent rate? Same eight percent rate of return. Instead of that three point one million, now you have two point, about two point one million dollars. It costs you a million dollars, a billion dollar mistake, just for those five years. So you think about that, 200 000 a year is what it costs you.

Yeah, so the example I always use is, I don't know how much interest you may be paying if you're trying to pay down debt before you start saving, but I can promise you it's not going to be 200 000 a year worth. Folks, that's a lot of money. So keep in mind, if you are delaying your retirement planning or you're delaying your savings towards retirement planning, don't delay anymore. Compound interest is so important, so, so important. Delivers a tremendous advantage. If you're not using it or taking advantage of it now, shame on you. Get started, you're going to need it.

Absolutely. And this next common mistake that we see, it really falls into the compounding interest, because this mistake that we see, if used properly, is the easiest way to save money and the easiest way to start compounding interest for the rest of your life. And this is the number three mistake as we see, is people not taking advantage of their 401k as well as they should be. So whether it's not taking full advantage of the employer match, not contributing the maximum that they need to be contributing into, or maybe just not increasing it year after year after year. These are things that you just, you want to make sure you have an understanding of what you should be contributing, what you need to contribute to get the maximum match, and then just make sure you're doing that, because you're leaving free money on the table.

Yeah, Dustin, it comes down to some simple things. One, it's priority. So you've got to decide, do I want to save for my retirement, and is it important? And once you make it important, you realize you're going to need it, then you'll do it. And so I'd like to just remind everybody, one, if your employer has a 401k, to Dustin's point, it's free money. So if they're going to give you a match, why would you do anything except put money in that plan so you can get the match? Number one, that is free money. That's in addition to what your employer is paying you in compensation or benefits. That's a perk that comes over and above those things.

Here's the other thing that I often say to people when we're in enrollment meetings, when we're in a workplace talking to employees. It's, where can you find a hundred percent rate of return on your money overnight? Where can you do that? And the fact of the matter is you can't. There's no investment that pays a hundred percent immediately. If your employer is giving you 100 match, that's 100 return on your money before we talk about what you can earn in the markets. So don't underestimate the power of that to double your money literally in the blink of an eye. That should make everyone listening check their 401k, make sure you're getting every bit of what the employer is willing to give you. Don't miss that money. It's free. Don't miss it. It's incredibly powerful.

Absolutely. And what we see sometimes is people, they're contributing but they're not contributing enough. So maybe if, for example, if you put in three percent, they're gonna match you three percent, 100 up to the first three, but then maybe it's fifty percent match on the next two percent you put in. People will just stay at that three percent, which is okay, because at least you're taking advantage of some of it. But even to get a fifty percent rate of return immediately on that next two percent, that's really, really powerful to make sure you have that.

And a couple other things, just to go a little bit deeper into the 401k, because it's such a powerful tool, is make sure you talk to your HR, make sure you know what you need to contribute, make sure you know what the investment selections are, make sure you're invested properly, because that can be a game changer too. We see some people sometimes too conservative in their 401k when we're not going to touch the money for 2015, who knows, we're not going to touch the money for a while. We want to have a lot of stocks in there, we want to get the compounding interest going.

The other piece on the 401k I would say too is, not all employers, and it's actually pretty rare that employers will have this, but having the Roth option. I don't want to go too deep into that, because really we're just talking about just the 401k and just not taking advantage of the match. We'll talk about that a little later, but the Roth portion is something you definitely want to be taking advantage of too.

Yeah, there's no point in wasting what could be a potential opportunity. And the only way you're going to know is to ask your HR folks or the advisor on the plan, whoever it may be. Don't be afraid to ask. These questions are good questions, and the more you know about your plan, the better that plan can serve you. So whatever your questions are, don't think that they're a dumb question. A lot of folks won't ask them because they think, oh gosh, my question's stupid and no one wants to hear it. Ask those questions. This is the rest of your life money. These are big blind spots that can cause you a lot of problems if you don't know the answers. So don't let these blind spots derail what could be a great retirement. Just be sure that you know what your plan offers. Take advantage of it, get the match, take advantage of Roth, whatever the things are that are most appropriate for you. If your plan offers it, take advantage of that.

And then lastly, I would just say, as we start to wrap up today's show, we'll start with these three common mistakes. We'll come back next week and we'll talk about the next three or four, and then maybe we'll round out the last few on the third show and pull it all together and maybe even show some examples. But the one thing I would tell everyone, these may or may not seem like common mistakes, they may or may not seem like difficult things to deal with. They might seem easy to some and more difficult to others. If you're not sure what you need to save for college for your kids, retirement for yourself, if you're not sure that you're on track, reach out to whoever you work with as a financial person, financial advisor, CPA. If you don't have one, we'd be honored to talk to you. Reach out to us, email, phone call. We're more than happy to help. We're a resource. You can find us on social media, you can find our website, omnistarfinancial.com. Feel free to check us out there. And if you've got questions and no one to turn to, let us hear from you. We'd love to help.

Absolutely. Yeah, good.

Well, we appreciate everyone joining us today. It's another great show. We're looking forward to bringing you the rest of this story, and we hope you enjoyed today. Stay tuned and we'll see you next week.

Thanks for joining us on We're Talking Money. Be sure to visit us at omnistarfinancial.com, where you can learn more about how we provide value to our clients. Subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

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