Beach bonfires, sunrise sound bath meditations, yoga sessions, and high-level financial discussions on everything from Bitcoin to bonds combined at the Future Proof Festival in Huntington Beach, Calif., last month. .
More than 4,000 wealth advisors and vendors from across the country gathered to talk investment strategies, learn about trending fintech, and eat tacos and ice cream while singing along with Third Eye Blind and the X Ambassadors.
One afternoon, I stopped by the Vanguard Investments tent and spoke with Colleen Jaconetti, Vanguard’s senior investment strategist for retirement solutions. For the past 20 years, Mr. Jaconetti has focused on financial planning and finding a balance between spending on immediate needs and saving for the future.
The following is Mr. Jaconetti’s remarks, edited for length and clarity.
Kelly Hannon: You’re known for your behavioral coaching. What are the main drivers of saving for retirement?
Colleen Jaconetti: The most important thing is to realize that if you want to have enough money for retirement, you need to start saving early and build a low-cost portfolio.
For many young people, it is difficult to extract funds for retirement from their current salary. They are now focused on paying their bills. It can be hard to develop discipline and understand that refraining from something while you’re young can have great benefits. This discipline helps you stay stable when the market becomes volatile, which is the key to long-term investment success.
Part of it is just people’s personalities. I have a nephew who likes to spend money as soon as he gets it. It’s his natural tendency. he is very generous. I’m not criticizing people who spend more money. They want to enjoy life. But getting such people to understand the value of savings can be difficult.
Then the second part is education. I really want to use it now, but I just need to understand that if I save it now, I might be able to retire three years earlier. That makes it more tangible for young people.
This helps you understand the trade-offs of small sacrifices. You need to see where you can make cuts in your budget.
Read more: Retirement Planning: A Step-by-Step Guide
What advice would you give to a young person just starting to save for retirement?
Make sure you have enough money in your employer-sponsored retirement plan to at least match your employer. Many employers will contribute anywhere from 50 cents to $1 for every dollar an employee contributes, up to 3% or 4% of their salary. Ideally, workers should aim to save 15% of their pre-tax income, including matches, each year. Giving up on matching with an employer would be a huge disadvantage to you.
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Did you have any problems with storage when you first started?
No, but I remember exactly how much I made every other week when I started working as a senior auditor at Ernst & Young in 1994. The first time I paid for my apartment and insurance in full, I thought, wait, where is it? Will my money go?
Once you realize where your money is going, you’ll see that even small increases in your retirement savings can make a big difference later on.
Vanguard has been at the forefront of the movement to help people roll over their 401(k) savings into IRAs and avoid cashing them out when they change jobs, a mistake I made at age 30. Could you please elaborate on that issue?
Some people say, “Oh, it’s not that much money, I want to buy a house, so I can take the cash right now.” But you won’t get that money back, and you’ll be giving up more than 20 years of tax-deferred investing and compounding, which is a lot of money. When I show people how much it’s going to be worth in the future, they usually say, “Wow, I had no idea that that amount of money today would add up and be worth this much in the future.”
What should you do if you are not yet retired but are inching towards retirement?
This is the time to put together the big picture: what you want, how much you need, and the best way to minimize your taxes.
The most important thing is what you envision doing after you retire. Some people like to garden or read books, while others travel two or three times a year.
Think about how much you need to retire and live the life you want. How much Social Security can you receive? Can you afford to delay receiving your benefits? Next, you need to consider whether you should spend it from a taxable or tax-free account.
Colleen Jaconetti is a senior investment strategist for retirement solutions at Vanguard. (Photo provided by Vanguard) (Vanguard)
Let’s talk about the concerns people have about spending in retirement.
Many people approach retirement with numbers in mind. I need $1 million to retire. Whatever it was, they decided to have a number.
If that happens, you don’t want to spend money from the principal after you retire. Therefore, they head into retirement with a broadly diversified, low-cost portfolio. After everything is in place, you look at the current yield and suddenly realize that you don’t want to spend your principal.
As a result, they heavily weight their portfolios toward high-dividend stocks and high-yield bonds to generate the income they desire. But what they don’t realize is that they may actually be putting the value of their principal at risk more than just using it.
When thinking about retirement spending, don’t focus too narrowly on preserving your principal and forget about diversification.
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What spending solutions can alleviate people’s fears of running out of money?
Dynamic spending. Although responsive to market performance during the year, year-over-year spending is kept within a range to provide some stability.
For many retirees, our dynamic strategy offers the best of both worlds. Respond to market changes without causing large fluctuations in annual spending.
This strategy allows you to set controlled maximum (upper) and minimum (lower) spending limits. Retirees can increase spending when the market is performing well, and reduce spending within limits when the market is performing poorly.
Let’s say a retiree starts a $1 million portfolio with 60% U.S. stocks and 40% U.S. bonds. Using a 4% initial withdrawal rate as a basis for comparison and assuming 30 years of retirement, you start with an annual income of $40,000.
Dynamic spending allows retirees to receive more income, say 5% or $42,000. In real terms, this could translate to enjoying a higher quality of life, but by their definition, it means traveling more, having more ability to donate, or perhaps helping your family financially. It’s about having more means.
If poor performance continues over a long period of time, real spending may decline year after year, especially in the early years of retirement. In other words, your real expenses could drop to $39,000 in year 1, $38,200 in year 2, and about $35,000 in year 5.
Having the flexibility to cut back on small expenses in weak markets and spend more in strong markets is an attractive strategy for many retirees.
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Kelly Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and author of 14 books, including In Control at 50+: How to Succeed in The New World of Work and Never Too Old To Get Rich. Follow her on X @Kellyhannon.
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