PODCAST EPISODE 236: “Big Changes” Small Differences

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Paul 0:09

Hello, welcome to your business your wealth. My name is Paul Adams and I am joined once again today by Mr. Corey Shepherd. It’s been a couple of weeks he is back in the supervision chair, as both my business partner, show co host and Chief Compliance Officer for sound financial group, which is one of the things that makes him most nervous is having me alone on the podcast. He has to listen to make sure I didn’t say anything to untoward. But, Cory, I’m glad you’re back.

Cory 0:38

I am, I am too. And at least at least I know it’s mutual self destruction, like I might be going down, but you’d be going down with me. So that’s where I held back a little bit.

Paul 0:50

Well, we’ve got we’ve got some fun things to review with you guys. Today, we’ve got three big articles one having to do with the changes on your 401k. Next is actually a bit of an article follow up from a couple of weeks ago, where the fidelity report came out and talked about the higher income you are the lower replacement rate you need. And we’re just going to talk about that a little bit as it relates to the importance that for you as a high income earner, what you set aside, the article might make you think you have an easier job, but it might actually be more difficult. Well, we’ll cover that. And then last but not least, we are going to totally lambaste an article that is absolutely clearly

Cory 1:27

silliest, silliest, silliest article from Apple news. So silly. They wouldn’t even let me open it on my PC.

Paul 1:34

And that’s how silly it is. And it is, it is great insight into how we can get some interesting stuff from news articles. But we really have to think through implementation. And is this article written for me and all the more important to have a coach and advisor that’s co piloting your financial future with you, or helping you navigate it at a minimum? So with that, Cory, are you ready for our first one?

Cory 1:59

I’m ready. All right. So

Paul 2:00

our first article is big changes coming to your 401k. And here’s what you need to know, from CNN business. And like we’ve been doing the last couple of weeks, we called out some important quotes from the article, rather than just scrolling all the way through it to talk about some of these changes. Now, one of the first is automatic enrollment in what would be the largest change to your 401k programs secure 2.0 would require employers to automatically roll all eligible workers into their 401 K plan at a savings rate of 3% of salary. So since

Cory 2:32

this is we’ve had auto enrollment light for about 20 years. This is auto enrollment heavy. Says like going from Bud Light to bud heavy.

Paul 2:41

Yes, exactly. Well, and it’s, there have been some good studies that have pointed this really working well. One of the often cited studies is actually I think it was out of New Zealand, when they started making people opt out of their organ donor card. And by opting out, instead of opting in, they found that organ donation checkbox on the driver’s license went way, way up. And they’re noticing the same thing with 401k plans, and they find it helps the lowest income people the most. Although I think time will tell whether or not the folks that are auto enrolled actually keep their money invested, and it actually translates to more retirement income for them.

Cory 3:24

Now, I will say, it probably ends up better than nothing. The only concern I have is that people not think that 3% is enough for most people, like they’re just like, Oh, it’s a three. And and of course it automatically goes up each year to assert I forget with 10. Yeah, so 10 is 10 even enough for a lot of people

Paul 3:48

will answer would be no.

Cory 3:51

But it’s better, better than nothing, I think step in the right direction.

Paul 3:54

Indeed, indeed. Well, that brings us to the next topic of the article, which is that pre retirees get the chance to save more, which I was pretty hopeful about when I started reading this section. But as you get into it, the ketchup contributions just for people ages 60 to 63, and 64. So three years, can increase their ketchup contributions to 10,000 year up from 6500. Now, beginning in 2023, these catchup contributions would be taxed as Roth contributions, meaning they be taxed before being invested for retirement, the earnings would be indexed for inflation. Now, this is a little bit of where even a good article with some good information can get things wrong. I think what they’re supposed to say here from what I’ve read on this bill, is though contributions would be indexed for inflation, because the 401k doesn’t control your income. Right? But then there’s this next part and there’s a financial advisor Sri Reddy is his name. He’s with Principal Financial some We’re in their retirement department that creates retirement products. He wrote people generally earn more as they age says Ready, and people in their 60s are typically earning more than they spend. Giving them the ability to increase their contribution makes a huge difference in retirement savings. Y’all. That end of that quote, right, there is the biggest pile of bull manure I have seen in an article short of outright like. And here’s what I mean by that. This is again, good information, mostly factual other than what appears to be some Scribner errors in the writing of the article. But we got to keep in mind these folks are at these financial writers especially have these deadlines and article after article, they have to get out sometimes multiple a day. And so they may not put much thinking into even who they quote, but $3,500 extra you can save per year for three years is not going to make a huge difference in retirement savings period. But they’re happy to kind of couch it like it is because it forwards the conversation for one of their key products in this case, for principle is their retirement accounts.

Cory 6:17

It’s not just 50 and over, it’s just for those three years that they can do more. That’s yeah, that’s that that’s really weird.

Paul 6:27

But it again, it’s some benefit to some constituency, which is half the battle for politicians. You know, what, what can we get past that helps some group and doesn’t make any other group too mad. So back to our next one, you can pay off student loan debt while saving. Now I’m going to have to move our video hear a little bit hopefully getting the rest of this quote and pay off student loan debt while saving employers could treat students so this one is optional. Now remember, it said you will have to enroll the employees. But this is an option for employers. Employers could treat student loan debt repayments as elective retirement account deferrals and provide a matching contribution to their 401 K’s. So if you paid off 1000 in student loan debt, it would be the same as putting 1000 into a retirement plan. As far as matching goes. Now what I highlighted in yellow, this next line is another one that’s just a financial journalist whose primary training is probably not impersonal or macroeconomic finance, it’s probably in journalism of some sort. If a company matches by 6%, that’s an extra $60 in savings, that is not how 401k matches work, they always match a percentage of what you put in 100% match to 3%, and then 50 cents on the dollar for the next three or something like that, or might be 50 cents on the dollar for the first 6% of your deferral. That would mean this would be an extra $500 contribution you as an employer would have the opportunity to make if you wanted to add this provision your plan. And and by the way, this, this plan has only gone through Congress so far, it still has to go through the Senate. But you’ll notice these provisions were walking through here unless somebody makes it part of a bigger omnibus package, the risk of making a lot of people mad, this isn’t going to make a lot of people mad, it’s mostly increasing some benefits. And for those of you out there as business owners, we’re always wary, certainly as business owners, what are these new programs going to cost us in terms of additional administrative overhead, it will do that. But in reality, there’s probably nothing in this bill that puts people in a position that they’re going to get massive opposition. No.

Cory 8:43

And here’s the weird part about how this is structured in the article. If you’re already Max a maxing out your 401 K or you know, putting $1,000 A year only into your 401k, then this would just be Oh, I could switch that. So it pays down my student loans. And I’m not sacrificing my match. So it’s not really extra dollars if you’re already doing it. And if you’re not already doing it, then you gotta go find the $1,000 in their example. So it’s even more money that you’re putting away that you weren’t so it’s, it’s nice, but it’s not like shocking me of like, oh, this is going to change everyone’s life. Yep.

Paul 9:24

That’s exactly what I feel as well. All right, here’s another one that’s going to delay the penalties.

Cory 9:31

It’s like a rerun a Seinfeld. That’s what a lot of this is. It’s like, it’s great. It’s comfortable. It’s fun for a few few minutes, but it’s not like it’s just my mind was blown years ago. And I’m remembering that but it’s not like really blowing my mind.

Paul 9:45

Indeed, yes. Americans are retiring later and living longer. So during the COVID Cares Act, they moved the required minimum distribution age out to age 72 from 70 and a half. they’re proposing In this that they would move it out to 75. And that they would drop so required minimum distributions or as I like to call it, the sword of Damocles hanging over the head of every retiree with a retirement plan. That sword of Damocles got went from a 50% penalty to a 25% penalty. So probably a good thing, I still don’t think people are gonna go well, it’s only 25 I won’t take my required minimum distribution, they’re still gonna take it. But still, but at least the sword of Damocles is perhaps slightly more dull than it was prior.

Cory 10:34

Well, it gives everyone a few more years to time to think about repositioning assets that they’re not backed into a corner with too much forced minimum income, which we also call these Yeah,

Paul 10:47

yep. Now, here’s another one that I think will kind of last quote from this article, I think we should really get some people’s attention. And that is, under the proposed act, companies that offer a 401 K plan will be required. So this is again, a required thing to allow part time employees who work at least 500 hours a year for two years, a little under 10 hours a week to contribute to a retirement account that would include part time workers, gig employees, freelancers, caregivers, and independent contractors. Now, I don’t know what kind of administrative mess that’s going to be. But I think big. And here’s why I think it could be a big administrative mess. Imagine right now that you have something like a podcast, and you pay contractors to work on that podcast and you pay some video people to work on the video, that if they put in over a certain amount of hours, are we going to be required to put those people inside of our company’s 401k? I don’t know. But it increases the administrative overhead. And the thing that I think is potentially a big legislative error about this just talk a little bit of politics is the reason many people have independent contractor relationships is because they want to do some of those things on their own SEP IRAs, etc. They want their freedom and autonomy to work when it works for them, etc. If we put them into a position that they had to, we’re required to participate in our 401k we might actually be messing up some of their own retirement plans. That’s kind of the first thing jumps out to me not to mention how much more work do we have to show that we’re compliant giving our employees the right to participate in the 401k. So if anybody wanted to be upset and send a note to their representative about any provisions of that, that would probably be the one that I would point to that’s probably going to create the administrative headache is the part time compliance and the potential to have to include independent workers and gig economy workers. Yeah. So yeah, right. Are you ready for the next one? Cory,

Cory 12:52

I’m ready. So JC,

Paul 12:55

this is going to pick up on what we talked about a little bit of a couple of podcasts ago, go, where fidelity did a big report about how much money it’s going to take for you to be able to retire what the replacement rates are going to be? Well, JP Morgan came out with a more thorough study of it, showing how much you need to replace as a percent of your income. Now, for the sake of our conversation, the only thing I extracted out was these different retirement savings rates. And Cory, I can’t even get us off the screen for this one. So I’ll just cover up our $30,000, folks. So we’ll just start at 60,000. If you’ve 60,000. In pre retirement income, you need a replacement rate of 93%. So one way to easily think about this, you see it dropping, the more income you have is that you likely have more surplus in your life today while working surplus and margins loan you give allowing you to save, allowing you to do some home improvement projects, etc. That you have to replace a higher ratio of your total income. The lower your income is. Because

Cory 14:03

the lower it is, that’s the less negotiable those spending things are.

Paul 14:07

Yes. Easiest way, I think to explain it. Exactly. Yeah. So once you get

Cory 14:13

free, but like we can go on for for now. Yep.

Paul 14:16

So, and this is where I think some of that disagreement comes from Cory is if we look at, I’m just gonna go to our next quote from the article here. And you can see that when you get up around 300,000 of income, which is where a lot of our clients are there and above. So you have 300,000, it’s a 72% replacement rate. Now, there’s a couple of things that makes that 72% a lot harder to hit for you. If you were the person who’s making 60,000 a year, you can do some social security calculator estimates and what you’re going to find are things like you know, you’re going to have $2,000 a month. So but your your or income of 60,000 of that portion that you need to replace about 90%. A good chunk of it, maybe $2,000 month is going to be replaced by your social security. And yet, the $300,000 income isn’t going to get anywhere near that kind of replacement rate from Social Security. So you have to be responsible for effectively all of it when you are at that level of income earning.

Cory 15:28

And what I’m hearing, basically, the thesis of this article is, the higher your income level, the bigger drop down in lifestyle, you’re going to be okay with when you retire, like, right, like 100,000, it’s saying, Oh, well, you won’t, you’ve been living with this kind of car and keeping this kind of house and all this, but as soon as you hit 65, like most of that stuff, you’ll be okay doing away with and it’ll just be basics.

Paul 15:58

I actually think it comes more from the fact that people in their later years pre retirement making good income, save just a much larger portion of it.

Cory 16:06

Okay, that I that I would be okay, because you for saving 30%, then you don’t need that replacement. But indeed,

Paul 16:14

but now, if we look at that, in that article, The 300,000 requires a replacement rate of 72%. So that’s about $216,000, do want to double check, I did that right? My head Cory 72% of 300,000, I think is 216,000. Cool, nice. This is where I need a button that I push that goes, Paul, you’re right. Maybe in corps voice. Miranda, if you’re listening, just show up show notes. So we compete together from other things. Cory says in meetings. So but but the idea is you’ve got to come up with $216,000 to replace your income to under 16,000 a year. Now in simple capital at work, that means about 5.4 million of capital at work outside of your home. And that is a lot more difficult for you to build up, then perhaps if I go back to our lower income rates, if let’s go to our $60,000 person that has to replace 93%, well of that 93%, that’s going to be about 55,000 ish of replacement. But of that, if 24 of that is handled by Social Security. And now you just have to have 20,000, that’s like half a million or maybe just paying off your house and doing a reverse mortgage would be enough. And so the moral of the story I’d want people to take away from this article, and all these articles, of course, are right in the description go right to our webpage we have all listed out so you can read them yourself. I think too many people might read that article, Cory and go down the path of, well, I’m gonna be, I’m gonna be okay. I don’t have to save as much as a percentage of my income because I’m high income. It’s like, oh, it’s it’s a lot bigger lift that you have than the person making $100,000 a year. Hmm. Now for our sacrificial Article of the day. Oh my gosh, the one, the one that I think we should put on the altar and set fire to

Cory 18:33

I love by the way that I sent this to you on my iPhone, and then tried to open it from our shared set of links on my PC and couldn’t even get into Apple news. Like they didn’t even have a way for me to get into it. In just for me personally right now.

Paul 18:50

Well, my one, go ahead, read it off. I want you to write

Cory 18:56

five lessons to take from millionaires who are really good with money

Paul 19:01

now by just hearing your article title because I see a show up and a feed and Microsoft Teams that Korean Miranda and I share. And I was like hey, this like this might be kind of a banger little article to go over? certainly sounds like it in the title,

Cory 19:16

right? And I’m thinking, Okay, who are the people that they’re going to reference because being a millionaire, actually doesn’t mean you’re necessarily really good with money, because there’s some people who can really earn money, but they’re really bad at doing anything with it afterwards, or they’re good at doing stuff. They’re bad at accumulating it. So there’s no no people’s names in here. No reference of who these mysterious millionaires are. The first thing

Paul 19:46

I was gonna say, right before you hit the first point. I gotta jump in with this. This first like two sentences, life would be a whole lot easier if somebody would just Venmo us 1 million by the way. Probably not. If you don’t, if you didn’t accumulate the million for most people, if an extra million dropped in your life, and you did not have the capacity to accumulate the million on your own, it wouldn’t help you, when there’s been more than enough studies that would absolutely damage you. But unfortunately, the chance of that happening is it well, probably zero. Mainly because Venmo doesn’t allow transactions at large anyway, in quotes, are in parentheses. But even though our chances of becoming a millionaire are slim, we could still manage our money like one now, I’m going to start right there. In today’s world, the only thing that’s gonna stop you from becoming a millionaire is you and your spending habits. We have countless countless examples of people working very regular jobs, non high school educated, who end up retiring perfectly fine and leaving their kids millions and millions of dollars all because they made simple decisions, say no to certain lifestyle expenditures over long horizons of time. And when you read something like this, it will, it will cue you in immediately that this article is not written for you, at least not you, the you that’s listening to this podcast. Because the things that we talked about on this podcast generally deal with people and households have higher income. And so if you’re hearing that as like, ooh, that resonates with me, then I just got to tell you, this probably isn’t your podcast? Because will tell you that is totally in your control. Okay, cool. Thank you. That was my my small rant, or you go into the first point. Yeah,

Cory 21:35

well, and I think I’ll stop, I’ll wait on a point that I make at the end if we talk about these. So number one, spend $10 to buy an apartment building. So what is this, it’s actually an affiliate link to a company called Fundrise, where you can have fractional shares, real estate, so you can put $10 in and own a little bit. It’s kind of a mutual fund for real estate at the end of the day. So they’re saying, Oh, well, people get wealthy investing in real estate, so you could invest in real estate. Okay, there’s, there’s another one down here that this is going to have in common with, but I

Paul 22:16

was gonna say, by the way, there’s no millionaires. That did it by investing with groups of other people that just had $10, except for maybe the founders of fundraising. Right? They didn’t do it that way. We’ve talked on the podcast many times, if you treat real estate investment, like you would business ownership, you’re gonna have the greatest likelihood of success. But that means you got a lot to learn, because of how much your human capital really matters in that transaction, where it doesn’t matter that much when you’re buying a CD at a bank or building a portfolio. So sorry, Cory, where were you going next?

Cory 22:48

Well, next is canceling your car insurance? No. No, I assure you, anyone who has a lot of assets, either real estate and or investment has done something to protect, like they’re protecting those assets against the things that they can’t control. So they’re not canceling their car insurance, but what it actually is directing you to as another affiliate link, for insured nation, it’s really changed your car insurance, save money on your car insurance, and they say this website could save up to 500 a year. Well, the target market for this article probably isn’t already paying $500 A year total. And so how can they actually save that much? And you know, paying as little as 19 a month for car insurance, that’s it’s gonna save you a little money, but it’s not it’s a drop in the bucket and the grand scheme of accumulating those millions pay off your credit cards is number three. Well, but it’s not it’s sign up for this service called Fiona that can help you pay off your credit cards. It’s really just refinancing your credit card debt,

Paul 23:53

more affiliate links, regard Are you into being able to transact with the penny hoarders affiliate relationships

Cory 24:03

and there’s plenty of studies that if people that people have been doing this with home mortgages for a long time, equities grown in their home, you got this credit card debt, we’re gonna roll it all into a smaller interest mortgage spread out over 30 years, you can help Well, without addressing whatever got the credit card to build up in the first place. People are right back in the same spot within a few years. Absolutely. earn up to 25% interest by investing in art. Oh, my

Paul 24:35

goodness.

Cory 24:38

So masterworks another affiliate link. This is not real estate this time, like Fundrise. It’s multimillion dollar works of art. I just think and they say you can buy shares of these artworks for as little as $20. Well, I would say If all you’ve got kicking around is 20 bucks left over at the end of the month to do something with buying art should probably not not be it?

Paul 25:02

No, here’s put it down that credit card debt from

Cory 25:06

this, right. So this was the parallel that I was going to draw. They’re talking about doing things like millionaires, but I think that there’s foundational principles and lifestyle choices of millionaires and there’s foundational principles that happen first. That then lead to the ability to do things like invest in art have some excess capital, because I think most of the people like if it’s a multimillion dollar artwork, you had to have done something to get the capital together to start investing in that artwork. No one did it by buying $20 worth of one with a bunch of other people. Absolutely. Absolutely. And then last, and even I can’t even Paul, you.

Paul 25:50

Okay, guys, if you’re not watching the video online, you’re not even gonna believe when I say this, boost your bank account by playing bingo is the fifth step. So I guess there’s some app called bingo cash, that you get to play bingo with your spending. And it’s like, one, maybe me I mean, it’s like playing the Credit Card Points game, except no Millionaire is telling you anybody to do this. It is the and by the way, these articles are floating around out there. And I don’t just mean from the Penny Hoarder. In this case, I think this is I should be careful. I don’t know if the Penny Hoarder is written by a man or a woman. But when you write an article like this, they should spell hoarder different, like with a W in the front, because you’re basically taking your entire audience, and you’re just totally monetizing them to say, you could be like a millionaire do these things like there is no millionaire wasting their time playing bingo, with their cash spending. at all, unless they happen to be so wealthy, that they have nothing extra to do with their time and they’re tired of Words with Friends, then maybe they would do. So, but as you guys look at this stuff, and we’re analyzed, because one of the things we want you to take away from today’s conversation is a whether you’re a business owner and executive things are gonna change in the 401k, probably in the next year. And you’re gonna have some things your company that you work for, or your company, if you’re the owner, you’re gonna have to navigate around like, what do we do about these part time employees? Do we want independent contractors? What are we going to do a student loan payments? For those of you that are clients of ours, we’ll be talking about those things as the new regulations roll out. Second is that you still have a lot of work to do as it relates to building up enough retirement assets. That even no studies show that you as a high income earner north of 300,000 don’t have the same replacement rate. You know, our clients that make over a million dollars a year, most of them are planning on retiring on way less than the million dollars a year, but they still have to set aside a really big chunk of money. And you’ve got a bigger headwind of taxes on your earnings to deal with along the way. It’s more of a reason to Tilton with a coach and advisor not less of a reason to do so. And last but not least, watch out for these ridiculous listicle listicles articles that are sponsored, because they literally make a promise about what kind of advice is contained in the article. And reading the article isn’t even worth your time. So with that, Corey, anything else you want to leave our audience off with today?

Cory 28:36

This is this has been fun and aggravating and wonderful. The things we have to read to help you out you all want me to do it sometime. So I got to expose myself to all this. Yeah,

Paul 28:49

we we tune in to the financial news so that you don’t have to allowing us to be a contribution to helping you design and build a good life.

 

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