EP35 GulfCoast Finanancial: The 401(k) Retirement
Peter Richon: Welcome into the program. This is GulfCoast Financial, brought to you by your resource for a commonsense approach to planning for your financial future. Voted Best of the Best in Financial Services by the Lake City Reporter, they are the team from GulfCoast Financial Services. CEO and Founder, John Kuykendall here with us. John, welcome back.
John Kuykendall: Thank you, Peter, it's great to be here. I hope everything's going well for you.
Peter Richon: It is. It is. A little stir-crazy cabin fever, still, but adjusting. John, I know that with circumstances so out of whack here over the last several months, a lot of people have maybe very immediate financial needs and concerns. One thing that has helped us make steady progress toward our financial goals has been the employer-sponsored plan. Depending on what our circumstance is, this still may be a very valuable tool, both long-term and short-term. Wanted to talk a little bit today about the 401k, one of our better tools for planning for our financial future, isn't it?
John Kuykendall: Oh, yes, it certainly is, although some people out there are saying they have a 201k after the recent downturn.
Peter Richon: I've heard that.
John Kuykendall: 401ks are certainly a great way to save because one, normally there is an employer match, which is free money. We never want to not take advantage of that. If your employer is willing to match in your retirement, then you need to participate in the 401k. Also, because it's pretax. There's certain tax advantages by getting that money out pre-tax and putting it in the 401k. It works great. Of course, the big problem, Peter, is that it has forced us to handle our own retirement.
Peter Richon: Yeah, we now shoulder that burden almost completely, don't we?
John Kuykendall: We do. I mean, back in the old days – they say the generation before this was really lucky because they not only got a Social Security check, but then they also got that pension check, that defined benefit plan that while they weren't able to participate in a 401k, the company put money aside. Then when they turned retirement age, they received a check, just like their security check, for life. They were able to determine how much money they had coming in each month and then worked their budget out of that. Actually, those people, looking back at some of the case studies, those people who retired actually had a little better retirement plan, a little better retirement situation that we have today.
Peter Richon: They had twice the amount of guaranteed income. It probably made them feel twice as confident.
John Kuykendall: That's true, and that's what we always talk about on this show, Peter. We talk about having a defined income plan coming in that's going to be sustainable and predictable to supplement our Social Security. We have to do that in order to plan. That extra check just really adds that much more stability to the retirement plan. I think sometimes when we try to put everything on the investments, and we're worried about the stock market, and worried about the real estate market, or we're self-directing our IRAs into gold and other things, we have too much reliability on the market and on the returns. Therefore, sometimes we overshoot. That causes us, in a downturn like we are right now, to have a 201k because we took too much risk.
Peter Richon: Benefits and disadvantages of the 401k verse the pension. The pension certainly outweighs the 401k as far as predictable results. We do have the ability to build up more sizeable wealth inside of that 401k. It's a matter of chance. We don't always want to base our financial future on chance, I don't think.
John Kuykendall: That's true. I mean we want to – what we like to do here is come up with a retirement plan that's going to be able to sustain us for that 30 year retirement that we're looking for or longer, and to know that we're going to be able to live the lifestyle that we wanted up until the years that we can't. We want to be able to go while we're young and we first retire. Then we want to be able to have certain amenities while we stay at home in later life.
The 401k is a great way to accumulate money. One of the problems with the people who had the pensions – while the pensions were great, they didn't save a lot of extra cash. Therefore, they didn't have the investment accounts that we have. The other side of that coin is that to be in a 401k requires discipline. It requires being able to stay in it, put the money in it, to look at the account. You just can't say the market's down. I'm going to put my statement in the dress drawer. I'm not going to open it.
Peter Richon: I was thinking about that. I perhaps, maybe, overstated that a little bit that it's just a matter of chance. We'll give it the benefit of the doubt. It's greater than just chance. There's a routine, and habit, and discipline that goes into making that 401k a success. We've got to do that savings on a regular, recurring, ongoing basis. The nice thing about it, it makes it easy and automatic for us.
John Kuykendall: Yes, that money's going in every payday. You don't see it. You'll be surprised. I've told clients before that we take money and we set it aside. After a while, if we do it routinely, you will never even realize that you're missing it. You learn to live. A good mentor of mine, a long time ago, told me that you will learn to live on what your income is no matter what it is. If you get a big raise, and you think, well, boy, I'm going to be able to save a lot of money, you're living expenses will rise to meet that raise.
Therefore, this money that you're not seeing is going into that 401k. You're not missing it. It's a great opportunity and a great way to save. The discipline, Peter, is really important. This isn't free money. This is money that, actually, we earned, we set aside, it came out of our paychecks, and we managed that over years. When we get it, we can't look at it like, wow, I've got all this free money. Now, I'm going to go buy that Ferrari.
Peter Richon: I have always had a problem with that terminology. It's very commonly used that the match is free money. John, I have found very little in life is free, especially money. The way I always thought about it is that that was part of my base compensation. I worked for that money. I just didn't receive it unless I put some skin in the game and took my planning and my financial future seriously. It's an unearned piece of the income that you worked for if you don't make those contributions to capture the match.
John Kuykendall: That's right, and Peter there are certain reasons why the company wants you to invest in that. The more participants they have in the 401k, upper management, therefore, can put more money in. It helps them too. It helps the company, overall, from a tax standpoint, payroll taxes and such. There are a lot of advantages and reasons why the employer and the employee both need to want and participate in the 401k. I have a lot of people who think that when I retire and I get this lump sum, now that's my money. I can go do a lot of things with it without a plan. That's where we fall down in our discipline.
We need to come up with that retirement plan. Make that 401k part of that plan, so that we know how much money we've got coming in. There are instruments that we can get. We've talked about the fixed index annuities on this show before, where we can get a lifetime income coming in guaranteed by the insurance company, and also some long-term care benefits provided that if we need that controller, that health situation later. There's a great way to do it, but we have to manage it, Peter. I'm afraid that a lot of people don't put a lot of thought into it at the end.
Peter Richon: You mean, I can't go out and blow it my first day of retirement and then expect to be able to afford the next day, John?
John Kuykendall: If you think you can, you need to call me because I've got a couple of stories I'd like to tell you.
Peter Richon: Yeah, you've probably, unfortunately, seen that story a time or two, actually.
John Kuykendall: I have seen it more often than I want to. It's not pretty. When you tell the client that he's out of money, and then they sit back and try to figure out where all the money went, it's not hard to explain the lawn service that he bought, the pick-up truck, the Cadillac –
Peter Richon: The Ferrari that he drove to your office in.
John Kuykendall: The vacation he took with his ex-wife, I mean, a lot of things. It's crazy how all this stuff goes in.
Peter Richon: Again, the burden of retirement, John, falls on our shoulders now with the 401k and the decline of pensions. Companies used to pay for that. They realized that that was a pretty expensive obligation. They have for most cases, most intents and purposes, done away with pensions. A few lucky ones left that still offer those. With the advent of the 401k, that responsibility for funding retirement shifted onto us. John, the same principles that take advantage of while we are working and accumulating money, while we're making those deposits, actually can potentially work against us once we reach the peak and have transitioned into retirement.
John Kuykendall: Oh, that's right, Peter, and that's why I really think that it's important that we do that income plan that we talk about so much on this show so that we can come up with an income plan that takes into consideration how much your Social Security's going to be, how much your living expenses are, where the shortfall is, and then work towards giving you a sustainable income to make that shortfall. At the same time, grow your assets with an asset plan that will help you for inflation and all the things that are going to happen in the future.
As we've talked on the show, we don't want to have all of our money tied into the market when we're in retirement. We've talked about that sequence of return. We're in a down market. We're pulling money out to live. It's going to make the account run out much quicker than if we had a sustainable income and we're just supplementing it with our investment plan.
Peter Richon: Again, we've got to have that plan, John, mapped out to show us how to systematically generate a livable income. Social Security is not going to cover everything that most people need to afford day to day, month to month, year to year expenses. We also need to make sure we can continue to generate that for all of the years to come. Not underspending, not having enough the first day of retirement, but not overspending. That concept of generating enough income is a tight rope, it's a fine line to walk to make sure that we are living a fulfilling life, but also not risking overspending and jeopardizing our standard of living down the road.
John Kuykendall: Oh, that's right. We talked about when Social Security was started in 1935 that Social Security was never meant to take the place of all your retirement, to be the thing that was going to be a national retirement policy. It was there, really, to supplement. Based upon the rules and regulations that they put in place at that point in time, really, you weren't supposed to get it because your life expectancy was less than what the required age to receive Social Security was.
It was really a government funded program that was not meant to be retirement. Yet, Peter, 40% of all Americans retired right now, according to the last statistics that I read, live on Social Security, alone, in retirement. I don't know how they do that. I think the average check is $1,800 a month. If you're living on that kind of income, that's the only income you have coming in, and you don't have any investments, you're not living a very good life.
Peter Richon: It's not really a livable income for most people.
John Kuykendall: No, I mean – and like I said, it wasn't meant to be, and it isn't. We have to come up with – we have to be self-disciplined and come up with a way that we can make sure that we have a retirement income every month while we're in retirement. I mean, that's one thing that we've worked for in the united states. Retirement's become a big part of our vocabulary. It's become a big part of our lifestyle. For some people, they will be retired longer than they worked.
We need to have discipline and a self-imposed spending limit through this income plan that we put together, maximizing taxes, doing the best we can with the taxes, looking and making sure we make the right decisions with Social Security, coming up with that income plan that we change every year or every two years, and just living through it with discipline. If we do that, Peter, then we're going to have what we want to have. We'll be able to do the things that we want to do. We'll be able to leave money to the kids or to the grandkids.
Peter Richon: Two sides of this, John, that I want to ask you about. First is during our working years, while we are participating in that 401k, we don't seem to get a lot of proactive guidance, or advice, or help, or oversight in making our choices and staying on top of things. Is that something that you and your team at GulfCoast Financial Services can help with?
John Kuykendall: Oh, sure, certainly we do that. Actually, with all of the state workers, we have a plan where we can actually take the money out of the FRS investment plan, put it into a self-directed brokerage account that's approved by the state of Florida, and manage that through the multiple funds, multiple portfolios that they have. We also offer advice to people. We'll look at what they're able to invest in and make recommendations to them about what they should be investing in based upon the market.
I was talking to an individual this morning, a client of ours who has that situation. He'd been managing his own 401k. During this last downturn, he went to 15% down. Of course, he's young. He'll be able to make it up. Then he said he figured out that his pain tolerance was 15%. He put it into cash. That was good. There's so many other people out there that say, I don't understand it. I don't want to look at it. I don't want to manage it. I'm just going to throw this stuff in the desk and whatever happens happens.
That's not the way we want to approach this. We want to manage it like it's a regular account that we have. We want to make the best we can. We want to maximize it. The better we do now, the more money we have in the future.
Peter Richon: John, a lot of additional gains there can be a lot of additional advantage to rebalancing accounts as we move through time or making informed selections. Maybe there's a time and a place where we want to get out of a certain fund and get into another one. Most people who are set it and forget it, it's done automatically, and think about the 401k as an out of sight, out of mind thing might forget to do those things and therefore miss out on some performance.
John Kuykendall: Yeah, I really think those people that do that don't really get the returns that they need. Anymore, especially in this market with the number of investments that we have. One of the criticisms with the 401k is I don't get a lot of investment choices. We need to make the best choices we can based upon what the 401k gives us. We need to monitor those because what was good this year may not be good next year. If you look at that chart that shows the best mutual funds, the fund could be at number one of all the mutual funds one year, but it's going to be at the bottom the next year.
You need to move it around and make decisions based upon what the market's doing, what that particular fund's doing, or investment option that you have. Then also rebalance, especially if you're doing company stock, Peter. You don't want the company stock to become such a big part of your retirement and your 401k that if something happened to the company, or they had a downturn, it would jeopardize your retirement.
Peter Richon: Right, and unfortunately a lot of people have done just that. I can think of a couple examples, Enron and Nortel. I heard horror stories about those companies where employees invested too heavily in the company stock. Then the company took a dive, and they suffered not only the loss of a job, but also the loss of the retirement funds that they had built up. Not to laugh at that or slight it, it's just that's a very uncomfortable position for those individuals, I'm certain. There also is some advantage to having some company stock in your plan as I believe. Correct, John?
John Kuykendall: I believe that too. Yeah, sure, I believe that certainly we should have some stock in the company that we're working for, that we've invested our future in. It also helps the company, but it gives us a feeling of connection.
Peter Richon: Ownership stake.
John Kuykendall: Yeah, we just don't want to make it so that it's 100% of our retirement plan. You made the mention about Enron. I remember back in 2000, when Enron went under. There was this guy who had a farm. He'd been retired for a couple of years. He was saying that it was terrible because he had lost all of his money. He had gotten so tied up in the returns that Enron was giving him that he had 100% of his retirement savings in Enron stock. He lost everything. While we don't want to laugh at that, or we don't want to make fun of it. It's a situation that you can't let greed overcome what you’re supposed to be doing for retirement.
Peter Richon: That was the first part, help along the way with your 401k. Ladies and gentlemen, if you've got questions, if you want to know the right moves to make, if you want to analyze the investment options, if you want to know how to access that 401k or roll it over and take more personal control over it if you've got those opportunities. If you want to identify those opportunities, pick up the phone, give John Kuykendall and his team at GulfCoast Financial Services a call, 386-755-9018, that's 386-755-9018.
John, we spend our career climbing up the mountain, trying to reach the pinnacle and financial success enough to one day retire, stop trading or time for money. Second part of this, you also help individuals understand what it takes to transition that 401k into what they need for retirement and can help them answer the question of how much is enough or do I maybe already have enough.
John Kuykendall: That's right. We work on a financial plan, and an income plan that will put together all of their assets and all of their liabilities, come up with where they are, how much we're going to need in retirement based upon their goals, their dreams, and what they're trying to accomplish. Then we can help them look back. One of the things we always want to mention on this show, Peter, because it's certainly a large part of retirement is when we're in the 401k, we're building a tax trap for ourselves.
Somewhere down the road, we're going to have to take that money out. As we take it out, we're going to be paying taxes on it certainly at a higher tax rate than we're paying now. We need to be aware of that. We want to make taxes a part of our retirement plan so that we look at how we're taking our distributions and how we're planning those. Also, if the company has a Roth 401k, then certainly I encourage you to put some of your money in it because that way we're building that money tax free. It will make the plan a lot better when we put it together and look at all of it.
Taxes are certainly going to be a big part in retirement for anybody. I think, Peter, really they're going to be a bigger part of our planning going forward. I just can't see us staying at this low tax bracket forever based upon the stimulus that we've had and all the programs that we've had. The money that' going to be required to pay back our debt, taxes are going to have to go up.
Peter Richon: Also, John, I think Medicare is means tested, right? Depending on how much income you have determines your premiums for Medicare. Then also income can cause Social Security to cross a couple of thresholds and become taxable. Some additional repercussions of the tax implications that I don't think people fully grasp and understand as they are saving in those tax deferred accounts. Just to echo what you said, if there is the ability for the Roth component in the 401k, or any opportunity to identify strategies maybe to be more efficient with the tax liability if we've already saved a large amount in tax deferred accounts, we probably should take the time to identify those.
John Kuykendall: That's right, Peter. We've got an excellent opportunity this year. The way I understand it is that we can take up to 100,000 out of our investments this year, prior to 59 and a half, without the 10% penalty. We have a couple of years to pay the taxes. It would be a great way to go ahead, get the taxes out of the way, open up a Roth IRA, and get some of that money growing for you after tax.
Peter Richon: Again, if you need help in making that transition, if you'd like to understand the amount of risk your accounts are exposed to, the tax liability that you might be liable for into and throughout retirement as you utilize those dollars, and the amount of income that you can create from your accounts, that's all part of the planning process there at GulfCoast Financial Services.
They offer the opportunity to sit down with you and go through a review and a strategy session with no cost, no obligation, whether in person or with the wonders of technology through these virtual meetings and reviews they're capable of conducting. They can help you get on track or make sure that you are making well thought through and informed decisions. All you need to do is pick up the phone and give a call, 386-755-9018, that's 386-755-9018.
John, coming full circle here, we began the program talking about how generations in the past has two streams of guaranteed income, the pension and the Social Security. A lot of their personal savings, they didn't even make investment with. They just saved it in the bank, in secure places, and it was just extra money. This generation, we probably require some investment risk and growth in order to meet our goals. There is a way to take some of that 401k money and recreate the kind of security that a pension once offered retirees.
John Kuykendall: That's right, we can. As I talked about earlier, that fixed index annuity will certainly give us a lifetime income. We can take part of the money and build another check that's coming in every month to supplement the Social Security and then still have the investment account, or the investments grow so they support more of our goals and dreams, things that we want to do but aren't necessarily.
You're right, one of the things that we have – this generation has over the prior generation, while we don't have that defined benefit plan, we do have a lot more expertise and a lot more investment programs available, financial advisors available to help you take those monies, and invest them, and get a return. While the prior generation put their money in the bank because savings was 5, 6%, that was a good return. You could get CDs for seven, eight.
Those people lived fairly well just investing in the bank. We can't do that. With interest rates low, we have to take some type of investment in the market to get the kind of returns that we want and also to have the money that we need to do the things we want to do. We do more than prior generations.
Peter Richon: While the 401k is certainly a valuable tool to help us make financial progress toward retirement, at retirement we want to turn that potential into a little bit more certainty, and security, and stability. That does take very careful planning, ladies and gentlemen, to understand the amount of income that you can generate from those retirement accounts, the tax liability, how much are you actually going to get to keep. Then through that process, determining how much risk is appropriate for your situation and for meeting your retirement goals.
John Kuykendall, his team there at GulfCoast Financial Services, can help you in that process. Pick up the phone, give them a call, whether you're still saving and participating in that 401k and would like some help and some guidance, or you are planning for that transition and intend to utilize those dollars for supporting your retirement. Pick up the phone, give them a call, they can help you on both sides of that, 386-755-9018, that's 386-755-9018, or online gulfcoastfinancial.net. John, we always appreciate your time here on the program. Thank you for providing your guidance, and insight, and perspective to savers and investors throughout the area.
John Kuykendall: Thank you, Peter, it was great to be here. Before we finish, I just want to say one thing, quickly. The Secure Act, also this year, made the required minimum distributions. We don't have to take those if you're over 70 and a half and you're taking it, or if you haven't reached 72 yet. There are no required minimum distributions. If you can live some other way off of some other money and not take that out, it might save you taxes. Come see us and let us help you with that.
Peter Richon: All right, important to note if you do not necessarily need the income from those retirement accounts and have met that threshold where you are required to take distributions anyway because the IRS doesn't forget about a tax dollar, then this year that requirement is waived. Maybe you could do some other things with that money. Let's be strategic. Let's be efficient. John Kuykendall, his team can help you identify those opportunities. Give them a call, 386-755-9018. They're looking forward to hearing from you real soon.