Can I Pause Retirement Contributions?

Summary

Summary of "Can I Pause Retirement Contributions?" Episode of "Jill on Money with Jill Schlesinger"

Podcast Information:

• Title: Can I Pause Retirement Contributions?
• Host: Jill Schlesinger, CFP®
• Publisher: Audacy
• Release Date: January 22, 2025

In this episode of "Jill on Money with Jill Schlesinger," host Jill Schlesinger addresses listener questions about managing retirement contributions, financial planning, debt management, and understanding Social Security benefits. Jill provides insightful, jargon-free advice to help listeners make informed financial decisions.

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1. Deciding When to Hire a Financial Advisor (00:03:20)

Listener Question from Mike:

Mike is contemplating whether to hire a financial advisor and seeks clarity on what a detailed financial plan should include. He’s also unsure if he needs a financial plan at his current stage as a DIY investor and wonders when it’s appropriate to transition to professional assistance.

Jill’s Response:

Jill emphasizes that hiring a financial advisor isn't strictly age-dependent but is more about the complexity of one’s financial situation. Significant life changes—such as starting a business, changing income sources, or handling diversified investments—are indicators that professional financial planning might be beneficial.

Jill Schlesinger (00:04:00): "This is not an age-based issue... it is a complexity issue."

She highlights the value of scenario planning, where a financial advisor can provide an objective perspective, uncovering outcomes that the individual might not have considered independently.

Jill Schlesinger (00:06:17): "The real benefit of a financial planner and one that is a fiduciary, is that it will give you a separate set of eyes on a situation that may lead you to one different outcome than you had even ever considered."

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2. Financial Planning for Peace Corps Service (00:06:50)

Listener Question from Anonymous (24 years old):

A 24-year-old listener preparing to join the Peace Corps seeks advice on effectively allocating $19,000 in savings. She has funds spread across a Roth IRA, 403 account, brokerage account, high-yield savings, and a checking account. She also has $20,000 in student loans, which she plans to defer during her service.

Jill’s Response:

Jill commends her for her financial preparation and advises categorizing her funds based on accessibility over the next two years. She recommends keeping money needed within two years in a high-yield savings account or a 2-year Certificate of Deposit (CD) to ensure liquidity and safety.

Jill Schlesinger (00:08:00): "Any money that you think you could use that you need to access within the next two years... should keep in your high yield savings account."

For long-term investments, she suggests allocating funds to broad market exchange-traded funds (ETFs) or a bond index fund, considering her young age and the extended investment horizon.

Regarding student loans, Jill advises evaluating the interest rates to determine if additional payments are beneficial.

Jill Schlesinger (00:09:00): "If you believe... this is long-term money, then I think I would consider just using the same exchange traded funds and not sweat about it."

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3. Using a Margin Loan to Pay Off Debt (00:12:20)

Listener Question from Ray:

Ray is considering taking a $60,000 margin loan against his $800,000 investment portfolio to pay off $20,000 in credit card debt and replenish his emergency fund after unexpected home repairs.

Jill’s Response:

Jill discusses the potential benefits and risks of using a margin loan. She notes that if the margin loan interest rate is lower than the credit card rates, it could be advantageous. However, she cautions about the risk of a margin call if the value of the investments declines significantly.

Jill Schlesinger (00:12:21): "The thing about a margin loan is that you're not taking so much money at margin that even if the market went down, there would be ever a margin call."

She advises assessing cash flow to ensure the margin loan is manageable and not opening up vulnerabilities in case of market downturns.

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4. Understanding Social Security Cost of Living Adjustments (COLA) (00:15:03)

Listener Question from Rich:

Rich seeks clarification on how Social Security’s Cost of Living Adjustments (COLA) work. He wonders if his benefits will increase annually based on inflation once he starts receiving them.

Jill’s Response:

Jill explains that the Social Security Administration announces an annual COLA to adjust benefits based on inflation. This adjustment ensures that the purchasing power of Social Security recipients is maintained over time.

Jill Schlesinger (00:15:03): "Every year the Social Security Administration will announce what is called a cola... people who are receiving Social Security income benefits... get a two and a half percent income increase in their base level of Social Security payments."

She clarifies that while the initial benefit is determined by one’s earnings record, the COLA is applied annually after benefits begin.

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5. Pausing Retirement Contributions to Rebuild Emergency Savings (00:15:10)

Listener Question from Robert:

Robert and his spouse, aged 40 and 41, have amassed $660,000 in retirement savings but have less than $10,000 in a regular brokerage account. After using emergency funds for house repairs, Robert considers pausing his Thrift Savings Plan (TSP) contributions for a year to rebuild his emergency fund while continuing to max out Roth IRAs.

Jill’s Response:

Jill, along with co-host Mark Zandi, supports Robert’s decision to temporarily pause TSP contributions to rebuild the emergency fund. Given their substantial retirement savings and military pension, reallocating funds to secure emergency reserves is deemed a prudent move.

Jill Schlesinger (00:16:18): "I would absolutely encourage you to do that."

Mark Zandi concurs, reinforcing that a 12-month pause, while still maintaining Roth IRA contributions, is a sensible approach given their financial standing.

Mark Zandi (00:16:07): "Just do it."

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Conclusion and Additional Resources (00:17:01)

Jill concludes the episode by encouraging listeners to reach out with financial concerns via the jillonmoney.com website and promotes her book, "The Great Money Reset," which offers strategies to transform financial chaos into opportunity.

Jill Schlesinger (00:17:01): "It's perfect for this time of year... 10 bold steps that help you turn chaos into opportunity."

---

Notable Quotes:

• Jill Schlesinger (00:04:00): "This is not an age-based issue... it is a complexity issue."
• Jill Schlesinger (00:06:17): "The real benefit of a financial planner and one that is a fiduciary, is that it will give you a separate set of eyes on a situation that may lead you to one different outcome than you had even ever considered."
• Jill Schlesinger (00:08:00): "Any money that you think you could use that you need to access within the next two years... should keep in your high yield savings account."
• Jill Schlesinger (00:12:21): "The thing about a margin loan is that you're not taking so much money at margin that even if the market went down, there would be ever a margin call."
• Jill Schlesinger (00:16:18): "I would absolutely encourage you to do that."

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Key Takeaways:

1. Financial Advisors: Consider hiring a financial advisor when your financial situation becomes complex, regardless of age.
2. Emergency Savings: Maintain accessible funds for short-term needs, especially during periods of limited income.
3. Debt Management: Weigh the benefits and risks of using investment leverage, such as margin loans, to manage debt.
4. Social Security: COLA ensures that Social Security benefits keep pace with inflation after they begin.
5. Retirement Contributions: It's acceptable to temporarily pause certain retirement contributions to strengthen emergency savings, particularly if you have a robust retirement portfolio.

This comprehensive summary encapsulates the vital discussions and insights from the episode, providing valuable guidance for listeners navigating their financial journeys.

Transcript

[Jill Schlesinger]

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[Jill Schlesinger]

Welcome to the Jill on Money show. It's Wednesday, January 22nd and we are here trying to help you make better financial decisions. Or maybe just guide you or coach you or manage your own expectations. Help you take a little of the pressure off of yourselves. It's very difficult. These are things that kind of build up over time. A lot of the emotions around money and I think that many of you are in such good shape and it worries me that often you are your own worst enemies. You make yourself crazy. So why don't you give us a holler if something is going on? We [e-mail], our website, and then you just click the contact us button and write us a note. While you're on the website, don't forget to sign up for the free weekly newsletter and check out our subscription service. It's called Jill on Money Live. That's where you have access to quarterly live webinars, bonus content, the back catalog.

[Mark Zandi]

All for 45 bucks.

[Jill Schlesinger]

What a bargain.

[Mark Zandi]

So do check it out.

[Jill Schlesinger]

All right, let's do some emails. Our first email is from Mike who writes, I've heard you talk a lot about what to look for in a financial advisor and I know to look for a certified financial planner who is a fiduciary, by the way. Just side Note, gang, all CFPs are fiduciaries. It's part of the certified financial planner code of ethics. So they are held to the fiduciary standard. They have to put you before their own interests, their company's interest. You come first. Okay, back to Mike. Mike writes, I've also heard you say that to develop a detailed financial plan, it can cost a couple of thousand bucks. What I'm not sure of is what exactly should that include? How can I ensure that I'm getting my money's worth here? Finally, I'm not sure if I really even need a financial plan at this point in my life. As a do it yourself investor, do you have suggestions on when someone should switch from do it yourself to a more detailed plan? Perhaps at age 50? Thank you so much. I listen to you and Mark daily on my commute and I've learned so much. Mike, great question. Now, this is not an age based issue. I know that you'd like to say, oh, at age 50 we have to do this. No, it is a complexity issue. Okay? And what I mean by that is many people will seek the services of a certified financial planner and really go through planning when things in their life are starting to pile up in terms of their ability to manage it and incorporate it into a long term game plan. So imagine this. You're 35 years old, you're not married, you have no kids, but you're starting a business and you want to know how much of the money you've saved you should allocate towards that new business without throwing your entire financial life off the rails. Or maybe you are 50 and maybe things are changing, or maybe you've got a new job, or maybe you've gone from one type of income to another kind of income. Anything that is a little bit different than what you've been doing is Usually what will prompt someone to, to think about a financial plan. Of course, as we do age, we will tend to use a financial plan to look at what options are in front of us. You know, I was just out to dinner with my dear friends and we were talking about the idea of retirement. And I think that what was that came to mind for me was that they were talking about like, here's all the things we want to do. But you know, if we to choose one thing, if we were to say, like, oh, gosh, we want to upgrade our home, then that would be maybe working another year, but maybe it wouldn't be. Maybe you already have enough money to do everything you want to do. Sometimes a financial plan can help you look at the, the, the various goals you have and determine which one should become the highest priority, which one is doable, not doable, and to understand what the scenarios would look like if you took one course of action versus another. So think of it more as like, I need to get a better look at my different scenarios.

[Mark Zandi]

By the way, there's a lot of.

[Jill Schlesinger]

Software out there that will allow you to do this yourself. But the real benefit of a financial planner and one that is a fiduciary, is that it will give you a separate set of eyes on a situation that may lead you to one different outcome than you had even ever considered. So, Mike, I hope that that helps you out. I love the idea of scenario planning, and I'm talking about scenario planning with life, not your investments. Okay, this next question is from Anonymous. Who's 24 years old? Oh my gosh. About a year and a half out of college, trying to figure out how to begin to prepare financially for my future. Okay. I've been working for a little over a year. I'm leaving my job and my home soon to join the Peace Corps. Oh, what a good egg you are. My salary the last year was relatively low, but I was frugal and I was able to save some money in preparation for the next few years. $7,000 in a Roth IRA and also will contribute a little bit more to max out for 20, 24. $1,000 in her 403, $6,000 in a brokerage account at Vanguard. But a lot of it's sitting in money market because I don't know where to invest it. $8,000 in a high yield savings account, $5,000 in a checking account. I also have $20,000 in student loans to pay off. I've been making payments towards them. However, I'm going to defer those Loans during my Peace Corps service, I might make an occasional small payment to prevent too much interest from accruing. I know in the grand scheme of things, the amount of money I have right now is relatively small. What? Wait a minute, you're 24 and you got money? It's great, you're in good shape. Guess I want to make sure I'm at least on the right track because I'm not really going to be making any money for the next two years. I want to effectively allocate the money I do have so that it can grow. My biggest concerns are where to allocate the extra money from my checking account, where to invest the extra money in my brokerage account. Currently that money is invested in a combination of exchange traded funds and a few individual stocks. I also don't know if I have too much money in a high yield savings account and if I should move more of that over to retirement and, or the brokerage account. All right, listen, anonymous, you're 24 years old, you're doing great, you're killing it. Here's a couple of questions to think about. Any money that you think you could use that you need to access within the next two years, that is what you should keep in your high yield savings account. Or that's it. You know, like you may, you're going to maybe come home from the Peace Corps. I don't know where you're going to be, but you might need to access some of that money. That's number one. Number two, any money you think you might need in two years when you return, I would take that money and maybe outside of that High yield savings account, I probably would just buy a two year CD and just have that locked in because I think interest rates are gonna change over the next couple of years. I wouldn't mind locking in money you think you'll need in two years. Could you come back, gotta get a job or I gotta move and I gotta do something in two years, whatever that is, I would buy a CD with that. Everything else you can think about investing. And when we talk about exchange traded funds, what I would do is I would just take a broad market exchange traded fund and anything that's that retirement account, boom, that's all that you're putting in. Maybe put a tiny bit in a bond index like 10 or 20%. But you're so young. I'm not sure about the brokerage account right now. Again, I don't know what your needs are, but if you believe. Let's just think about this.

[Mark Zandi]

Let's say that in two years you.

[Jill Schlesinger]

Want to know that you've got money set aside that will be able to float you for when you return. And not have a job and have some money. I might just take the money that's both in the brokerage and the high yield savings account and checking account, just whatever that is, whatever you think you're going to need. Among those three accounts, that $19,000. If you think it's going to be I'm going to need $15,000 for that, then I wouldn't invest it. But if you really don't need need money and this is long term money, then I think I would consider just using the same exchange traded funds and not sweat about it. The one last thing is I don't know what your student loan interest rates are, but if they're high enough, if there may be some of those scary private loans that are out there, or if you're making maybe it's 7 or 8 or 9%, maybe I'd pay off a little bit more than just the minimum minimal amount every so now and again. I don't know. Just something to think about. So, anonymous, I wish you the best of luck and let us know how it goes. Here's a question from Ray. Who subject is margin loan to pay off debt. Okay. Ray writes, after using my emergency reserve fund to pay for a complete rebuild of our air conditioning and ventilation system, we have now found ourselves in debt. Oh my God. Their daughter, $50,000 wedding credit cards mounted. Okay, so they owe 20 grand on their credit cards. They want to replenish their emergency fund and pay down the debt with a margin loan. Oh, they've got 800 grand invested. They could take a $60,000 margin loan against that. Good idea. Hmm. The thing about a margin loan is that you're not taking so much money at margin that even if the market went down that there would ever be a margin call. Margin is borrowing against the holdings in your investment account. And remember, margin loans only on brokerage accounts, not on retirement accounts. And if you could get a margin loan at, I don't know, 3, 4, 5%, it's pretty good deal for you. So what I would say is if you took $60,000 out, I mean at least do the 20 for sure to get the rid of the cards and then I want to know what the cash flow looks like. Would you take a margin loan to rebuild an emergency reserve fund? Maybe. I might, I might do that. You know, just know that of course.

[Mark Zandi]

The risk of a margin loan is.

[Jill Schlesinger]

The value of your equities goes down so much that you're actually asked to repay that loan immediately. But you're very far from that. It's usually a 50% level and I think you're going to be fine. So it's not this is just in this instance, gang. I don't want everyone hearing me saying like, yeah, do a margin loan to pay off your credit card debt. That's not, not it doesn't work for everybody. But Ray, if you've got further questions, follow up with us.

[Unknown]

50 GS.

[Jill Schlesinger]

50 GS for a wedding when you don't have the money. All right, question from Rich. Hey, Jill, I've heard you mention that Social Security is inflation adjusted. Does that mean when I get my statement of what my benefit will be if I wait until either at 62, 65, 67, that the payment that is listed will rise each year, year based on inflation? I have to under admit that I don't understand what this means. Well, every year the Social Security Administration will announce what is called a cola, a Cost of Living Adjustment for Social Security Benefits. So for example, in 2025, right this year, people who are receiving Social Security income benefits, like 70 million people, they get a two and a half percent income increase in their base level of Social Security payments. If you're talking about will your benefit go up every year prior to that? I think that the estimate that you're getting is based on your work record. But once you claim, that's when the cost of living adjustment kicks in. So if I were going to get $1,000 check every single month, I would get a little 2.5% bump on that every year. And that's better than what many people get when it comes to any guaranteed stream of income, a nice cost of living adjustment. This question is from Robert, who writes, thank you again for the fabulous show and all the help you provide your listeners. I have a simple question. Am I okay to skip maxing out my workplace retirement contributions this year? I use a Roth thrift savings plan as I am in the military and use the same amount to rebuild my cash savings instead. All right, let's figure this out. So Robert says 20, 23 and 24 were the first years I could max out Roth IRAs, spousal, Roth included, as well as Roth contributions for a thrift savings plan. I don't get a match in the thrift savings plan. My wife and I are 40 and 41. We've got $660,000 in retirement savings between our accounts, 80% Roth 20% traditional. They've got less than $10,000 in regular brokerage account.

[Mark Zandi]

This year required us to use a.

[Jill Schlesinger]

Bit of our emergency cash for house repairs while we still made the retirement contributions. I think I'd feel better if we put the approximate $24,000 I would allocate through the thrift savings plan this year and keep it in cash instead. It would get us back to just over six months of emergency savings. So the question am I okay to take a year off from TSP contributions and rebuild cash instead? I would still max out our Roth IRAs for the year. Ideally I would like to be able to retire by 60. Earlier is better and I feel like we're on a good trajectory, especially since I've been active duty military for almost 19 years now. I always appreciate the Jill and Mark sanity check. I'll give you my sanity check. And Mark, you can weigh in because you were asked. I think this is perfectly reasonable. A lot of money that's already in retirement they're going to have, he's going to have a military pension and yeah, I like rebuilding the emergency reserve and they've got a lot of money saved already. They're only 40 and 41. What do you think, Mark?

[Unknown]

I am 100% on board with this. This is a 12 month pause and it's not a total pause because they're still going to be maxing out Roth IRAs for both of them. So yeah, go ahead. It's just 12 months.

[Mark Zandi]

Just do it.

[Jill Schlesinger]

I think it's great. I think I would absolutely encourage you to do that. For those of you who are hearing this, maybe you also blew through some of your emergency savings. Maybe that meant you had to actually go into credit card debt. Give us a Holler. Go to jillonmoney.com, click the contact us button, write us that note. And if you want to join us on the air live, check the box. We'll do everything else. Hey, while you're on the website, don't forget I have a book. I've got two books actually. The most recent one is called the Great Money Reset. It's perfect for this time of year. Subtitle is something you're going to probably have some recollection with, but it's about 10 bold steps that help you turn chaos into opportunity. That's the book, the Great Money Reset, to be found on the jillonmoney.com website.

[Mark Zandi]

You can subscribe to us on the.

[Jill Schlesinger]

Odyssey app or wherever you find your favorite podcast. Don't forget to lift someone up and now for that subtitle. Change your work, change your wealth, change your life. Thank you for listening. We'll talk to you tomorrow. Real Estate it's been a cornerstone of.

[Mark Zandi]

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[Adam Scott]

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[Ben Stiller]

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[Adam Scott]

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[Ben Stiller]

Yep, each weekday beginning January 7th, we'll be dropping an episode featuring exclusive behind the scenes tidbits and brilliant insights from our cast and crew and us, Patricia.

[Adam Scott]

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Adam on Apple Podcasts, the Odyssey app, or wherever you get your podcasts.