TRAILER

Welcome to episode 75 of the One for the Money podcast. I am both glad and grateful you have taken the time to listen. They say wisdom is learning from the mistakes of others and in that spirit, this episode will feature the mistakes a retirement expert made about her own retirement and I’ll share ways to avoid these same mistakes.

In the tips, tricks, and strategies portion, I will share a handy rule of thumb regarding knowing if you are on track for retirement.

In this episode...

Who Is Alicia Munnell? [1:45]
Mismanagement of Investments [2:47]
Failure to Utilize Roth 401(k) [5:24]
Premature Government Pension Withdrawal [8:14]
Using Retirement Funds Early [10:07]

MAIN

Most people really only have one shot at retirement so you want to be sure you get it right and you will want to be sure to avoid any mistakes. They say wisdom is learning from the mistakes of others and in that spirit, there was a recent article in the WSJ on the ways a retirement authority got it wrong. This can serve as an example of what not to do. The Oct 12, 2024 article states in its opening line “Alicia Munnell spent decades trying to improve how Americans retire. Even she made mistakes in her retirement planning.”

First, let me share more about Alicia Munnell. She is an economist who served as an assistant secretary at the Treasury Department under President Bill Clinton. Her time in the Treasury Department was preceded by 20 years at the Federal Reserve Bank of Boston. After her time in the public sector, she established Boston College’s Center for Retirement Research, a think tank in 1998.

Alicia, who is 82 years young, has been steeped in finance for many decades and her work covered everything from improving the 401(k) to whether the U.S. faces a retirement crisis.(Her Answer: Probably yes, since she and her colleagues calculate about 40% of the working population isn’t saving enough to maintain their lifestyle throughout retirement.) And yet despite the focus of her life’s work, she made some basic mistakes about her very own retirement.

Here were some of her mistakes along with my thoughts on how she could have avoided them.

One mistake she repeatedly made was not regularly monitoring her investments. Like many people, she said that she lacked the time and interest to manage money. What she would do would rely on the occasional advice from her son, who works at a financial firm.

In her words “Every now and then, he tells me to send him my asset allocation and then he tells me how to adjust it. If I had to figure out what to invest in, I’d have no clue,” said Munnell. “People have busy lives. Retirement planning should not be something they have to put a lot of effort into.”

This boggles the mind. I am shocked a retirement authority, who highlights the importance of 401ks handles her retirement investments so carelessly. First, she doesn’t have a set schedule to review her investments on a regular basis, instead, she said that “every now and then” she reaches out to her son who works at a financial firm for changes she should make. And because she approached things so haphazardly, she or her son never consider her overall goals or taxable implications regarding her investments as demonstrated by the other mistakes that she had made.

Here’s how Alicia could have avoided this investment management mistake. She should have spent the time with her husband outlining their specific goals for retirement. These goals would then be used to align her investments with those specific goals. She then should have had regularly scheduled meetings to confirm their goals and re-align their investments if necessary. She should have assumed this responsibility herself or delegated it to a financial planning professional who was aware of her goals and could meet with her regularly.

Alicia admitted she didn’t have the time and yet still was personally making the changes to her investments based on the occasional advice she solicited from her son. Since she lacked the time and desire to manage these investments she most likely would have benefited from the right CFP that would have taken the time to understand her and her husband’s goals and manage their investments accordingly. It’s a real shame that she didn’t engage in this type of guidance. What we have learned about our clients in our goal meetings is often surprising and is only a result of taking the time to have our clients go through the exercises to help them better articulate and prioritize the goals that are most important to the life they want to live. Using these goals, we then create and implement the best investment strategy to achieve them and we meet and speak with our clients regularly to re-confirm their goals and adjust their investments when needed.

Alicia said another mistake she made about retirement is that she didn’t move any of her money from a traditional 401(k) to a Roth 401 (k) and Neither did her husband. She said as a result that they are required to take more withdrawals (via Required minimum distributions) than they need right now and have to pay more taxes as a result. She said and I quote “someone should have said, “If you’re going to work until 82, you might not want to put all your savings into a traditional 401(k). Put some into a Roth.”

Again, it’s really surprising that a “retirement expert” would say “Someone should have said….put some in a Roth”. My first question is who does she think this “someone” should be? Her co-worker, her husband, or her son? Talk about taking zero personal responsibility. And if she is expecting “someone” to tell her this information, why didn’t she seek out professional advice? Again, it’s strange that someone so steeped in retirement readiness was so unready for retirement.

Here’s how she could have avoided that mistake. She could have spent the time to project her income, retirement balances, RMD requirements, and the potential taxable implications. Years and even decades prior she then could have modeled different scenarios such as Roth conversions, Roth Contributions, or Back Door Roth strategies to determine what the most effective way she could have created tax-free forever funds. It’s unclear how “someone just saying something” would have put her in the best possible situation. It also seems as if she, her husband, or their son didn’t have the time or inclination to conduct such an analysis so she should have delegated this task to the right CFP because many CFP don’t go to these lengths of tax and income projections.

At my firm, we really enjoy helping our clients navigate their approach to taxable, tax-deferred, and tax-free funds to ensure they will pay fewer taxes in retirement. Everyone has to pay taxes so it all comes down to having clients pay taxes when it is to their advantage. For our clients with lower income years that means Roth contributions or Roth conversions. For clients in higher earning years that means having them make the maximum pre-tax retirement contributions. This type of planning is some of the greatest value we provide clients where we can help them save literally millions in taxes by implementing the right strategies at the right time and project the results and making adjustments in the subsequent years. She would have benefited tremendously from working with a CFP that models current and future tax rates, account balances, and required minimum distributions.

Another mistake she made that was noted in the article was regarding her government pension. She said, and I quote “When I left the Federal Reserve at age 50, I listened to someone who said I should take my monthly pension benefit early because I’d be so much better at investing the money than the Fed. So I took my monthly checks starting at 50 and didn’t invest a penny. Very quickly, my pension check became part of my spending. The monthly payment would have been meaningfully higher had I not taken it early.”

There are those words again, “I listened to someone”. What qualifications and analysis did this “someone” provide to determine that it was better to take the pension early and invest it than take a higher pension later? This still may not have been a poor decision, but why did Alicia Munnell follow the first part of the “advice” and not follow through with arguably the most important piece of advice, investing the pension instead? Clearly she didn’t have the inclination, time, or knowledge of why it was so important to invest these proceeds instead.

Here’s how she could have avoided that mistake. She could have spent the time to project what her pension benefit would be at 65 and compared that to what her benefit at 50 + investment returns would be and project these further throughout retirement. It’s again mind-boggling that a “retirement expert” listens to the advice of a random coworker but doesn’t once advocate the need to sit down with a planner who could have modeled such a scenario for her to make the best decision.

I’ve modeled these scenarios for many of my clients and in almost every instance you want to delay your pension for as long as possible. The only time it makes sense to take a lump sum or take it early is if you have a shortened life expectancy.

Alicia Munnell said another mistake was taking money out of a retirement account to help with a child’s wedding, which she said, and I quote “probably not a smart thing to do”. Again, I’m not sure if that was or was not the right decision. But what is clear, is that she never analyzed this financial decision in the context of her entire financial plan and how this related to her goals.

Here’s how she could have avoided that mistake. She could h...