02.19.25 Your Savings Rate / Running Out Of Money In Retirement

Summary

Summary of "The Clark Howard Podcast" Episode - February 19, 2025: "Your Savings Rate / Running Out Of Money In Retirement"

Host: Clark Howard
Release Date: February 19, 2025
Episode Title: Your Savings Rate / Running Out Of Money In Retirement

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Introduction

In this episode of The Clark Howard Podcast, Clark delves into the critical topics of savings rates and the increasingly prevalent issue of running out of money in retirement. The discussion is enriched with real-life listener questions, offering practical advice on personal finance management. Clark emphasizes the importance of being proactive with savings, understanding financial products, and cultivating disciplined spending habits to achieve long-term financial security.

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Key Topics Discussed

1. Savings Rates and Capital One's Controversy

Clark opens the episode by addressing a significant issue with Capital One, highlighting deceptive practices that have adversely affected customer savings rates.

• Capital One's Misconduct: Clark explains how Capital One introduced a second savings account with a nearly identical name—360 Performance Savings Account—to the popular 360 Savings Account, which previously offered substantial interest rates. This move led to existing account holders being unknowingly moved to accounts with significantly lower rates (from 4.25% to 0.40%) without adequate disclosure, prompting federal scrutiny.

  "Capital One did something that was really dirty dealing...they came up with a second 360 account called the 360 Performance Savings Account, keeping the name almost identical." (03:15)

• Impact of Inertia: Clark discusses how banking giants exploit customer inertia, leading to prolonged periods of low-interest earnings on savings, often below 0.5%, compared to more lucrative alternatives available elsewhere.

  "The lack of disclosure and the inertia in our lives that's getting us ripped off. So pay attention." (05:30)

• Advice for Consumers: He urges listeners to regularly review their savings accounts and consider moving their funds to higher-yielding options, such as discount brokers offering rates closer to 4.5% - 5%.

  "It's up to you and me to not allow these games." (05:50)

2. Listener Questions and Advice

Clark addresses several listener inquiries, providing tailored financial guidance based on individual circumstances.

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a. Emergency Fund and HELOC Strategy (Michael, Florida)

Listener's Concern: Michael is contemplating moving his emergency fund from a high-interest savings account to a Home Equity Line of Credit (HELOC) to have funds readily available.

Clark's Response:

Clark cautions against mixing the emergency fund with investments or HELOCs, as it increases financial risk. Using a HELOC for emergencies ties home equity to unpredictable financial needs, potentially jeopardizing home ownership during unforeseen circumstances.

"If you take out against it, you are putting your home at risk." (07:04)

He recommends maintaining a separate, liquid emergency fund to ensure stability without exposing the home to additional risk.

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b. Maximizing $50,000 in Savings (Lee, Wisconsin)

Listener's Concern: Lee, a debt-free 27-year-old, is unsure how to best utilize $50,000 in savings. Options considered include purchasing real estate, stocks, index funds, or leasing a billboard.

Clark's Response:

Clark praises Lee’s strong financial position and recommends diversifying investment strategies. While investing in billboards is creative, he suggests balancing between continued investments and maintaining a robust emergency fund, especially given current favorable rates in short-term treasury bills.

"Nothing wrong with having some of that [money] available for emergencies, rainy day." (08:51)

He advises keeping part of the savings in high-yield, low-risk options while exploring varied investment opportunities to optimize returns without sacrificing liquidity.

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c. TSP Loan for Home Purchase (Derek, Ohio)

Listener's Concern: Derek, a federal employee with a maxed-out Thrift Savings Plan (TSP), considers taking a $50,000 loan from his TSP for a home down payment, questioning its impact on his retirement.

Clark's Response:

Clark reassures Derek that utilizing the TSP loan is not catastrophic, especially since Derek is maximizing his contributions and has no debt. He notes that the current loan terms (15 years at 4.3%) are favorable compared to potential mortgage rates, making it a viable option for home financing without significantly harming retirement prospects.

"It would not be catastrophic if you use this provision." (11:44)

Clark also downplays the significance of mortgage interest deductions for most individuals, emphasizing the advantage of self-repaying the loan at a reasonable rate.

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d. Car Insurance for a Son (Bill, New York)

Listener's Concern: Bill is worried about potential insurance liabilities if his son and his friends rent and drive cars under Bill’s insurance policy.

Clark's Response:

Clark advises against using rental cars to mitigate liability risks, explaining that it offers no real protection compared to the risks associated with using Bill’s vehicles. He recommends transferring ownership of a vehicle to the son, thereby requiring the son to obtain his own insurance policy, which would contain liability risks independently.

"There is nothing special or different you need to do with the car rental." (25:04)

Clark stresses the importance of separating the son’s driving activities from Bill’s personal insurance to minimize potential legal and financial liabilities.

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e. Mortgage vs. Investments (Cole, Ohio)

Listener's Concern: Cole, a 31-year-old with a $55,000 mortgage at a $700/month payment (plus an extra $500 towards the principal), seeks advice on whether to allocate additional funds towards paying off the mortgage or continue investing.

Clark's Response:

Clark advises prioritizing tax-advantaged retirement accounts over accelerating mortgage payments unless the mortgage interest rate is exceedingly high (e.g., 7% or above). He underscores the benefits of contributing to Roth IRAs for tax-free growth and long-term financial security.

"I would rather see that extra 500 a month going into... a Roth IRA." (28:26)

He encourages Cole to continue maximizing retirement contributions to leverage compound interest and secure a robust financial future.

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f. Roth 457B and Roth IRA Contributions (Michael, Ohio)

Listener's Concern: Michael, a 36-year-old federal employee, inquires about contributing the maximum to both a Roth 457B plan and a personal Roth IRA, given his income level.

Clark's Response:

Clark confirms that Michael can indeed maximize contributions to both accounts, provided he remains within the income eligibility limits. He commends Michael for his disciplined saving and highlights the benefits of combined retirement contributions for long-term wealth accumulation.

"You can do the Max 7000 and that do the Max in the Roth 457B." (23:15)

Clark also acknowledges Michael’s service as a firefighter and projects a secure financial future thanks to his prudent financial habits.

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3. Financial Habits and the "Live on Less Than You Make" Philosophy

Clark passionately discusses the prevalent issue of individuals, regardless of high incomes, living paycheck to paycheck due to unchecked spending. He introduces the "big barn theory", comparing high-earning professionals like doctors and athletes who, despite substantial incomes, often find themselves financially strained due to poor saving habits.

"One in seven people who retired say they're having to go back to work this year because they didn't realize that they didn't have enough money to live the retirement life they wanted to live." (17:21)

Key Points:

• Mindful Spending: Clark emphasizes the importance of controlling spending habits, especially when income increases, to avoid escalating consumption.

• Paying Yourself First: He advocates for prioritizing savings and investments before discretionary spending.

• Building Financial Blocks: Encourages establishing diverse financial safety nets, including emergency funds, retirement accounts, and education savings plans (e.g., 529 accounts).

• Long-Term Security: Reinforces that disciplined saving and investing are fundamental to achieving financial independence and security.

"It's never what you make, it's what you don't spend that counts." (24:12)

4. Notable Quotes with Timestamps

• On Capital One’s Practices:

  "Capital One did something that was really dirty dealing...they came up with a second 360 account called the 360 Performance Savings Account, keeping the name almost identical." (03:15)

• On Inertia and Savings:

  "The lack of disclosure and the inertia in our lives that's getting us ripped off. So pay attention." (05:30)

• On Emergency Funds and Risk:

  "If you take out against it, you are putting your home at risk." (07:04)

• On Smart Investments:

  "Nothing wrong with having some of that [money] available for emergencies, rainy day." (08:51)

• On Retirement Planning:

  "I would rather see that extra 500 a month going into... a Roth IRA." (28:26)

• On Financial Security:

  "It's never what you make, it's what you don't spend that counts." (24:12)

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Conclusion

In this episode, Clark Howard provides invaluable insights into optimizing savings rates, avoiding financial pitfalls with banking institutions, and making informed decisions about investments and retirement planning. Through addressing diverse listener questions, he reinforces his core philosophy: living below one’s means, disciplined saving, and strategic investing are pivotal to attaining financial independence and ensuring a secure retirement. Clark’s practical advice serves as a guiding roadmap for listeners aiming to enhance their financial health and avoid common money-management mistakes.

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For more personalized advice and resources, visit www.clark.com and explore ClarkDeals.com.

Transcript

[Unknown Speaker]

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[Clark Howard]

It's great to have you here on the Clark Howard Show. Our mission is to serve you with advice and information that empowers you so you make better financial decisions in your life. You know, one of the most popular pages we have on clark.com is our best High Yield Online Savings Account list. I want you to not get ripped off by your bank. Capital One was recently accused of cheating customers out of interest rates. And it turns out that over and over again we're getting cheated on savings and interest rates from our bank, our brokerage, even potentially at a credit union. I'm going to tell you what you need to know and later. Do you know? A number of celebrities have revealed that they're broke. Broke even if they made a fortune or make a fortune in their career. It just goes to show it's never what you make, it's what you don't spend that counts. I'm going to talk about that later in this podcast and YouTube show. So capital One thing is such an important example for you because Capital One had very heavily promoted an account called the 360Savings Account. And many, many, many of our listeners and viewers opened 360 savings accounts that were paying great rates of interest. Well, Capital One did something that was really dirty dealing to their customers. They came up with a second 360 account called the 360 Performance Savings Account, keeping the name almost identical. And people in the 360 savings account that had been earning great interest rates and there were billions of dollars in them. Suddenly we're making really puny, terrible rates of interest. Only people who moved and you had to do it yourself. And allegedly Capital One employees were prohibited from telling you that the account now had two names with two entirely different interest rates. The people who went into the new one or moved their money into the new one were suddenly making the kind of interest rates we talk about, and everybody else was getting terrible interest. So the Feds have gone after Capital One for this. And let me tell you the difference. So people were making 0.40 and the 360 savings account four and a quarter percent and the 360 performance savings account. Now, the rates could change any time, but that was pretty much the gap. But that's not even terrible compared to what goes on at the giant monster megabanks that pay you on your savings 1, 100, the 1%. They're not charging you that on the credit card you have with the giant monster mega bank. They're not charging you that on the vehicle loan. No, they're taking advantage of people's inertia. You work to save money and then you want that money working for you. But if you're not paying attention, the bank or the brokerage is going to take advantage of you. The reality is most of us never actually look to see what interest we're earning in the brokerage account or in the money market account or in the credit union account or bank account. And what you don't know in this case will hurt you. You know my whole thing live on less than what you make, which I'm going to talk about later in this podcast and YouTube show. And then you have that money and you worked hard to live on less than what you make. You want that money to work for you, not for some giant bank or some brokerage that's taking advantage. Now, here's the weird thing, generally not true with the giant monster mega banks. But elsewhere there will be alternatives, options that will get you a much higher rate. With discount brokers, the default might be a crummy rate of interest. But just with a simple transaction that will take you maybe two to three minutes to do, you can move that money painlessly to earning the highest in the markets, somewhere close to four and a half to five percent instead of earning somewhere below a half of a percent. It's up to you and me to not allow these games. Now, there's a simple way that you fix this, and that is requiring disclosure. Just imagine if in your monthly statement it said in bold, you are earning, you're earning 1,100th of 1%. However you'd write that out, would people just let that money sit there? It's the lack of disclosure and the inertia in our lives that's getting us ripped off. So pay attention. Go look at our guide of the best rates. Move that money to get your money.

[Listener]

Earning something Michael in Florida says. So I know I'm supposed to have an emergency fund, which I didn't mind given high interest savings accounts. This interest rate has been dropping as interest rates are. I'm thinking about investing my emergency fund and getting in heloc so I have money on tap for an emergency. What do you think about this strategy?

[Clark Howard]

So you're mixing apples and oranges. Then that creates additional risk in your life because if your rainy day fund no longer exists and you take that money and you're 100% invested, then you create an environment where you're skating on thin ice. Because anytime you have an emergency, you're having to tap the equity of your home. Now, the cost of a home equity line of credit, the interest you have to pay is not brutal at all, but you are every dollar you take out against it, you are putting your home at risk. If you own your home free and clear and you have enormous equity and you want to have that as your standby emergency and you understand that all your money being invested means in the short term you have a lot more volatility and you're having to rely on your home. Okay, if you still carry a mortgage though, and you're going to take out a HELOC and use it for a what if fund that I'm not comfortable with. So it depends on your overall financial picture. A third of people almost own their homes free and clear. If you're one of those and you want to do that, that would be an acceptable choice.

[Listener]

Lee in Wisconsin says, what should I do with $50,000 in savings? I'm a single 27 year old, blessed with no debt and I'm able to max out my Roth IRA each year.

[Clark Howard]

That's fantastic.

[Listener]

And contribute to a company matched 401K. For the past year I've been investing the money that I have saved in short term treasury bills until I figure out what to do with it. But I'm feeling like I'm not maximizing the power of having this cash saved. What would you do? Buy real estate stocks and index funds or buy a billboard to lease?

[Clark Howard]

Lee? Definitely buy the billboard to lease. No, I love that as an alternative. Isn't that fun? Okay, so Lee, you're Doing so many great things. You got your Roth, you're maxing out. I don't know how much you're contributing to the employer provided 401k. But you've got this money that you're saving. And doing treasury bills has been a really good choice lately. The interest rates on it have been really good and there's a good chance they might increase because of how large the federal budget deficit is. And it's possible that people will be earning more with the lowest risk lending the federal government than putting money with banks, credit unions, brokerages. So you're talking about taking money that is there for emergencies, is available to you. You're saving it about the best way possible. You're earning a return that actually exceeds the rate of inflation. Right now. You want to have that rainy day account and you also have ballast with your money. You're investing from the stock market going through a significant decline. As I've talked about, stock values are significantly overvalued right now. At some point we're going to have a correction, we're going to have a bear market. You don't want to be in a position where you have to sell for a short term need at a time that you're selling into the teeth of a market that is in a bad spot at that time. So I love Lee for you to keep doing what you're doing and have some money available for emergencies, rainy day. Nothing wrong with having some of that. And don't feel like every last dollar you have needs to be invested.

[Listener]

I've got my savings in that Schwab short term treasury fund you recommended to me at one point.

[Clark Howard]

Yeah, so that's, that's fine to do. Schwab, Vanguard, Fidelity, all have really good US Government money funds. Treasury funds, they're a little different one from another that earn very good rates of interest based on what's going on in the marketplace.

[Listener]

Derek in Ohio says I've been working to save for a down payment for the purchase of my first home. This has been more difficult than I anticipated. I'm a federal employee and have a TSP retirement account. I've been fortunate enough to make the max contribution to it. It recently came to my attention that I can take a home loan of up to $50,000 from the account to use toward the purchase. The loan term would be for 15 years and has an interest rate of 4.3%. Any interest paid goes back into the account and will be reinvested. Would taking a loan from this account be catastrophic for my retirement? I'm a 36 year old male with no debt.

[Clark Howard]

So, Derek, it would not be catastrophic if you use this provision. You're saving the maximum you can in the TSP every year. So you're saving an enormous amount of money every year. In two years you will have saved or put aside an amount roughly equal to what you want to take out for your home loan. I think that's fine. 15 years at 4.3. Who's getting that right now? There were times that I was totally, totally opposed to this when people were borrowing money from a plan like this at a higher interest rate than what mortgages were. Right now that's turned in the reverse. So in your case, as someone carrying no debt, saving the maximum you're allowed to each year, I'm okay with it.

[Listener]

And there's no consideration about the interest being deductible on a regular loan. Does it matter because you're paying it back to yourself.

[Clark Howard]

The value of the mortgage interest deduction is so oversold. And the real estate community, it is worth so much less than people think it is. Except for ultra, ultra high income earners buying mega mansions with humongous mortgages. It's not the great thing that is pitched as being so in your case. I think that's fine. And coming up ahead, you're saving the maximum you can in the best retirement plan anybody has available to them that I know of in the US the thrift savings plan. What about people who make a ton who are flat out broke? We're going to talk about that.

[Unknown Speaker]

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[Listener]

It's Krista from the Clark Howard Show. I'm going to play you what we call a Clark minute. It's sort of a vitamin of advice from Clark squeezed into one minute. Here it is.

[Clark Howard]

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[Unknown Speaker]

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[Clark Howard]

You ever heard the big barn theory? Some of they talk about doctors. Sorry, doctors, but it's something I heard long ago that doctors are the big barn theory. That they will have huge barn doors. That after all that schooling and all that, finally, particularly certain specialties, big money's coming in and then at the other end, the barn doors are wide open and that big money that comes in just goes right out the other side of the barn door. In surveys who make big money, who are in the top tier of income earners in the United States, say that they're living paycheck to paycheck. It gets a lot of publicity about the fact that in the NFL, the most recent stat I saw is that 80% of NFL athletes end up broke five years after their playing days end. Actors. Kiplinger did a story about how Jim Carrey, Nicholas Cage, Hugh Grant and Al Pacino all went and took acting jobs after they were pretty much retired because they needed the money to live on. They had run through all the millions and millions and millions of dollars they earned. When it happens to a public figure, it brings attention to it. But this happens every day to people who were fortunate enough or worked hard enough that they had a really great income stream while they were working, either owning their own business or working for someone else and earning really great money and were living a lifestyle where they were spending pretty much all of it. And at the end of the road, they didn't have much of anything. You know, one in seven people who retired say they're having to go back to work this year because they didn't realize that they didn't have enough money to live the retirement life they wanted to live. So you hear what is clearly an obsession of mine. There's no doubt it's an obsession, the idea that you create your own. Unless you're earning an extremely low wage, you and I create our own financial insecurity or build our own financial security based on how we live day to day. The paychecks we get month to month, what do we do with that money? How are we spending that money? What are we doing to save before we get our net? Check that it's habits that matter. Habits building in a psychology about how you deal with every paycheck that comes in up front. Now, I've been a maniac saver my whole adult life. If you're a longtime listener Viewer, you know, it's because I learned from my parents not having saved adequately when my father lost his job and the financial hardship that they face, they eventually got solidly back up on their feet. But I was a teenager when that happened. And let me tell you, I learned everything, everything I needed to know about why saving for that unexpected rainy day, because rainy days come, is so core and key to building that financial security. And one of the best times to build in better habits is whenever you get a raise. Most of us in the United States, that is unusually skewed here versus other countries, we are such a consumer oriented society that when people make more money in the United States, they buy more, they spend more, and they feel like it's a just reward because we're conditioned that way from the fact that they got a promotion or got another job with more money. That's one of those inflection points that if you can bend what's known as the marginal propensity to consume, it's a chart that shows that in America, as our incomes rise over our lifetime, if they do that, our spending goes right up with it, like track for track, right on up. That's how you could have people earning a great deal of money who are living paycheck to paycheck because they never broke that cycle of increasing consumption as the paycheck increased. That's where the core is to you, having power over your own wallet is that you don't like Pavlov's dog. In America, every time you get a pay raise, you suddenly spend more money. No, no, you really need to think about paying yourself first into whatever retirement plans available to you. If there's not one where you work, you know, I'm the man from Roth, that Roth ira. Building up that rainy day account you got kids setting up if they think they're going to go to college, setting up the 529 accounts. If you have access to a health savings account, if you're eligible for one, doing that, you build those blocks of financial security.

[Listener]

Michael in Ohio wrote in with this, my employer now offers a Roth 457B plan. Can I contribute to the max of $23,500 into this plan and also contribute the max of $7,000 into my personal Roth IRA? I am a married fireman, so we fall under the income limits.

[Clark Howard]

So, Michael, I'll express this very quickly again how much I appreciate your courage, the danger you face never knowing when you start your shift what kind of harms way you're voluntarily putting yourself into to see to the safety of others. And thank you for doing that. And yes, you can do both. As long as you're under the income limits. A contribution to a qualified retirement plan in no way unqualifies you to do a Roth IRA. So you can do the Max 7000 and that do the Max and the Roth 457B. And if where you are in Ohio you get for years of service, you're going to get a good pension as a firefighter. You are going to be so financially set down the road because you are doing such a great job living on less than what you make.

[Listener]

What a super saver you think people say like they don't make enough money to save. That's impressive. Bill In New York, says Clark, my 25 year old son and a few of his friends are planning on renting a car to carpool to another state. My son currently drives one of my vehicles. I'm sorry, just laughing because we both have sons on our insurance. My son currently drives one of my vehicles that is registered in my name and I have him listed as a driver on my auto insurance policy. My policy covers rental cars, but I am fearful that should he get into an accident, my insurance would be impacted. Additionally, he'll be with a few of his friends and I don't want to be liable to them should anything go wrong. Therefore, my preference is for him to get a car insurance with the rental car agency instead. Is this a good strategy and if yes, what insurance should he get from the long list of choices? And FYI, he has his own medical insurance through his employer.

[Clark Howard]

Bill, we gotta talk here. So he's obviously working at a traditional job where he's got medical insurance, he's got health coverage. Let's dial back from the whole thing of renting the car and he and a bunch of buddies are going somewhere. Let's say he was driving the car that's yours registered in your name. Forget the rental vehicle and he has an accident and any of his friends have an unfortunate event from that and get hurt, your insurance is responsible. All the rental car is is another vehicle that has the same liability risk for you as the vehicle that he has. I imagine you have a decent amount of assets. It would be much better at 25 years old for your son to have a vehicle. You could sign that vehicle over to him, he gets his own insurance on it and you're protected from the liability risk of his buddies riding with him in his own car or riding in one that is rented. So you're talking about liability shield here. The risk to you is very, very large, particularly in New York State that has something called vicarious liability. I'm not a lawyer, I'm not going to dwell on it, but there's a lot of risk involved, specifically in New York that can be magnified from other places. And I just don't like him. And this idea of the rental and running around with friends is getting you to think about this. I don't like him. At that age, being a driver of one of your vehicles, being on your insurance, do that, take care of that. As far as the risk, the risk is identical in the rental as it is in that owned vehicle. So I don't know there's anything special or different you need to do with the car rental. There would be separate from what needs to happen anyway with your own vehicle. I just think you need to focus on separating that part of your son's life from your life.

[Listener]

Cole in Ohio says, I'm currently 31 years old and owe roughly 55k on my mortgage. The payment's about $700 a month and I put an extra $500 a month toward the principal. I'm at a point in my life where I can save and invest a decent amount of cash. I make about $4,000 a month after taxes. I have about $10,000 in emergency savings.

[Clark Howard]

Wait, wait, wait. I got to stop here. This is an incredible story you're sharing. This is the complete opposite of what I was talking about just moments ago with people living on fumes with their wallet. $4,000 a month net, paying the $700 mortgage, adding an additional 500 to it. Let's hear what else is going on.

[Listener]

I have about 10,000 emergency savings and currently have about 40k invested in the stock market. I invest $500 a month into a Fidelity brokerage account as well that I recently opened. My question is, would you recommend I put more towards the principal on the mortgage monthly to pay it off as soon as possible, or use the extra cash to continue making investments?

[Clark Howard]

So I'm not. Unless you have a high interest rate mortgage and you don't say, Cole, what your mortgage rate is, I would rather see that extra 500amonth going into. Wait for it, wait for it. A Roth ira. You don't say you have a Roth. You say you're putting money in a Fidelity brokerage account, but that's a traditional investment account. Unless you just haven't said it's in a Roth IRA. I need you at 31 working hard to build up tax free Money for your long term future. And a Roth IRA, seven grand a year goes in there. That 7,000 grows tax free all through the years. I mean, the 500 would take you to 6,000 anyway. The point is it grows tax free all through the years. And then at retirement, which is identified under the current law is 59 and a half or later, you get all that money available to you tax free. The money in an investment account is subject to long term capital gains and that's good, but not as good as tax free. If your mortgage interest rate is very high by what we did have as rates like today's rates, if you're paying a mortgage rate of 7% or above, then throwing the extra cash at the mortgage is an acceptable alternative. But I really want you because you're going to own this house free and clear by the time you're like 36, I guess, at what you're putting money in. I'd like you to think about well past 36 and using time to build up long term financial security for you through a Roth ira. And I want to thank you so much for joining us. And you hear how there are people who at all different walks of life, all different income levels, are able to live on substantially less than what they make. And you know, we don't know any of the people have kids they're paying for. Kids are expensive in each case, but the trend is clear that so much is the choices we make and how we handle our dollars. And what we choose to buy or not buy is the more important thing. Remember, it's never what you make, it's what you don't spend that counts for you to build financial security over time. I want to emphasize something else I talked about last month. Money is not God. Money is not, you know, something to worship. Money is what gives you the ability to have the choices you want to have down the road. You don't want to have your independence taken away from you. Everything I talk about about money is not sitting there counting your gold coins. It's about you having the independence to have the life you want to have. And so what we're about is you learning ways to save more, spend less, and avoid getting ripped off. And we got that advice for you so many different ways, [e-mail] and buying things at the best possible price. You can buy [e-mail], check them out and have a great rest of your day.