Beach bonfires, sunrise sound-bath meditation, and yoga sessions mixed with high-level financial discussions on everything from bitcoin to bonds: That’s the Future Proof Festival, which took place last month in Huntington Beach, Calif.
More than 4,000 wealth advisers and vendors from across the country came to talk about investment strategies, learn about buzzy fintech, and scarf down tacos and ice cream while singing along with Third Eye Blind and the X Ambassadors.
One afternoon I popped into the Vanguard Investments tent to sit down with Colleen Jaconetti, a senior investment strategist for Retirement Solutions at Vanguard. Jaconetti’s focus for the past two decades has been financial planning and digging into the balance between spending on immediate needs and saving for the future.
Here’s what Jaconetti had to say, edited for length and clarity:
Kerry Hannon: You’re known for your behavioral coaching. What is a key driver to saving for retirement?
Colleen Jaconetti: The most important thing is recognizing that if you want to have enough to live on in retirement, you have to start saving early and have a portfolio with low costs.
For a lot of the young people, it’s hard to take money out of their current paycheck for retirement. They’re focused on paying their bills right now. The discipline and the understanding that foregoing something in your early years can pay huge dividends is hard to get your hands around. That discipline helps you hold steady when markets get shaky, which is a key to long-term investment success.
Some of it is just people’s personality. I have one nephew who likes to spend his money as soon as it’s in his hands. It’s his natural inclination. He’s very generous. I’m not criticizing people who spend more. They want to enjoy their life. But it’s harder to get someone like that to understand the value of savings.
Then the second part is education. While you really want to spend now, if you understand that if you save it now that means you can maybe retire three years earlier. That makes it a more tangible thing for younger people.
It helps to understand the trade-offs of small sacrifices. You need to see where in your budget you can consider trimming.
Read more: Retirement planning: A step-by-step guide
What advice would you give a young person just starting to save for retirement?
Set enough aside in your employer-provided retirement plan to at least get the employer match. Many employers contribute anywhere from 50 cents to $1 for every $1 an employee contributes, up to 3% or 4% of their salary. Ideally, workers should aim to save 15% of their pre-tax income each year, including any match. Giving up the employer match would be a huge disservice to yourself.
Did you have an issue with saving when you were starting out?
No, but I remember exactly how much I made every other week when I started as a senior auditor at Ernst & Young in 1994. I was paying for my apartment and insurance all for the first time, and I was like, wait, where is my money going?
Once you are aware of where all your money goes, you realize that a little bit over here in retirement savings actually will make a huge difference later.
Vanguard has been at the forefront of the movement to help people roll over their 401 (k) savings to an IRA and not cash out when they change jobs — a mistake I made as a 30-year-old. Can you elaborate on that issue?
People say, ‘oh, it’s not that much money, so it’s okay if I just take the cash now because I want to buy a house.’ But you can’t put that money back, and you’re giving up that tax-deferred investment and the compounding for two decades or more, and that’s a lot. When you show people what it would be worth in the future, they usually say, ‘oh wow, I didn’t realize that that amount today would accumulate to be so much down the road.’
If you’re not in retirement yet, but you’re edging up to it, what should you be doing?
This is the time to put together the big picture of what you want to do, and then how much do you need, and what’s the best way to minimize taxes.
The biggest thing is what do you envision doing in retirement? Some people want to be gardening and reading books, and some people are going to be taking two or three trips a year.
It’s figuring out how much do you need to retire and live the life that you want to live. How much Social Security will you get? Can you afford to delay receiving your benefit? Then you need to consider whether you should spend from your taxable or tax-free accounts.
Let’s talk about the angst people have about spending in retirement.
A lot of people get to retirement with a number in mind. I need a million dollars to retire. Whatever it is, they decide to have a number.
Then when they have that, they don’t want to spend from their principal in retirement. So they’re going into retirement with a broadly diversified, low-cost portfolio. They’re all set and then when they look at current yields, all of a sudden, they don’t want to spend their principal.
So they overweight their portfolio in dividend-paying stocks and high-yield bonds to get the income that they desire. But what they don’t realize is that you could actually be putting the principal value at risk more than if you just spend from it.
When you think about spending in retirement, don’t be so narrowly focused on preserving principal that you forgo diversification.
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What’s a spending solution that can ease people’s concerns about running out of money?
Dynamic spending. It’s responsive to annual market performance but the year-over-year spending amount is kept within a set range to provide a level of stability.
For many retirees, our dynamic strategy offers the best of both worlds. It’s responsive to market changes without causing significant fluctuations in annual spending.
This strategy allows them to set controlled maximum (ceiling) and minimum (floor) spending limits. Retirees can spend more when markets perform well or cut spending when they don’t — within limits.
Say a retiree starts with $1 million in a 60% US stocks, 40% US bonds portfolio. You’d start with $40,000 a year in income with a 4% initial withdrawal rate as the basis for comparison and an expected 30-year retirement.
Dynamic spending allows retirees to receive more, say 5%, or $42,000 in income. In practical terms, this could translate to enjoying a higher quality of life, however they define it: more travel, greater ability to donate, or perhaps having greater means to help family members financially.
If there’s a period of prolonged underperformance — especially early in retirement — year-over-year real spending could decline each year. In other words, real spending could drop to $39,000 in year one, $38,200 in year two … down to say $35,000 in year five.
Having the flexibility to make small spending decreases in down markets, and the desire to spend more in a positive market is a compelling strategy for many retirees.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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