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Improving Retirement Outcomes: Control is an Illusion... Or It It?

Listen now!


With Guest:

Katherine Roy

Chief Retirement Strategist, Head of Individual Retirement

J.P. Morgan Asset Management

S. Katherine Roy, Managing Director, is Chief Retirement Strategist and Head of Individual Retirement for J.P. Morgan Asset Management. In this role, Katherine is responsible for delivering timely personal retirement-related insights to financial advisors. Focused on the retirement income-related landscape for more than 15 years, Katherine specializes in identifying themes, strategies and solutions that can help advisors successfully partner with individuals in the transition and distribution life stages. 

Katherine is consistently ranked as a top speaker at major industry and firm-specific conferences and events. She also has been interviewed and quoted in the financial press on a variety of key retirement planning topics. 

Prior to joining the firm, Katherine was Head of Personal Retirement Planning & Advice at Merrill Lynch, where she led strategy and innovation in retirement income solutions for individuals, and the retirement planning, advice and guidance programs available to integrated benefits plan participants. She also held several roles in financial planning product development, participant communications and consulting, and interactive client experience initiatives. Katherine received a B.A. from Yale University and is a Certified Financial Planner®.

Recap, Highlights, and Thoughts

If you are looking for a great conversation about the realities, challenges and opportunities for individuals on their journey to retirement, this is the episode for you. If you want information and perspectives on the coronavirus, hold onto that thought for a minute. This episode features my conversation with Katherine Roy, Managing Director, Chief Retirement Strategist and Head of Individual Retirement for J.P. Morgan Asset Management. During our conversation we hit on many of the key points and Katherine’s perspectives on J.P. Morgan’s recently released Guide to Retirement. We talk about what she wishes people spent more time thinking about, thoughts on how your prioritize different savings goals, how employers can better support their employees as they prepare for retirement, an urban legend or two and one of Katherine’s favorite topics, the Roth 401(k) feature. 


Before we get started, this episode was recorded prior to recent major market events driven by the Coronavirus. Everything we talk about very relevant, but if you want to hear more about that, there is double header episode this week where we provide updates for employers about Key 401(k) Plan Management Considerations During COVID-19. That one features yours truly, be sure to check that out as well. 

Before we get started, we have had a lot of new listeners to the podcast this year, don’t forget to subscribe on your favorite podcast app so you are notified of each new episode. Like the name implies, we publish new episodes nearly every Friday. That’s it, I hope you enjoy my conversation with Jason!

Thanks for listening!​​

Sincerely Your Host, 

Rick Unser

NEW: Episode Transcript

Rick Unser (00:00:00):

Well, Katherine, welcome back to the podcast. It's been a little while and I loved our first episode. So if anybody hasn't listened to that about your passion for Roth and Roth 401k plans, I'd highly recommend they do that. But welcome back today and I can't wait to hear what you have to say about all things retirement.


Katherine Roy (00:00:20):

Yeah, thanks for having me. I'm thrilled to be here.


Rick Unser (00:00:22):

Well, let's just jump in here. I guess, you know, when you think about this whole retirement planning thing, I mean we've made it pretty easy for people, right? You save money in your workplace retirement plan, you invest in a target date fund, and then when you get to retirement, just, you know, don't withdraw more than 4% of your savings and you're good. I mean, is that it? Is there anything else to talk about at this point?


Katherine Roy (00:00:44):

You make it sound so easy and yes, I mean, I guess if, if there are some general guidelines, those three or four things are really gonna have or have the biggest impact on, on people achieving a successful outcome. You know, my brain goes to, you know, it's a little bit more complicated than that. We know that you can derail that plan pretty quickly or you can derail the savings by taking loans or being in situations where you don't have an emergency reserve funds. I think that's why you see that really come to the forefront in terms of a strategy that more and more Americans need to need to have access to or need to really put effort towards so that they can handle when life happens. So that's I think number one. What I would add to that as a little bit more meat to it.


Katherine Roy (00:01:27):

And then second, I know you started out with this raw thing. I think, I think the saving tap tax smart and helping more participants think about pretax versus Roffman when is a big decision and, and I would encourage people to spend a little more time there. And I know we'll talk a little bit more about that as well. Health and health care spending is really, really important as well. So you know, obviously one of the big things I often tell very young people is look the, you know, healthcare costs are going to be some of the biggest things you're going to cover during their lifetime. You know, much less your retirement and they're taking care of yourself is going to be equally as important so that you can save enough money to be able to cover those costs as well as, you know, hopefully healthy lifestyle.


Katherine Roy (00:02:05):

And then, you know, two last things, you know, it doesn't, security is such an important side of this. By working in and paying the tax along with your employer and during your career can take a little time and actually look what that benefit doing and look at your sister's statement, login to and understand what sort of income you're growing there as well. And then lastly, check in once a year. Make sure you're making adjustments. If you get raises, you know, do you have auto escalates that or you know, do you have ways in which as you were human capital increases in value. Are you interrupting that natural tendency to spend all of that and think about dedicating more of that to savings because the higher lifestyle you get used to, the more you're going to have to save to be able to accomplish that. And so having a process by which you think about that every year, it's going to be really important. So I guess to sum it up, yes, in terms of guideposts, if people could save as much as they can invest a versified way that risks as they approach retirement and control their savings in retirement, they're going to be, they're going to be fine, but we know that there's lot more complication and opportunity along the way.


Rick Unser (00:03:09):

Yeah, and I guess just current and present complications, there's been a lot of market volatility. I think anybody who pays any attention to what's going on in the world is probably pretty aware that things are a little crazy right now in the markets. We're getting a lot of questions right now about what should we do, what can we do, how should we communicate to employees? So I guess as you sit back and look at what's available to employers or maybe what employers can be doing if they have employees or if they feel they have employees that are concerned about market volatility and yeah, let's just take any of the current like facts sets out of this. It's more just, you know, market volatility in general. Are there a few things that you think are good to communicate? I mean, I don't know, just personally the whole, Hey, this is a longterm investment. Just, you know, put your head down and you'll be fine. I mean that I, I dunno, I mean it not horrible advice, but I feel like that's just people are like, okay, I got it, but this is really scary. Give me something more to hang on to.


Katherine Roy (00:04:13):

Yeah, sorry. I mean I think there are three things that, that we've been focused on, you know, through this period of time and whenever things get volatile, 2018 or on Christmas we were having the same kind of discussion. It's not quite to this level, but you know, number one, obviously timing the market is impossible. But I think even more important for people to understand as to why is because you often have the best and worst days occur so close together to each other. And so if you do have that emotional reaction to you know, get all out of the market after a particularly bad day, you know, chances are pretty good that the next day actually could be the best day of the year. And we have, you know, specific examples of that in 2015 August 24th was the worst day of 2015 and August 26 was the best day, right? So they happened very close together with each other.


Katherine Roy (00:05:00):

And so, you know, when we have an impact of being on the market chart and our guide to retirement in which we show, look, if you just stay invested for a 20 year period where a lot of things happen between 2000 and 2019 or 2020 a lot happened in the market. Yeah, you would have generated a 6% return. And that's pretty healthy. That's what our assumption is going forward as well for people saving and investing for retirement. But if you get out of the market, he missed the best 10 days, you really cut that by by two thirds, he'd get to about a 2.4% rate of return over that time period. And so just this idea of staying disciplined and staying invested through those Rocky time as well as this proximity of good days and bad days. I think it's really important for people, people to understand.


Katherine Roy (00:05:40):

And the second thing we've tried to highlight, it's really who should be concerned about volatility. We often get asked the question, you know, what should millennials know about volatility? What should they do? You know, the answer is they should save as much as they possibly can. Volatility is our friend, you know, their periodic contributions and therefore [inaudible] and little markets are buying shares at lower values and that's going to in the long run, you know, provide potentially more for their retirement. So that's an opportunity for them. But really focusing them on saving. Now obviously who are most concerned about are people close to retirement where these types of market swings, particularly if they're retiring this year in particular, that's where it's going to have the biggest effect on an asset because their wealth is greatest. So their, their risk is great because their wealth is greatest and they're about to enter into, you know, retirement and potentially draw down some of that portfolio during this period of time, which can really dollar cost ravage their portfolio.


Katherine Roy (00:06:32):

Really the opposite of the benefit that young people have. Truly the opposite. So for that I would, you know, in turn to employers for maybe the third point and that is, you know, we all know that times like this happened and we shouldn't be surprised even though I think we always are, but it's really a time to revisit your, or take a take a really close look at your default. Whether it's a target date fund or other solutions or photography date funds in particular, you know, is your target date fund, is your default working the way that you would anticipate it to work for all the different constituents in your, in your population, for your participants. And in particular that that population that is at greatest risk. So how is it doing for people that are close to retirement, has it de risked appropriately. So those people hopefully are not experiencing these swings to as great an extent as younger participants. And that's why, you know, from a JPMorgan perspective, you know, we think it's really important to be risk down to, you know, let's say a 40% equity level at retirement. Cause you want to manage that volatility when their wealth is greatest to protect as many participants as we can to get across the finish line. So if that is your goal and that's the outcome that you're looking for is you know, using periods of stress like this to, to really take that assessment we think is important.


Rick Unser (00:07:47):

Yeah, I would agree. And I talked to some folks, it's Hey, rather than having that urge to just sell everything to exactly what you said, do you understand the risk you're taking in your portfolio? And if you feel like you need to do something, maybe this is a good time to get a better handle on how much risk you're taking or not taking and see if that ticks and ties to where you are in the grander scheme of preparing for an on your journey to retirement. The other thing that, and I'd just be curious to get your, your 2 cents on this that I've had some conversations with people about and you know, I don't know that this sets up well in a communications piece or a, you know, an email out to employees, but the idea that, okay well let's just say for a second, you make the decision and you pull the trigger to, to sell everything and sit in cash cause you just can't take it anymore.


Rick Unser (00:08:38):

That makes you feel really good in the moment. Well that's the easier decision. Obviously not the necessarily the right decision, but it's easier of the decisions. I feel like the harder decision is, okay well I'm sitting in cash now. When do I get back in and how do I get back in? Is there to be some magic number that I miraculously deploy all of my capital that I just sold out and left in cash? Am I going to do it in stages? And the other thing that I feel like people kind of gets them thinking a little bit is, all right, well, I'm going to wait for the market to go down. Okay, well is it 10% is it 20% is it 30% what is that decline that you're waiting for and what if it doesn't happen? What if all of a sudden instead of the market going down, the market just went up 10% what if it goes up 20% I mean forget the last returns and things like that, but what do you do? What does that mean to your idea that you're going to buy back into this market at some point? I don't know. That's something that, like I said, I don't know that that fits well in a flyer or an email, but it's, does that make sense or is that kind of a sound process?


Katherine Roy (00:09:50):

Yeah, I mean I think, I think you're raising all of the points that someone needs to think through if they think that they can actually time the market and get back in and then you're right. What if those actual conditions don't materialize given we can't predict where the market's going and we have no control over that. So I think maybe to add to your points, you know, number one, you know, by getting out, you're, you're locking in your losses for sure, right? So that you're creating certainty that you will lose that amount of money versus you know, remaining invested through the volatility. And number two, we do know, you know, through flows from large, you know, retail sector, self-directed providers on the outside of plan. But you know, what, where you see flows getting back into equities is once people get comfortable and that's typically after a lot of positive returns have been experienced and you're sitting in cash.


Katherine Roy (00:10:40):

So as, as, as positive returns are being observed, that's when it takes off and to get people the confidence they need to get back in the market and as a result they get back on the market typically more highs or having missed those days. And that is generally not the best time to be, to be getting in. Right. Both from a, you missed out on the outside, but it often could mean that you know, you've got some downside potential coming your way as well. So I think you're, you're raising all the, all the right points there.


Rick Unser (00:11:08):

And the other thing that I guess gets me kind of scratching my head is, you know, in these times of volatility you see a lot of people all of a sudden paying attention to what's going on in their portfolios or, or things like that. And maybe not really digging in in the way they should. But I, I guess that brings me to, if you're inclined to look at your 401k plan at this point, are there things that you would rather people spend time thinking about that might be more valuable than, you know, should I sell everything or should I, you know, de-risk everything because I can't stand seeing my account balance go up and down as much as it is on a daily basis.


Katherine Roy (00:11:45):

Yeah. And I wish they would just engage with, you know, the, the planning tools that are available through, you know, almost every single provider has a really, I think, you know, they, they often have easy paths. They often have more complex paths, but simply engaging and focusing on what you know is going to be probably the bigger contributor to their success and that's they're saving how much they're going to spend in retirement when they plan to retire and shift from saving to spending. I think those are major decisions and major drivers of someone's outcome. So stopping focused on the portfolio and instead engage on the planning side. And so having a plan, at least having a guide in terms of where you're headed is so important. Yet, you know, based on the retirement confidence survey, which has been done for more than 25 years, we've never cracked 50% of participants or their spouses spending any time at all.


Katherine Roy (00:12:44):

You know, really understanding what it's going to take to successfully retire. So, even though we've got all these tools out there, you know we've got often even on home pages, this view of what your account balance could translate into into income, but that is using a bunch of different defaults and assumptions. You know, people don't click through and try to make it their own and personalize it. Really understand, you know, where they're headed. So you know, I always view these times as you know, this may be the time you sit down and actually invest that time and really understand is this market volatility and how your portfolio is performing really make the biggest difference or is it your savings behavior and what you're trying to accomplish and understanding what your goal is, which is you know, half the battle. I think it's really important. And if individuals have an advisor that they're working with or they are working through, you know, call center, maybe pro all of their wealth, not just there for one K you know, is their advisor or is there the person that they work with providing this to them on an annual basis?


Katherine Roy (00:13:41):

I always kind of ask that question cause I think a lot of people get frustrated with planning quote unquote because they feel like they do it once and they never do it again. But I think we've got a hold providers and advisors accountable for really making that an ongoing process that people can rely on and understand, you know with market conditions like their economic condition that might or you know, rise or be changing along with people's personal circumstances evolving. You know, they kind of always have a litmus test or spend some time each year understanding you know, where they are and where they stand and what more they could be doing or what changes they might need to make that it's going to be really the difference in them being able to retire comfortably if they retired or not.


Rick Unser (00:14:21):

Yeah. A couple of things you said there that I that I want to unpack. One thing that I think has become pretty evident as 401k plans defined contribution plans have continued to have a bigger role in people's retirement and retirement preparation. Their assets they're going to have in retirement. That role of the employer becomes, I feel like more and more important as they guide or steer or, or nudge their employees in the right direction to making good that will eventually, you know, help them exit the workforce and retire. So you mentioned lack of engagement on tools and, and I, that's something we've heard other people talk about and, and you know, people obviously are always trying to figure out how do you get more engagement? That's, that's obviously a big buzzword these days, but are there other things that you see the employers doing that maybe are, you know, disconnects in, you know, the way that they're approaching things or the way that they're communicating about their retirement plan or the, you know, retirement benefits that they're providing and they're either not meeting what employees need or are, they're not really having the impact that they could or should in someone's ability to prepare or their path they're taking to retirement?


Katherine Roy (00:15:42):

Yeah. If I, number one in terms of these disconnects, you know, this, this idea that I simply defaulted my participants in the pretax side that I am somehow not giving tax advice or I'm being taxed agnostic and, and so again, coming back to this Roth idea, I think there's a big disconnect between what participants need if a Roth is available in their plan, you know, how do they make the most of that Lynch and they make the most of that depending upon where you think taxes are going in the future, whether it be higher, the same or lower, you know that's really a critical decision for people to be thinking about and they need more guidance on that front. And I'm not you, my advice, I'm just talking about general guidelines around when you might want to save into one versus the other with the idea that people need a healthy mix so that they have control and flexibility.


Katherine Roy (00:16:28):

Cause I think to your point, you know, we're seeing the opposite end of people retiring that often. You know, the foreign key system has worked. Employers have provided a fabulous benefit. People who have been diligent pavers and invested wisely or consistently, they are retiring now with a majority of their wealth and tax deferred accounts. And that's great because it was a great accumulation vehicle. But being concentrated in that way really may subject them to not having a lot of control longer term with the taxes they pay, the Medicare premium, their taxability, social security, which is really important for people where social security is paying for a majority of their retirement. And it's really an important thing to be thinking about. So you know, that's I think number one and and helping higher income people in your plan are in plans, understand that the income limit does not apply to them.


Katherine Roy (00:17:13):

I think that's one of the big disconnects by state. You know, number two I would say is, is this idea of using default to a much greater degree and maybe getting through the noise of what you think participant reaction might be. And we can even provide our own participant research to show this. So we know that only about 55% of plans offer auto enrollment. Only 11% of that or 11% total do it for new hires. Also periodically kind of pull in non-participating people on a systematic way. You know, yet we know about 98% of people who are auto enrolled are very happy with having been auto enrolled. They're either satisfied or very satisfied and they'd stay enrolled through that process. And then secondly, picking your auto default decision in terms of percentage is important, but also this idea of auto escalate. So we only see about 38% of plans, you know, having some sort of auto escalate feature.


Katherine Roy (00:18:08):

Yet we know that people who are auto enrolled and have auto escalate are much more confident about having enough money for retirement and in their retirement strategy overall and again are very satisfied with their plans. So when we ask participants who actually experienced these types of auto features that are really helping them to save more or to capture people who may have opted out but may, you know, need to get back in the plan. When we actually ask those participants, you know, are they always satisfied they are yet plan sponsors still are not adopting these types of strategies at the, at the rate they need. And so when we look at, you know, the target savings rate that we estimate most people are going to have to shoot for, you know, we try to incur people at 15% of their gross income. Again, the employer match could be very helpful in that and the age of that 15% but that's really what it takes, not just to successfully retire but to weather all that life throws at you along the way. So if we're defaulting people in at three and not auto escalating them, inertia is going to keep them at that very little rate and that's not going to produce a positive outcome in the long run. So I think those would be the, the areas that I just see as great as the 401k system is working. I see. I think there continues to be disconnect on, on those particular topics.


Rick Unser (00:19:20):

Yeah, I agree. And I think those are really good points. I'll throw one more on there that we're seeing some research and we've talked about this you know, late last year on the podcast where automatic enrollment, some studies are showing it based on how employers are kind of using it, enrolling it out is actually having a negative impact on savings rates. And it's a little counterintuitive. It's like, well, hold on a second. Wouldn't people be saving more with automatic enrollment and more people are joining the plan? Well, again, I think what we've seen is yes, more people are joining the plan. Participation rates are going up, but when people voluntarily join the plan, they're typically saving more as a percentage of their income than they are when they're automatically enrolled. I don't know if you've seen the same thing, but that was definitely one interesting thing is we've, we're now having a lot more data on this whole automatic enrollment concept since it's been around for over a decade now.


Katherine Roy (00:20:16):

Yeah, I mean we, we see that in our participant research too, are ready fire, aim series. You know, we, we obviously want to base many of our investment decisions around how do people actually behave and making sure that we're investing as effectively as it can for them. And we definitely see that that trend, and I think it's public correlated to the idea that when we asked participants to define sponsor your employer be helping you gauge how much you should be saving. You know, majority of them say yes, they're looking to their plan sponsor to help them with that decision. And so what a plan sponsor makes the election to set the default so low. I think many participants are inferring that that's going to be sufficient. That's advice are there, they're defaulting to here, that must be where I need to be. And if they don't take action as a result of that, an increase that at some point, again, that's where auto escalate could, could remedy that. At least you know, in the future. So yes, we definitely do see that and are concerned about that.


Rick Unser (00:21:06):

You've mentioned your guide to retirement a couple of times and I had a chance to take a look at that. I thought that was great. One of the things, just kind of on the theme of what we've been talking about in terms of savings, having such an important role in people's ability to prepare for retirement. You know, one of my little phrases that I know I picked up somewhere, I didn't invent this, that's for sure. But you know, you can't invest your way out of a savings problem. I think you guys had a really great chart in your guide to retirement, which I will probably sample from over time, but it was just talking about, and I'm probably saying the wrong name here, but basically some savings hierarchy and I think had some really good food for thought on questions that employers get and retirement service partners get around. Well, should I save for retirement or do this and one or two of these. I thought, well, I'd love to get your thoughts on because I think these are pretty common ones that employers get or HR departments get or you know, certainly retirement service partners get. But one of the big ones that we hear consistently is, you know, should I save for retirement? Should I contribute to my 401k or should I pay down debt?


Katherine Roy (00:22:18):

Yeah, it's a question I get a lot as well. So I, you know, our, our view there and our savings hierarchy, I mean it does, it depends on the type of debt. But if you, let's say that you have something like a student loan or you have something that has a schedule, obviously you want to meet your debt payment, which we see particular student loans, miss payments happening quite a bit. But you know, hopefully meeting that payment first and what you're obligated to. And I think the next question becomes, okay, well where do I put my next dollar? Do I try to pay down that student debt or that, that higher cost debt first or do I save for retirement and are our view there, you know, I think is, is consistent across the industry. You don't want to give up free money. So if there is a company match, either with an HSA which reduce CS or the DC plan, which is much more prevalent that there's a match there, you'd want to try to save as much as you can to get as much of that match as possible.


Katherine Roy (00:23:12):

And then we do recommend that you go and you pay off with your next dollar after you've been able to do that. Pay off higher interest loans first. And the way that we defined higher interest loans is any sort of loan that has an interest rate that exceeds or is greater than the amount that we would estimate you could earn longterm by placing that dollar into a diversified investment solution. So our right there is 6% and again that's using our longterm capital market assumptions, our target date series, our model portfolios, we always try to triangulate, you know, somewhere between 60 40 70 30 equity bond type of portfolio. What might that generate over that long savings and investment horizon? And so 6% has been a number for several years now. So if you have interest that's owed at a rate greater than that, you would want to pay that down as quickly as you can because you're losing ground by having that interest incurred at a rate higher than than where that dollar would, that dollar could potentially earn in the market.


Katherine Roy (00:24:09):

So that's kind of how we try to think about it. You know, obviously the employer match is so incredibly valuable. I think that the order might be a little different if all of your debt is consumer debt that you're revolving on credit cards, which have a much higher interest rate than you're losing ground a lot, a lot more quickly. So you know, they're, you're going to want to have a really aggressive plan, I would argue to cut back your spending and try to, you know, cover that consumer debt as quickly as you can and also reduce your lifestyle to maybe more manageable level going forward so that you're in a better position, you know, to be able to replace those lifestyle needs with the savings that, that you're putting forth in the plan.


Rick Unser (00:24:49):

All right, that's great feedback. And I think, again, that's kind of number one question that is typically floated around out there. And I think disgust in a lot of circles are, are just those casual questions that a lot of people get. I think number two, when maybe this is a little more specific for me, you know, based on where people are in their life, but for me with a couple of kids coming up in this whole college thing, should you save for retirement or save for your kid's college? And I think that's an interesting question, especially in the times we live in right now with the prevalence of student loans. So what are your thoughts there? What, what did you, what did you guys come to as a thought process in your, you know, guide to retirement?


Katherine Roy (00:25:31):

So I will confess, I am an angry retirement person relative to the other goals that people are saving for. Because what I find, whether it's planning tools or if it's behavior or attitudes, you know, people or processes tend to give greater importance to goals that are occurring sooner and goals that are occurring later. And I understand that's the natural tendency. I have. My own son is a freshman in college and I've written two tuition checks now and I completely can relate to this now I think more personal level, but I just try to emphasize, you know, just because retirement is quote unquote last, it's the farthest out of the time horizon. You really have to think about priority and how important it is to you personally to you being able to, you know, support yourself and not, you know, eventually become reliant on children. It's an extreme example.


Katherine Roy (00:26:20):

I know. Take care of yourself first. One of the analogies I love always love to focus on is when they're going to do the safety briefing on planes. I'm on planes constantly and it kind of dawned on me a couple of months ago. I finally kind of tuned into the briefing that they go through every single flight when there's an emergency and those little yellow cups drop from the canopy above you. They tell you very explicitly to put your mask on first before putting the mask on children or loved ones that they need assistance. And that makes I think a whole lot of sense to me because you want to make sure you're going to be okay before you start, you know, helping others and making sure they're okay. And so I would think about retirement and college the same way. And, and the other thing I would focus in on is you can't finance retirement and you don't have human capital left typically.


Katherine Roy (00:27:06):

I mean if you can, if you can work and you want to work, that's great, but that's often very difficult for older people to do. So those key levers are funding opportunities that are available for college, whether it's paying from your current income or taking out loans, you know, those are options for a college decision that are not available to you for retirement. So thinking about that, I think it is important now obviously I would want people to be able to do both, right? You're likely going to have those two goals. You're going to want to try to balance that. I think two words of advice here, you know, one, again have that plan. Understand if I redirect, you know, a certain amount of my savings into an account for my kid's college. What is the trade off I'm making in retirement? Am I going to have to work longer?


Katherine Roy (00:27:53):

What's your lifestyle trade off of I making there? Should I be saving more? And once the kids get through college, how am I going to address that trade off? And I think many times people don't do the homework to understand what that is and they end up holding the bag later and being frustrated by, you know, where they end up without, you know, having that pre-knowledge. And then my last one here, I mentioned, you know, you're putting money into an account. You know, you want to make sure it is the most tax efficient account you possibly can use. We know that a majority of people are trying to save something for their kids college. Unfortunately a majority of that is exactly that is saving and saving in a bank account where they're earning no compounding whatsoever in terms of interest. And they're also not getting tax benefits that that five 29 accounts can offer. And so based on our own research, we just see people not saving efficiently for college costing their retirement pretty significantly if they are redirecting funds to make up the difference. And so, you know, making sure that if you are redirecting, you're understanding the trade off you're making with retirement, but you're redirecting it in a way that really can be the most efficient way for you to be able to meet more of those costs for retirement so that you don't further invade upon your retirement savings.


Rick Unser (00:29:05):

And you just touched on something there that I think, I feel like I've seen go in and out of the conversations that the retirement industry is having with employers. And it was this concept of, well, you know, as you get older, you may or may not have that ability to work. So maybe you just kind of re-describe that. But the, the, the concept that I would love for you to hit on here is I feel like there's been some conversations about, okay, well as we see people staying in the workforce longer beyond that traditional retirement age of maybe 65 that that has a negative impact on employers and this is something that they're trying to figure out how they can help people make that transition in a timely fashion to retirement. I don't know. Do you see employers thinking about that? Are you having conversations as you think about retirement and the timeliness of retirement or is that kind of an urban legend that people like to talk about but employers aren't really making decisions based on we really want to see people retire by X date?


Katherine Roy (00:30:15):

Yeah, I think a couple of things here, at least we see in the data. I mean number one, while more people are in the workforce at older ages today, so just to maybe put it in perspective, in 1998 there was about 18% of the population age 65 to 74 which is kind of the sweet spot. About 18% were in the workforce, meaning they either had a job or were looking for a job, you know, 10 years later it was up to a quarter. So 25% right now we're about 27% but the focus or the projection by 2028 is it's going to go to about a third of Americans and that age group, you know, we'll be, we'll be in the workforce now. We have to balance that with our just a whole lot more people in this age cohort now. So the reality is by sheer numbers, there are many, many, many more people leaving the workforce than ever before.


Katherine Roy (00:31:05):

And interestingly, when they do leave the workforce, again back to the retirement confidence survey, we have this as a chart and a guide. The general retirement age or that desired retirement age has consistently been age 65 I think it's very, very welcome to Medicare eligibility and less though it is the security itself. But you know, the average experienced retirement age is 62 so the three years early and interestingly this year and in that survey that again we have the guide. You know, I found it interesting that the number one reason why people say they're retiring early has always been as long as we've been tracking it, health, health costs or healthcare, sorry, health issues, health, disability, you know, health problems are, are pushing me out of the work earlier than I'd anticipated. Interestingly this year it's tied with changes at my company are downsizing. So I think that's concerning because if you have individuals that aren't financially prepared but yet are being swept up into those types of corporate decisions, that is not a positive outcome for obviously the participants to be, to be dealing with particularly they're not, they're not prepared.


Katherine Roy (00:32:09):

So we think the conversation started so much earlier like, Oh, how are you making sure that you were planned design and the wellness activities you have going on. You know, how are you making sure that you can have more of your participants get to retirement with the ability to, if they want to leave a work force that they can. And we know that older workers who are financially able to retire but continue to work because they love what they do, we know that they are hugely valuable for the human resource perspective. A culture carriers, companies, mentors, you know, if they love coming to work everyday at, at a company and they're doing it because they want to, that is a fabulous employee to have. But we also know the opposite is not a good situation. I want to, he's only coming to work because they have to because they don't have the financial means to leave, may have high absenteeism. Their attitude is going to be, you know, cause they're not as positive. And so again, you know, we, we want to kind of reflect the fact that older workers can be hugely valuable, have huge, huge experience, huge value in terms of their capital. But we want to, we want to have more employees working longer or later into their lives because they want to, you know, not because they have to.


Rick Unser (00:33:18):

Yeah. The whole concept of job locked or job trapped versus being there on a positive voluntary basis. And in your survey, I think this is always surprising to people, right? Because I think like you said, we were going through some of those, you know, while retirement or this retirement or that, I think a lot of people's calculus is, okay, well if I have to do this or if I need to cover this expense or if I need to forego saving for retirement, I can just add a few years onto my working career and everything will work out. You know, it might not be the best solution, but that's my fallback plan. Can you just talk a little bit more about what you guys are seeing in terms of that element of, of the workforce? Are those people that are having to leave early and what that means to, you know, to retirement or what that means to their ability to, you know, lead a successful life. And retirement. And, and I guess maybe as you're thinking through that, are there ways that employers could do a better job of trying to help people think about that situation, which is not a pleasant one, which is, I know you think everything's going to be great and you're gonna live forever, but here's the reality that we're seeing statistically you're, or just from research surveys, et cetera.


Katherine Roy (00:34:35):

We did some research on both the boomers and the millennials over the last five or so years, and when we dressed us people's outcomes as a result of an early retirement by three years, what what we see is that it takes what was a pretty successful outcome from a financial perspective and derails it and to do rails if for three reasons, because one, you know, you lose those three years of saving, which often in people's plans, you know, those are probably the biggest years of saving as they ramp up for retirement too. They start to top their for OneCare top their assets sooner than expected. So you're extending the time horizon. So you know, if, if you've got two people in the household, even if one of them is having some health issues, you're still planning for that household and there could be a spouse that's very healthy and, and now you're topping those assets earlier for an for a longer period of time.


Katherine Roy (00:35:30):

And then some people do typically equate stopping work with starting social security. So you're really locking into the charity and the 25 to 30 haircut where you otherwise may have thought about getting 100% and that's a huge difference in the amount of income that, you know, security is providing an offsetting from a spending perspective. So, you know, those three years are really, really critical. I think a couple of things. One, you know, we talk a lot about stress testing people's plans and you know, helping them understand the risks that they may or may not ever experience, but how, you know, risk proof is that plan. And have they evaluated, you know, the risks I live to a hundred or the risk that they're going to leave the workforce three years earlier. You know, and what is the effect of that and how can they maybe take some action at a younger age to help protect themselves against that?


Katherine Roy (00:36:18):

I think the second thing we're saying actually in our chase data, and so we have access to a de-identified database of spending behaviors or for households that do majority of their spending with through JP Morgan chase. And we're able to look at that again, a completely de-identified way. So we have no idea who these people are, but we can look at the spending behaviors and what we actually see is that maybe on the, on the good news front here, so maybe leaving the employer plan space worth individual and looking more at the household ecosystem. We do see quite a long transition into retirement by the household. And what I mean by that is, you know, we can look at when retirement income starts to hit the one bank account. So security check might start hitting or an annuity or a pension payment and we can kind of look at that household and say, okay, something's happened from a retirement perspective.


Katherine Roy (00:37:06):

You know, has their employment income stopped, you know, what are those, what does your spending look like? And what we see is that for many people, employment and income continues often for the spouse, the spouse continues to work maybe for healthcare coverage but also having employment income matched with that retirement income. And that can be potentially that backup plan for these types of situations. Just because one person has to retire, it may not mean that you know, the whole household's retired if you have another working spouse that can help offset some of that. So also thinking about that as you're thinking about planning for your retirement, the risks that you face as an individual, but also some of the strategies you might be able to employ if you are in that Mary's situation. It's something to think about.


Rick Unser (00:37:48):

No good points. And on the healthcare side of things, that was one thing I didn't see, or at least I didn't, you know, observe in your report was really any specific numbers or guidance around healthcare costs in retirement. And I dunno, I feel like some people have put out some pretty scary numbers where you know you're going to need $280,000 you're going to need more than $300,000 in retirement to fund your healthcare expenses. Is that something you're tracking or is that something you have some thoughts on or is that maybe not as big of a concern as others have made it out to be in terms of retirement success or or preparation, et cetera?


Katherine Roy (00:38:30):

Yeah, you may have missed it cause we we, we are not in the scary number camp. So you may have as you put through Utah probably reasonable numbers and they didn't catch you at that. Just so you know, I think health care cost is something we actually added a lot into the 2020 guys this year on a couple of different fronts. One pre 65 health care costs. So we just talked about a lot of people leave the workforce early. If they don't have access to an employer plan to a spouse, they're going to have to buy it if they want coverage, which I hope everybody does. If they want to purchase coverage, they're going to do it in the marketplace. And so what we'd heard from a lot of financial advisors, you know, implant as well as, you know, helping people put aside the plan, you know, how do I help my participants in my clients get their arms around what those costs look like.


Katherine Roy (00:39:19):

Because you know, if you say I'm going to retire at 60 and you know you're running the numbers and you're not factoring these types of costs between now and when you're Medicare eligible, you're missing a pretty big monthly expense that you know, could, could shock you if you haven't done your homework. So one of the things we added this year was again, it's pre 65 to five showing the range of cost between silver and bronze plans, which are formulate plans are available in the marketplace. We give the national high and low for each of those. I think what was shocking as we did the research to try to narrow down the numbers we going to provide is that it's not, you know, it's not just about the coverage that you're buying. It is about the pool of people that are also buying that same coverage. And it goes down to the zip code level.


Katherine Roy (00:40:08):

And so when we were searching around for high and low, you know, locations, shockingly, our highest expense that we could find was in Apalachicola Florida. And the lowest expense we could find was actually Brooklyn, New York. And so if you think about the cost of living in those two places for everything, but healthcare, you would probably argue that Brooklyn is, is dramatically more expensive than Apalachicola Florida. But because of the health pool and the population of people that are buying insurance in those zip codes, people in Brooklyn appeared to be quite a bit healthier and managing that health much more effectively than people in, in Florida. So, so what our main message is is you know, participants, individuals, they need to log into, you know, we get the Kaiser family foundations website that gives a, has a really great quick, easy way of assessing what your costs are going to be.


Katherine Roy (00:41:00):

You know, cost can range from you know, $600 a month to as high as $2,100 a month. So you know, the $2,100 a month, that's, that's, that's Apalachicola Florida, right? That is, that is going to break most people in terms of their ability to cover that for you know, the period of time before they retire. So really understanding what these costs are and getting it local to your level is important. And then the second piece there is that it's going to grow quickly. So if you're 64 and you retire and you just have one year worth of expense, it's going to be about $1,400 a month. But if you retire at 50 in the same year, it's only about $800 a month. The important thing for people to understand is, okay, I retire at $5,800 seems reasonable, but by the time you're 64 it's going to be almost double what you're paying monthly when you began your retirement.


Katherine Roy (00:41:48):

So assuming that 6% growth rate between when you start these types of costs and when you end is going to be really important as well. And then obviously the ending point is Medicare. And there's some good news there with a caveat. A good news is that we see out of pocket costs all in for people who go on Medicare this year, it's about $5,300 per person per year. So again, we like to talk about it in either monthly or annual term rather than these big scary numbers where you've present, valued all these future costs to today because people just don't know how to digest that or what to do about that. And so I think it's important to make it manageable. And I always joke it's, you know, it's not like you present value all the Starbucks vanilla lattes. I'm gonna order in retirement back to today and say, Catherine, he's $50,000 to buy a coffee in retirement. So it's, I think it's likely that for healthcare as well.


Rick Unser (00:42:36):

On that note, one statistic that we talked about in a prior podcast was, Hey, what if I told you you're going to spend $60,000 on cable in retirement? You know, how does that make you feel? Does that, does that help you put this in a little bit of perspective?


Katherine Roy (00:42:49):

A lot of Netflix,


Rick Unser (00:42:51):



Katherine Roy (00:42:52):

Yeah. So, so the 5,300 is is you know, it's more muted in its growth rate and that's what we see going forward. So we actually made the decision this year to lower our, our growth rate on Medicare specific healthcare costs from six and a half to six, which again, if you friends with financial plans, you know that a cutting a cost like healthcare by half a percentage point, that's, that's a pretty big number over 30 year horizon are pretty big change over at 30 horizons. So that's good news. But the bad news is that we think more and more individuals are going to be subject to greater and greater means testing for Medicare. I realize that's at the higher end of the income and wealth spectrum. But this idea that the more I draw out of a 401k or the more I draw out of a tax deferred retirement plan flowing through my modified adjusted gross income that's going to drive my healthcare costs and what I'm paying for Medicare is you know, going to be a reality going forward as Medicare gets in more challenging shape. Which is why, again back to Ross, back to diversify solutions like an HSA that you know, gives you tax-free opportunity to cover your lifestyle needs without triggering Medicare costs, at least for now. You know, I think is is really an important thing to be coaching individuals on particularly to employers, mid career people that are on a trajectory to have all of their wealth and tax deferred assets. I think they are particularly at risk to pay more for their Medicare costs in retirement.


Rick Unser (00:44:16):

And since you went to Medicare, I think the logical follow onto that is what are you guys seeing around social security? Do people have a a handle on how that works and when they should take social security or is that a big black box or do you see people making bad decisions as they think about how to approach that?


Katherine Roy (00:44:40):

I think we're seeing improvement and I think if it's maybe a, maybe a brighter spot. And then Medicare, I think, you know, when you compare 2012 claiming decisions 2017 you know you've gone from about 40% of people claiming at 62 to maybe 30% now. So you know, pretty significant drop and people claiming as soon as they can. And you're also seeing some growth at the far end. So obviously 70 is the last age at which you claim. And so we're seeing about 2% to 5% so 3% increase in people delaying. So you're seeing some movement there, I think in the right direction. Now again, that could be because we've had strong employment and some people are able to work longer. You know, people have less access to pension, so they're working longer as their claims history later. The function of that more so than this, you know, they really are making a better decision.


Katherine Roy (00:45:29):

But I think you know, there's so much education out there about security now about a third if people wait till full retirement and use, which is a good marker as well. Now obviously people claim early because if they have no other source of income or they're in bad health, you know those types of things are, are very reasonable reasons for people to claim social security early. I think where I continue to be frustrated is this mindset that it's going to change, go away, disappear and so therefore I've got a claim even if I have financial flexibility where I could claim later on the claim and as soon as I can because I'm going to get it while the going is good. And I think there is having a more thoughtful understanding of of how security works. You know, one of the things I've been talking a lot about is, you know, last time security was major that reformed as 1983 when we were dipping into the trust fund and, and Ronald Reagan and tip O'Neill got together and said, look, we're going to move social security at full retirement age from 65 to 67 so I remind people they didn't do it right away.


Katherine Roy (00:46:27):

They gave a 17 year hiatus, so fewer than 17 years of claiming or had already claimed this period. There was no change for you. And then we gradually started to implement the change, which we'll wrap up in 2022 when we get to, you know, every new 62 year olds for retirement age will be 67 so all in, you know, 40 year horizon to implement targeting very young people the most in terms of how the benefit change. And so that's how we see healthcare reform happening going forward. But the main point here is that 1982 was the last time we kept the principle of the trust fund between 1983 and 2020 every check that has gone out the door has been covered by what, what is the engine of social security and that's all the payroll taxes that are being collected every single year. So that is covered 100% of all checks going out.


Katherine Roy (00:47:16):

Unfortunately this year, you know there are enough baby boomers that have tipped the scales and our auto security then we're going to start to draw off of the excess that they put in when they were working and we're going to eventually deplete the trust fund by 2035 but we have to ourselves that at that point payroll taxes are still going to be collected at an 80% coverage type of ratio. So our gap is 20% you know, we believe that probably before the major election that proceeds 2035 you'll see some action in terms of what to do about that 20% gap. And the good news is that there's lots of levers to pull and lovers that can be pulled gradually know the most recent proposal that was floated beginning of last year, I believe in the house, you know, had strategies of increasing the payroll tax by 0.1% over a 25 year period would actually go a long way.


Katherine Roy (00:48:07):

Or raising the payroll tax collection on higher income people above the threshold or above the cap. You know, again, we don't want to raise taxes because we don't have to drag on the economy, but I'm giving you a sense that there are the tax levers, there's the benefit levers, there are a lot of different things that could be adjusted over such a large pool of people and a large timeframe, you know, fill that, that gap. So my main message would be understanding your benefits. So log on to or have your clients or participants do that every single year and understand what that benefit value means to them. They check their earnings history, make sure it's up to date, and then make an informed decision when you're getting close, right? Inform yourself in your 50s and you understand that the security works and you know, understand that it's highly unlikely to change for people over the age of 50 to make a good choice as to how it's going to fit into your income plan.

Rick Unser (00:48:54):

Yeah, and you had some pretty nice charts I felt like in your guide to retirement as well. So certainly some good examples of maybe how to think about different timeframes or scenarios where it might make more sense for you to start at one time frame or another. Is that right?


Katherine Roy (00:49:12):

Yes, I mean we have, we have three different charts, you know, the first one is understand how your decision to claim is going to affect the benefit you receive. So claiming early permanent reduction, full retirement age, a hundred percent claiming at 70 124 to 132% you know, maximum benefit could be, again, depending upon your full retirement age can be how you can maximize it. So that's really step one. We have a sign that talks about the breakeven age, so if you claim early, you're going to get littler checks. If you wait, you're going to get bigger checks, you know at what point do those crossover, at what point do this claiming later pay you more in total out of social security. And the answer is there is age 76 or 52 versus full retirement age and at age 80 if someone's trying to decide between full retirement age and age 70 so again 76 and 80 are the ages at which you have to look beyond those that age to get more out of social security as a result of waiting for a bigger check than getting a lot of smaller checks earlier.


Katherine Roy (00:50:12):

And then also on that side, your odds of living that long cause it's great to know to break even age. But if I'm a man or a woman and I'm 62 today, what are my actual odds of living to 76 or 80 you know, age 80 those odds are six and 10 men, seven and 10 women, they're going to live at least that long. So we have pretty high odds. So understand that. And then the last one is, is around this idea that, you know, if I wait to collect social security and I'm not working, I'm going to have to draw on my 401k or my portfolio and what rate of return would I need to generate to make claiming earlier, maybe be more attractive if I could protect my portfolio and takes us security even at a reduced rate, it might make sense. Or likewise, if there are lower returns and higher longevity, you know, waiting until 70 maybe your best choice from a total value perspective.


Katherine Roy (00:51:00):

Even if you have to draw in that portfolio early on to delay social security, you're going to end up in a better place if you live to, you know, later in later ages. So we've tried to give really the numeric facts around how South Korea works, but we recognize those securities is often an emotional decision for people to be making. And you know, what we don't want to do is have people say, Oh my gosh, you know, if I'm going to be drawing on my portfolio or my 401k, I have to be all in cash because I wouldn't be so nervous about any sort of market volatility to delay taking social security. You know, that's not going to produce a better outcome anyway or either. Right? So somebody needs to be kind of balancing the, you know, we'll do stay disciplined in your investment portfolio strategy if you don't take social security or if you do and, and, and balance that into the equation as well.


Rick Unser (00:51:45):

Well said. And you mentioned government involvement to need to change some of the social security stuff. So, so I guess that brings me to something that we saw at the end of last year, which is the new secure act, which I think has some impact on retirement plans, which we talked about on a prior podcast with Bob Holcomb. But I guess as you think about the secure act and what impact that might have on individuals ability to retire or their retirement planning, are there some elements there that employers should be aware of that might impact the individual more so than might have an impact on their retirement plan itself?


Katherine Roy (00:52:27):

So I'll, I'll caveat this with this is going to be the more high net worth or affluent type of participants and under them that you know, they, you'd be thinking about which again, I know a lot of employers are very focused on how do I help everybody, you know, get to the finish line. But particularly for, you know, people who have 401k as part of their, their broader portfolio. Just one thing we're talking a lot about on, on the out of plan experience is the combined change to move required minimum distribution age to 72 and the elimination of the stretch IRA option, which now, you know, forces out most non spouse beneficiaries forces all tax deferred money out of the IRA within 10 years of the second spouse passing away. And the byproduct of that I think is, it's two things. One, you know that that RMD age required minimum distribution age really does anchor many Americans on when they're going to take money out of their or 401(k) and while yes we're living longer and moving the RMD age out, you know, may make sense.


Katherine Roy (00:53:31):

The, the maybe unintended consequence is that people often in their sixties if they have retired, don't have a pension, they can have pretty low tax pictures and you know, even if or if no tax, right, let's say their, the deduction is covering, you know there's some security is not taxable. They could be in a very low tax type of situation. And then again, if all of their savings is in tax deferred accounts, their RMD is going to shoot them up into higher brackets and they're ultimately going to pay more tax on that accumulated tax for saving than if they may be thought about using their sixties to either, you know, use a portion or you know, pull out some from their tax deferred accounts and pay tax at a lower rate. But even more beneficial is to convert that into a Roth for life and to do that kind of systematically through their sixties so that they really mitigate really higher MDs in the future.


Katherine Roy (00:54:25):

And they're also using the tax cuts and jobs act, which is true, you know, low brackets until 2026 here, you're taking advantage of probably the lowest practice that we are likely to experience that could be made permanent or we know right now Wilson's that 2026 you're, you're using those to prepay some of these taxes and getting it to that tax deferred tax free account for life. So that's important I think for a couple of different reasons. One, you know, if, let's say you pass away shortly after, you know, you retire and it passes to non spouse beneficiaries for some reason maybe don't have a spouse, you're single. You know, you might have people in the middle of their careers in their highest practice as beneficiaries now receiving pretty large inflows of, you know, foreign K or IRA assets over a 10 year period, which again leaves less to beneficiaries than when they could stretch it.


Katherine Roy (00:55:15):

So again, having a Ross as a tax free option that goes to that mid career beneficiary, we think, you know, it gives them more flexibility or at least is less sensitive to where your beneficiaries are in their tax journey and passes that tax-free to them. So we think that's important as well as this idea that you know, a lot of people are not going to die holding hands. Right? And so we all know that a single tax brackets and a Medicare surcharges for single people are at a lot lower threshold. And so obviously, you know, wanting to keep more of that heart on savings and investing, having more ROS helps mitigate against that type of situation there as well because you've got flexibility, you know, should that happen? I think, you know, the main thing is just we're kind of, we're kind of compressing the years in which people are making withdrawals from. Therefore we care IRA is compressing the amount that the beneficiaries or the time beneficiaries have. And and what that usually means is higher tax practice and more being distributed. And what we want to do is help people think about smoothing it out or you know, thinking Roth conversions or Roth contributions as a good option to help give more flexibility and control.


Rick Unser (00:56:29):

Well since you mentioned Roth a couple times, I definitely wanted to give you a chance to focus on that a little more and I think there's starting to be more awareness of Roth and just anecdotally I'm seeing higher participation in Roth in a lot of plans. Are there still misperceptions out there that we haven't talked about that you think would be good for employers to be aware of or think about trying to clear up within their workforces?


Katherine Roy (00:56:59):

Probably since we last talked, probably I've mentioned it a couple of times. It's probably clear to all of your listeners that I be given research that we've done on the withdrawal order and on a number of different fronts. In particular looking at the Medicare surcharges, I have become even more of a Roth 401k or Roth. We love her. Just because I think it is such a powerful tool that gives participants control over what their tax picture looks like. And you know, again, I spend a lot of time looking at the high net worth side of things. But for me what was was the biggest shock as we did that research was just how incredibly valuable tax free social security is to, you know, participants at lower levels of the income spectrum or savings spectrum and how only having tax deferred money really puts them at risk or makes them have to take what is already probably a fairly challenging trade off between their income and their lifestyle and make that even worse because the tax consequences of all of those years of saving, you know, are all embedded in that tax deferred account.


Katherine Roy (00:58:06):

So I'd be again, quite passionate about Ross being considered as a default option, particularly if you're defaulting young people that are at the bottom of their wage curve, you know, education, et cetera. Now when I say that, I'm literally going to the point where I often start seminars or training for financial advisors saying, look, if I could get to retirement with 100% of all of my money to Ross, I would do it full stop. I understand that that would be costly at certain points to prepay the tax. So that may not save me money over my lifetime as much as I think it will. But I, I just think that's the trajectory we need to be headed towards. And when I say that I get often pushback and some misconceptions that I hear a lot, number one, Congress will change their mind and ultimately tax the earnings within Roth accounts.


Katherine Roy (00:58:54):

But that kind of structure is going to be too good to be true. And so therefore, you know, ultimately they'll backtrack on that. So you know, a couple of points there. I think 7% of current tax advantaged accounts, DC and IRA fit in raw status. That was the last number I had. I need to revisit it. But last time I looked at was 7% so that means 93% is sitting in tax deferred status, which is, you know, why you see when they need to pay for something, they shorten time of being able to stretch that out even longer and get that in terms of getting rid of stretch, you know, force more of that talks to poured money into the taxpayer. It's huge in terms of revenue. The U S government today, now, you know, the raw only 7% most of the Roth is contributions or conversions. Already that talks has been paid on.


Katherine Roy (00:59:39):

There's pretty clear precedent, I think. You know, I would say I was 100% present and we don't double tax things. And so therefore, you know, that's not going to be something that they could change their mind on. But you know, what would it take to get the earnings on that 7% significant enough to be worth the political capital, the political costs of going after and taxing it. And based upon my, just back of the envelope litmus test, it would be, look, we'd have to have 100% ratifications every new dollar being put into a tax advantage account needs to be into a Roth. We would need probably 50 years of a rip roaring bull market. People staying invested in it to get enough earnings in that account towards her type to be worth any sort of tax revenue that would be worth the cost. So I don't think that's the reality now.


Katherine Roy (01:00:31):

You know, you could force RMDs on, on Roth IRAs like rough 401ks to get it into the tax payer sooner that that may be likely, again, not hearing anybody talk about it, but that that could be something that comes across. I think what could also happen is having raw withdrawals included in modified adjusted gross income, like municipal bond interest as a source of income that decides whether you have the means to pay more for your Medicare. I think that that could happen, but I think very unlikely that they'll change the rules of the account. And I also just focus on, you know, I think president Obama at some point did mention that it might be a good idea to tax five 29 withdrawals and you know, the next day we sent it that because of the, you know, the reaction to it. So I don't think that this idea of changing the account taxation policy is something that would be viable. And what I haven't seen is the idea of income limits on a Roth 401k. So that I think would be much more difficult to implement. But I, you know, that's, that's not something I thought about or, or have heard any discussion on.


Rick Unser (01:01:34):

Got it. And I guess based on everything we've talked about, if I go back to my original sort of, you know, tongue in cheek statement that, you know, Hey, this whole journey to retirement pretty you know, pretty easy. I think based on all the stuff that we've been talking about, obviously there's, there's a lot more to it than appears on the surface. Recognizing that there's also curve balls. There's also things that happen over time where people are going to have to make some financial pivots or do some things a little differently than maybe they intended to. Are there some things that in your research or just anecdotally you would suggest that, okay, I get it. Things happen. They all happen to all of us, but here's a couple things that maybe are don'ts that you would just encourage people that maybe have in the back of their minds as they're trying to think through things.


Katherine Roy (01:02:28):

And the last couple of years, again talking about our 15% savings target, you know I joke about life happening and so for the last two years I have asked the audiences I've spoken to that if anybody has had a life that has gone according to plan, what they please raise their hand. And candidly, over the two years I've had two people raise their hand. I mean I talked to at least two if have actually had their let go according to plan. And so I, in terms of don't, I mean I, I'm going to come back to a theme that I think is just really important to hit home that's don't not have an emergency reserve plan, right? Don't, don't not have that, right? We absolutely have to have that, you know, don't not think about insuring your human capital. So, you know, we talk a lot about the savings and the investing side.


Katherine Roy (01:03:21):

You know, that's all assuming that you're healthy or you're working, you have the human capital and you've got the salary and the contributions to be able to pay into social security, the tax that you owe to build that benefit or to save a new 401k. You know, what happens if that has issues. So, you know, thinking about protection strategies like term insurance, if you're the primary earner in your household and something happens to you that you need to have the human capital protected or if you're, you know, in your forties early fifties disability becomes a reality. And so are you thought about protecting your human capital, those types of situations because just like people retired, you know, three years early for for health problems and disability, right? Having a disability solution from an insurance perspective, if it's reasonably priced and fits into your plan, this is something to equally think about.


Katherine Roy (01:04:09):

And then the last one, I just, maybe it's cause I'm old and I'm thinking about this myself is you know, how do you manage your human capital and your skills so that you do have that backup plan? I mean I think a lot of people with these, again, a statistic that that health problems is now equal to your changes at your company that are either causing you to make a decision to leave or your employer asking you to, you know, what is your backup plan in terms of a second career or a second act and how are you maintaining the skills or the optionality to be able to, you know, put those to work if that's the situation that you run into. And likewise your social capital in terms of your, you know, your network and your ability to, you know, stay connected with people that could open those doors for you, should you be in that situation. So yeah, I guess I go to kind of all of those types of how do you, how do you protect them capital. You really earn your ability to contribute to these things as well. But again, always having a emergency reserve to be able to tap into should you be in that situation?


Rick Unser (01:05:06):

No. And that's one thing we haven't hit on that before I let you go. I'd love just to get your thoughts on, I feel like people's guidance around emergency savings is anywhere from a couple months, a couple years of how much you should have set aside w what are your thoughts there or what do you have in your guide to retirement that might help people formulate a better answer that's more specific to them.


Katherine Roy (01:05:31):

So we, in our guide, we have this kind of simplistic three to six month view of your total expenses. But I, I typically go further than that and say, look, you know, it's three to six months while you're working. And during those accumulation years, you have to balance it though with the thinking of, you know, how stable is our, my earnings? And, and the reason that it was three, six months is, you know, that's generally how long it takes a typical person in a typical profession to find a new position when you look at time and unemployment and unemployment collection. But that's not true for everybody. That's the average. And then we all know no one's average. So my sister is a tenured professor. She cannot lose her job really. I mean, I'm sure there could be extreme things she could do to lose her job, but she's tenured.


Katherine Roy (01:06:12):

She probably needs two to three months because she's has consistent human capital, you know, an investment banker or someone who's in a position where there's only three of you in the country. You know, if you lose your job, the ability to get one of the other two jobs is probably pretty rare. So you're going to need a little bit more time. You might want to think about having a year, you know, the volatility of your job or the length of time it would take you to find a very specialized job that you're in to replace that you're going to need more. So that's, that's generally the guideline for accumulation. You know, I like to say when people are in their fifties early sixties and they're, they're thinking about retiring, they will need to shift that emergency reserve fund potentially to a number of years worth of their net expenses.


Katherine Roy (01:06:55):

You know, if they were to be retired. So if they, you know, understand how their spending relates to the purity or other sources of income that might be coming to them, you know, a spouse continuing to work for a period of time, how do I make sure that I'm building up, you know, a higher reserve of cash in advance of retirement is something that I'd recommend. But then you're really shifting from an emergency reserve fund to, you know, more of a bucket strategy of how do I make sure I've got the liquidity I need for those maybe early couple of years of retirement harvested proactively, you know, during hopefully positive markets. So I helped protect myself against sequence of return risk and having to sell at the wrong time.


Rick Unser (01:07:32):

Really appreciate you sharing some thoughts there. And I think that again, emergency savings is something that I think is starting to pop up more in the employer conversations around is this a topic we should be trying to help employees with? And I think everything you just said there makes it makes a ton of sense. We've covered a ton of ground today. I loved your guide to retirement. I think that it had a ton of great information. Before I let you go, is there anything that we missed that you think would be good as a quick mention or, or something that would be helpful to employers or their retirement service partners as they're thinking about how to help employees going forward in their journey to retirement?


Katherine Roy (01:08:14):

I guess as I reflected upon, you know, we have covered a lot of ground and I would want them to be thinking about just how important their retirement benefits that they either are advising on or providing or working with participants every day. Just how incredibly important that is. And so I know we covered a lot of areas where we could improve or we could, we could see the system maybe working more effectively for more people. But for me, I'm just really grateful for what everyone's doing. Right? And I think we're, we're, for many people, the system is working really well because everyone is so focused on getting more people across the finish line and being successful and having a good retirement outcome. So I would just want people to, to recognize that what they're doing if they're in the retirement space, like I have been for most of my career, that it's a fulfilling place to be. And so while we can, we can seek to make it better if it is doing so much for so many people today.


Rick Unser (01:09:03):

I think that's a great point. And I think something that unfortunately gets lost in the shuffle when you have articles and other things just talking about how this isn't working, I think a lot of the success does kind of get overshadowed. So I appreciate you mentioning that and this was awesome. I will make sure that we don't wait so long to have you back again and definitely we'd love to. We'd love to chat again in the future.


Katherine Roy (01:09:27):

All right. Thank you. I really appreciate the time.

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