Helping some family members plan

[Yegey]

I am helping family member (close relatives) do some retirement planning. This is because I notice they barely save any money for retirement and they are in the 40's. One has a high paying position and the other has a lower paying job. I am a bit concern that their runway is running out.

The problem is I am not sure what I can do to help them plan in such a way they won't be in trouble when they retire. I have to admit that I never really had a plan for myself. I just save as much (around 15-20%) as I can and invest in mostly equity. I don't know my numbers but I think I will be OK since I started doing this in my early 20's.

I have since managed to get both to max out their retirement plan this would probably be about 15% saving (for the person not highly paid since they max out) into a target fund. The question is if this is going to be enough? My thought is no., but how can I help them come up with their numbers? My thoughts were.

1. Examine their expenses. In the case of the lower paying one, they are living at their parent's home to help pay off student loan debts. I would think they need to figure out expense as if they live separately.
2. Do some sort of 25x expense calculation.
3. Setup a social security account to get their SS payout. Subtract that from their expense.
4. use a calculator like ******** to calculate what they need to save. I pick that calc mostly because it allow glide paths.

Note that I don't have full picture of their finance and they are unlikely to give me the full detail, so it would be best that I guide and enable them. They are making progress but seems in my opinion procrastinating. These are steps that can be all done within a month, but there's always something going on in their lives that take priority and I have to periodically push them along.

 

[gecko10x]

I would suggest that if they can get to saving 25%+ of gross income, they will be good, unless they truly have zero today, in which case they might need to go higher than that.

 

[pacergal]

I am assuming they have asked you for guidance.

Print and give or send Bill Bernstein's pdf : If You Can
It talks about investing and retirement savings.

They need to review budget and spending in detail, pay attention to the "Needs" vs the "Wants" (hopefully they understand the difference.)

Save at minimum 15%, since they are starting later.

Good Luck!

 

[SnowballCamper]

Maxing out the retirement plan at work is the essential first step, along with the Roth IRA. Next is to set up more saving as an automatic purchase of a low cost index fund that is timed with each paycheck. Some points for why this is good.

• It's dollar cost averaging, show them an article about it.
• The additional savings is easy to access compared to retirement funds.
• Tax on the capital gains when you have to use it will likely be less than regular income tax.
• It doesn't require a detailed budget plan...you don't have to get in the weeds with them about how they spend their money, just tell them they should pay for their future first.

 

[pb4uski]

I suggest that you use FIRECalc..

• On the Start Here page, input their current portfolio balance and for years use 95 or 100 minus their current age.
• On the Other Income/Spending tab, input their expected SS at their FRA of 67 and any pensions that they have from work.
• On the Not Retired? tab input the year that they plan to retire (age 60?, 65? other?) and their annual retirement savings between now and then.
• On the Your Portfolio tab, replace the 75% under the Total market selection with their equity percentage.
• On the Investigate tab, select the next-to-last option to calculate the spending level for 95% success.

The click on Submit. The result should be what they could safely spend at the age that they plan to retire given their current retirement savings, future retirement savings and social security. Then the question becomes... can they live their desired retirement lifestyle on that amount of spending?

You can do it for yourself to begin with to see if you are as on track as you think that you are.

What FIRECalc is doing is to assume NO withdrawals until their retirement year, just savings as input and growth from now until then. Then at the retirement date, it calculates safe spending given the accumulated balance of retirement savings and SS.

If they can live on that amount of safe spending then they are on track and have a good plan, if not then they need to save more and/or work longer.

 

[Sunset]

I once explained to a person they could save some $$ into their IRA, for retirement, and it would also reduce their tax that year.
They did it, and I thought all was good, and they would carryon.

Just over a year later, they withdrew it all as it didn't reduce their taxes the following year

 

[pb4uski]

^^^ The 10% early withdrawal penalty is specially designed for people like that!

 

[Yegey]

I actually gave them Bill Bernstein PDF, but I am doubtful either read it. I think they both fall into the trap of having too many things going on with their lives that they don't see this as a priority. I have been trying to provide prodding. At least I got them to increase contribution.

The higher paid person has some retirement savings. I believe they some savings due to automatic enrollment to target fund in their retirement plan. They apparently been contributing for several years without paying attention to it. I have encourage them to look into backdoor Roth and taxable brokerages. They mentioned they can even afford to save 50%. The downside is of course they are procastinating on the next step. However, maxed out retirement plan + SS should be enough to live on after retirement. I may tune out at this point since I just want to make sure they don't starve in retirement. I would prefer they do more to avoid dropping their standard of living, but that would be on them.

The lower paid person has zero retirement savings since this is their first job with a retirement plan and reasonable wages. I am more concern since lower income means lower SS, too. I feel planning is more important and while it's also on them the situation is more dire and require more intervention.

 

[Sojourner]

They are making progress but seems in my opinion procrastinating. These are steps that can be all done within a month, but there's always something going on in their lives that take priority and I have to periodically push them along.

Big red flag here IMHO, the only people who will succeed at saving and investing really well for retirement (and especially early retirement) are those who are eager, enthusiastic, and proactive about it. This doesn't sound at all like your relatives, who are procrastinating and making excuses. You're free to continue to try to help them, but be prepared for frustration, aggravation, and possible failure. In my experience, even people who ask for help with their finances/investing typically aren't prepared to make the changes necessary to truly alter their trajectory.

 

[Mark1]

have since managed to get both to max out their retirement plan this would probably be about 15% saving (for the person not highly paid since they max out) into a target fund. The question is if this is going to be enough? My thought is no., but how can I help them come up with their numbers?

Yes, it will be enough, if they work long enough. IMO, it is way to early to try and help them determine at what age they can retire. At this point automatic savings like 401K and monthly debit of saving account to saving/brokerage account should be the focus.

 

[Al18]

I think the less advice you give them, the more likely it will be followed. Encourage the high earner to bump out the amount contributed to a 401K, and every time they get a raise to add another 1% to their contribution. For the low earner, I would encourage them to contribute to a Roth 401K, if available.

 

[engineernerd]

Sounds like the higher-paid relative may just need a bit of hand-holding to get started (people literally have no idea how to go about things they haven't done before).

I would focus on the easiest option (helping them open and make an initial deposit into a brokerage account, and get it linked to their bank account for ease of sending $$ from every paycheck). Maybe for now choose things like brokered CDs for most of the investments, and only a little in a stock fund, so they can "feel" how little they miss the money for a while before you expose them to a possible stock-market crash.

 

[engineernerd]

I would say running the numbers could easily backfire for the lower-paid relative since it is likely to be discouraging. Better to just nudge towards more savings, if there is any headroom above the student loan payments. If the parents will continue to be a strong and reliable financial safety net (housing, and if he loses his job, other expenses as well) then opening and funding a Roth IRA would be a great next step. Otherwise, emergency savings would be a higher priority IMHO.

EDIT: Maybe the numbers won't look so discouraging to this person if their current standard of living is low enough. You know them better than we do.

 

[brett]

I was in a similar situation a number of years ago. In the end I walked. They wanted reward with no work or sacrifice.

Fortunately no ill feelings. I simply backed off slowly and left them to it.

It became crystal clear to me that they were not serious. They wanted an effortless instant, painless solution/roadmap where none existed.

Good luck.

 

[pb4uski]

.... The lower paid person has zero retirement savings since this is their first job with a retirement plan and reasonable wages. I am more concern since lower income means lower SS, too. I feel planning is more important and while it's also on them the situation is more dire and require more intervention.

The lower paid person should see if they could benefit from the retirement savers tax credit. DS is lower income and in some years we can calibrate deductible IRA contributions to reduce his AGI to qualify for the highest tier of credit (50% of retirement savings) and then supplement that with Roth contributions to totally offset taxes owed so he gets a refund for all federal income taxes withheld for the year.

https://www.nerdwallet.com/taxes/learn/can-you-take-the-savers-credit

Also, whie lower income means lower SS as you stated, the benefits formula is tilted to provide higher benefits in relation to Average Indexed Monthy Earnings (AIME) for lower income people. The first bend point, up to $1,226/month of AIME is 90%, the second bend point for the next $6,165 of AIME is 32% and above that is 15%.

 

[Yegey]

Big red flag here IMHO, the only people who will succeed at saving and investing really well for retirement (and especially early retirement) are those who are eager, enthusiastic, and proactive about it. This doesn't sound at all like your relatives, who are procrastinating and making excuses. You're free to continue to try to help them, but be prepared for frustration, aggravation, and possible failure. In my experience, even people who ask for help with their finances/investing typically aren't prepared to make the changes necessary to truly alter their trajectory.

I am not entirely altruistic. They are close enough that someone like my kind spouse would ask me to help them later on and even take them in decades in the future. I rather not spend my retirement with extra roommates and extra expenses.

I did something similar decades ago strong arming my parent to invest even though they didn't really want to because it was scary. I wanted them to have a decent retirement, but I also didn't want to spend my future years paying for my parent's retirement while trying to pay for my kids college.

 

[Yegey]

I would say running the numbers could easily backfire for the lower-paid relative since it is likely to be discouraging. Better to just nudge towards more savings, if there is any headroom above the student loan payments. If the parents will continue to be a strong and reliable financial safety net (housing, and if he loses his job, other expenses as well) then opening and funding a Roth IRA would be a great next step. Otherwise, emergency savings would be a higher priority IMHO.

EDIT: Maybe the numbers won't look so discouraging to this person if their current standard of living is low enough. You know them better than we do.

Their standard of living is only low because they live with their parents. My concern is what if the parents passes away say in 10 years from now. I have no way to know what the mortgage situation is on the house and if they will inherit the house. Even if the house is inherited, property tax in this state is quite high. I have talked to them about this. They do think it's an issue but don't feel the same urgency.

 

[Yegey]

The lower paid person should see if they could benefit from the retirement savers tax credit. DS is lower income and in some years we can calibrate deductible IRA contributions to reduce his AGI to qualify for the highest tier of credit (50% of retirement savings) and then supplement that with Roth contributions to totally offset taxes owed so he gets a refund for all federal income taxes withheld for the year.

https://www.nerdwallet.com/taxes/learn/can-you-take-the-savers-credit

Also, whie lower income means lower SS as you stated, the benefits formula is tilted to provide higher benefits in relation to Average Indexed Monthy Earnings (AIME) for lower income people. The first bend point, up to $1,226/month of AIME is 90%, the second bend point for the next $6,165 of AIME is 32% and above that is 15%.

Thanks, I will take a look.

 

[Calico]

I am not entirely altruistic. They are close enough that someone like my kind spouse would ask me to help them later on and even take them in decades in the future. I rather not spend my retirement with extra roommates and extra expenses.

I did something similar decades ago strong arming my parent to invest even though they didn't really want to because it was scary. I wanted them to have a decent retirement, but I also didn't want to spend my future years paying for my parent's retirement while trying to pay for my kids college.

Just because you are asked to do something, doesn't mean you have to oblige. "No" is a complete sentence.

 

[Yegey]

Just because you are asked to do something, doesn't mean you have to oblige. "No" is a complete sentence.

True. I believe that technically, one could just say no. However, familial relationship could throw a wrench. I would not be able to for example turn my parents away if they work hard but failed to invest. A similar situation applies here.

 

[OldShooter]

... I think they both fall into the trap of having too many things going on with their lives that they don't see this as a priority. ...

Give each of them a can of cat food and ask if that will be acceptable as a retirement diet.

 

[rk911]

OP..IMO you're dipping your toes into dangerous waters. If things go bad, for whatever reason, guess who they will blame. If I were you I'd either advise them to seek out a professional money manager and/or tell them how you became FI and RE...general principles only and definitely not specific investments. Lead by example.

 

[Yegey]

OP..IMO you're dipping your toes into dangerous waters. If things go bad, for whatever reason, guess who they will blame. If I were you I'd either advise them to seek out a professional money manager and/or tell them how you became FI and RE...general principles only and definitely not specific investments. Lead by example.

I am, but my advise so far is to get their saving rate up and invest in essentially the option they are automatically invested into in their retirement fund which is a target fund. It is my hope that they will tend just continue saving and contributing to the target fund and don't think about it for the next 20 years.

I don't want ot lead by example because I don't want ot disclose my finance.

 

[rk911]

I am, but my advise so far is to get their saving rate up and invest in essentially the option they are automatically invested into in their retirement fund which is a target fund. It is my hope that they will tend just continue saving and contributing to the target fund and don't think about it for the next 20 years.

I don't want ot lead by example because I don't want ot disclose my finance.

What I meant by 'Lead by example' was in terms of the general principals, not specific investment choices. No need to dislclose any personal data. We don't but we also don't live like the Unabomber. While we live in average 1600sf 3-BR/2-bath home in a middle class neighborhood, we drive nice, new cars, have

 

[pjigar]

OP..IMO you're dipping your toes into dangerous waters. If things go bad, for whatever reason, guess who they will blame. If I were you I'd either advise them to seek out a professional money manager and/or tell them how you became FI and RE...general principles only and definitely not specific investments. Lead by example.

I was gonna say the same thing! No good deed goes unpunished. I always coach people by teaching them how to fish. If they don't want to learn how to fish then I leave them alone. I provide general guidance but never specifics. Because people I would want to coach would be someone I care about so I have to strike a balance. The last thing I want is that my relationship with them gets ruined in the process. In other words, try to inspire and empower them. If they don't want to wake up then there is not much you can do. If you really really care about them then hook them up with some good fee-only advisor.