07.02.25 OK 401(k) / It’s A Large Small Business World

Today, Clark discusses a disturbing trend underway involving retirement accounts, and explains the best way to use a 401(k). Also, Clark explores the significance of small business in building wealth and influencing the overall economy, including the opportunities provided for workers now facing uncertainty. Steady Retirement Saving: Segment 1 Ask Clark: Segment 2 Small Business: Segment 3 Ask Clark: Segment 4 Mentioned on the show: Clark.com - INVEST & RETIRE The Only Two Exceptions to Clark Howard's Annuity Rule Immediate Payout Annuity: What Is It and Do You Need It? How to Start Investing: 10 Steps for Beginners 3 Big Retirement Account Changes You Haven't Heard About What Is a SEP IRA and Who Is Eligible? What Is a Solo 401(k) and How Does It Work? How To Buy Term Life Insurance in 7 Easy Steps Homeowners Insurance Archives - Clark Howard How to Shop for Lower Car Insurance How To Send a ‘Drop Dead’ Letter to a Collection Agency Clark.com resources Episode transcripts Community. Clark.com / Ask Clark Clark.com daily money newsletter Consumer Action Center Free Helpline: 636-492-5275 Learn more about your ad choices: megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:05Speaker 00

  It's great to have you here on the Clark Howard Show. You know, our mission is to serve you with advice and information that empowers you to make better financial decisions in your life. And one way the Team Clark is here to serve you is with our websites, Clark.com and Clarkdeals.com. I hope you'll check them out. And also, hey, I'd like something free that's actually incredible. Our free newsletters. You can sign up for it at Clark.com/newsletters. In today's episode, I want to talk about some trends, one that's not your friend, the other that can be, going on with retirement accounts.

• 0:50Speaker 00

  And then later, I'm, I mean, to call it an obsession is accurate. I am obsessed with people who become entrepreneurs, people who have the courage to start their own businesses. And I want to tell you why that is so important to me. Right now, there's two crazy things going on at the same time. Data shows that the percent people are contributing to retirement plans through work, average amount is a percent of their pay, higher than it's ever been.

• 1:28Speaker 00

  At the same time, there's a significant number of people who are reducing the amount they're putting into their 401Ks, reacting to current economic uncertainty and all the news that comes out every day that can overwhelm you. I think back to what happened earlier this year, when the stock market went through a rapid and large decline. And unfortunately, a lot of people through that period said, "Uh-oh, this is too tough for me." They sold out their positions in their 401Ks.

• 2:11Speaker 00

  They didn't take the money out, but they... Just put it into the cash equivalent of their 401k and they stopped contributing to their 401ks. So what happened? They reacted to a big drop in the stock markets. It happened again in a very short period of time. And then what did they miss? A rebound that came quicker than normal. The decline was quicker than normal. The rebound was quicker than normal. The money round-tripped, basically. But people panicked, sold into the down and missed the recovery. And you gotta play to win, like they say in the lottery. But investing's not a lottery.

• 2:55Speaker 00

  It's not a stacked deck against you. It's a stacked deck for you because time is your friend. The best way to use a 401k is diversified in it, steady as you go. You put in money every pay period, spread out among investing choices in it. Or if that stuff is all too confusing to you, just put all your money in your 401k in the target retirement fund. Set it and forget it and continue to contribute. Knowing that two out of three years, the market climbs. There will be like earth-shattering declines from time to time. There will be bear markets, which is where the market declines by 20% or more.

• 3:37Speaker 00

  And very, very rarely, there will be catastrophic drops in the market that take years to recover. For a static investor, static investor is somebody who's got money in and they just sit there with it. They don't add anything to it. But when you're in a 401k, or if you're automatically contributing to a Roth IRA, you are dollar-cost averaging, which takes out some of that fear risk out of you contributing to a plan with ups and downs happening. Because let's say the market goes through a big decline and it takes a while for it to recover. But you're continuing to contribute each and every pay period?

• 4:21Speaker 00

  You then, during the time that things are bad... Or buying the shares in the target retirement fund or whatever you're doing on sale. You're buying more shares with the same money, which means when the market ultimately recovers, you have continued to put money in at lower prices and you benefit fully from the recovery. Steady as you go, core and key. Now, I said there was one other thing that was potentially good or bad. Federal law now allows, when you approach retirement, if your employer plan provides the option of converting some or all of your 401k money into an annuity.

• 5:06Speaker 00

  Now, you know, I've said annuities are cuss words. The reason is that a lot of annuities are trash. A lot of annuities have way too many complications. A lot of them have ginormous fees. These annuities that are done right inside an employer plan are that category of annuities I say is okay. Where you turn your money into a straight lifetime stream of income. And so, these are neither good nor bad. What makes one good, what makes one bad? If your employer is providing one that is really low cost,

• 5:44Speaker 00

  so you are getting a known, predictable, clear guaranteed income through the remainder of your lifetime. And if you have a spouse, you can buy an option where it continues for their lifetime. So you get a lower amount then. When it's clear, simple, low cost, commission free, that's when these 401k plan options of annuitizing your money, like making it like an additional social security type check, good idea. But these are not something that automatically is good or bad. Because the insurance industry has a way of getting its nose under the tent and messing up what could be a good thing and making it a bad thing. Krista?

• 6:27Speaker 01

  All right, I have some investing questions for you. This one came in from Andrew in Iowa. Despite not being incredibly high earners, who are just under 23 years old, my wife and I just hit the milestone of $10,000 in retirement savings.

• 6:41Speaker 00

  Okay, see, I love this. I love this because Andrew, I have talked about for years, most people historically did not get serious about thinking about retirement at all till they hit their 40th birthday. It was like a milestone of hitting middle age that people would say, huh, wow, I gotta think about the future. You are part of a generation that thinks completely differently than people have in the past. It's wonderful that you're not even 23 yet and you've already saved $10,000 towards retirement. And that time of having done it so young makes the power of that $10,000 so much greater down the road. And sorry I interrupted Krista.

• 7:26Speaker 01

  It's okay. I know you get very excited.

• 7:28Speaker 00

  I do about people doing it. I started my first IRA when I was 19.

• 7:33Speaker 01

  That's amazing. And that, I bet you back then, that was a super rarity that someone would think to do that.

• 7:39Speaker 00

  Yep.

• 7:40Speaker 01

  So Andrew says that they have that $10,000 milestone and 70% of those funds are Roth. However, since I do more of the financial work in our marriage, I only just recently realized that all of these funds are in my name. My job offers a 401k while hers doesn't, and I opened up our Roth IRA. I asked if she'd like to open up one of her own and we'll focus on contributions there, and she wasn't incredibly interested. If we do continue with all these savings in my name, would there be any issues? She's the sole primary beneficiary, and I thought spouses just continue those accounts as normal if inherited. Do I have any reason to convince her to start putting money under her name, or would it be fine to just continue contributions as we have been?

• 8:23Speaker 00

  Okay, so first of all, I'm so glad that the two of you are having these discussions in your early twenties. Second, that you've saved what you have already. Third, one change I'd make right away, you say you don't earn a lot of money, you need to switch to 100% Roth, no traditional. And yes, she needs her own money in her own name. Over the course of a lifetime, over the next 40, 50 years, you have no idea what happens with each of you. You each need to have money in your own name. And if the two of you start funding a Roth IRA for her, you're funding your 401K Roth

• 9:07Speaker 00

  version, you each develop your own assets. And that is really important for the future. And eventually, when you are earning more money, you're both going to want to be contributing the max you can to a Roth IRA, which today is $7,000. Down the road, when you're making a lot more money, and right now, you roll your eyes when I say, "Yeah, contribute the max." That may become routine for both of you as your earnings rise. And that's why you want money in each of your names. All those reasons.

• 9:39Speaker 01

  New investor in North Carolina says, "I'm 43. I'm ready to start adulting and getting my finances in order."

• 9:45Speaker 00

  See, there's that age I talked about, typical age.

• 9:48Speaker 01

  "I'm not sure where to start. Do I need a financial plan from a CFP? I know these can cost thousands of dollars, but are they worth it? I have a lot of questions about what funds to start, retirement, term life, education, HSA, et cetera. My spouse has fully funded her HSA, 401K, and profit sharing, but I'm self-employed and have been working as a tech contractor for a financial services company for the past two years. I'm not sure if I will be a contractor forever, but the hourly rate is very good. I'm currently setting aside several thousand into high-yield savings account, but that's it. I need to start funding all the appropriate buckets. I'm also interested in the SEP because I'm self-employed. Do I need a financial plan? And where can I find a reputable one? And how much should it cost? It would be helpful to have someone get me started in these areas."

• 10:32Speaker 00

  Okay, new investor. You mentioned the right thing that you need to be doing right now, and it's not the first thing you asked. It's not going and having a financial plan done or anything like that. It's simpler than that for what you need. You need a Roth SEP. You mentioned the simplified employee pension. You can have as a sole employee is the easiest. Costs nothing to set up, no commissions involved. You just put your money to work in that Roth SEP. Guess how much you're allowed to put in it? Up to $70,000 in a year, or 25% of your pay.

• 11:17Speaker 00

  Whichever is less of those two you're allowed to do. So you're able to start paying catch-up on retirement directly from your self-employment income. The money will grow tax-free, you'll spend it tax-free, which is a new option with SEPs. And if you go to any of my three favorite children, Schwab, Vanguard, or Fidelity, you can set up your SEP. You want it in the Roth. You put the money in the target retirement fund, and you're great. Because what you need to be about right now is accumulating. You don't need some fancy-dancy, multiple-thousand-dollar financial plan.

• 12:01Speaker 00

  What you need to do is you need to get started investing for the future. Now, if you have kids, then term life insurance that you mentioned briefly is a priority, and it's really cheap to buy. You want to buy something known as level term insurance. If it's you and your spouse, you each probably want a term life insurance policy to protect the other. But if you have kids, you have a higher priority to make sure you have term life insurance to protect them into adulthood. Term life insurance is simply death coverage. It only pays if you die. It's simple to buy, very, very cheap. We have a guide how to buy it at Clark.com.

• 12:45Speaker 01

  And Joe in Georgia says, "My wife and I are considering this company..."

• 12:50Speaker 00

  Oh, you name them.

• 12:51Speaker 01

  ...Moomoo, which is offering an 8.1% APY on a savings account. "We've never heard of this company, but they say they're FDIC insured. I'm confident about safety, but my wife has her reservations. Could you shed some light on the safety of such high-yield savings accounts to help us make a more informed decision? It would make my wife so much happier, knowing her money is safe, and you know what they say, 'Happy wife, happy life.'"

• 13:14Speaker 00

  Well, let me tell you about Moomoo. Moomoo is a very, very small...

• 13:20Speaker 00

  Competitor of Robinhood, same kind of idea of Robinhood. It's an app-based investment platform. And so to stand out from the crowd, they're doing a thing where if you put money in through Mu Mu into a savings account that they route to an FDIC insured bank, for 90 days, you get the 8% interest. So it's just a teaser, just to gain attention, just to attract your money into their platform. It's not really an 8% savings account. So, I mean, it is 8% for 90 days, but then there's all kinds of limitations on it and all that.

• 14:02Speaker 00

  The real thing about Mu Mu is that it is a trading platform that is commission-free, is more limited in the products it offers. It's really for active traders doing options, buying exchange traded funds, things like that. You can't do, I don't think at this point you can do retirement accounts, can't buy mutual funds. It is an investors-oriented, active investors-oriented organization.

• 14:30Speaker 01

  I would be very nervous myself with anything like this because it's only FDIC insured once it is moved into these savings accounts.

• 14:39Speaker 00

  That's right.

• 14:39Speaker 01

  And it just would, I don't know, maybe it's an unjustified fear, but I would be so worried about that period of time when my money is floating.

• 14:49Speaker 00

  Well, you think about all the people who got hurt with the fintech apps.

• 14:53Speaker 01

  Yes, that's what, yeah.

• 14:54Speaker 00

  Where the money has been lost in space, hundreds of millions of dollars.

• 14:58Speaker 01

  I mean, yeah.

• 14:59Speaker 00

  Just poof, that was supposedly an FDIC insured accounts. It's been very unsettling for people. There's no scandal involving Mu Mu or anything like it, but your point is well-taken because we've seen this movie before. And when it goes from an app through a transit process into a financial institution, and only then is it FDIC insured.

• 15:25Speaker 00

  That is a valid point, and that would speak to her worries that this is, this is not real. And there is that transition period that it's not real till it becomes real.

• 15:38Speaker 01

  Would you do this with one of these companies? Say Robinhood was offering that?

• 15:41Speaker 00

  So, Robinhood is a work in progress, and I need to talk in the future about Robinhood's new investment platform where you pay to be part of it and all the rest. Robinhood seems to be growing into an adolescence now from being kind of a wild child. And, uh, and so I do need to address that because I've said both good things and bad things about Robinhood and talk about that. In this case, this seems to be just an attention getter. And if you're not interested in doing exotic trading and frequent trading and all that, I don't think it's worth the hassle to, for 90 days during the 8% interest. That's what I would say.

• 16:25Speaker 01

  All right.

• 16:26Speaker 00

  So, coming up ahead, we're going to talk about something that is so true to my core, so much a part of my beliefs, and it's how this country succeeds because of small business owners and entrepreneurs and what role you can play in that. I am obsessed with entrepreneurs and small businesses. Why? Because as companies get bigger, they get older, they get more bureaucratic, they become more dinosaur-like, huge, very small brains.

• 17:04Speaker 00

  And that creates a lack of innovation over time, and they're kind of like lumbering giants, creating opportunity for individuals and entrepreneurs to come along and offer a service or product quicker, more advanced, cheaper, you name it. You look at any of the large companies in this country, they all started off small somewhere. But I want to hit you with some stats. Do you know that nearly half of employment in the United States is in small businesses, not big ones? You know what else? Depending on whose stats you believe, somewhere around plus 60%, close to two-thirds of job

• 17:48Speaker 00

  growth in the United States comes from smaller firms, not big ones.

• 17:54Speaker 00

  And that brings up an annex. If you right now are being pushed out of your job, wherever you are, you're getting laid off, whatever, or the company closes and you're having to look for a new opportunity, don't make the mistake most people do, which is even though roughly half the jobs in the United States are with big firms, the growth again is with smaller firms that you don't normally know the names of. They're the ones where the openings come available. They're the ones where the opportunity for growth is available. And speaking of that, when you work somewhere, usually it's when you

• 18:35Speaker 00

  get the boot out that you're like, what am I going to do now? This is where you take your years of experience, education, training, and the ideas you have to do something better, cheaper, faster than what was happening in the field you learned in. The opportunity, every time the economy slows, the opportunity for the next wave of growth in America comes from people that were comfortable in a job, maybe bored in a job, and they get booted out, and then they're like, well, I'm going to go start my own thing. And it creates

• 19:20Speaker 00

  the next wave of economic energy in the United States. If you want to look where the real wealth is in the United States, and this is something we've known based on academic research for the last 35 years, is the real wealth in the United States flows to business owners. And you can become wealthy, like we were talking about earlier in this podcast and YouTube show, from being Steady Eddie, saving on your job, saving through the years, you can end up wealthy later in your life. You can, if you do the basics about living on less than what you make and saving money. But the really wealthy people

• 20:05Speaker 00

  in this country did it by having the guts to start their own business and be willing to accept the possibility that you will fail at your quest. But if you succeed, the opportunity, I mean, is there really a limit? It seems there's not. If you get out there and start your own thing. I see a time like today with the economic uncertainty, the fears of the job market contracting. I see this as planting the seeds of the next wave of opportunity from entrepreneurs and small business owners. And today, because of the internet,

• 20:50Speaker 00

  so many services that used to be difficult for a small business to have, to set up, are now available off the shelf. I mean, one of the things I think about is it used to be that automated payroll, HR, all that stuff was only available to big firms. Today, there are various services like this that are designed for one person or more company, and they're affordable. I think about how, when I started my first company 45 years ago, it was so difficult to provide any kind of retirement plan to employees. Today, that's nothing.

• 21:34Speaker 00

  You can offer big company kind of benefits in a small business today if you start adding employees. Opportunity knocks. Are you going to open that door and walk through it? It's your choice.

• 21:49Speaker 01

  That's awesome. I love it. All right. Makes me want to go start a business.

• 21:53Speaker 00

  Bye.

• 21:55Speaker 01

  Marie in Tennessee says, "Last year, we switched home and auto insurers to save on the premiums. This year, our premiums have gone up again. No surprise, reflecting your comments on a recent podcast. However, I'm reticent to shop again. We now are with a local broker with a reputation for going to bat for his clients. Would having a personal relationship with an agent be even more important in these days when the insurance companies are looking for any and every reason to cancel? And P.S., upon expressing our concern about the premium increase, the agent responded that we need to stick with what we have."

• 22:28Speaker 00

  So, I love, in this tumultuous environment, particularly for homeowners insurance,

• 22:37Speaker 00

  More so even than auto for sure, that an independent insurance agent is worth his or her weight in gold. And gold's pretty valuable right now. So they understand the market. They live it every day. And again, they need to be an independent agent. A captive agent's not the same. Captive agent is what most of the agents out there are. They work for only one insurance company. An independent agent can, works for you and can write insurance from many different companies. I think they're extremely valuable and useful right now. And

• 23:19Speaker 00

  if your agent, who's an experienced agent, tells you, let's stick with where you are for right now, trust that. The premium increases are going to moderate, but they've been bad ugly over the last many years. We're going to have one more upcycle with auto insurance premiums because the increased cost of auto parts from tariffs. But the trend moving forward is going to be moderation in those premium increases, at least for auto.

• 23:53Speaker 01

  And if you really want to check it out, you could always call a couple of companies and see what they quote you.

• 23:59Speaker 00

  You could, but, but once you go, if you trust this individual, follow their advice. If you get huge premium increases at your next renewal, and they're like, manana, manana, keep going with what you got, that's when you should follow Krista's advice and do some independent shopping on your own.

• 24:19Speaker 01

  This is from Mike in Florida. Back in 2023, I received a ticket for driving my rental car in

• 24:29Speaker 00

  Siena is a cool town.

• 24:30Speaker 01

  What a great town. I love it. Yeah, I've been there too. The rental car agency mailed the tickets to me and I did not pay. Now, a California collection agency has just sent me a collection notice. How should I deal with this collection? What did Clark do?

• 24:44Speaker 00

  Okay, first of all, you will not have your credit ruined by this. We've been through this before. We did research. And these collection agency efforts cannot lead to a mark on your credit. You will know whether or not you did something illegal in Siena. You can choose to do what you want. I told the story about a year and a half ago about getting a ticket from Austria. And I was trying to figure out how to pay the thing. They sent me the ticket all in German.

• 25:21Speaker 01

  Haven't you gotten them in Italy too, though?

• 25:23Speaker 00

  Oh, I've gotten tickets in Italy. I've gotten tickets in Germany.

• 25:27Speaker 01

  Oh, my gosh, Clark.

• 25:29Speaker 00

  Where else? Holland? Where else have I gotten tickets?

• 25:31Speaker 01

  This is why I don't rent cars in these places, but...

• 25:35Speaker 00

  Well, it's hard in Europe. And I mean, I've rented cars in Asia. Did you drive in Thailand?

• 25:41Speaker 01

  No way. Have you met me? Absolutely not. Are you out of your mind?

• 25:47Speaker 00

  I rented a car in Thailand. And Lain and our son Grant were screaming at me over and over again.

• 25:55Speaker 01

  Yeah.

• 25:55Speaker 00

  Because they were terrified driving around. No tickets, no wrecks in Thailand. Anyway.

• 26:01Speaker 01

  So you're a good authority to speak to this dilemma Mike is having.

• 26:06Speaker 00

  Yeah. So, Mike having rented cars on four continents. I'll tell you that it's a hazard of travel. You can decide on your own whether you want to pay up for this ticket in some way. Make a deal with the collection agency or ignore them. You can send them a letter to drop dead. And the drop dead letter is one where they can't contact you further. They can't sue you against it. They cannot, based on the research, we did. We could not find that it is legal for them to put this on your credit. So it will be your choice from here how you deal with it.

• 26:45Speaker 01

  And we do have a quote unquote drop dead letter on Clark.com that you can check out if you're looking for that info. And then Will in Florida says, is Walmart Pay safe to use? Should I sign up for Walmart Pay if I shop at Walmart often? Are there any disadvantages to using it?

• 27:03Speaker 00

  So the platforms where you tap to pay with the phone. This is one where in the Walmart app, you use tap to pay. Walmart at this point, to my knowledge, is not offering you any deals or discounts for using Walmart Pay. There's just saying it's free. So I don't know where there's any convenience factor for you as a Walmart shopper. I compare it to Amazon, which if you get the Amazon credit, you get 5% off on everything you buy, right? Is that everything you buy at Amazon?

• 27:41Speaker 01

  And Whole Foods and some of the other.

• 27:44Speaker 00

  Well, so you get 5% off by paying three times the price for groceries, a whole paycheck. And then they say, okay, here's 5% back at the three times the price. I do not get that store. Anyway, the Walmart Pay, it's safe to use. It's fine to use. I don't understand what the benefit is to use it unless and until Walmart offers you some kind of incentive for you using Walmart Pay to buy from Walmart. Maybe Walmart feels like their price is already low enough and they don't need to discount. One of the differences between Walmart and their rival, which is, well, their rival used to be Target.

• 28:29Speaker 00

  Target with the red card, you get 5% off on everything. Clear incentive. Again, the Amazon, 5% off using their card. There's no incentive that I see for using Walmart Pay. So I've always been like a big huh about it and I don't use it, even though I shop at Walmart a lot. So I want to tell you, my favorite holiday is coming up in two days. That's the 4th of July. 4th of July means so much to me. Because I am privileged to be from an immigrant family. Four immigrant grandparents to the United States.

• 29:12Speaker 00

  And I felt so privileged with the opportunity that this country has provided to me. Everybody has their own story. Some people this may ring hollow with. But I feel that we've got such a great thing going in the United States. And we go through our rhythms. Sometimes people are not as happy, other times they are more happy. But if you think about the long trajectory of this country, and how many great things have happened in this country. I for one am so grateful and thankful to live in the United States of America. And you enjoy your 4th of July.

• 29:57Speaker 00

  And for me, I always enjoy the 4th. And I enjoy so much what it means to be in my heart. Have a great day.