Pod Insights The Clark Howard Podcast 11.18.24 A Better Way To Save For Retirement / Living Paycheck-To-Paycheck About this episode Pensions are relics and 401(k)s are problematic. We need a rethink on how we save for retirement, and how we allocate those savings with the certainty that people won’t outlive their money. A solution is out there, and Clark shares that with you today. Also, Clark breaks down the paycheck-to-paycheck cycle many find themselves in, and how for some earners, it’s entirely possible to break that cycle. Solving Saving For Retirement: Segment 1 Ask Clark: Segment 2 The Marginal Propensity To Consume: Segment 3 Ask Clark: Segment 4 Mentioned on the show: Clark.com - INVEST & RETIRE The dangers of underestimating your retirement Annuities Aren’t the Problem. Commissions Are, Say These Industry Pros Best Financial Advisors in 2024 Vanguard Personal Advisor Review What to Do When You're Being Harassed About an Old "Zombie Debt" 10 Ways To Save on Prescription Drugs Should I Contribute to a 529 Plan Only To Roll It Into a Roth IRA Later? Best 529 College Savings Plans By State Clark.com resources Episode transcripts Community. Clark.com 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
Transcript 0:00 Speaker 00 Your sausage McMuffin with egg didn't change, your receipt did. The sausage McMuffin with egg extra value meal includes a hash brown and a small coffee for just $5. Only at McDonald's for a limited time.
0:12 Speaker 01 Price and participation may vary. Promotion pricing may be lower than meal pricing.
0:15 Speaker 02 They're running a cover two defense. But you're running to get game day deals on Uber Eats. Keep everyone at tonight's watch party fed with deals from your go to restaurants. Or stock up with deals on your favorite snacks and groceries. Whatever the occasion, get game day deals on Uber Eats all season long. It's not football without food. Uber Eats, order now. Terms apply. Product availability varies by region. See app for details.
0:50 Speaker 03 It's my pleasure to welcome you here to the Clark Howard Show where our mission is to serve you with advice and information that empowers you to make better financial decisions in your life. You know, we talk a lot about 401ks, IRAs, those kinds of things on the show. I've also talked about how behind so many of us as Americans are in saving for their retirement. I've got a solution I think would work for that. You're going to have to hang with me because it's way out there and I'm going to share it with you. And later, living paycheck to paycheck. It used to be something we thought about only for people who were at the lowest end
1:33 Speaker 03 in the income spectrum, but now it filters throughout levels of income. I'm going to talk about that. Crisis is an overused word in the United States, everywhere, you know, everything's a crisis. But there is something that may rise to the level of crisis. It's that such a large percent of Americans as they get older, don't have enough money to live on when they don't want to work anymore. And so we're going to have people who work way past when they feel physically up to it or just mentally want to.
2:14 Speaker 03 They want to have time to just enjoy themselves, leisure activities or whatever. And there's something that I talk about just in passing. And that's that pensions really don't exist anymore in the United States. Except for a lot of government jobs come with a pension. But in the private sector where most of us are, there's almost no pensions. Because people used to work for one company for decades. And part of the deal was every year you worked, you had pension credits that you accrued. And then when you hit that golden number of years, you then had the golden parachute,
2:59 Speaker 03 which was a pension that you would have for the rest of your life. And you'd have social security. And then it was called the three legs of the stool. The third one was whatever money you'd save. Well, as companies stopped hiring people with the expectation they'd stay for a long time. And our expectations changed and people change jobs all the time. The 401k became the substitute that has been a big failure. 401k has not worked. It's worked for very high income earners. Hadn't worked for anybody else, really.
3:38 Speaker 03 Except for that rare individual who stays at a place for a long time and steadily contributes. And in the Boeing strike, one of the big things about it was all about the 401k, that the workers wanted the pension back. That Boeing had gotten rid of, I don't know, 15 years ago, 10 years, whatever. And they wanted it back. And Boeing was like, no, we're not going to take on a pension obligation. And so the whole thing is a broken conversation across corporate America and with us as individual workers.
4:20 Speaker 03 Because what we really need is something truly portable, which is our own account that employers can fund, rather than one that the company does that they control. So I've talked, not in years.
4:38 Speaker 03 But this idea that came out of the University of Chicago School of Economics, as I recall, and was implemented more or less, more or less than more in the country of Chile, but the idea is that you have your own pension fund that you build up over the years and your employer can contribute to it, you contribute to it, and in one model, it's mandatory that the employer has to contribute 10% of your pay to it and you have to contribute 10% of your pay to it. And wherever you work, that it's part of
5:21 Speaker 03 employment, that this money is going into it. No 401ks anymore, none of that, that you have a pension that you get at the end of your work time. So this idea works except for people that are self-employed or gig workers, because then you have to have a vehicle for them to put money aside. And so I don't know all the answers, obviously, at all. None of us do. I only know a small amount about some areas. But we need something that gives people certainty in retirement. That's why people love social security so
6:02 Speaker 03 much. You work your years, you pay in the social security system, and you know what check you're going to get every month. I mean, I think how many people ask now when they submit questions to us about, okay, I saved this money over the years, I did the 401k, I did the IRA, now I don't know how I actually spend the money in retirement. So we need an ability for people with what we've already had with 401ks, with IRAs, to be able to convert them into a steady income stream in retirement. And right now, that's been completely fouled up by the fact that the insurance industry
6:47 Speaker 03 Is based on ultra-high commission products where you could use, I'm going to cuss here, use an annuity to basically set up your own pension. So what we need is for commission-free products to be made available for turning money you've saved and invested over the years into a stream of income. There would be clean, simple products where the money you put in actually works for you by sending you a monthly check rather than having the dishonest process of the insurance industry selling these bad-for-you, ultra-high-cost annuities.
7:29 Speaker 03 I mean, when I think about the unfinished business we have here, because a lot of people want and do successfully save for retirement. A lot of people, as I learned with going out and interviewing people with the TV crew, people don't know what to do when they change jobs and they got this employer plan and that employer plan, the other employer plan. And how do you move them? What do you do with them? We need to have a thoughtful process where we come up with our own plan that we have that stays with us that employers can or are required to contribute to. We need to rethink both ends of it.
8:12 Speaker 03 How people accumulate money and how people have the certainty that they won't outlive their money. And both of these things are messed up right now and must be fixed. For you and me today, we have to live within the circumstances of how the financial world works today. And that's why we have to have the discipline to save that money, put that money in. And build financial security for ourselves in what is worse than an imperfect system. It is a broken system, but we have to use it as best we can for our own financial
8:53 Speaker 03 well-being. But I want us to worry about the country's financial well-being and get this stuff fixed. It's not as hard as it may seem.
9:04 Speaker 04 Okay, this question came in from Daniel in Georgia. At the beginning of the pandemic, my wife's company froze her pension after accumulating about 20 years into it. She was told that it would not grow with inflation. It would remain the fixed dollar amount of the time of freezing. She asked if it was possible to get a lump sum so we could invest it ourselves, and they say that's not allowed. The amount is around $300 per month. When she retires in about 17 to 20 years from now, that unadjusted $300 isn't going to pay a utility bill. Is there really nothing we can do? Is it possible we're misunderstanding what the freeze means? 20 years of loyalty for that pension to become essentially worthless seems absolutely criminal.
9:44 Speaker 03 Daniel, this is a story that sadly has happened to so many people with employer-provided pensions, is they decide, we're washing our hands of this, we're getting out of the pension business. Your benefits are frozen, which means that there's, from a pension standpoint, there's not another day's work there that will reward you. And so the employer's like, you know, she leaves, we'll just replace her with somebody else. You can just go. And so pensions were used as a way to build longevity with employment and reward people for longevity employment. The big thing, Daniel, in your scenario, is the way pensions are calculated,
10:28 Speaker 03 the greatest pension benefit to somebody comes in the last few years of work.
10:35 Speaker 03 And in this case, she could stay another 20 years and there's no future benefit whatsoever. So you understand the situation exactly as it is. And there is sadly, nothing you can do other than they probably, as many employers do, they probably now have a very generous match on a 401k, usually coming out of the bad news of terminating pensions. Companies, at least for a number of years, offer very solid matches of 401ks. And your wife needs to participate in that to the max to pick up that full, what I'm
11:19 Speaker 03 hoping is a very solid generous match.
11:23 Speaker 04 Fred in Minnesota says, I'm wondering if I really need my financial advisor. In addition to my 403B and my wife's 401k, we have Roth's 529s, HSAs and brokerage accounts. About a third of our money is invested with my financial advisor's firm and the rest through Vanguard or our employers. I'm just not sure I need that guy. He's a fiduciary, he's trustworthy and he knows all of our assets. But frankly, I know my own investments through Vanguard outperform him and cost less. The main reason I hang on is I'm thinking that with all our investments and passive income streams, it might be harder during the decumulation stage than it has been in the accumulation stage, avoiding unnecessary taxes, et cetera. What do you think? Do you have a guy? Do I need a guy?
12:03 Speaker 03 Okay, great question. And guy is an expression because many people in financial services now are women.
12:10 Speaker 04 Good friend who is a female financial planner.
12:13 Speaker 03 So Fred, making this decision is, first of all, in the deaccumulation phase, as you perfectly pointed out, that's when a financial planner proves his or her worth the most. Because that is the hardest part of the whole thing for people who are conscientious about saving money and are well diversified is how do I then spend it? How do I know what I can safely spend? How do I deal with the tax implications? What it might mean to What I have to pay for Medicare Part B. There are all these things that come later afterwards. So you want to make sure you most efficiently use that money going forward.
12:56 Speaker 03 And then all the estate planning that's important later in life, that having a good fee-only financial advisor becomes very important. You have realized that the fees you're paying to this advisor, because they're so much higher than the fees you pay for Vanguard, over time, you'll end up with more efficiency with the investing through Vanguard than you would with the fiduciary fee-only financial advisor. So what you could do is you could hire a Vanguard fee-only financial advisor through personal advisory services. The maximum you pay through that, I think, is 0.30 of a percent, less than one-third
13:39 Speaker 03 of a percent versus the 1% you're typically paying to a financial advisor. You could look at that, since you are already embedded so heavily in the Vanguard system. Or you could choose to handle your own investing till later in life, when you would want to hire someone to provide that advice, either on a fee basis, paying a fee-only financial advisor for hourly, ongoing advice, or one-time advice as you need it episodically. Any of these things would work, but right now, it sounds like you're not that jazzed by who you're using right now for the advice with the financial advisor.
14:22 Speaker 04 Dana in Pennsylvania says, "Last November, my family visited Italy and rented a car to be more mobile. Of course, we had read the horror stories of renting a car in Italy, but as seasoned European travelers who have rented cars in numerous countries without issues, we decided to stay our course. Eleven months later, we received a traffic violation in the mail from my husband traveling three kilometers over the posted speed limit."
14:43 Speaker 03 Oh, come on. Three color, that's what 1.8 miles over the speed limit? You've got to be kidding me.
14:51 Speaker 04 Based on the current exchange rate, the ticket cost is roughly $45 if paid within five days of receipt. The cost increases to approximately $100 for non-payment. It does look as if the ticket has been sent by a collection agency on behalf of the Florence Police Department, as I know it's usually, is usually the case. It can be paid online via the website and they give the website. Should we pay the ticket and chalk it up to a lesson learned? Or is it okay to ignore?
15:18 Speaker 03 Wow, we, we get so many questions about the tickets driving in Italy, or sometimes other places in Europe, but generally Italy. They don't make it easy for you to comply. The tickets most often are for driving on a street that tourists are not allowed to drive on, that you only know from a symbol that will be as you enter the street. And many times you can't even avoid it. So this is your call, whether you would pay it or not. The consequences, they're zero to your credit. I don't know of anything that anyone's ever have it happened to them if they didn't pay one of these automated Italian tickets that people get.
16:02 Speaker 03 So it is your decision whether or not you choose to pay it. There will be no consequences that I'm aware of if you don't pay it. So this is your decision, what you decide to do. But that's really lame, giving a ticket for going 1.8 miles over a posted speed limit? Wow. Coming up ahead, living paycheck to paycheck. Most often it will be because people are living at a lower income level, but so often it's not even based on that. It's how we're choosing to live that has us living paycheck to paycheck.
16:47 Speaker 00 Your sausage McMuffin with egg didn't change. Your receipt did. The sausage McMuffin with egg extra value meal includes a hash brown and a small coffee for just $5. Only at McDonald's for a limited time.
16:59 Speaker 01 Price and participation may vary. Promotion pricing may be lower than meal pricing.
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18:33 Speaker 03 Living paycheck to paycheck has always been in the modern era, something that happens to people who live in the lowest income sector of the United States. And other countries as well, by the way. People who are like the lowest 20, 25% of income earners.
18:54 Speaker 03 They are what economists call negative net savers. Because what they make at work is not enough, or if they're in retirement and they only have social security to live on, it's not enough to be able to pay for life's necessities. Just straight out life necessities. It's brutal for people who are just trying to make it, putting food on the table and thank goodness for the wonderful nonprofit organizations that run food banks around the country that keep young children from being hungry by having it possible for people
19:36 Speaker 03 to be able to receive food supplies when they can't afford them. And this is a real issue. And if you've never lived a tough, tough paycheck to paycheck existence, this is real. I mean, at our last Habitat build, I was having to go get some supplies in the middle of a build day. And once a month, there's this nonprofit organization that does food donations to people. It's a once a month food bank instead of a regular one. The vehicles were lined up on the route I was going for a mile and a half, waiting for their turn to receive a donation of food.
20:19 Speaker 03 A mile and a half line is terrible. But what's different now is that 20% of high income earners, according to a study by the Bank of America Institute, one in five people receiving high income salaries, high income, which is roughly a couple hundred thousand a year, are living paycheck to paycheck. 20% are living paycheck to paycheck. How could that be? I mean, this is terrible to say, but there can be exceptions, but in most cases, it's lifestyle creep.
21:00 Speaker 03 Long ago, I remember on TV, I was doing profiles with families, the single individuals, families, whatever, that were struggling financially. And I was interviewing a woman who was talking about her financial difficulties in their household. And they made what was a very large income in those days. And we were talking about where the money goes. And she was talking about, well, you know, I mean, I, when I get the kids new shoes, the shoes are like, I'm trying to remember how much money it was. Whatever it was, it was far more than I've ever spent on a pair of shoes in my life. And we've had 15 years of inflation since then.
21:44 Speaker 03 And I was sitting there and I was, it took everything I could to keep my mouth shut and listen to her talk about where all the money was going and how much she was spending on this, that, and the other. I asked her if she would be willing to go shopping with me on camera, and she was not. But the point was that a lot of it is we have, as our incomes go up, and I talked a while back about this boring economic concept, the marginal propensity to consume, but we're experts at it in the United States, that there's a lot of people in what's referred to as the mass affluent, who feel like they gotta have this, they gotta have that, they gotta have the other, and it's gotta be the best of everything.
22:29 Speaker 03 And that's just not true. And I want to draw this distinction, that a lot of the anxiety people who make more than an average income in the United States have, is based on the spending choices we make along the way. And I want to point out again, there can be exceptions. There could be exceptional circumstances. There could be a very large medical problem going on in a family, very expensive medical problem, something like that. But a lot of times, it's what we choose to spend money on that really gets us into that difficult way.
23:10 Speaker 03 And that's why I talk so much about living on less than what we make. And yes, the people in the bottom 20% of income earners in the country, that's a luxury they don't have usually. But as you move up that income scale, it is something we can do in most cases. We're just not doing it. And that's why I really want you to think about your needs versus your wants. And even the things you buy, are there cheaper ways to do them? And we all have our priorities.
23:48 Speaker 04 Okay, Henry and Georgia wrote in with this. What's the statute of limitations on a credit card? A so-called law firm says that they want to deliver court ordered documents for a lien on my property. The court order is from a credit card. They say it dates back to 2002 to 2009. They're saying the original balance was over $4,000 and now the balance is almost $8,000. I do not recognize this account or card.
24:14 Speaker 03 Okay, so there are several things that could be going on here, Henry. First of all, it would be the rarest of rarest circumstances, almost impossible because credit card debt is an unsecured debt, meaning that they can't attach your home or personal possessions, except in the rarest of circumstances, usually involving allegations of fraud on your part. Second, I'm guessing this is not a law firm. This is a scavenger collector. They may use a name that sounds like a law firm. But what a scavenger collector does is they buy old, what are known as line item debts. They may have paid for something that old.
24:59 Speaker 03 They may have paid a fraction of a penny. And they are trying to collect a debt that, again, could be for someone a different Henry, likely not a scamster, although it could be a fake debt collector. It's likelier this is one of these scavenger collectors who is coming after you, throwing spaghetti at the wall, hoping you're the Henry they're looking for. Maybe not at all. So within five days of contacting you, they have to send you in writing a statement of the debt and give you the opportunity to dispute the validity of the debt. They're not going to have anything that proves you owe the debt.
25:43 Speaker 03 So likely, they would just go away. You have the right to tell them not to contact you further. Now, there is the rarest of possibilities, very rare, that a mistaken judgment was entered against you. Wrong person, and there is a judgment. That that wouldn't have shown up on a credit check for you would be surprising to me. At some point, you would have known if there long ago was a judgment against you. It would be really unusual that you would have no knowledge of it at all. But the most important thing is, don't pay them any money at all.
26:26 Speaker 03 Do not be intimidated into paying a cent.
26:29 Speaker 04 Ken in California says, "Do you know they pretty much outlawed the use of drug manufacturers coupons for prescriptions to push you to cheaper generics in California? Even though sometimes with a coupon, the name brand is way cheaper. I occasionally have to send my prescriptions to Tennessee where my son lives. I have him use the coupon, pick it up, and mail it back to me. It's worth all that compared to buying the overpriced generic in California."
26:53 Speaker 03 Wait, wait. This is bizarre and weird, isn't it?
26:56 Speaker 04 Mm-hmm. You're right. RX costs have skyrocketed, and you have to shop around to find the best deals. It's the actual way to move prescriptions around to each pharmacy that I have a problem with. You go to a doctor and get maybe three prescriptions. They ask you where to send the RXs to, and you can't, while standing in the doctor's office, start shopping around and have them send each prescription to the three cheapest places you find. So you send to one pharmacy, shop around, and then transfer them to other places. Then in 90 days, the process starts all over, when you now find other pharmacy stores, retailers, et cetera, with better price, and you have to, again, transfer the prescriptions. I'm not always sure the time I spend doing this is worth the savings, although over a year on all the prescriptions, I'm sure it would be. Is there an easier way?
27:42 Speaker 03 I'm totally puzzled about this thing, Ken, because my daughter lives in Los Angeles, and there's a name brand drug that she uses. Manufacturers, they don't call them exactly coupons, but it's like a coupon that gets her an ultra-low price on filling that prescription and she fills it in Los Angeles. I'm not aware of any law that California has on the books that bans these discounts for a name-brand prescription. I'm totally confused by that. As far as my default on prescription drugs, I've mentioned many times, I fill mine at Costco. Costco has a member
28:27 Speaker 03 pricing on meds that almost always is far cheaper, because the way Costco marks things up, no more than 14%, far cheaper than the prescription plan I have through employment. You having to send this all the way to your son halfway across the country, have him fill the name-brand drug with a coupon and send it back to you, is so crazy terrible that you're doing that. I'd hunt around and see if there's pharmacies, independent pharmacies, in your area in California that accept the manufacturer's coupon against the brand
29:12 Speaker 03 name, because this just isn't something I have heard is a problem.
29:18 Speaker 04 Wesley in Georgia says, "I unfortunately lost my brother earlier this year."
29:22 Speaker 03 I'm really sorry.
29:23 Speaker 04 Sorry, Wesley. "He had no children, but had inherited a share of an IRA from our mom when she died last year." Sorry about that, too.
29:30 Speaker 03 Wow.
29:30 Speaker 04 "It's a really tough time. And he named my two-year-old daughter as the sole beneficiary of his IRA. So my daughter now has an inherited IRA with about $100,000 in it. We know we'll need to make RMDs out of the IRA over the next 10 years, but even after the tax is owed, it will be a lot of money. Going to college is part of our family culture, and of course, we can already tell our two-year-old is a genius. So we are thinking of trying to put some of it in a 529, but wanted to know what else we might consider doing with this money, so it helps set her up for financial success. From what I can tell, if I don't put it into a 529, it'll go to a UTMA account, and as soon as she turns 18, she'd have access to the funds. And this makes me a bit nervous, as I know I wouldn't have made the best decisions
30:15 Speaker 04 with that kind of money at 18. What do you suggest?"
30:18 Speaker 03 All right. So, one thing is...
30:22 Speaker 03 529 accounts owned by a child for a child's benefit used to have really terrible treatment by financial aid calculations, different than what it was for a parent owning one for the benefit of that child. And that doesn't seem to be the case anymore. So you're going to be okay putting some money in that 529. And then if there's money left over after college in that 529, it's grown tax-free through the years in the 529. And then it can be converted into up to 35 grand under current law, into a Roth IRA and continue tax-free growth
31:02 Speaker 03 through your child's entire adulthood to be spent in retirement as tax-free money. So the 529 has become a really good vehicle to put money in for benefit of a child. On the UTM and UGMA accounts, depending on your state, which they're called. All right, so I'm going to tell you something, real life, real life. Most parents who set up an UGMA account or UTM don't ever tell their kid it exists when they get older until they think they're mature enough. So it can just sit there as a custodial account until and unless the financial institution ever tells you
31:46 Speaker 03 the account's going to be frozen or whatever, till you change it into the kid's own name. So this is not, and I know, I know I'm talking about real life and not what the rules say, what the law says. I think you're going to be okay putting money in there. And then when your kid is mature enough, you do it. And with each of my kids, that has come at different ages where they've matured to that point. And then we've told that child, hey, as an adult, you have this money available to you, it's your money. So that's my answer to that. And I want to really honor your wishes
32:27 Speaker 03 that the money is used wisely in honor of your brother's memory. And I think that the 529 since college is part of your family culture. Putting a lot in there is a great strategy. A substantial amount of it, and then the rest you put in the Utma. And I think you'll be okay with the money being in the Utma. At least I expect so because you'll keep it a secret if you need to. I know where I'm going to hear from lawyers saying, Clark, why are you saying that? Real life. And thank you so much for joining us today. Hope you have a wonderful rest of your day and all week long.
33:11 Speaker 03 We've got free one-on-one advice available to you from our Team Clark Consumer Action Center. Go to clark.com/cac. 30 hours available each week to get that free one-on-one advice. And know what we're about, you, learning ways to save more, spend less, and avoid getting ripped off.
33:37 Speaker 00 Your sausage McMuffin with egg didn't change. Your receipt did. The sausage McMuffin with egg extra value meal includes a hash brown and a small coffee for just $5. Only at McDonald's for a limited time.
33:49 Speaker 01 Price and participation may vary. Promotion pricing may be lower than real pricing.
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