Episode 81 — How to Start Saving for Retirement the Right Way

Saving for retirement can feel overwhelming, especially when it seems far away or when life has other financial priorities right now.

In this episode of Catholic Money Talk, we walk through how to start saving for retirement effectively, why starting early matters so much, how different retirement accounts work, and why consistency is one of the most important parts of the plan.

We also talk about retirement through a Catholic lens of stewardship — preparing wisely for the future so that we can continue to serve, give, and respond to what the Lord may ask of us later in life.

Please click the link below to get in touch with me if you have any questions.

Transcript

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Paul, Welcome to Catholic money talk, where we talk about all things money and finance, and we try to do it through a lens of being Catholic, where our ultimate goal is to one day be in Heaven with the Lord. I am your host. Paul Scarfone, thank you for being here today. One Welcome back to Catholic money talk. Today we're going to dive into how to save for retirement effectively. But before we do that, let's say a prayer in the name of the Father and of the Son of the Holy Spirit. Amen, Heavenly Father. We thank you for this day. We thank you for all the ways that you love and bless us, Lord, Lord. We know that you have an awesome plan and that you love us so much. Help us to yield to your plan, to accept those invitations that you give us every day, to draw closer to you. Bless us, to stay in any situation that we might find ourselves in, Lord, fill us full of hope and joy. We ask this all in Jesus name, amen, in the name of the Father and of the Son and of the Holy Spirit, Amen. So before we jump into today's topic, I just have to offer a little disclaimer here. I'm not a licensed financial advisor. I don't have a series six, series seven, or 63 or any of those numbers, right? We're today. We're talking about what is needed to establish a retirement account and a strategy of behaviors and activities that we need to participate in to execute a strategy. We're not going to be talking about the particular products or funds or stocks that we might invest in, right? I'm not licensed to talk about that, and I mentioned this throughout today's podcast, that there are some resources that you can get to, whether it be through your company's 401, k or a financial advisor. So with that, we'll jump in today's topic. So a question that I get fairly often is how to save for retirement effectively, and it was brought back to my mind very vividly in the last couple of weeks. So along with my business, which is coaching people and helping them create a plan to hit their financial goals. Part of that is working with business owners. And one of my clients, we recently established a 401, K plan for his business, and I had the opportunity to get in front of his employees and explain some of the plan to them and the benefits of it and why they should do it. And as I was talking to them, I thought this is a great topic to bring here. I did it in a prior episode. I believe it was going to look it up real quick, Episode 20, where I spoke about looking at retirement, and I I focused a lot about what the Lord might be calling us to in retirement and the need to create a plan for retirement. But today, I thought I would dive into how to actually save for retirement, effectively, what tools and strategies we have in place, as well as how to define the goals and find the goals that we should have for retirement. So why does this matter? Well, so many people overlook retirement savings, they don't start early. And when we look at investment calculators and just imagine like paying off debt or saving money, the earlier we begin these things, the easier it is, because time is a big factor in hitting our financial goals. So sometimes when we come out of college, we get our first job. So much of life is happening. We think retirement is so far off. I don't have to worry about it right now, but boy, if we could jump on it early in our careers. We'll, we'll, it'll be less work. We have to do less of a lift throughout our entire life to get to that point of retirement. So I want to emphasize on how saving early it can provide more financial freedom in the future. It also builds excitement. This is one of the things I said to these employees a couple weeks ago when I met with them and kind of laid the plan out when I was a young guy in banking, and we were always paycheck to paycheck, and I was probably in, let's see, 20 I was 25 I think, when I first had a job where I was able to set up the 401 k plan my previous employer, they didn't have a 401 K, and it was on me to kind of find an individual retirement account. We'll talk more about that later. But I hadn't done it. So until my employer offered me the opportunity to participate in a 401, K, I hadn't done that. And I started doing it, and there was a company match, and I remember it was probably two or three years in, all of a sudden I had about $20,000 to. Saved to retirement, and that was the first time in my life where I saw my name on a bank statement that had, you know, over $20,000 in it. And that was exciting. I never thought that would be the case. I had been so used to low balances, you know, in my college years may be overdrawn at times negative balances. So to actually see an account that had my name on it with a healthy, you know, five digit balance, that was exciting, and it continued to push me forward, although I didn't develop good discipline at regularly contributing to a 401, K, and we're going to talk about that more, but let's first talk about like, where do we start setting retirement goals? Why is setting a clear goal important in Stephen Covey's book, The Seven Habits of Highly Effective People, he talks about start with the end in mind, right? So what is our goal when we think of our retirement goal and our savings goal for that, we want to be able to save money so that when we get to a point where we either stop earning or we stop working at a full time job and supporting ourselves solely by the the dollars we're earning. We want to have saved enough money that that can either replace our income or supplement, right, maybe a lesser income in retirement, not so much building a nest egg that we're just going to completely use up quickly. But if that, if we could save enough where that generates income every month, every year that we're able to live off of right? So we want to be able to determine how much money do we need, and at what age do we need that money to have been accumulated by in order to live off of it. And there's some good tools. One great tool I like to use, investor.gov, they've got a bunch of financial tools and calculators. They have a retirement ballpark estimate, and that is a calculator that gives you the opportunity to say, you know the fields. It asks you for how much you already have saved for retirement? How much money do you think you'll need each year to cover expenses once you retire? What's the annual income you expect to receive from other sources? Great option. Just put zero there, right? So that you can kind of look at worst case scenario. And then it asks you things, will this income be taxed in retirement? What's your current age? When do you think you'll retire? When do you think you'll you'll die? Right? What's your life expectancy? And then it brings in to account different percentages and rates, so inflation rate, right? That's so helpful. When you're doing a calculator, it'll ask your current tax rate, your retirement tax rate, and then an assumed a average annual rate of return. And you can change all of those around, right? And there's a little button you can click to adjust for inflation. So great calculator, investor.gov, and it is their retirement ballpark estimate calculator. And once you plug everything into that calculator basis, it's basically going to say how much you need to start stay saving every year. And I just completed it just a little while ago, before I spoke to you about it. So I made sure it was current and fresh in my mind, and I played around with a couple different numbers, and one number kind of shocked me and how much it wanted me to start saving. Start saving today. Another number was kind of what we're already doing, and I could see where those rates and percentages played out. Then there was another number where, you know, let's say I need even less to live on in retirement. It showed that what we might we might already be close to the finish line, right? Only a little bit more to contribute. Every year, so you're able to fill that out. And it's, it's a great starting point. You know, this is one of those things. When I've worked with clients that are nearing retirement, they're scared to look at a calculator like this. They're so worried because of the unknowns, but until we actually look at it and tackle it, we can't even get started towards it, like looking at a calculator like that or not, doesn't change our situation, right? But having good information, we're able to use that to inform our behaviors, right? And that's what we're trying to do, Catholic money talk. We're trying to develop good behaviors with money, good financial behaviors through a faith lens, right? Our priority isn't saving for retirement. Our priority is getting to heaven, right? And so we want to do whatever the Lord's calling us to do, whether it be during our working career, during. Retirement, we want to be able to give where he's calling us to give. Want to be able to do all those things, but we also need to be good stewards of what he's given us, and part of that is retirement is down the road. It might be way down the road for some of us. It might be the next moment for some of us, and we want to be able to do our best in preparation for retirement, so that we can serve the Lord, however he's calling us to serve Him in retirement. So this is why we're doing it. This is why we need to have a goal, and we need to create a plan. And there's one tool, investor.gov, ballpark, retirement estimate. So we figure out our goal, how much we need to save retirement, then we look at, how can we actually do that? How do we choose the right type of retirement account? Now, there's a few different kinds. There's an employer sponsored plan. That's when I was mentioning earlier, when my first retirement account was a 401 K through my employer, if you work in a nonprofit, they all have a 403 B. All these numbers and letters are basically just referring to areas in the tax code that in tax law that have made provisions to be able to set money aside for retirement. There's individual retirement accounts. IRAs individual retirement accounts. I actually think it stands for Individual Retirement agreements, but we call them accounts. Makes more sense. You set up an account, and those, all of these, have different contribution limits, and that you built an eligibility that you need to attain in order to participate in these. And then there's self employed or small business owners right now, my wife and I, Taryn and I, we have our own businesses. So we have self employed plans. The business owner I was helping earlier, which I just mentioned, it was a for profit company. He established a 401, K for his employees. And if you, if you don't, let's say you're not self employed, and your company does not offer a 401, K, well, you can open an IRA, an individual retirement account, and within all of those, there's two other kind of sub accounts, subways to look at this. There's traditional retirement accounts. Traditional retirement accounts means the money you put in is pre tax, so that reduces your taxable income. So let's just say you make $50,000 a year, and you put $5,000 into your pre tax, your traditional retirement account, whether it be a, 401 K, a, 403 B, an individual retirement account, or your self employed retirement account, if you put pre tax dollars in, it reduces your you know, if you put $5,000 of pre tax dollars, it would reduce your $50,000 income to $45,000 and that's what you get taxed on. 45,000 not the 50. So that's traditional. If you have a Roth Roth means after tax dollars. So if I have $50,000 income, and I put 5000 into my Roth retirement plan, again, it could be a 401, K, a, four or 3b, a, an, Ira, if, but if it's a Roth plan, that means I pay tax on it, and then I put the money in, right? So my $50,000 in income, I put 5000 to my Roth. I still get taxed on 50,000 because my contribution was after taxes. So why does any of this matter? Well, what happens then is that$5,000 grows, and if we're 20 years old, maybe that $5,000 by the time we get to 60 years old, over 40 years, maybe that $5,000 grew to be $500,000 right? If, if we put that in as traditional money, as pre taxed money, when we start taking that $500,000 out in retirement, we have to pay taxes on it, because we never pay taxes on it when we do make that as a Roth contribution, we already paid taxes on it. So when that grows to $500,000 we don't need to pay taxes on it as we're pulling it out. So that's a pretty cool piece of it. You could sit with your CPA to figure out which one makes the most sense for you. And it's really looking at things like, how much time do you have to invest? What's your current tax rate? What do you anticipate a tax rate in retirement and so forth. Either way, if you start retirement early, you'll be you'll be good. You'll be better off than most people who who don't start tackling it right away. So one other thing I'll add about 401 k's and 403 B's potentially, is many times the employer may offer some type of match. So the company that I. Was working with we established a 401 K for their team. There is a company match. So the first 1% that the employee puts in the business matches 1% for every additional percent the business matches half a percent up to the employee contributing 6% so what that looks like is, if an employee was putting 6% of their income in, the business, would then match it and put three and a half percent in. So it's like they were getting nine and a half percent of their gross pay into their retirement account, which for most people that you know, if you're starting at a young age, you're going to be very well off as you if you stay with that consistency, consistently. So that is how to choose the right retirement account, and you have to see what's available to you now. How much do you save and how to grow your money. So the biggest element for investing and saving like this is something called compound interest, and I love using a compound interest calculator when I'm working with clients and talking to people about the benefits of saving early and on a regular basis and what that money could grow to. It's one of the things I'll sit with clients when they're looking at paying off debt, and maybe they have a $200 debt payment, and they're thinking, wow, when that's gone, I can start saving. I can use that money to save. And we say, well, yeah, that's not just a $200 monthly decision you're making right now, let's look at the long term impact of $200 and I'll plug it in a long term compound interest calculator, and you'll see that $200 monthly can get to 100,000 200,000 300,000 the longer time goes by, and the sooner you're able to free that money up to save it towards retirement, the more it's going to be able to grow and to help you. So power of compound interest is important. The sooner you do it, the less money you'll actually have to save, because the money that you've already invested starts working for you. A great compound interest calculator is investor.gov they have a compound interest calculator there. That's fantastic. I love it. It's the one I go to every time. You can also put in a range of investment return rate and to get a good idea of the money that you could earn, so compound interest and the rate of return is a big piece of growing your money. Now, how much to save? Right? That's the question I just mentioned prior the calculator that retirement ballpark estimate calculator that will give you a good, at least starting point of how much money can go in. But here's what I would challenge you to do, and I talk about this in the goal setting, how to set goals episodes, and that is, determine what are the priorities in your life right now and then? How much of your income can you devote to those things? So for instance, if you're trying to save for a house right now, you might want to focus entirely on saving for a house right a down payment, and you might put off saving for retirement for, say, six months or a year, depending on how long it'll take you to put that down payment together, you might be replacing a vehicle. You might be having a new baby. There might be something in your life that is top priority right now, in this moment. And so my encouragement to be to you would be whatever amount of money you can start to put towards retirement while you're still achieving your other goals, to start doing that now, right? Experts, your survey experts, they're going to say anywhere from 10 to 15% of your income should go to retirement. Boy, if you started doing that at 20 years old, you would have boatloads of cash when you got to retirement. So, so, so that would work, right? But the key is to start somewhere. And one of the recommendations of where to start, especially if you're working somewhere, would be, is there a match that I can take full benefit of? So the example I used earlier where the company, if you put in 6% as the employee, company's giving you three and a half percent, and that's the max of their match. So you have a total of nine and a half percent of your income going into your retirement account. That's a great place to start, right so looking at all those factors, the key is to start at some point, even if you don't think you can afford to right now, even starting at a little bit, 100 bucks a paycheck, 200 bucks a paycheck, whatever it might be, it will start to add up, to give you an example, and I'm going to go into my little compound interest calculator here to give you a quick idea. So if you have no money saved, and let's say you know what, we'll say you're a 30 year old, right? And let's say you determine you can save two.$150 a paycheck. So let's call two paychecks a month. It's called $500 a month, and you're 30 and let's say you're going to do that until you're 62 so we'll do 32 years estimated interest rate. The average has been somewhere between 10 and 12% over the past, like 50 years in the stock market on a well diversified portfolio, right? So I'm going to use nine, and then I'm going to use an interest rate variance of one and a half. So that's going to give us everywhere from seven and a half percent to 9% to 10 and a half percent rate of return. So when I calculate that, right? So putting 250, a paycheck in at 30 years old, so $500 a month, at 30 years old, and doing that for 32 years, an estimated interest rate of anywhere from seven and a half to 10 and a half percent. So using 9% is that minimum mint median, right the average, the middle. So here's what your money would turn into. You would have put, where's that number you would have put that $500 a month for 32 years. So that's like, what a little over$180,000 in at 62 if you had 9% interest rate, you'd have$984,000 right? If it was seven and a half, let's say you're very conservative on your investments, you'd be at 730,000 and if you were at, you know more like that the market has averaged over the past 50 years, you 10 and a half percent return on a well diversified portfolio, you'd be at over 1.3 million in your retirement account. And that's that's not doing 10% that's not doing 15% that's only doing 250 bucks a paycheck, right? $500 a month. That's not a lot, and that's starting at 30. If you started at 20, and give you this idea, this will be crazy. So do that for 42 years. Well, now you've got, you know, seven half percent, 1.5 million, 9% which, again, is very conservative, two and a half million. And at 10 and a half percent, almost $4 million right? So you more than doubled your return by starting 10 years sooner. And that's the benefit of this. The sooner you start, the better the better off you'll be so so that's about, how much can we save? The power of compound interest, you know, watching your money grow, being consistent with it. What are the investment investment strategies that's going to be based on your risk tolerance? If you set up a 401, k, right off the bat, they usually have some options in there based on the year you plan to retire, and it'll have like, a pre mixed portfolio of diversified options that get conservative as you get older and older and older. I don't necessarily love those type but that's a great place to start. That's better than not having a retirement account, and that's better than just putting the money in a savings account with the bank or under your mattress, right? That those give you no opportunity for rate of return. So having as much exposure to the market as your risk tolerance will allow will get you the potential most growth, right and diversification that just means spreading across different types of investments. So you can invest in big companies and small companies, in us, based companies and foreign based companies, in tech companies, in utility companies, energy companies, healthcare companies, financial companies, right? You can invest in so many different things. You can use funds. You can use stocks. The choices are almost endless, but within a retirement account, particularly a, 401, K or four, 3b, some employee sponsored program, you're going to have some limits on what's available to you. If you're setting up an individual retirement account in IRA, you're going to have a lot more options to you. The last element of growing your money and saving over time is to be consistent with it. So once you set it up and you start, try to never stop it, right? Like if you have to stop spending in other places, try to do that before you touch the retirement. Because even small amounts over time, being regular and intentional with it is usually more effective than occasionally investing a large sum of money, and that has to do with something called dollar cost averaging. So dollar cost averaging, it basically involves investing a set amount of money at regular intervals, right? So a set amount of money over a set period of time, and you just keep investing it, regardless of the price of the investments, right? So, in, in right now it as I'm recording this, it is the beginning of April 2025, and the market has come down a little bit, right? As you know, there's been. Some political stuff, tariffs happening, global economic changes, and so the markets react to that, and it's dropped, right? And we're you know, if you made an investment three months ago, it's now down quite a bit. But that's okay, because if you've made investments since three months ago, each month or every other week, whatever your schedule is, you've been buying investments that have gone down in price, so they're kind of like on sale. And history has kind of shown that over a five period span of time the market it's something like 90% of the time it's up over a five year span, something like that. If you pick look at the whole market graph, and you pick 2.5 years from, you know, five years apart from each other, something like over 90% of the time, five years it's up, right? So that's historically what it's been that could be based on just profitable companies, growth, inflation. And so chances are, if you're buying something as it's dropped, and you're being consistent with it over time, it'll begin to rise and you'll start to make money on it, right? It'll turn to a profit for you, and that's how the rate of return goes. Right? Your investments grow over time, and so not trying to time the market, but just having a discipline of investing on regular, you know, set amount of money over regular investments over a set period of time, that's dollar cost averaging, and that's a huge benefit as you're investing for the long term. And retirement is investing for long term. And then you need to start monitoring and adjusting your plan. So what I just told the employees of this company recently who set up the retirement plan, I said, like the 401, K company offers advisors to talk to the employees, to say, Hey, what's your risk tolerance? And let me explain some of these investments to them. That's great. You want to have a financial advisor that can help do that, someone who's got the heart of a teacher who is willing to explain to you your different options and teach you about these investment instruments that you can invest in, what diverse you know, what diversification in a portfolio looks like, to get you comfortable with it so that you're not afraid of it. You want to be able to understand what you're putting your money into. So every year, I find it helpful. I do it myself. I sit down with my financial advisor. I say, anything I need to know, how does stuff look? Do we need to adjust anything right? And so having a moment right an annual review is a good time to kind of look at your investment strategy, your retirement strategy, and see if you're on track to what you think you should be doing. Same thing goes for rebalancing investments. Sometimes you might say, hey, I want to do 25% of my investments. I want them in US based companies, and 25% I want in foreign companies, and 25% I want in big companies, and 25% I want in small companies. And a year goes by and you've been investing like that, but values have changed. Things have gone up and down, and maybe you have 30% in a certain category now, right? And do you want to rebalance that? Do you want to pull that back to 25% and reallocate those dollars into other areas of your portfolio? So having a chance to look at that annually and decide if you need to rebalance anything is important. And then the other retirement considerations to have as you're effectively putting a retirement plan together is to think of what are the other incomes or expenses that I might potentially have in retirement. So Social Security, that's a big thing right now. My mom, she's collecting Social Security. My dad was as well. A lot of people over the age of 62 Eric, you know, have the opportunity to collect social security, and so they're doing that. Then there's the healthcare cost of retirement, they're going to look different than when you were an employee. And then the last part is just the tax implication. So if you're saving money pre tax, you're going to have to pay those taxes in retirement. So you want to take that into consideration when you're thinking about your drawdowns, right? When you're taking take$100,000 out of retirement, you might need to send Uncle Sam, you know, 20% of that, or whatever your tax bracket is, in retirement, a key thing to keep in mind. So to kind of recap some of this, how to save for retirement effectively, setting goals is essential. You want to make sure you choose the right retirement account for your situation. And based on your situation, you may have different options than your neighbor, right? And then if, the earlier you start, The more consistent you are, the more wisely you invest, are all going to add to a better result. So that's, that's my kind of pitch today. It was kind of a quick crash course in just retirement strategy and and why you need to have a plan and the different ways you can execute it. And again, I am here to help. If you have questions, there's a link in the podcast episode description. You can click it to send me a question. And you can click a link to grab some time on my calendar and chat. I'm happy to understand your situation and potentially help you kind of navigate some of these questions that you might have so that you can get started with your retirement. So thank you again for joining me today. I hope this was helpful. God bless. Thank you for listening to Catholic money talk. I hope you join us again next time, please click Subscribe on your podcast app to get notified of new episodes. God bless you and have a great day. Foreign.