Exclusive Interview: Todd Hillstead, Edelman Financial Engines

Practical Financial Planning Tips - Including Why You Should Have 12-24 Months of Cash On Hand When You Retire

Ric Edelman: One of the big questions is how should we be managing our money in an environment like this? Let's face it, 2022 is an economic environment unlike anything we've seen, frankly, since 2008. What do we do now? Well, to help us figure all that out, I'm very happy to welcome on to the program a good friend of mine, Todd Hillstead. He's executive director of financial planning at Edelman Financial Engines. So let's break this out into three separate categories, what you need to do now. But the answer to that question depends on where you're at in life. When we do surveys across the country of retirees and we ask, what is your number one regret? The number one thing people say is, I wish I'd started saving sooner. And tied to that, we know from industry data the average U.S. worker starts investing in their 401k at age 37. They're squandering almost 20 years of contributions because they figure, I'm young, I can't really afford it, I can't contemplate retiring, and they just delay it and they put it off, ending up with regret that they didn't start sooner.

Todd Hillstead: And it's so true, you know, and I often talk with people that are now in their 50s or 60s, and life will come at them hard. So we often try to encourage people that are just starting out or new, not only do you save into your 401K in retirement accounts and by the way, but this is also coming from a friend. You won't like me now, but you'll like me in 40 or 50 years. Save till it hurts. Don't just save. If the match is 4% or 5% say, 'Hey, I'm going to get my full match'. And if someone hasn't told this to you by now, it's nice that you hear it. Now you need to be saving at least 10%, 15%, sometimes 20% just to maintain your same standard of living down the road. So save until it hurts. But the other thing that you need to be doing, or at least consider doing is build up this cash reserve. Don't treat your retirement account as this piggy bank of what you tap when life throws your curveball. Start to set aside some money every single time you get paid into an account that's not in your checking or savings. It's something that's essentially untouchable, for emergencies only.

Ric: Let's talk about mid-career folks in their 40s, early 50s, they've got maybe $400,000 or $500,000 saved by now in retirement accounts. They're watching massive market volatility. Anybody who has looked at their 401k statement lately or gone online to see the current value, has seen a remarkable decline in value 10%, 20%, 30%, depending on the account's holdings. What do you say to these folks?

Todd: Well, first of all, you've accumulated a lot of money and it feels like the stakes are a little bit higher. What you have to do, number one, is check where your head's at and check where the source of information that is coming to you. Where's that coming from? Because it can often really throw you off kilter to where you make some really big, sometimes negative investment decisions. Continue to contribute. Often you might even want to consider contributing more. Investing is one of the only places where when prices are down, a lot of people consider, gosh, maybe I won't continue investing. You go to the store and you see a discount on your favorite pair of shoes or your favorite line of clothing. You're probably going to buy two in two different colors. The same thing rings true with investing. See if you can contribute more. And then one thing that is often talked about, Ric, on your radio show, in particular in all of your books, is rebalancing. As you're contributing money on a weekly or semimonthly basis, look at what your allocation is and buy a little bit more on some of those investments that are down a little bit.

A Bridge to Medicare Coverage – and Test Driving Your Retirement

Ric: Let's talk about folks who are now nearing retirement. They don't have 30 years for the markets to recover. These are probably the most scared of investors. What do you say to them?

Todd: Well, and it is scary. And that's something that we just all need to acknowledge. You read the headlines right now and it's rumors of wars, pestilence. I mean, everything that you can imagine is going on. But be careful of that. If you go back and you take those same headlines, but you change the date on them instead of 2022, you often go 79, 82, 90, 2000 - a lot of these headlines are very, very similar. And just remember that these world events, number one, they do not destroy your investments, your economic wealth that you've created. So that's something that is very important to go and look at to make sure those allocations are set up correctly. The other thing is that your health insurances and the health of you is vitally important too. Make sure your health insurance, if you're transitioning into Medicare, that you have all of your health insurances dialed in. One of the biggest things that I see where people make a big mistake is they often don't transition or have adequate health insurance as they're transitioning from employment to retirement. And often some of these expenses really catch them. It's a surprise a little bit in terms of what they have to pay for - deductibles, for medical surcharges with prescriptions. Get all of those dialed in. The third thing that I would just suggest that people look at is live your retirement in a year or two, give it a test run for six months, see how it really works. You may find that you're not necessarily ready to live on that retirement budget. I always have people do a six-month run, a six month test, a couple of years before they retire to see if they're really ready to make that transition.

Ric: Smart advice. I often say the same thing to young married couples who are planning to have children, and when they do have a child, one of them will quit their job and become a stay-at-home parent. And I'm like, well, act like now as though that paycheck is gone, because if you can't do it now as a test, how are you going to be able to do it later for real? And so, yeah, there's no reason to wait for retirement to begin to act like you're in retirement. And that's really good advice, Todd. One final area. Those who are already retired, they are totally dependent on Social Security, a pension, if they're lucky enough to have one. And whatever money they've accumulated in investments and those investments are falling in value dramatically, putting real pressure. Just as the investments are able to produce less an income, they have to provide more because of inflation. This can really scare people in their 60s and 70s and 80s. Given this economic environment, what do you tell them they ought to be doing with their investments?

Recommendation: 12 – 24 Months of Cash As You Start Retirement

Todd: If you're in that category, that's really tricky and it's a scary time right now. And so getting this done right, one, is mission critical. If you haven't already, one of the best things that you can do is to meet with a fee based fiduciary and build a retirement plan. In terms of what's going on with your withdrawal rate, I often find that people are withdrawing too much money from their investments. There's other sources that we could start to pull some money from. For example, often in retirement, we at least advise people to have at least 12 - 18, in a lot of cases, 24 months of cash on hand. In some situations, we can stop or at least decrease the amount of a withdrawal when your investments are fluctuating like this and live off your cash reserve for a couple of months so that you're not placing as much stress on the withdrawal from your investing. Number two, again, look at your allocation. You may find that just in this past year, last year was a really good year for investments. They did very well. You may find that your allocation and your investments got a little too top heavy. It got a little too aggressive to what you're truly comfortable with. And in those situations, you can go in and make a few slight changes to make it to where it isn't as aggressive as it was last year. And again, the third thing to remember, and this is a very important thing, is to just stay balanced, decreases and drops like this do not happen for forever.

Ric: We've been talking with Todd Hillstead, he's executive director of financial planning at Edelman Financial Engines. Todd, you're in Utah. You have colleagues all over the country. You're demonstrating pretty well that what you should do, how you should behave in an economic environment like this really depends on where you're at in life. There's a really big difference in behavior and strategy between someone in their late 20s and someone in their early 60s. And so wherever you're at in your path of your life line, you really want to make sure you're talking with, as Todd said, a fiduciary financial advisor, a fee based advisor who is serving your best interests. Todd How would people reach you or colleagues of yours at Edelman Financial Engines?

Todd: The best place would be to go to our website, EdelmanFinancialEngines.com. From there you can click on a location that's close to you and from there find someone that would be willing to help, and there's anybody that would be willing to help. At our firm, whether you have amassed significant amounts of money, if you're just getting started, if you're massively in debt, it doesn't matter. Every single individual matters and deserve sound and rock solid financial advice. We'll help anybody that's willing to listen but going to our website is a great source to find the person closest to you.

Ric: EdelmanFinancialEngines.com. Todd Hillstead, thanks so much for joining us on the show.

Todd: Ric, great to be with you.

Ric Edelman: Todd and I actually spoke for almost 20 minutes. If you would like to watch or listen or read the full conversation, just check us out at TheTruthAYF.com.